While K-pop agencies faced challenges in the third quarter, financial recovery may be possible by 2025.

• The "Big Four" K-pop agencies have reported poor third-quarter results, primarily due to low album sales.
• This year, all agencies have experienced a significant drop in their stock performance.
• Citi predicts a financial recovery from 2025 to 2026, with Hybe and SM Entertainment being their top picks.

In the third quarter, K-pop businesses faced financial struggles, with three of South Korea's top four agencies experiencing a decline in their financial performance compared to the previous year.

The K-pop industry is facing a decline in album sales and the absence of record-breaking groups such as Blackpink and BTS, with the latter's members serving their mandatory military service and Blackpink only announcing a 2025 reunion.

Despite the increase in streaming revenue, it has not been sufficient to offset the decline in album sales revenue during the first half of the year.

The stock prices of SM Entertainment, JYP Entertainment, and YG Entertainment on the small-cap Kosdaq have decreased by 16%, 43%, and 10.41%, respectively, this year. Meanwhile, Hybe, listed on the blue-chip Kospi, has experienced a stock drop of over 11% year to date.

In the third quarter, the performance of the "Big Four" K-pop companies was evaluated.

Despite not providing reasons for its downbeat earnings, a Nov. 6 note from Yuanta Securities analyst Hwan-wook Lee stated that sales decreased due to limited artists and activities during the 2024 Olympics, while profitability was also negatively impacted by the higher costs associated with the launch of KATSEYE, a localized group in the U.S.

During the earnings call, SM Entertainment CFO Jang Jeong Min stated that revenue decreased due to a decline in album sales and production costs for a debut program, while weaker earnings from subsidiaries also contributed to the decrease in operating profit.

According to Samsung Securities analysts Minha Choi and Yeonghoon Kang in a Nov. 11 note, YG Entertainment's operating loss was not surprising because the company's artists were relatively inactive. During the third quarter, only Babymonster, a rookie group, and solo artist Lee Seunghoon released material.

NH Securities reported that JYP Entertainment was the only profitable company in the industry, with a "dramatic rebound to profitability" and an "earnings surprise," thanks to the "full-fledged" activities of boy group Stray Kids, which began its world tour in the second half of 2024.

Recovery in sight?

Citi Research suggests that K-pop investors can look forward to 2025, despite the dismal year-to-date stock returns and poor financial results, as they put 2024 behind them.

Earlier this month, Citi analysts John Yu and Alicia Yap stated that they have a positive outlook on the sector, as its revenue growth is expected to increase.

In 2025, Citi anticipates that the combined revenue of the Big Four agencies will increase by more than 21%, while in 2026, it expects a nearly 15% growth.

According to Citi, the return of top groups BTS and Blackpink and improved monetization of fandom platforms will help boost revenues.

Tencent Music has partnered with DearU, a subsidiary of SM Entertainment, to offer its direct messaging service to QQ Music users.

The Bubble messaging service offered by DearU is a popular fan communication platform, where subscribers receive exclusive messages from artists on a monthly basis.

In December, Weverse, a platform specializing in hosting artists' content, will introduce a new subscription membership model.

The return of popular groups will not only increase album and concert revenues but also boost ROI across various businesses. For example, fandom platforms will experience an increase in user traffic, and younger artists under the same labels can showcase opening acts at top artists' concerts.

The weakening of the Japanese yen is expected to create a favorable foreign exchange environment for Citi, which is predicted to benefit the most due to its higher revenue exposure to Japan.

Although analysts prefer Hybe for its balanced IP portfolio, the firm is more optimistic on both Hybe and SM, with SM being more dependent on China momentum due to the nationality of its artist lineup.

The return of Blackpink is expected to cause significant fluctuations in YG's stock price.

Despite the analysts' optimism, JYP may face challenges in maintaining long-term growth due to the struggles of newer artists in finding success.

Citi's optimism also echoes reports issued earlier this year.

In March, Goldman Sachs stated that the K-pop industry is "misunderstood." The bank argued that K-pop companies should be evaluated based on offline concert audiences rather than album sales, and predicted a "high potential for valuation re-rating."

K-pop companies have a significant growth opportunity in Japan's fanbase in the near-term, and Goldman is optimistic about the global fanbase, particularly in the U.S.

The sector has a "long runway of growth ahead" as K-pop is becoming mainstream globally, with artists performing in major U.S. festivals like the Coachella Festival and Lollapalooza.

Earlier this year, Morgan Stanley stated in a note that K-pop was "on the brink of expanding its international audience."

"The South Korean pop music phenomenon, after cultivating a devoted following in Asia for over 20 years, is set to enter the mainstream, creating investment opportunities."