The author is an analyst of KB Securities. She can be reached at firstname.lastname@example.org. — Ed.
Maintain BUY; TP raised by 13.0% from KRW270,000 to KRW305,000
We maintain BUY on Big Hit Entertainment (to be renamed HYBE this year), but raise our TP from KRW270,000 to KRW305,000. The company’s recent acquisition of U.S. music publisher Ithaca Holdings via its wholly owned subsidiary Big Hit America should (1) bolster the pipeline of global artists and (2) diversify the range of merchandise found on the company’s mobile app Weverse—a global fan community platform. We now expect 2021E-23E revenue CAGR for Weverse at 27.5% (as opposed to 19.1% previously). We believe future EPS growth (via acquisition-backed inorganic growth) will outweigh EPS dilution from the rights issue to fund the Ithaca acquisition.
Rights issue to fund acquisition of U.S. company Ithaca Holdings
Big Hit Entertainment announced on Apr 2 that it would acquire Ithaca Holdings via its wholly-owned subsidiary Big Hit America. For the acquisition, Big Hit America would conduct a rights issue totaling KRW1.0tn, with the full amount of newly issued shares (950mn) to be acquired by parent Big Hit Entertainment. Big Hit Entertainment, in a bid to secure operating capital, decided on a rights issue worth KRW440.0bn targeting its existing shareholders. Meanwhile, related parties of Ithaca Holdings, in a bid to solidify collaborations, will participate in Big Hit Entertainment’s private placement, which should secure around KRW182.0bn. Ultimately, the parent will have around KRW2.0tn in cash (via existing cash holdings + two rights issues); in exchange for the 100% interest in Ithaca Holdings, it will pay around KRW1.2tn.
Acquisition to bolster pipeline of global artists, Weverse revenue
Ithaca Holdings owns a variety of music interests, including SB Projects (management clients Justin Bieber and Ariana Grande) and Big Machine Label Group (famous country singers), and has major subsidiaries Silent Content Ventures (content producer and distributor) and Drew House (producer of merchandise based on proprietary artist IPs). The tie-up should shift Big Hit Entertainment away from its high dependence on the seven-member Korean boy band BTS (aka Bangtan Boys) and facilitate its entry into the overseas merchandise market with global artist IPs, which should translate into a jump in revenue for Weverse Shop.
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