BTS agency's listing face hardships

K-pop boy band BTS pose during the press conference for new album release on Feb. 24. / Courtesy of Big Hit Entertainment

By Kim Jae-heun

Big Hit Entertainment Founder and CEO Bang Si-hyuk

Everything seemed to be going well for Big Hit Entertainment and its plan to go public this year as their peak estimated valuation on the stock market was estimated at 6 trillion won ($48.19 billion).

Just two years ago, their enterprise value hovered between 1.28 trillion won and 2.28 trillion according to a 2018 report by the Hyundai Research Institute (HRI).

But, thanks to K-pop sensation BTS, the label grew so much in one year that it's revenue in 2019 skyrocketed 95 percent to 587.9 billion won, while its operating profit increased 17 percent to 97.5 billion won. Reflecting this performance, HRI estimated its new enterprise value at 4 trillion won last year.

At the time, Kim Hyun-yong, a researcher at eBest Investment & Securities, said Big Hit Entertainment would be holding 39 concerts this year, attracting a near 2.3 million audience worldwide, nearly double the amount and size of music events it hosted last year.

“Considering this, the market can give the music label a price-to-earnings ratio at a minimum of over 30 times to a maximum of more than 50 times. The entertainment company's valuation is estimated at between 3 trillion won and 4.5 trillion won,” Kim said.

Bit Hit Entertainment's underwriters for its projected initial public offering (IPO) stated that the company's value was 6 trillion won, much higher than that of the combined valuation of the next big three local music labels, whose aggregate market capitalizations was 1.47 trillion won as of March 22.

However, some think that the music label's valuation is overrated.

A source from a securities firm said the investment bank underwriters compared Big Hit Entertainment to global companies during the corporate evaluation process, one of which was a firm in the content sector, a completely different business field from that of the music label.

The underwriters also applied a different standard for business profit comparisons to raise Big Hit Entertainment's enterprise value. The severe competition in selecting managers for the IPO apparently resulted in exaggerations of the music label's valuation, which is unlikely to be accepted for its official listing.

Diversifying its business model was another important factor for Big Hit Entertainment's successful IPO.

Currently, the music label depends on BTS for much of its revenue source, despite attempting to start new business models utilizing database and information technology, as well as intellectual property. It began to provide content such as webtoons and novels, and created a platform for fans and their idols to communicate.

However, these business are receiving cynical evaluations. For instance, the company launched a game called “BTS World” in collaboration with the country's largest mobile-game company Netmarble, which is also the second largest shareholder in the music label. The game got much expected attention among fans, but failed to go viral.

BTS member's compulsory military service in the near future is also a negative factor for the IPO. Jin, the oldest member of BTS, has failed to make it clear whether he will join the army this year, but he will have to start his mandatory service within the next two years. Jin is 28 years old and the law only allows Korean men to postpone their enlistment until they are 30 years old. Also, the law bans men over 28 years of age who have not completed their military service from traveling overseas unless they get a government exemption.

Other members will soon face the same problem and when it comes to the time when more than half of the group's members will have to join the military, many predict the music label's growth will falter.

The newly introduced five-member boy band Tomorrow X Together is not generating any significant presence on the K-pop scene either and the chances that Big Hit Entertainment's collaboration with CJ ENM or its subsidiary Source Music to get megahit are also fairly low.

To make matters worse, the expanding COVID-19 outbreak around the world has caused the postponement or cancelation of many BTS' concerts. The pandemic is just now beginning to impact heavily on the United States, Europe and Southeast Asia and this could, in the worst case scenario, result in the band's tour being called off completely.