CHICAGO, ILLINOIS – AUGUST 03: (L-R) Danielle, Hyein, Hanni, Minji and Haerin of NewJeans perform at Lollapalooza at Grant Park on August 03, 2023 in Chicago, Illinois.
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It wasn’t an easy start to the year for investors in the K-pop sector, as lower sales and profits in the fourth quarter and dating scandals weighed on share prices.
However, Goldman Sachs expressed optimism for the industry in a March 14 report, saying the K-pop sector is “misunderstood.”
Shares of K-pop’s Big Four companies have all fallen since the start of the year. Shares of JYP Entertainment are down over 37% year-to-date, while YG Entertainment is down almost 17%. Kospi-listed Hybe, home of superstar BTS, saw a smaller decline of about 4.5%.
Shares of SM Entertainment have plunged over 17%. The decline comes as one of the agency’s artists was involved in a dating scandal that attracted widespread attention at home and abroad.
In February, the stock fell for five consecutive sessions to its lowest level since October 2022 following the drama surrounding Karina, the leader of the girl group Aespa. The selloff wiped $50 million off SM’s market value as Chinese fans threatened to quit to boycott the group’s albums.
Nonetheless, Goldman Sachs sees “high potential for valuation reassessment” as companies continue to deliver multi-year earnings growth. For 2023, all four companies reported higher full-year sales and net profit.
A superior evaluation metric
Goldman said the selloff was tied to markets focused on album sales, which have historically been considered a key indicator of the number of fans and therefore companies’ prospects.
“We challenge this mainstream thinking and argue that the offline concert audience … is the better benchmark for measuring K-pop’s growing reach,” the analysts wrote. They explained that album sales can be affected by the share of wallet at which a fan can purchase multiple albums – which is common in the K-pop fan base.
The analysts also said album sales skyrocketed during the pandemic due to a lack of offline interaction, skewing the metric relative to fans.
Japan should drive short-term growth
Assessing the industry based on in-person concert attendance, Goldman said “growth continues to accelerate rapidly” and “in the near term, we see audience growth in Japan as the key growth driver.”
The analysts see significant short-term fan base growth opportunities for K-pop companies in Japan, “which we believe are being overlooked by the market.”
They note that Japan is one of the largest fan bases for K-pop overseas, with Hybe, SM and JYP together accounting for 7% of the live music market in Japan. Goldman pointed out that Japan’s top talent agency Johnny & Associates has been embroiled in a major scandal that has caused the industry to become more favorable to K-pop artists.
In 2023, Kouhaku Uta Gassen, Japan’s biggest music show, invited five K-pop artists and two local groups produced by K-pop companies. It was the first time the show featured male K-pop artists since 2011, and the largest number of K-pop groups ever featured on its program.
Goldman estimates that concert audiences in Japan will grow at a compound annual growth rate of 24% from 2023 to 2026, with the combined share of Hybe, JYP and SM doubling from 7% to 14%.
Catalysts for growth in Japan include SM’s newest Japanese boy band NCT Wish as well as JYP’s upcoming boy band NEXZ.
The global fan base
Goldman is also optimistic about the global growth of the K-pop fan base, particularly in markets such as the United States
The report pointed to the success of Hybe-managed girl group NewJeans on the US charts. In a March 27 report, analysts noted that NewJeans’ latest album debuted at No. 1 on the US Billboard 200. The group’s lead single, “Super Shy,” debuted at No. 2 on the Billboard Global 200.
The group was also the first South Korean girl group to perform at Lollapalooza. The Chicago Sun Times reported that the group may have managed to attract its largest audience ever for the festival’s 5 p.m. time slot.
Le Sserafim, managed by Hybe subsidiary Source Music, also debuted at the Coachella music festival on April 13, with another show scheduled for April 20.
Hybe also recently announced that it will be expanding its partnership with Universal Music Group, including exclusive distribution rights for Hybe artists and labels. UMG’s roster includes Taylor Swift, Ariana Grande and Justin Bieber.
Goldman said the announcement is a visible sign that K-pop is becoming mainstream worldwide, resulting in a competitive position that enables greater bargaining power in business relationships.
The analysts concluded that the sector has “a long growth path ahead,” adding that “further downside potential for Wallet stock, which has normalized near pre-Covid levels, appears limited in our view .”
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2024-04-17 00:09:56
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