K-pop message boards are where Korean boy band fans go to swap stories with fellow travellers.
Last week, a pressing new subject emerged: how to get your money back if you are regretting your investment in South Korea’s most famous music agency, which listed earlier this month. “How do I get a refund on the shares I bought?” asks one desperate investor. “I still have the receipt.”
Questions like this have been shared across message boards by retail investors that piled into the Big Hit Entertainment listing. The initial public offering of the agency behind worldwide pop phenomenon BTS had been among the most hotly anticipated of the year. It did not take long for disappointment to set in.
By the end of the first day of trading, shares had peaked and were on their way down. Institutional investors and foreign funds sold off stock amounting to nearly half the total outstanding amount in the first two days and, by a week in, Big Hit’s fourth-biggest shareholder, a private equity firm, had sold half its holding, or 4.5 per cent of outstanding shares. As for retail investors, many of them were caught off guard.
The $50bn retail share lottery
There were signs before the IPO that market sentiment would prove out of step with economic reality. An army of BTS fans joined millions of retail investors in putting down deposits of more than $100,000 each for the chance to win an allocation of just two shares in a lottery. The central bank was sufficiently alarmed about the resulting huge money flows into brokerages — a combined total of more than $50bn — that it kept a close eye.
But then it also appeared that hard-headed institutional investors had been converted into believers. BlackRock and GIC were among the 1,400 institutional funds that flocked to be allocated shares in the IPO.
In the event, when trading began, the stock nearly doubled — from the IPO price of Won135,000 ($115) to Won270,000 ($236). From there they rose another 30 per cent as the retail investors who had missed out on the lottery drove a trading frenzy. But by 9.15am, a downward march had begun. Big Hit shares are currently trading at about Won156,000.
A one-hit dependency
Big Hit’s up-down IPO aside, K-pop is a growing economic force. The combination of catchy tunes, synchronised dance routines, perfect skin and considerable social media savvy has brought in big money.
South Korean exports of cars and petrochemicals have fallen this year but one K-Pop song — ‘Dynamite’ by BTS released in August this year — added $1.5bn in exports from album sales and other merchandise.
The pandemic has also thrown up new opportunities. More than 7m fans tuned in to two online concerts held by the band this year after world tours were cancelled. Merchandise sales linked to these performances were more than double what would be expected from a physical concert.
But one of the snags for Big Hit is that its future rests on the shoulders of just one band — the seven members of BTS, who accounted for more than 97 per cent of the agency’s sales last year.
Two of the seven are due to disappear for up to two years of compulsory military service in the next couple of years. When this has happened to other bands, they have struggled to recover.
There is now talk of allowing K-pop stars to delay their time in the military but it would have to happen soon to prevent a partial break-up of BTS.
New music, older business model
Perhaps this explains why Big Hit has recently become keen to advertise itself as a “platform” business, touting in particular growing sales on its online app where fans watch BTS videos, pay membership fees and shop for merchandise.
Yet its business model is anything but high tech. Almost all its cash is made in a traditional music agency way. Concerts brought in about a third of total revenues last year. Most of the rest comes from sales of fan merchandise, licensing and albums.
It is also struggling to build a pipeline of new pop groups. The barrier to entry is not high for competitors. There are more than 2,000 entertainment agencies in South Korea, with over 1m signed pop trainees. Just over a decade ago, Big Hit was struggling after a string of failed bands and was on the brink of bankruptcy. Its fortunes changed when RM, the rapper in BTS, approached it with a homemade demo tape.
“To be fair, the formula to making a hit band is not something that can be bottled up. No one knows if a band is going to make it until it does,” said Mr Lee, a Seoul-based rival music producer with 24 years experience in the industry. “But some agencies have a better batting average than others.”
Local rival JYP Entertainment is one of them, having consistently created hit groups with at least two years of overlap between each one.
Big Hit, on the other hand, has not managed to find the next BTS yet — despite having 105 signed trainees. Instead, it has tended to buy in musical talent by acquiring smaller local agencies.
The agency’s problems are amplified by local laws that limit K-pop group contracts to a maximum of seven years. Once popular, many members trade themselves, like Premier League footballers.
Even if members stay signed with the same agency, the revenue split agreement tends to change in favour of the band with the new contract, severely denting agency profit margins. Add to that, the popularity of most K-pop groups has tended to peak after five years and then tail off. BTS has now been around for seven, and is two years into its second contract with Big Hit.
Can the mega-valuation be justified?
Kihoon Lee, an analyst at Hana Financial Investment, believes Big Hit has a strong story to sell nonetheless. “Investors are being too pessimistic about lost concert revenues. Online concerts — which require no additional expenses to air — are becoming a whole new revenue stream.”
He added that the market should not overlook the potential of the platform business either. “It’s growing into a place for content, ticket and merchandise sales and not just for BTS. That potential is significant.”
The industry does have an impressive record of market success. Investors who bought stocks in two of Big Hit’s largest rivals, SM and JYP Entertainment, have enjoyed spectacular windfalls. During the best years, investors will have had a more than 23-fold return on their initial investment.
However, even before a single Big Hit share changed hands, its IPO price already represented a valuation of nearly 60 times forward earnings. SM traded at 13 times the same measure in its first year of listing; JYP at just four times in its early years.
“Blockbuster [Korean] listings this year have followed a pattern, with shares hitting the first trading day’s limit of 160 per cent,” said Hoonsik Min, a research analyst at Credit Suisse. “Some investors are assuming that is the new norm. But the problem is Big Hit is starting out at a much higher level than its predecessors. Those levels are not sustainable.”
Big Hit’s big valuation is also at odds with its declining profitability. Rivals have managed to keep operating margins consistently high — more than 40 per cent for JYP in the first quarter. At Big Hit, margins have fallen to less than half that, as it has invested heavily in its platform business. The question is would that platform still have the same potential without BTS.
“Looking back at the last two decades or so of K-pop bands, every time a band was at its peak, it felt like that fame would last for ever, sometimes even to me,” said the music producer Mr Lee. “For younger fans, BTS is like their first love, so it can be blinding. Fame is a powerful drug, not just for the artists but also for the fans. There always is a comedown.”