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Time to buy Korean entertainment stocks?

Some see their valuations attractive as earnings are expected to improve on new business; HYBE is top pick

By Jan 20, 2022 (Gmt+09:00)

3 Min read

HYBE’s web novels featuring BTS
HYBE’s web novels featuring BTS

Hopes for a rebound in South Korea’s entertainment shares emerged as their earnings are expected to improve on new businesses and their valuations are attractive enough.

Those stocks tumbled as a spread of the Omicron variant of COVID-19 dampened hopes for the economic reopening. The US Federal Reserve is predicted to raise interest rates in March, also souring investor sentiment on the sector.

Analysts, however, recommended buying those shares on dips, saying their recent declines were excessive, given their stable main business. Local entertainment companies are expected to secure growth momentum as they are speeding up their new business, analysts said.

TUMBLE ON OMICRON, FED

HYBE Co., the country’s leading entertainment stock, closed up 4.9% at 288,000 won ($241.9) on Thursday. The stock of the label behind BTS, the world’s top boy band, has lost 31.7% from its 2021 high of 421,500 won hit on Nov. 17.

Its competitors were also sluggish. YG Entertainment Inc. has skidded 32.7% from its peak of last year, while JYP Entertainment Inc. and SM Entertainment Co. have slid 22.4% and 18.2%, respectively.

Last year, South Korea’s entertainment stocks had surged with HYBE and SM Entertainment soaring 120.3% and 149.4% in one year, respectively. The global success of K-content and expectations of offline concerts powered shares in the entertainment sector. Hopes for growth momentum from new businesses such as metaverse and non-fungible token (NFT) bolstered their stock prices further.

But they lost ground around the end-2021 as the Omicron dented predictions of the economic reopening. The Fed’s signal on early interest rate hikes hurt growth stocks, including the entertainment shares, which were hit harder due to high valuations.

“BUY ON DIPS”

Analysts doubted how much the entertainment shares would fall further from the current prices, saying their main business stays healthy. HYBE’s operating profit was forecast to surge 96.7% to 389.5 billion won ($327 million) this year thanks to the growing global fandom and new platform business, according to financial information provider FnGuide Inc.

HYBE is set to establish a joint venture with Dunamu Inc. in the first half for the NFT business based on the intellectual property of its artists such as BTS. HYBE planned to produce content such as webtoons and web novels in the first quarter and start the game business in the second. SM Entertainment launched the meta-passport to be used in the virtual world earlier this year.
(Courtesy of SM Entertainment)
(Courtesy of SM Entertainment)

Some analysts pointed out rising interest rates are not always a bearish factor for growth stocks, saying directions of long- and short-term interest rates, as well as their difference, are also important. Long-term interest rates often reflect growth and inflation, while short-term rates are influenced by a monetary policy.

“Long-term interest rates are likely to fall while short-term rates will rise when a spread of the variant virus increases the downward pressure on the economy amid a tighter monetary policy bias,” said Ahn Jin-ah, an analyst at eBest Investment & Securities. “Growth stocks often outperformed value stocks when the spread between long- and short-term rates narrowed.”

HYBE IS TOP PICK

South Korean entertainment stocks valuations became attractive because of their recent declines, analysts said. HYBE’s 12-month forward price-to-earnings ratio was 39.8 times, down from 57.2 times as of the end-November 2021, according to FnGuide. The ratio fell below 40 times for the first time since January last year, indicating its share price slipped to the level before reflecting the economic reopening and hopes for new business such as the metaverse and NFT.

eBest Investment & Securities selected HYBE as its top pick among the local entertainment shares. KB Securities Co.’s first choice was HYBE and its second was SM Entertainment.

“HYBE is set to kick off world tours, starting from BTS’ Seoul concert in March. In addition, the company is scheduled to expand its business into games, webtoons and NFT,” said Lee Sun-hwa, an analyst at KB Securities.

“SM is undervalued with its 12-month forward PER at 23.4 times, below the entertainment sector’s average of 31 times,” Lee said referring to the price-to-earnings ratio.

Write to Hyeong-Gyo Seo at seogyo@hankyung.com
Jongwoo Cheon edited this article.
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