Korea/Asia, Events, IPOs, Douglas Research Advisory

Douglas Kim

Korea/Asia, Events, IPOs

Equity Capital Markets

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Based on the Smartkarma's platform interest rates comparison, there is overwhelming evidence that suggests the LACK of interest in the Big Hit Entertainment IPO as compared to the Kakao Games and SK Biopharm IPOs. In fact, the IPO interest levels of Kakao Games and SK Biopharm are similar (100 for Kakao Games and 97 for SK Biopharm). However, the interest levels for the Big Hit Entertainment is much lower (36) than those for Kakao Games and SK Biopharm.
In other words, the viewers of our insights already have figured out that the IPO price range of Big Hit Entertainment is TOO HIGH and as a result, there is not much to gain from this IPO. The bookbuilding for the Big Hit Entertainment IPO starts on September 24th and based on the Smartkarma interest level comparisons combined with our own valuation assessment, the institutional investors' interest in the Big Hit's IPO will be much lower than those for Kakao Games and SK Biopharm. 
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Based on the Smartkarma's platform interest rates comparison, there is overwhelming evidence that suggests the LACK of interest in the Big Hit Entertainment IPO as compared to the Kakao Games and SK Biopharm IPOs. In fact, the IPO interest levels of Kakao Games and SK Biopharm are similar (100 for Kakao Games and 97 for SK Biopharm). However, the interest levels for the Big Hit Entertainment is much lower (36) than those for Kakao Games and SK Biopharm.
In other words, the viewers of our insights already have figured out that the IPO price range of Big Hit Entertainment is TOO HIGH and as a result, there is not much to gain from this IPO. The bookbuilding for the Big Hit Entertainment IPO starts on September 24th and based on the Smartkarma interest level comparisons combined with our own valuation assessment, the institutional investors' interest in the Big Hit's IPO will be much lower than those for Kakao Games and SK Biopharm. 


Interest Comparisons of Upcoming Korean Large-Cap IPOs: Kakao Games & Big Hit Entertainment

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Our base case valuation of Big Hit Entertainment is EV of 4.1 trillion won, a market cap of 4.8 trillion won, and an implied price of 132,429 won per share (representing 2% lower than the high end of the IPO price range of 135,000 won per share). Given the low upside, we recommend investors to avoid this IPO.
If the IPO is priced at the low end of the IPO price range (105,000 won), then this IPO could have a reasonable upside (+20% upside). Otherwise, we think it would be better for global investors to allocate their precious capital in other more attractive companies.
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Note the key assumptions in our valuation:
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EV/EBITDA multiple - We used a 30x EV/EBITDA (2020E) to value the company, which is a 30% premium to the average EV/EBITDA multiple of the comps.</li>
<li>
Sales growth - In 2020, the comps are expected to have an average sales decline of 11.9% YoY. We estimate Big Hit's sales to increase by 12.5% YoY. Overall, we would give an edge on the sales growth metric to Big Hit versus its peers given its much higher sales growth over a longer period.</li>
<li>
Operating profit growth - We have assumed the company's operating profit to increase by 17.1% YoY in 2020 and by 20.9% YoY in 2021.</li>
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Our base case valuation of Big Hit Entertainment is EV of 4.1 trillion won, a market cap of 4.8 trillion won, and an implied price of 132,429 won per share (representing 2% lower than the high end of the IPO price range of 135,000 won per share). Given the low upside, we recommend investors to avoid this IPO.
If the IPO is priced at the low end of the IPO price range (105,000 won), then this IPO could have a reasonable upside (+20% upside). Otherwise, we think it would be better for global investors to allocate their precious capital in other more attractive companies.

Note the key assumptions in our valuation:


EV/EBITDA multiple - We used a 30x EV/EBITDA (2020E) to value the company, which is a 30% premium to the average EV/EBITDA multiple of the comps.

Sales growth - In 2020, the comps are expected to have an average sales decline of 11.9% YoY. We estimate Big Hit's sales to increase by 12.5% YoY. Overall, we would give an edge on the sales growth metric to Big Hit versus its peers given its much higher sales growth over a longer period.

Operating profit growth - We have assumed the company's operating profit to increase by 17.1% YoY in 2020 and by 20.9% YoY in 2021.


Big Hit Entertainment IPO Valuation Analysis

Big Hit Entertainment ("BHE") is getting ready to complete its IPO in the Korean stock market in early October. This is the second largest IPO in Korea this year after SK Biopharm. The IPO price range of the Big Hit Entertainment is between 105,000 won to 135,000 won. The IPO base deal size is from $634 million to $816 million. The expected market cap after the IPO is from 3.8 trillion won to 4.9 trillion won. The bookbuilding for the institutional ivnestors starts on September 24th.Excluding YG Plus, Naver, and Kakao as comps and including only JYP Enter and YG Enter as comps, the average EV/EBITDA multiple would decline to 33x, which is lower than the bankers' EV/EBITDA valuation multiple of 42.4x. Moreover, it may be more appropriate to include S.M. Entertainment in the comps as well. The bankers probably excluded S.M. Entertainment as one of the comps due to its relatively low valuation multiples.<div class="content-highlight">It is time to separate the wheat from the chaff among the large cap Korean IPOs in 2020. SK Biopharm has performed very well post its IPO and it is highly likely that Kakao Games IPO will also have an excellent performance post its IPO next week. Thus, SK Biopharm and Kakao Games are the wheat of the large cap Korean IPOs. However, mainly due to lofty valuations and over-reliance on the BTS, the Big Hit Entertainment IPO is likely to become the chaff.</div>

Big Hit Entertainment ("BHE") is getting ready to complete its IPO in the Korean stock market in early October. This is the second largest IPO in Korea this year after SK Biopharm. The IPO price range of the Big Hit Entertainment is between 105,000 won to 135,000 won. The IPO base deal size is from $634 million to $816 million. The expected market cap after the IPO is from 3.8 trillion won to 4.9 trillion won. The bookbuilding for the institutional ivnestors starts on September 24th.Excluding YG Plus, Naver, and Kakao as comps and including only JYP Enter and YG Enter as comps, the average EV/EBITDA multiple would decline to 33x, which is lower than the bankers' EV/EBITDA valuation multiple of 42.4x. Moreover, it may be more appropriate to include S.M. Entertainment in the comps as well. The bankers probably excluded S.M. Entertainment as one of the comps due to its relatively low valuation multiples.It is time to separate the wheat from the chaff among the large cap Korean IPOs in 2020. SK Biopharm has performed very well post its IPO and it is highly likely that Kakao Games IPO will also have an excellent performance post its IPO next week. Thus, SK Biopharm and Kakao Games are the wheat of the large cap Korean IPOs. However, mainly due to lofty valuations and over-reliance on the BTS, the Big Hit Entertainment IPO is likely to become the chaff.

Big Hit Entertainment IPO Preview (Time to Separate the Wheat from the Chaff)

Korea / Special Situations, Clepsydra Capital

Sanghyun Park

Korea / Special Situations

The last one of the big three IPOs in Korea this year unveiled the IPO book.
Big Hit Ent. offers 7.13M new shares with a 100% primary offering. The capital increase rate is 25% with a dilution of 20%.
Institutional allotment is 60%. A total of five bankers will be underwriting with a firm commitment.
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The book opens on September 14 (for overseas institutions) and closes on September 25. You will get to know the allotment on September 28, followed by October 5 for subscription and 8 for payment.
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The last one of the big three IPOs in Korea this year unveiled the IPO book.
Big Hit Ent. offers 7.13M new shares with a 100% primary offering. The capital increase rate is 25% with a dilution of 20%.
Institutional allotment is 60%. A total of five bankers will be underwriting with a firm commitment.

The book opens on September 14 (for overseas institutions) and closes on September 25. You will get to know the allotment on September 28, followed by October 5 for subscription and 8 for payment.


Big Hit Ent. IPO: Terms & Valuation Issues

Equity Bottom-Up

<a href="https://www.smartkarma.com/entities/netmarble-corporation" target="_blank" data-smartkarma-citation="entities:22839:1" rel="noopener">Netmarble Corporation (251270 KS)</a> reported excellent 2Q 2020 earnings results after the market close today. Due to the much better than expected results, Netmarble Corp's share price is likely to rise sharply tomorrow morning.The company reported sales of 685.7 billion won (up 30.3% YoY and 15.3% higher than the consensus estimates and operating profit of 81.7 billion won (146% YoY and 27.9% higher than the consensus estimates) in 2Q 2020. After today's strong earnings announcement in 2Q 2020, it is likely that the sell-side is likely to raise earnings estimates of the company by at least 10-15% for 2020.Netmarble's stake in four key companies including Coway, NCsoft, Bit Hit Entertainment, and Kakao Games is estimated to be 4.8 trillion won. We have assumed the value of the company's core game business to be 7.8 trillion won, using a 20x EV/EBITDA multiple, and an estimated EBITDA of 390 billion won in 2020. The NAV of the company is 14.4 trillion won or 167,691 won per share, which is 12% higher than the current price.

Netmarble Corporation (251270 KS) reported excellent 2Q 2020 earnings results after the market close today. Due to the much better than expected results, Netmarble Corp's share price is likely to rise sharply tomorrow morning.The company reported sales of 685.7 billion won (up 30.3% YoY and 15.3% higher than the consensus estimates and operating profit of 81.7 billion won (146% YoY and 27.9% higher than the consensus estimates) in 2Q 2020. After today's strong earnings announcement in 2Q 2020, it is likely that the sell-side is likely to raise earnings estimates of the company by at least 10-15% for 2020.Netmarble's stake in four key companies including Coway, NCsoft, Bit Hit Entertainment, and Kakao Games is estimated to be 4.8 trillion won. We have assumed the value of the company's core game business to be 7.8 trillion won, using a 20x EV/EBITDA multiple, and an estimated EBITDA of 390 billion won in 2020. The NAV of the company is 14.4 trillion won or 167,691 won per share, which is 12% higher than the current price. 

Netmarble Corp: Firing on All Cylinders + Earnings Beat Consensus by Big Amount in 2Q 2020

South Korea

HYBE Co., Ltd. operates as an entertainment company. The Company provides music production, album distribution, entertainers management, publicity, planning, training, and other services. HYBE also makes television shows.

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HYBE (352820 KS)

Interest Comparisons of Upcoming Korean Large-Cap IPOs: Kakao Games & Big Hit Entertainment

Based on the Smartkarma's platform interest rates comparison, there is overwhelming evidence that suggests the LACK of interest in the Big Hit...

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Big Hit Entertainment IPO Valuation Analysis

Our base case valuation of Big Hit Entertainment is EV of 4.1 trillion won, 2% lower than the high end of the IPO price range of 135,000 won per share

Douglas Kim

Big Hit Entertainment IPO Preview (Time to Separate the Wheat from the Chaff)

Excluding YG Plus, Naver, and Kakao as comps and including only JYP Enter and YG Enter as comps, the average EV/EBITDA multiple would decline to...

Douglas Kim

Big Hit Ent. IPO: Terms & Valuation Issues

The last one of the big three IPOs in Korea this year unveiled the IPO book. Big Hit Ent. offers 7.13M new shares with a 100% primary offering. The...

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Netmarble Corp: Firing on All Cylinders + Earnings Beat Consensus by Big Amount in 2Q 2020

Netmarble Corporation (251270 KS) reported excellent 2Q 2020 earnings results after the market close today. Due to the much better than expected...

Douglas Kim

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