[Company Exploration] HYBE, Idol and Content Dual Wings 'Earnings Surprise'

Record High Quarterly Sales and Operating Profit
'IP' Continues to Be a Key Contributor Following Artist Albums and Performances

As concerns over inflation, which began with rising raw material prices, grow, consumers are tightening their wallets and companies are showing reluctance to invest. The complex interplay of exchange rate fluctuations and reopening (resumption of economic activities) has cast a shadow over economic outlooks. Listed companies on the domestic stock market have released their first half performance reports. Despite fears of an economic downturn, many companies recorded 'earnings surprises' that far exceeded market expectations. Asia Economy examines the business structures and sustainability of growth of HYBE and KIDARI STUDIO.

[Asia Economy Reporter Lee Kwang-ho] HYBE recorded an earnings surprise in the first half of this year. As COVID-19 cases decreased and social distancing measures were eased, sales from artists' albums and performances grew significantly. The company achieved record-breaking growth by steadily expanding its activity spectrum.

HYBE posted consolidated sales of 512.2 billion KRW and operating profit of 88.3 billion KRW in Q2 this year. These figures represent increases of 83.8% and 215.3%, respectively, compared to the same period last year. The sales and operating profit are the highest ever recorded on a quarterly basis. Net profit also rose by 359.3% over the same period. Notably, sales from 'direct participation' by artists stood out.

'Direct participation' refers to revenue generated directly from artists' activities. Sixty-four percent of total sales came from artist activities. With consecutive album releases and performances, this figure more than doubled compared to the previous quarter. The successful debuts of LE SSERAFIM and NewJeans this year also had a significant impact. In particular, NewJeans secured first place on Mnet's 'M Countdown' on the 18th with the debut album's first title track 'Attention,' establishing themselves on the top chart in a relatively short period.

HYBE Labels artists sold a total of 8.53 million albums in Q2. This accounted for 42% of total album sales on the Circle Chart (formerly Gaon Chart). Performance segment sales reached 85 billion KRW, a 38.6% increase compared to the previous quarter. The Q2 performance sales reflected the success of BTS's Las Vegas concert and SEVENTEEN's Seoul concert, among others.

An Jin-ah, a researcher at Ebest Investment & Securities, evaluated, "HYBE possesses a combination of core business strengths, macro factors, and business scalability, including rapid growth of artists (speed of fandom expansion), successive debuts of girl and boy rookie groups, formation of global fandoms due to K-POP market expansion, foreign exchange gains from the strong dollar as a global market payment method, and a fandom industry capable of hedging against inflation."

Attention should also be paid to 'indirect participation' sales from planning merchandise (MD) and licensing, aside from 'direct participation' sales generated by artist activities. Sales recognized from MD and licensing in Q2 amounted to 98.8 billion KRW, representing a 42% increase from the previous quarter and a 97.2% growth year-over-year. The active domestic and international activities of artists led to a corresponding increase in MD sales.

A HYBE official stated, "This is the result of SEVENTEEN and TOMORROW X TOGETHER, who grew under the multi-label system following BTS, rising to become top-tier artists."

The significance of growth in indirect participation sales is notable. When the COVID-19 pandemic caused deterioration in the performance market and restricted artists' offline activities, HYBE focused on a business model (BM) that could generate profits by utilizing intellectual property (IP) without direct activities. Since then, sales through IP commercialization such as goods, licensing, content, and fan clubs have steadily increased.

In particular, content sales, which were 132.2 billion KRW in 2020, grew 180% to 370.3 billion KRW last year. This is interpreted as reflecting high global fan participation in paid non-face-to-face content such as online concerts during the COVID-19 pandemic. This indirect participation has proven to be a reliable source of revenue. It has a lower cost ratio compared to direct participation sales, making it more profitable. For example, performance revenue is shared with artists, but content revenue goes entirely to the company. At the center of this is 'Weverse' (fan community platform).

Lee Hwa-jung, a researcher at NH Investment & Securities, said, "With last month's update, Weverse integrated V Live video functionality," adding, "Live communication with artists is expected to drive noticeable traffic growth in the second half."

HYBE's adjusted EBITDA, which recorded the highest quarterly performance, is also noteworthy. It reached 107.4 billion KRW in Q2 this year, marking the first time the company surpassed 100 billion KRW since its establishment. The company possesses substantial cash-generating power and plans to continue investments with ample funds. In the second half, HYBE Japan plans to introduce a new boy group in Q4 through '&AUDITION.' A project to debut a new local idol in the United States is also underway.

Meanwhile, HYBE is also engaging in indirect investment activities by investing in other companies. Representative examples include investing in the 240 billion KRW 'Hashed Venture Investment Fund No. 2' formed by Hashed Ventures at the end of last year and Dunamu, the operator of the virtual asset exchange Upbit. In addition, HYBE is expanding its network by investing in various companies with new businesses in mind.