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South Korea's Big Hit is on the verge of an explosive stock market debut thanks to its biggest act, BTS.   © MTV/AFP/Jiji
Market Spotlight

South Korea gets BTS fever as Big Hit IPO pulls in funds and fans

Retail investors are powering the revival of the Kospi index

KIM JAEWON, Nikkei staff writer | South Korea

SEOUL -- As Big Hit Entertainment was preparing for this month's initial public offering, its hottest property -- K-Pop boy band BTS -- became the first South Korean group to reach No.1 on the Billboard Hot 100 chart with "Dynamite."

For Big Hit and those clamoring to get into its IPO, the song title was prescient.

Riding on the success of the seven-member band, Big Hit is on the verge of an explosive stock market debut that analysts say will further boost the attraction of Seoul's market and the country's benchmark Kospi stock index for retail investors, after successful offerings by Kakao Games and SK Biopharmaceutical this year.

"I want to buy Big Hit shares, if possible. I've heard that it will hit a jackpot once it lists," said Park Ji-hyun, a part-time worker for a media company in Seoul. "But I may not get a chance as it requires a lot of money."

South Korea's retail investors, who now dominate the Kospi, will apply for shares Monday and Tuesday.

Most are likely to be disappointed. Big Hit has said 60% of the offering will be sold to institutional shareholders, while retail investors and its employees can buy 20% of the shares each. Institutional investors have already sought more than 1,000 times the number of shares on offer.

That has allowed Big Hit to price the IPO at 135,000 won per share, the top of an indicative price range, to raise 962.6 billion won ($827 million) through the offer of 7.13 million new shares. It is the biggest IPO in South Korea since Celltrion Healthcare raised 1 trillion won in 2017.

A total of 67 South Korean companies have raised about 2.8 trillion won this year, up 22% from the same period last year, according to data from the Korea Exchange. That is the highest since companies raised 8 trillion won three years ago.

The pricing will ensure Big Hit has a market cap of 4.8 trillion won when it lists on Oct. 15. At that level it would be just outside the top 50 stocks in the Kospi, putting it in the same level with LG Uplus, the country's third-largest telecom company.

Today's Kospi reflects years of a shift towards tech, biopharmaceuticals and energy from telecom, finance and utility sectors. Tech, biopharma, energy and consumer sectors made up 51% of the value of the market in 2019 from 33% in 2000, while that of telecom, finance and utility dropped to 15% from 36% during the same period, according to Korea Capital Market Institute.

It is also a market marked by retail investors' increased influence. Their net buying in the Kospi and minor bourse Kosdaq reached 37.2 trillion won for the six months from February to July. In contrast, foreign and institutional investors dumped their stocks, with net selling marking 25.4 trillion won and 2.4 trillion won, respectively.

Retail investors accounted for 68.7% of trading volume in the Kospi in June, up from 51.3% in January, according to Korea Exchange, which runs the market.

Those individual investors -- who researchers say prefer active over passive investing -- have shown appetite for riskier stocks which dropped sharply hit by the pandemic, betting on them to recover.

"Retail investors bought stocks in airlines, energy, tourism and leisure industries whose earnings worsened amid COVID-19 and other issues," said Kim Min-ki, a researcher at Korea Capital Market Institute.

The Kospi dropped sharply in March due to the pandemic but recovered quickly and has risen 7% year-to-date. Biopharmaceuticals and service sectors led the rebound, spiking 54% and 34%. Stocks in the steelmaking and construction sectors have dropped 14% and 11%.

The influence of small investors -- including many BTS fans -- bodes well for Big Hit's IPO. It will become the country's largest entertainment agency, bigger than the three major agencies of JYP Entertainment, SM Entertainment and YG Entertainment put together.

After the IPO, Big Hit founder and CEO Bang Si-hyuk will remain its major shareholder status with 34%, followed by game developer Netmarble with 20% and private equity STIC Investment with 7%.

The seven members of BTS own a 1% stake in their agency, Big Hit.   © Getty Images

BTS's seven members together own a 1% stake, given to them by Bang in August to encourage their activities.

The company itself remains heavily reliant on its top act. Big Hit said that 87.7% of its revenue came from BTS in the first half of this year. Hanging over the group's seven members is the prospect of their 18-month military service.

But Lee Ki-hoon, an analyst at Hana Financial Investment, said that Big Hit's shares will continue to rise after the IPO as interest in BTS is unabated.

"BTS's story cannot help but being consumed. It is now global No. 1, and its next songs are in line with its narratives," said Lee.

Others say that BTS's strong fan base creates enormous economic value for Big Hit, helping the company make money continuously. For instance, BTS has launched special editions or products in cooperation with Samsung Electronics and Starbucks, creating revenue without directly involving in concerts or albums.

"Big Hit Entertainment leads fandom economics, creating revenue directly from artists and indirectly from the platform as well," said Park Yong-hee, an analyst at IBK Investment & Securities.

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