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Graphic by Kim Seung-mi

Big Hit Entertainment, the management company of BTS, finalized a price of 135,000 won (US$115) per share for its initial public offering (IPO). This is the largest IPO since Celltrion Healthcare (1.0088 trillion won, or US$863 billion) in 2017.

Estimates of demand from 1,420 institutional investors on Sept. 24-25 showed a competition ratio of 1117.25-to-1, Big Hit Entertainment announced on Sept. 28. The ratio was lower than the 1478.53-to-1 for Kakao Games -- another major hit at its listing -- but higher than the 835.66-to-1 for SK Biopharmaceuticals. The IPO price was set at 135,000 won, representing the upper end of the desired price range (band). Big Hit is expected to raise 962.55 billion won (US$823 million) through the IPO. The vast majority of participating institutions -- 1,381, or 97.3% -- offered an amount equal to or greater than the 135,000 won at the band’s upper end.

But the percentage of institutional investors who agreed to “obligatory ownership” -- which means that they receive priority shares in exchange for an agreement to sell them for a specified period of time -- totaled 49.3%, which was lower than the 81.2% for SK Biopharmaceuticals or the 58.6% for Kakao Games. In terms of agreement periods ranging from 15 days to six months, most institutional investors (49.4%) signed on for one month. Compared with the SK Pharmaceutical situation, where the largest percentage signed on for six months, this could be seen as indicating institutional investors’ greater reluctance to hold on to their shares for long periods of time.

The activities also bear connections with a recent debate over whether Big Hit’s IPO value has been overestimated. While the company recorded sales of just 587.2 billion won (US$502.2 million) and operating profits of 98.7 billion won (US$84.4 million) last year, market capitalization based on the IPO price amounts to 4.85 trillion won (US$4.1 billion). This level puts it on par with the 4.87 trillion won (US$4.17 billion) for LG Uplus, which recorded 12 trillion won (US$10.26 billion) in sales and 680 billion won (US$581.61 million) in operating profits last year.

Big Hit maximized its market cap by using the EV/EBITDA method (enterprise value/earnings before interest, taxes, depreciation, and amortization), which is typically used with large-scale equipment industries, rather than the price-earnings ratio (PER) mainly used to calculate entertainment company value. According to the PER approach, which adopts current term net profits as its standard, Big Hit’s market cap would be around 3 trillion won (US$2.56 billion). Multiplying by the PER of 42 for JYP Entertainment -- which belongs to the same industry and has 63.8 billion (US$54.55 million) in predicted net income attributable to controlling interests this year -- would give a market cap of just 2.6 trillion won (US$2.22 billion). Even when the entertainment industry PER is increased to 50, this still would only give a company assessment value of 3 trillion won (US$2.56 billion).

Instead, the company’s value could increase further, as the EV/EBITDA approach adopts the sum of operating profits plus tangible and intangible asset depreciation costs (EBITDA) as its standard rather than current term net profits. Due to rental costs for its new building and other factors, Big Hit’s tangible and intangible asset depreciation costs for the first half of this year totaled 11 billion won (US$9.41 million) -- three times larger than the semiannual 3.3 billion won (US$2.82 billion) for last year. The calculation of this as pre-depreciation profit rather than a deduction gave a total of 121.9 billion won (US$104.25 million). Also, because the list of comparison companies included others that have experienced large rises in share value this year -- including YG Plus, Kakao, and Naver -- the average EV/EBITDA was 42.36, giving a total of 5.16 trillion won (US$4.41 billion) when the two were multiplied together.

Analysts suggested Big Hit carries some investment risks in terms of its heavy reliance on BTS for sales and the potential for major members to be enlisted for mandatory military service.

But other analysts predicted Big Hit’s corporate value could increase further. Lee Ki-hoon, an analyst for Hana Financial Investment, said, “If you take into account BTS’ value as a top global act and the expansion potential of Big Hit, controlling shareholder net profits could reach 272.4 billion won [US$232.98 million] by 2022, and the corporate value could grow to 14 trillion won [US$11.97 billion].”

Big Hit plans to proceed with general subscriptions on Oct. 5 and 6 before its Oct. 15 listing on the stock market. Subscriptions are being carried out by sponsors NH Investment & Securities and Korea Investment & Securities, joint bookrunner Mirae Asset Daewoo, and underwriter Kiwoom Securities.

By Shin Da-eun, staff reporter

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