The author is an analyst of NH Investment & Securities. She can be reached at firstname.lastname@example.org. -- Ed.
It appears highly likely that the disruption of offline activities caused by Covid-19 will impact not only concert sales but also album and merchandise sales. However, sales of digital content (music/videos) should be relatively safe. Accordingly, we advise a selective investment approach focusing on firms with high digital sales portions and individual momentum (lineup expansion/restructuring). We maintain a Neutral stance towards the sector.
A time when crowds are unwelcome
At entertainment companies, revenue sources largely divide as: 1) offline events (concerts/fan meetings); 2) tangible products (albums/merchandise); and 3) digital music. With Covid-19 resulting in cancellations and delays of mass-gatherings, earnings at entertainment players are unlikely to remain unscathed.
In the case of offline face-to-face events such as concerts and fan meetings, direct impacts from Covid-19 are inevitable. Given that: 1) album purchases are closely tied to participation in fan meetings; and 2) concerts are the main venue for merchandise sales, indirect effects on tangible product sales are also possible. With global travel restrictions still in place, global concert tours are unlikely to normalize until end-2020 at the earliest. Believing that digital content offers the best prospects for stable sales during Covid-19, we advise taking note of companies with robust digital content capabilities.
Difficult to replace traditional concerts with non-face-to-face events
With Covid-19 disrupting offline activities worldwide, some companies are embracing non-face-to-face alternatives. SM Entertainment recently held some fan meetings online, and the effect on promoting album sales appeared similar to that of offline fan meetings. As online fan meetings become more widespread, cost savings effects are expected. In the case of concerts, however, replacement appears difficult, as direct participation is integral to the consumption experience and it is challenging to differentiate online concerts from existing broadcasted music events.
Pay attention to: 1) digital sales; and 2) structural growth
We adhere to a Neutral rating on the entertainment sector, noting likely impacts from Covid-19-related disruptions to offline activities and the possibility of prolonged butterfly effects. In particular, selective attention should be given to firms which boast: 1) strengths in non-face-to-face products (digital music); and 2) structural growth (eg, lineup expansion or the scrapping of loss-making divisions). As Korea-China relations appear to have entered a thawing phase, it is also worth noting whether a firm’s lineups enjoy strong popularity in the Chinese market, such as that claimed by BTS, Big Bang, etc, in light of the potential for Chinese concert tours down the road. Against this backdrop, we continue to offer YG Entertainment as our sector top pick.