K-pop stocks poised for new growth phase - Industry leaders looking to revive their fortunes
SEOUL: K-pop music agencies are in need of a second act after an US$8bil equity rout sparked by concerns over falling album sales.

Hybe Co, SM Entertainment Co, JYP Entertainment Corp and YG Entertainment Inc, whose shares are down as much as nearly 50% from a 2023 high, are looking to new acts, distribution deals and gains on streaming sites to revive their fortunes.

With the popular BTS and Blackpink groups going on hiatus and a decline in album sales in China, K-pop companies need a new growth strategy.

Goldman Sachs Group Inc and HSBC Holdings Plc are among the analysts arguing that the plan by these music agencies to engage fans through concerts and broaden their reach to the United States and Japan will pay dividends.

“Current concerns about the K-pop outlook do appear to be excessive,” said Junhyun Kim, an analyst at HSBC.

Even if physical album sales were to decrease in 2024, there are “various other ways to monetise K-pop fans”, he said.

While digital streaming is becoming dominant in the music industry, K-pop agencies have relied on physical album sales as these can be bundled with lucrative exclusive merchandise.

However, falling album sales in the second half of 2023 led to Hybe reporting its slowest quarterly growth for the three months through December.

Yuanta Securities Co expects album sales in 2024 by the four major K-pop agencies to drop 5.3% year-on-year to 82.7 million copies. Over the past four years, sales growth has stayed above 40%.

Hybe, the biggest by market value among the four, is now leading the way with its strategic pivot.

It signed a distribution deal with Universal Music Group NA, the world’s biggest music company, that will widen its digital and geographical reach.

Ongoing penetration on global streaming sites also helped ILLIT, a new girl group under its management, break records for the highest first-week streams for a K-pop debut album on Spotify.

Peers are also promoting newer talents to offset China’s headwinds.

Increasing popularity for Riize is expected to boost earnings growth for SM, while packed schedules for key artists, including Stray Kids and Twice, will enable JYP to maintain its revenue base, according to Morgan Stanley.

Fans are also anticipating the resumption of activity from YG’s Blackpink.

With pandemic-related restrictions over, off-line concert audiences should be the more important metric to measure K-pop’s growth versus just physical album sales, said analysts at Goldman Sachs.

K-pop’s fan base is expected to expand by 26% annually over three years, with audience growth in Japan as the key driver in the near term, Goldman Sachs analysts, including Eric Cha, wrote in a note on March 14.

This recovery comes after the industry grappled with concerns over the re-contracting of key artists, drug probes and a decline in group buying of albums in China last year.

It remains to be seen if the new generation of artists will be able to sustain their trajectory.

Established acts such as Blackpink, the world’s most popular girl band, and Hybe’s BTS have fuelled a global craze for South Korean entertainers.

Still, valuations have become attractive after a significant de-rating over the past six months.

Shares of Hybe, JYP and SM are now trading at about one standard deviation below their five-year average forward earnings, according to Bloomberg-compiled data.

“We see K-pop on the cusp of being a mainstream genre in the global music industry and think the risk-reward for the sector is attractive,” Morgan Stanley analysts, including Seyon Park, wrote in a note last month.

The recent share price correction has offered “an opportunity for investors to ride the longer-term theme”. — Bloomberg
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SEOUL: K-pop music agencies are in need of a second act after an US$8bil equity rout sparked by concerns over falling album sales.