Buying K-Pop Stock Just Got Less Risky For US Investors: The Ledger – Billboard

The Ledger is a weekly music industry economics newsletter sent to Billboard Pro subscribers. An abridged version of the newsletter is published online.

An exchange-traded fund, or ETF, focused on Korean music began trading on the NYSE Arca exchange on Thursday, giving U.S. investors a way to buy shares of companies that trade on exchanges in South Korea. But the ETF stands out for another reason: a set of K-pop stocks will carry less risk than standalone companies that rely on dozens of labels, each with a handful of top artists as well as extensive catalogs.

Trading under the aptly named symbol KPOP, the ETF includes the shares of 30 companies, including several music companies: HYBE, home of K-pop megastars BTS and up-and-coming artists Tomorrow X Together and Enhypen; YG Entertainment, home to BLACKPINK, the all-female quartet that debuted at No. 22 on the Hot 100 last week, as well as Big Bang; SM Entertainment, home to SuperM, NCT 127, and Girls’ Generation, among others; and JYP Entertainment, home to Stray Kids and Twice. These are enviable lineups of established and future stars. But, compared to other music companies, these are small lists. However, when grouped together, they involve considerably less risk for investors.

Investors like diversification because it reduces a company’s risk of loss. Investors felt the impact of HYBE’s reliance on BTS after the group announced on June 14 that it would take a break to focus on solo projects. The company’s stock price fell 27.5% the next morning and as of Friday’s closing price is still 12.7% below the pre-announcement level.

BTS accounted for 60% of HYBE’s revenue in 2021, according to an analyst’s estimate. This reliance eased after HYBE acquired Ithaca Holdings in April 2021, which added artist management (Justin Bieber, Ariana Grande and others) and Nashville’s Big Machine Label Group to the company’s portfolio. company. But BTS — encompassing touring, sponsorship, merchandise, recorded music, and artist management — remains vital to HYBE’s financial prospects, to the point where investing in HYBE is a bet on BTS.

An ETF – in this case, no company owns more than 10% of the total value – gives investors more diversity than they can get by investing in the standalone companies. K-pop-focused music companies simply have smaller rosters than major labels such as Universal Music Group (over 3 million records and nearly 4 million compositions owned and administered) and Warner Music Group (more 100,000 songwriters and composers) and even smaller entities such as Believe (more than a million artists served by its distributor TuneCore and its labels) and Reservoir Media (more than 140,000 royalties).

Securitized music assets also provide investors with diversification that reduces the risk of an artist or song performing poorly. Take Hipgnosis Music Assets 2022-1, a $221.7 million bond backed by royalties from over 950 compositions. The top five songs account for 28% of publisher net share and label net share, according to the report by ratings agency Kroll Bond. The top five artists represent 61% of the NPS/NLS, which means a higher level of concentration than a major label. But Kroll considers the royalties, spread across several publishing administrators, to be diverse and gave it an A- rating (meaning “high quality” and “planned to weather tough times with low credit losses”). Indeed, only 23% of the NPS/NLS of the songs in the link come from compositions less than 10 years old. This means regular streaming royalties from quarter to quarter, year to year.

K-pop companies also differ from major labels in their revenue timing. A major like UMG or WMG – each a collection of record labels and publishers with large catalogs – derives most of its revenue from streaming royalties which, on a huge catalog, are flat quarter to quarter. other. Not only do K-pop companies have fewer releases, but they also rely heavily on physical products, such as multiple editions of titles on CD. The resulting revenue streams are more likely to occur in installments, not on a regular basis from quarter to quarter. For example, SM Entertainment’s second quarter album and digital music revenue fell 28.2% year-over-year; the company released six albums in the quarter compared to eight albums in the prior year period.

However, the business model of a K-pop company adds to the diversification. While SM Entertainment’s music revenue – its main source of income – fell 28.2%, its earned concert revenue (after earning almost zero a year earlier) showed a 137% increase. MD/licensing/photoshoot revenue. Along with an 18.1% improvement in revenue from appearances (from TV, ads and events), total company revenue was down just 5.2% year-over-year . HYBE’s acquisition of Ithaca Holdings also provided geographic diversification by expanding the company beyond South Korea and giving it a stronger presence in the United States. For investors, an ETF reduces risk and improves diversification better than new signings and acquisitions.

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