[This Week's Highlights] DearU, Unifying the K-pop Platform Realm

Providing service for communication with celebrities via private messages
Expanding market share to 51% through acquisition of competitor Universe

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[Asia Economy Reporter Jang Hyowon] DearU, the fan platform operator of SM Entertainment, attracted significant attention in FnGuide's stock inquiries. It is analyzed that expectations for stock price increases have grown as the company expanded by acquiring competitors and is expected to recruit overseas artists.

DearU is a company that provides a service called ‘DearU bubble,’ which allows communication with artists and celebrities through private messages. The largest shareholder is SM Studios, a subsidiary of SM Entertainment, holding 31.98% of DearU’s shares. The second largest shareholder is JYP Entertainment, holding 18.53%.

DearU bubble is an application (app) centered on one-on-one communication. Fans select the group they want to communicate with and pay for subscriptions for the desired number of members to receive messages from the respective artists. Artists send texts or emoticons to all subscribers from time to time and share their daily lives with fans through voice messages, photos, and videos. Fans can experience personal communication with artists and enjoy exclusive photos and videos shared only on DearU bubble, providing a high level of satisfaction.

Founded in 2017, DearU initially offered a karaoke app called ‘EverySing.’ Later, in 2019, it merged with Brainicle, which developed messenger apps DonTalk and WibeeTalk for Woori Bank, and launched ‘Listen,’ an artist-exclusive fan community platform. However, these apps did not achieve significant success in terms of revenue.

DearU’s revenue began to increase significantly with the launch of DearU bubble in 2020. Revenue rose sharply from 1.7 billion KRW in 2019 to 13 billion KRW in 2020. In 2021, it jumped to 40 billion KRW. It is expected to have recorded 49.1 billion KRW in revenue last year. DearU bubble accounts for 96% of total revenue.

Economies of scale led to a turnaround to profitability in 2021. Operating losses of 500 million KRW in 2020 turned into operating profits of 13.2 billion KRW in 2021. The operating profit margin is around 33%. Due to the subscription service nature, marginal costs are low, allowing for higher margins as the number of users increases.

DearU, showing such growth, recently attracted great interest from investors by acquiring its competitor ‘Universe.’ On the 11th, DearU signed an asset transfer agreement to acquire all intellectual property (IP) contract rights of the fan community platform ‘Universe,’ operated by NCSoft.

Universe’s main service is private messaging that allows one-on-one conversations between artists and fans, similar to DearU’s bubble service. However, since the service was operated by a game company rather than an entertainment company, it did not grow significantly. As of the third quarter of last year, Kleb, the operator of Universe, recorded 8.8 billion KRW in revenue and an operating loss of 300 million KRW.

Experts expect synergy effects from the combination of DearU bubble and Universe. Following the announcement of the acquisition, securities firms have unanimously raised DearU’s target stock price.

With this asset transfer, DearU will bring in 27 groups of artists who ranked within the top 100 in album sales last year. Adding Universe’s 200 artists to the existing 360 on bubble, DearU will secure about 51% market share in terms of IP count in the fan platform market. Most K-pop artists, except those serviced on Weverse by HYBE and YG Entertainment, can be found on bubble.

Minha Choi, a researcher at Samsung Securities, said, “Due to the absorption effect of Universe, revenue is expected to increase by about 30% and operating profit by 45-50% compared to last year’s forecast. Although several global fan community platform services have been launched alongside K-pop’s growth, this asset transfer will reorganize the market into a two-strong structure.”

Namsoo Lee, a researcher at Kiwoom Securities, said, “The start of bubble services for artists with strong fandoms such as IVE, MONSTA X, ATEEZ, and THE BOYZ is anticipated. These groups sold 1.25 million, 1.31 million, 320,000, and 490,000 albums respectively in their first week this year, which is expected to lead to an increase of at least 500,000 subscribers.”

Lee added, “The membership and private one-person ticket price of Universe is set at 7,900 KRW, which is 75% higher than bubble, so bubble has an advantage in subscription price barriers. Since new app development will utilize existing tools, development costs will not be significant, and an additional annual revenue of 16 billion KRW and operating profit of 6.5 billion KRW are expected based on 500,000 subscribers.”

Besides the Universe acquisition, the market is also focusing on DearU’s recruitment of overseas artists. Hajung Kim, a researcher at Daol Investment & Securities, said, “Overseas artists will be a challenging area for major fan platforms, and DearU has the time advantage as a pioneer to challenge that market first. Attention should be paid to the success or failure of DearU’s overseas artist recruitment strategy.”

Holding 110 billion KRW in Cash... How Will It Be Utilized?

DearU’s financial condition is very strong. As of the end of the third quarter last year, total assets were 148.1 billion KRW, total liabilities 10.9 billion KRW, and total equity 137.3 billion KRW. The debt ratio is about 7.9%. Notably, cash and cash equivalents and short-term financial instruments account for about 74% of total assets, amounting to 110 billion KRW, indicating abundant liquidity. The reason for holding such a large amount of cash is that DearU raised 85.8 billion KRW when it listed on the KOSDAQ market in 2021. Most of the public offering funds are kept in time deposits and savings accounts.

The reason for accumulating cash like this is that there was almost no plan to use the funds at the time of the public offering. According to the securities registration statement, DearU planned to use 600 million KRW of the public offering funds for facility investment and 11.8 billion KRW for hiring development, planning, and operation personnel. The remaining funds were classified as others without specific usage plans. It is analyzed that the KOSDAQ listing was aimed more at enhancing corporate image and enabling financial investors to recover their investments rather than raising funds. DearU is expected to use the surplus funds for M&A and IP acquisition, such as the recent Universe acquisition.

DearU’s revenue source is subscription fees from app users. Therefore, accounts receivable are small, and cash flow is good. The main operating expenses are commissions paid to artists and salaries for employees. Unlike manufacturing, there are no tangible assets like factories, so depreciation expenses are minimal. This explains the high operating profit margin.

Outside operating profit, there are many financial gains and losses. Since DearU provides global services, income in foreign currencies such as the US dollar occurs, resulting in gains or losses depending on exchange rates. In the third quarter of last year, foreign exchange gains and foreign currency translation gains amounted to 1.5 billion KRW and 2.9 billion KRW, respectively.

Interest income from loans is also generated. As of the third quarter last year, DearU earned 1.2 billion KRW in interest income. DearU lent 12.4 billion KRW to employees participating in the employee stock ownership association. Employees who bought DearU shares through the association are estimated to be in profit as the current stock price has risen about 40% compared to the public offering price of 26,000 KRW.

In terms of governance, SM Entertainment and JYP Entertainment hold significant shares, ensuring stability. Combined shares held by them, key executives, and related parties amount to 63.6%. However, last month, after key executives exercised stock options and sold shares, market investment sentiment was somewhat dampened.