The idol-making success story has been approved for a Hong Kong IPO and is expected to debut as the exchange’s first talent agency stock next month

Key Takeaways:

  • YH Entertainment has been approved for a Hong Kong IPO and aims to raise up to $200 million, even as its declining net profit margin may raise concerns for investors
  • Artist management is the company’s top income source, accounting for 90% of its revenue

By Ken Lo

Entertainment companies count artists as their most important assets, with retention of A-listers often a matter of life and death. At the same time, show business has become one of the riskiest industries in China due to tight government control that can sometimes see today’s stars tumble from grace for anything from tax evasion to bad behavior. So, any companies from the business walk a tightrope everyday, especially talent managers whose hot commodity today could become an industry pariah tomorrow.

China’s top talent agency star is YH Entertainment Group, which passed an IPO hearing with the Hong Kong Stock Exchange last Sunday. The nation’s largest entertainer-management firm previously filed for an IPO on China’s domestic A-share market in 2018, but later closed the curtain on the plan 2021 without making any listing.

In March this year it redirected its sights on the glitzier Hong Kong market where movie stars are practically a dime a dozen. According to its IPO prospectus, the company’s casting book includes many of China’s most popular entertainers, such as Wang Yibo, Han Geng and Fan Chengcheng, brother of one of the country’s most famous actresses Fan Bingbing.

Ok, so perhaps these names mean little to our English language readers. But they mean big bucks for the massive Chinese filmed entertainment market, where YH controlled a leading 1.9% of the talent agency market last year, making it the leading player in this highly fragmented space.

Financial media IFR reported YH Entertainment has already begun a pre-IPO roadshow to test investor appetite for its shares, with plans to raise $150 million to $200 million. It would use the funds for its talent management operations, including for the purchase and outfitting of talent training centers and expanding training programs, as well as for building up its music-IP library and potential acquisitions.

Its prospectus shows that Du Hua, chairman, CEO and executive director, is the star of the company, directly or indirectly holding 50.18% of its shares. Supporting cast members include Alibaba Pictures (1060.HK) and CMC, each with 14.25% stakes, and TikTok parent ByteDance with 4.74%.

Star cultivator

YH was founded in 2009 and uses a talent cultivation model based on similar companies from South Korea, and has gone on to established itself as the best of its class in China. Of its 66 artists under contract, 55 have been cultivated from within, and another 71 trainees are being groomed for future stardom. The company also cultivates entertainment groups with names like Uniq, Next, Everglow, Name and the virtual idol crew A-Soul. The company’s artist management business contributes nearly 90% of its revenue.

YH is also noteworthy as one of the first talent agencies from China to go global with its establishment of a South Korean subsidiary, Yuehua Korea, in 2014.

China’s talent show craze that peaked around 2018 proved a bonanza for YH Entertainment and its peers, spawning shows with names like “Idol Producer,” “Produce 101,” and “Youth With You.” The company’s A-listers like Wang Yibo and Meng Meiqi became instant sensations after participating in such shows, giving a big boost to its revenue.

But as often happens in China, the film and TV regulator later decided that too many talent shows aren’t healthy for Chinese viewers. As a result, it has been clamping down on the genre ever since by limiting the number of shows on the air – spotlighting one of the biggest risks that companies like YH Entertainment face.

Despite that, the company’s revenue doubled from 2019 to 2021, reaching 1.29 billion yuan ($190 million) in the latter year, with artist management revenue accounting for 84% to 91% in each of the last three years. Its profit tripled from 119 million yuan to 335 million yuan over the same period. Its revenue and profit were 350 million yuan and 80.52 million yuan in the first four months of this year, though its net profit margin fell to 22.8% from 26% year-on-year.

The falling margin owned mostly to a nearly 20% increase in operating costs resulting from changes to its revenue-sharing arrangement within its artist management business and an increase in share-based payments.

Regulatory storm

The crackdown on talent shows is just one example of how show business in China faces regular regulatory storms, including another one last year involving the exposure of a top talent surnamed Wu who displayed poor behavior. As a result, the Cyberspace Administration of China launched a 100-day campaign to crack down on bad behavior by talents, especially in relation to idols’ unscrupulous relationships with their fans. Talent shows launched by iQiyi (IQ.US) and Tencent (700.HK) were suspended and the star rankings compiled by TikTok’s website in China were also pulled in a relentless crackdown.

YH Entertainment also noted in its prospectus that it faces risks related to potential lawsuits involving its talents, including complaints related to their misconduct or misbehavior in violation of laws and regulations. It can also suffer as the result of bad press that can translate to reputational damage adversely affecting its financial performance. That’s why due diligence is so important for the company before it enters into contracts with any new talent.

In addition to training up new talents, the company also unveiled a virtual idol group named A-Soul in November 2020 together with ByteDance, hoping to use such virtual talent to offset the uncertainties from overreliance on real-world A-listers. The company said it’s quite pleased with A-Soul, but admitted the group accounted for less than 3% of its total revenue – hardly a major new revenue source.

Its relatively unique business means there are no publicly-listed domestic peers whose financials we can use as reference to estimate YH Entertainment’s potential IPO value. Among the top four listed artist management companies in South Korea, Hybe (352820.KS), which manages the popular South Korean idol group BTS, is the only one that recorded a profit last year, with a price-to-earnings (P/E) ratio of 43.5 times. Extrapolating YH Entertainment’s profit for the first four months of this year to a full-year forecast of 242 million yuan, the company could get valued at about 10.53 billion yuan.

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