Korea Exchange Relegates SM And YG Entertainment From Blue-Chip Companies To Mid-Sized Businesses

May 06, 2021

SM Entertainment and YG Entertainment are no longer considered blue-chip companies under the Korea Exchange’s classification system.

On May 4, according to the Financial Supervisory Service’s Electronic Disclosure System, the Korea Exchange had demoted SM Entertainment and YG Entertainment from blue-chip companies to mid-sized businesses the day before.

This is SM’s first relegation in its status since it moved from a venture business to a general business (the former name for blue-chip companies) in March 2008. This is YG’s first relegation in its status since it first became blue-chip in April 2013.

According to the Korea Exchange’s criteria for periodic classification reviews, a company must achieve a certain scale of business and meet certain financial requirements to be considered blue-chip. These details include having a net worth of over 70 billion won (about $62.5 million) and to have earned an average total of over 100 billion won (about $89.2 million) over the most recent six months. There must also be no impaired capital. Over the most recent three years, the average return on equity (ROE) must be over 5 percent, the term net profit must exceed 3 billion won (about $2.68 million), and sales must exceed 50 billion won (about $44.6 million).

Other classifications include venture businesses, which the Korea Exchange considers to be rising stars in the business world according to various other criteria, and the technological growth businesses, which are for new listings. Companies that do not fall into these other categories are called mid-sized businesses.

Based on their business scale alone, SM Entertainment and YG Entertainment would not have been relegated. In the past year alone, SM Entertainment had a net worth more than eight times the required minimum criteria to be considered a blue-chip business, while YG Entertainment had a net worth more than six times the required minimum criteria. In the past three years (2018-2020), the average sales of SM Entertainment were more than 12 times the required minimum criteria, while the average sales of YG Entertainment were more than five times the required amount.

However, the businesses were relegated based on negative results in net profit and return on equity (ROE). Over the past three years, SM Entertainment recorded an average net loss of 24.4 billion won (about $21.8 million) and an ROE of -3.8 percent. YG Entertainment recorded a net loss of 1.8 billion won (about $1.6 million) and an ROE of -0.5 percent over the same period.

SM Entertainment took a serious hit in 2020 with a net loss of 80.3 billion won (about $71.7 million). Their sales amount went through a severe drop compared to the previous year, and the company also suffered losses in investment of up to 13 billion won (about $11.6 million) through their subsidiaries and joint enterprises. SM Entertainment had expanded its mergers and acquisitions from 2017-2018, but ended up suffering losses in advertising and food and drink franchises due to the COVID-19 pandemic.

On the other hand, YG Entertainment suffered a slump in its main business of music production and artist management. Although the company recorded business profits of 17.6 billion won (about $15.7 million) in 2018, the business profits dropped to 7.6 billion won (about $6.78 million) in 2019 and 7.7 billion won(about $6.87 million) in 2020.

Of the traditional “Big Three” entertainment companies in South Korea (SM, YG, and JYP Entertainment), only JYP Entertainment maintained its status as a blue-chip business. Even though its average sales for the past three years was the lowest of the Big Three, it showed consistency by increasing its net profit by 20-30 billion won every year. In the same time period, it recorded an ROE of 18 percent.

Stock analysts theorized that this fluctuation in performance may be due to the large number of subsidiaries that SM and YG have. Other theories include the transparent governance structure of JYP Entertainment, where founder Park Jin Young focuses on content production and leaves the chief executive officer and chief financial officer roles to others, preventing the reckless business expansion that can come from having a single owner. Park Jin Young has also established a system of producers in JYP Entertainment to reduce his own role as a producer at his company and to prevent fluctuations in quality across albums.