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The K-pop sector witnessed capital outflows of $8 billion as dating scandals, drug probes, contract issues with top artists, and declining album sales on faltering China demand hit stock prices of the top K-pop music agencies last year.

Yuanta Securities forecast that 2024 album sales from the top four agencies will fall 5.3% year-over-year (YoY) to 82.7 million copies.

The stocks of the top four agencies, namely Hybe, SM Entertainment, JYP Entertainment, and YG Entertainment, are trading at levels as low as 50% from their 2023 highs. Last week, Hybe's stock price tumbled 5.8%, wiping out ₩1.2 trillion ($873 million) of market value after an internal tussle with Hybe-owned ADOR escalated.

ADOR is behind the emerging girl group NewJeans, and Hybe owns 80% of it, while Min Hee-jin, the CEO of ADOR, holds an 18% stake. Hybe announced it would report Min ee-jin to the police over allegations that Min attempted to take over control of ADOR. In response, Min refuted all allegations and claimed Hybe mismanaged the label in a two-hour press conference.

However, analysts at Goldman Sachs had a positive outlook on the sector, seeing a "high potential for valuation re-rating," given their consistent delivery of year-on-year earnings growth.

The top four managed to post higher revenues and profit margins for 2023. However, looming challenges could mean they have to pivot to new markets, distribution deals, and expanding their presence on digital streaming platforms to find lost momentum.

"Current concerns about the K-pop outlook do appear excessive," said HSBC analyst Junhyun Kim, adding that there are "various other ways to monetize K-pop fans." Analysts at both firms believed that agencies engaging fans via concerts and planning expansion in Japan and US markets would pay off in the future.

Meanwhile, Morgan Stanley analysts said the recent price correction has offered "an opportunity for investors to ride the longer-term theme."

Since the beginning, K-pop agencies have banked on selling physical albums with attractive merchandise to boost their company bottom lines. Goldman analysts highlighted that as the effects of the pandemic fade, offline concert audiences also become a more critical parameter to gauge K-pop's growth aside from physical album sales.

The analysts said that "growth has not stopped scaling at a rapid pace," and "in the near term, we see audience growth in Japan as the key growth driver." They believe K-pop agencies' opportunity for fanbase growth in Japan "is being overlooked by the market."

Japan's top talent agency, Johnny & Associates, was involved in a massive scandal that led the local industry to cater to more K-pop artists. Goldman Sachs estimated Japan concert audiences to grow at a 24% compounded annual growth rate between 2023-26, where the combined market share for Hybe, JYP, and SM in Japan would increase to 14% from 7%.

In March, analyst Eric Cha estimated that K-pop's fan base worldwide would grow by 26% annually over the next three years, led by audience growth in Japan's markets.

Goldman Sachs is also optimistic about K-pop's fanbase growth in the US. In a March-end report, analysts highlighted the success of Hybe's girl group NewJeans on US charts. Their latest album reached the top of the US Billboard 200 charts, while their lead single, "Super Shy," ranked second on the Global 200 charts.

Hybe also inked a distribution deal with Universal Music Group for more comprehensive digital outreach on streaming sites and deeper market penetration. Other K-pop agencies are also working to bring in new talent.

Goldman Sachs said the announcement from Hybe shows K-pop is becoming mainstream everywhere.

They concluded that there's "a long runway of growth ahead" for the K-pop industry, adding that "further downside for wallet share, which has normalized close to pre-Covid levels, seems limited, in our view."