Big Hit Entertainment Co., Ltd. is a South Korean entertainment company established in 2005 by Bang Si-hyuk. It currently manages soloist Lee Hyun and idol groups BTS and TXT. The company has multiple subsidiaries, including Source Music, and is the largest shareholder in Pledis Entertainment.
Big Hit Entertainment is expected to be listed in 15 October 2020.
I wrote this article to express my opinion on this stock.
Reasons to buy:
Does anyone not know BTS group?
BTS, also known as the Bangtan Boys, is a seven-member South Korean boy band that began formation in 2010 and debuted in 2013 under Big Hit Entertainment.
BTS is no doubt the most successful Korean pop group and recently made history when it marked No 1 on Billboard Artist 100 Chart.
BTS ruled the Artist 100 thanks to its first Billboard Hot 100 No. 1 “Dynamite”. The song drew 20.8 million airplay audience impressions (up 8%) and 14 million U.S. streams (up 11%) and sold 153,000 downloads (up 96%) in the tracking week, according to Nielsen Music/MRC Data. BTS became the first all-South Korean act to top the Hot 100 upon the song’s debut at No. 1.
Source: Billboard.com article
There are many reasons as to why this group is so popular. Some of the most commonly agreed reasons are their:
- Passion for music and captivating performances;
- Storytelling for their songs and lyrics, which forms the basis for the Weverse platform explained later; and
- Love for their fans and communications.
Will they continue to be as popular and successful? In my opinion, I have no doubt that they will continue to be a symbol of K-pop in the next few years.
Weverse is a Korean mobile app and web platform created by South Korean entertainment company Big Hit Entertainment. The app specializes in hosting multimedia content and artist-to-fan communications for K-Pop bands and musicians.
In other words, the Weverse is a platform designed to become YouTube and Facebook of entertainment companies and celebrities, where fans can communicate with celebrities, buy goods, read stories and watch performances.
To give a parallel example: just like Marvel studio has its own universe and stories for each character, so does the BTS group in their songs and lyrics. It is the consumers and fans that pay for these stories and services on the Weverse platform, just like moviegoers pay to see Marvel movies in theaters.
This platform for entertainment is unprecedented. Before, all artists simply used YouTube and other SNS to upload their performance and communicate with their audience. If the Weverse can set a precedent and become the most dominant platform, then Big Hit Entertainment can become the platform company it dreams of.
Reasons to not buy:
- BTS risk:
Ironically, biggest reason to buy the stock is also the biggest reason not to buy stock.
All Korean males are required to serve the mandatory military service up to 1 and a half year, during which economic activities are not allowed. The BTS group has not served their military service yet, and they are expected to go into the Korean army soon in the next one to two years.
The issue with military service is that more than 90% of Big Hit Entertainment’s revenue solely comes from the BTS group. While it has been striving to lessen its reliance on the group and diversify revenue channels via other artists, the most recent revenue figure still indicates that 85% of its revenue still comes from the BTS group, alone.
What does all this mean?
It means that while military risk is already a known fact, 1) Big Hit Entertainment will be hit when the BTS group goes to army and 2) follow-up artist groups have to make up for revenue loss if and when the BTS group becomes less popular.
So far, however, none of other artists from Big Hit Entertainment has shown the potential to replace the explosively popular BTS group yet.
Therefore, there is an inherent risk in having the most famous group without others to support them when they go to army or retire.
The valuation of Big Hit Entertainment is definitely on the high side. The expected PER is in the range of 47 to 61 and PBR 4.0 to 5.1.
The usual comparable companies in the same industry comprise of the Troika JYP, SM and YG Entertainment. And the expected IPO valuation of Big Hit Entertainment is larger than the combined market capitalization of the three companies by 1.6 trillion Korean Won (approximately 1.3 million USD).
The reason for high valuation of Big Hit Entertainment is that it has included Naver and Kakao as comparable companies in their IPO valuation, which are IT companies with high multiples in South Korea.
This is because Big Hit Entertainment argues that the Weverse platform explained above is a new IT platform which will be different from the traditional business models employed by other entertainment companies. Hence, their valuation commands high multiples.
While it is true that the Weverse platform has the potential to be a different business model and thus a game changer, Big Hit Entertainment company is not an IT company by nature.
If the Weverse platform cannot live up to its dream and Big Hit Entertainment cannot continue to produce other artists groups to back up the BTS group, then this valuation is a definitely overvaluation.
There are a number of risks to buying Big Hit Entertainment stocks.
- The spike in the number of and spread of COVID-19 may dampen the demand for entertainment products and concerts;
- BTS group will go to serve the Korean army for one year and a half;
- The Weverse platform may underperform against its expectation;
- Big Hit Entertainment may fail to create as famous group as BTS in the following years; and
- Depreciation of Korean won is making stock investment in South Korea unfavorable for foreign investors. I have presented my thesis on KRW/USD exchange rate here;
It is true that BTS is the most successful and famous K-pop group in history. The Weverse application has the potential to become a platform for celebrity in the same way that YouTube or Facebook have become dominant, and Big Hit Entertainment can have the universe of its stories, just like the Marvel Studio does.
While it is obvious that loyal fans to BTS group will continue to be loyal and contribute to Big Hit Entertainment’s profits, there is a lingering question that needs to be answered:
Will the Weverse platform attract beyond its existing fans and attract more people in the same way that Marvel movies have?
If the answer is yes, then the stock price may not be overvalued.
If the answer is no, then the stock price is overvalued.
Which way will you bet?
Disclosure: I do not personally own Big Hit Entertainment stock. I wrote this article to myself, and it expresses my own opinions. I am not receiving compensation for it other than from the Macrotrend. I have no business relationship with any company whose stock is mentioned in this article.
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