The author is an analyst of NH Investment & Securities. She can be reached at email@example.com. — Ed.
According to Maslow’s hierarchy of needs, individuals must satisfy their lower-level needs first before progressing on towards higher-level goals (ie, one must secure food before catering to taste). Standing in contrast, the so-called lipstick effect points out that consumers still spend money on small indulgences even during a recession. Going further, many Millennials and Gen Zers appear willing to cut back on food to pursue their desires. For them, hobbies are the driving force.
Among such motivators, K-pop artists have particular pull, drawing in fans who choose the merchandise of their favorite artists over more essential needs. In Japan, where fandom culture is referred to as ‘otaku’, the idol market has thrived irrespective of economic conditions.
Despite concerns over economic slump, companies with artists boasting strong fan bases should fare well in 2023. In particular, those who are primed to further expand their fandom momentum or have strategies to drive up spending per fan are to set themselves apart. Highlighting the firms with customers who are undeterred by economic cycles, we present a bright outlook for the entertainment and casino industries.
I. Tastes still matter, even in times of recession
In times of economic slowdown, consumers tend to cut spending on discretionary items. However, the lipstick effect remains in play. We note that for the MZ generations, the lipstick effect is emerging in a somewhat different form, with consumers showing a willingness to buy expensive, luxury items that offer greater long-term satisfaction over inexpensive offerings that provide instant gratification. In particular, fans today appear more than willing to spend for their favorite artists. In line, we forecast that fandom-based sectors such as K-pop, as well as casinos, will survive, even during a recession.
II. Entertainment: Fandom choosing artists over essentials
Over the past few years, K-pop has grown exponentially. However, doubts have also risen towards the market’s future growth prospects. And, such doubts have only grown stronger as of late in the face of recession. That said, we note that the Japanese idol-based industry continued to post double-digit growth based on inelastic fandom demand during the recession of the 2010s. Boasting robust inelastic demand, the K-pop market has secured a variety of income sources, and next year, a new platform for K-pop fans is to be launched. We positively view the K-pop industry’s strong growth potential.
III. Casino: To fare better despite forex concerns
Having seen hopes and disappointment in relation to economic reopening amid the repeated re-proliferation of Covid-19, casino operators are finally to fare well. Earnings are recovering on an unleashing of pent-up demand from Japanese VIPs, which we attribute to improving customer access to Korean casinos, thanks to the visa-free policy between Korea and Japan and an increase in flights between the two countries. While some are concerned over unfavorable macro conditions (eg, yen depreciation), the casino industry still boasts inelastic customer demand, which is being proven by the strong inflows of Japanese visitors following the reinstatement of the visa-free policy. While it should take some time before accessibility for Chinese customers improves, given that China’s zero-Covid policy remains in place, it is only a matter of time before their pent-up demand is released.
IV. Top picks
We maintain a Positive rating on the entertainment/casino sector, expecting strong growth to be achieved even in times of economic slowdown, backed by inelastic demand. With economic re-opening effects concentrated on 2H22, earnings expansion driven by re-opening is to continue in 1H23. We recommend HYBE and Paradise as top picks, favorably noting HYBE’s debut of promising new artists and improving profit structure (driven by platform business) and Paradise’s potential for an uptick in visitors (mass, high roller).