An initial public offering from Big Hit Entertainment — valuing the group behind K-pop superstars BTS at almost $4bn — has sparked criticism from analysts who say the price is too high given mounting risks facing South Korea’s entertainment industry.

The Seoul-based music agency, which formed the seven-member boy band a decade ago, wants to raise up to Won963bn ($809m) by listing 21 per cent of the company on the South Korean stock exchange, according to a regulatory filing on Wednesday.

The IPO is set to be South Korea’s biggest in three years and the implied market capitalisation of $3.9bn, at the top end of the pricing range, would make Big Hit more valuable than the country’s three largest listed music agencies combined.

The listing comes against a backdrop of unprecedented popularity in South Korean pop music, largely spearheaded by the huge global fan base of the world’s biggest boy band, BTS. The group’s first English language release, “Dynamite”, last month became the first South Korean song to top the US Billboard Hot 100. 

However, the IPO pricing implies that Big Hit will start trading at 76 times its projected earnings for 2020 — roughly double the 30 to 40 range of its main domestic rivals and five times that of Samsung Electronics, South Korea’s biggest company and the world’s biggest maker of computer chips and smartphones.

“The price range looks expensive relative to its earnings and compared with its rivals,” said Lee Jin-man, an analyst at SK Securities.

Big Hit’s revenue nearly doubled to $500m last year, on the back of sellout global tours by BTS and the boy band’s rapidly expanding fan base. The company touted new income streams through emerging acts, and language learning platforms and gaming products.

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But Big Hit’s profits in the first half of 2020 slipped 4 per cent to $42m as the coronavirus pandemic forced BTS to cancel tours, underscoring the company’s heavy dependence on the band.

Sung Mi-kyung, a researcher at Korea Creative Content Agency, said that while the K-pop industry was adapting to restrictions on international travel and large public events such as concerts with a surge in online content, coronavirus was “putting the brakes on”.

“It is very important for artists to communicate and unite with their fans through concerts in order to expand their fan bases . . . they can’t do this at the moment, which poses a risk for the growth of the K-pop industry,” she said.

One investment manager at a US hedge fund noted that the music industry was now seen as a key growth driver for the South Korean equity market, the fifth biggest by capitalisation in Asia. But he queried the prices attached to such stocks.

“For example, [Big Hit’s] dependence on BTS is too high while singers’ deviant private behaviours pose investment risks in the sector,” said the investor, referring to scandals in 2019 that led to two other K-pop celebrities being jailed for rape and a short-term hit to stock prices across the industry.

Mandatory conscription to the South Korean military also looms as a problem for BTS — though Big Hit noted in its regulatory filing that the 18-month national service of its oldest member, Jin, could be postponed until the end of 2021.

Still, the listing is expected to deliver a windfall to Big Hit’s founder and biggest shareholder Bang Si-hyuk and the seven BTS members — also known as the Bangtan Boys. Mr Bang, who owns 43 per cent of the group, has given each of the stars 68,385 shares, worth Won9.2bn at the top of the IPO price range of Won105,000 to Won135,000.

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Mr Lee of SK Securities said the expensive IPO price also highlighted a broader shift under way in South Korean stock markets from traditional hardware manufacturers producing computer chips, ships and cars to “content creators” such as entertainment companies and games makers.

Additional reporting by Kang Buseong and Edward White

Via Financial Times