Humiliation for HYBE without 'Bangtan Sonyeondan'... Securities Firms Lower Target Prices Amid 'BTS Military Hiatus'

[Image source=Yonhap News]

[Asia Economy Reporter Lee Seon-ae] Securities firms have been consecutively lowering their target prices for HYBE. The reason for the downward revision of target prices is the inevitable decline in profitability during the "military hiatus" (a gap period due to military service) caused by the enlistment of BTS, which accounts for more than half of HYBE's sales. Last month, BTS announced that the eldest member Jin (real name Kim Seok-jin) would enlist first, followed by the other members in order, and HYBE also issued an official statement saying that BTS has begun concrete preparations to fulfill their military service obligations.

According to the securities industry on the 5th, DB Financial Investment maintained its "buy" rating on HYBE but lowered the target price from 220,000 KRW to 160,000 KRW the day before. The target price is based on a price-earnings ratio (PER) of 33 times the expected 2023 earnings, and the multiple has significantly decreased compared to the company's historical average. The absence of BTS and the resulting decline in expectations for Weverse traffic are the reasons for the target price cut.

Hwang Hyun-joon, a researcher at DB Financial Investment, explained, "The target price was lowered considering the market situation without BTS. However, thanks to steady artist album sales, normalization of performances, and strengthening of the rookie lineup, we expect a favorable earnings trend to continue. We believe the fandom platform business still needs to be monitored for performance, so we maintain the buy rating."

HYBE's sales and operating profit for the third quarter of this year increased by 84% and 215% year-on-year to 445.5 billion KRW and 88.3 billion KRW, respectively, meeting the consensus (average securities firm forecast) of 403.7 billion KRW in sales and 57 billion KRW in operating profit. With the addition of SEVENTEEN, TXT, and NewJeans, album sales remained solid, and performance sales reached 47.2 billion KRW, reflecting concerts by TXT and SEVENTEEN. Indirect participation-type sales driven by the existing lineup also increased by 35% year-on-year, leading top-line growth. Profitability declined due to an increase in cost ratio caused by more offline performances.

Researcher Hwang emphasized, "The selling power of SEVENTEEN and TXT is strengthening, and new girl groups like NewJeans are quickly establishing themselves. The integrated Weverse and V Live app's monthly active users (MAU) and performance trends need to be monitored. The average MAU in the third quarter was 7 million, showing a slower increase than expected but still growing. The enhancement of services and expansion of artists on Weverse are still considered mid- to long-term positive factors."

[Image source=Yonhap News]

On the same day, Hanwha Investment & Securities also lowered HYBE's target price from 244,000 KRW to 185,000 KRW. Park Soo-young, a researcher at Hanwha Investment & Securities, said, "With Jin's enlistment decision, uncertainties related to BTS's military service have been resolved, but it is expected to take more than a year for rookie artists such as SEVENTEEN, TOMORROW X TOGETHER, ENHYPEN, LE SSERAFIM, and NewJeans to approach BTS's growth curve." Accordingly, the profitability decline is inevitable as six rookie artist groups debut from the end of this year through next year. He also added that it is unfortunate that the margin decline period must be endured until the clear growth of other intellectual property (IP) occurs.

Kiwoom Securities also lowered the target price from 265,000 KRW to 175,000 KRW. Lee Nam-soo, a researcher at Kiwoom Securities, pointed out, "Next year, expansion of existing artists' albums and concerts, as well as growth in the gaming business, are expected, but at the same time, there are factors such as sluggish sales in advertising due to the absence of BTS's full-group activities." He analyzed that without efficient cost management, deterioration in profitability due to sales decline is inevitable.

Korea Investment & Securities cited not only BTS's military hiatus but also the delayed introduction of paid services for the fan community Weverse and the decline in valuation of the platform industry as reasons for the profitability hit. Accordingly, they lowered the target price from 280,000 KRW to 230,000 KRW.

HYBE's stock price closed at 122,500 KRW the previous day. This is about half of the closing price on the listing day, October 15, 2020, which was 258,000 KRW. At the third-quarter earnings conference call, Lee Kyung-jun, HYBE's Chief Financial Officer (CFO), stated, "BTS accounts for 60-65% of this year's sales," and "Next year, the sales proportion will decrease while sales from other artists will increase, intensifying margin pressure." Other artists, including Ithaca Holdings, account for 35-40% of sales.

Meanwhile, HYBE announced that in the short term, some members' individual activities are scheduled until the first half of 2023, and with various pre-prepared content, BTS will be able to engage with their fandom ARMY. HYBE and the members hope to resume full-group activities in 2025.

This content was produced with the assistance of AI translation services.