[Upcoming IPO] BTS label Big Hit’s IPO expected to raise around $840 mn

Investors are expecting Big Hit Entertainment to pull in the highest subscription demand for public shares during the initial public offering process this year. The company is home to the seven-member boy band BTS which has achieved global success.

Big Hit is likely to raise more than 1 trillion won ($839 million) through the IPO with an estimated enterprise value of up to 6 trillion won, Korean Investors reported earlier.

The industry’s estimated valuation of Big Hit ranges between two trillion won to five trillion won. Hana Financial Investment has predicted the company’s valuation to be anywhere between 3.9 trillion won to 5.2 trillion won.

The company submitted an IPO application on May 28 to get listed on the country’s main bourse KOSPI. The review process was expected to wrap up by July 30 based on the Korea Exchange’s listing guidelines but it has been delayed in a request for additional materials.

Despite the hiccup, the investment industry does not see this to be problematic as delays are quite common and do not necessarily point at a fault. Yet, there are some views that the hold up may be due to concerns that Big Hit needs to diversify its business structure which is heavily dependent on BTS.

Two of the seven BTS members are nearing their mandatory military service with the oldest member Jin’s deadline to enlist being this year. The group will not be able to perform as a complete team for much longer which has sped up Big Hit’s efforts to tap into other projects and engage in various M&A activities.

For example, the entertainment acquired management rights for Pledis Entertainment which manages boy band groups such as Nu’Est and Seventeen.

“Right now, Big Hit’s dependence on BTS is over 90%, but this will drop to 75% by acquiring Pledis,” said Hyun-yong Kim, an analyst at eBest Investment & Securities.

The industry is also expecting to see synergy from the collaboration with beNX, an operator of fan community platform and commerce, and Big Hit 360 which manages content and performances. Big Hit has also acquired entertainment company Source Music which manages girl group GFriend.

COVID19 THROWS A CURVE BALL RAISING MIXED VIEWS OVER VALUATION

In 2019, Big Hit became a frontrunner in the Korean entertainment industry with a record-high turnover of 587.2 billion won ($491 million), and an operating profit of 98.7 billion won. The company’s operating profit was higher than the combined profit from Korea’s three leading entertainment companies – SM, JYP, YG – which are listed on the country’s junior KOSDAQ market.



BTS' popularity isn’t showing any signs of slowing down which is good news for investors who anticipate the group's success to spill over to the IPO.

Yet, the coronavirus has surfaced as a variable that may affect the company’s valuation.

Investors are paying close attention to Big Hit’s performance for this year because the global pandemic has led to the cancellation of concerts and tours which account for a handsome portion of the company's revenue.

In 2019, Big Hit earned more than half of its operating profit from concerts and additional revenue. North America accounted for 30% of the company’s turnover.

In 2020, Big Hit’s economic activities in North America hit the brakes given that coronavirus suspended global traveling for most countries and it is unclear as to when the company will be able to resume activities.

Big Hit has turned to other options to keep up the BTS momentum. In June, BTS held a paid online concert which drew in 750,000 viewers across 107 regions. Considering that a packed stadium during a world tour holds approximately 50,000 people, the online concert garnered the effect of 15 performances in a single show.

BTS fan club members, referred to as the Army, paid 29,000 won ($24) and non-fan club members paid 39,000 won ($32) to watch the concert. In addition to ticket prices, swag items sold via online mall pushed the overall profit to over 25 billion won ($21 million).

“Big Hit's turnover for 2021 is estimated to be around 750 billion won at a minimum with an operating profit over 150 billion won,” said Ki-hoon Lee, an analyst at Hana Financial.

There are views that the company may be overvalued. It would be too much to apply a P/E ratio of 30 times to 40 times to Big Hit when considering that the company's industry peer and competitor JYP has a P/E ratio of 24 times. Also, other entertainment giants such as YG and SM have market caps in the ranges of hundred billions of won.

However, an investment banking industry source pointed out that Big Hit's valuation is likely to surge if the P/E ratio for overseas entertainment companies is applied instead of domestic entertainment companies.

Still, BTS' mandatory military service remains a pending variable that may affect enterprise valuation, the source added.

In 2018, BTS renewed a seven-year contract with Big Hit.

“We don’t know when Covid19 will end and we definitely don’t know when offline activities will resume which makes the outlook for performance during the second half of the year not so optimistic,” said an executive from the entertainment industry.

The executive pointed out that there's a chance that Big Hit may receive valuation below market expectations.

Nonetheless, Big Hit's IPO is expected to be one of the largest offerings in 2020, and many investors are closely eyeing the steps of the company.

Founded in 2005, the company’s founder and chief executive officer Bang Si-hyuk is the biggest shareholder with a 45.1% stake. Korean game company Netmarble is the second-biggest shareholder with a 25.22% stake. Other majority shareholders include local private equity firm STIC Investments and China-based VC Legend Capital.

NH Investment & Securities, Korea Investment & Securities, and JP Morgan are the lead IPO managers. Mirae Asset Daewoo has also participated as a joint manager.

 

By Jae-won Park and Yun-sang Ko

wonderful@hankyung.com