A Pair Trade Between SM Entertainment (Long) Vs HYBE (Short)

• In this insight, we discuss a pair trade between SM Entertainment Co (041510 KS) (long) vs HYBE (352820 KS) (short).

• There is an increasing probability that HYBE's founder Bang Si-hyuk could face some jail time in which case there could be some vacuum of management leadership at HYBE.

• Despite its recent outperformance, SM Entertainment's valuation is much more attractive than HYBE (SM is trading at 9.6x EV/EBITDA vs 18.5x for HYBE in 2026).

SM Entertainment's Aespa Whiplash (Source: SM Entertainment)

Negative on HYBE [Short]

There are two key issues facing HYBE - one very negative offset by another which is positive.

• The main negative issue facing HYBE is that the Korean financial authorities plan to report Bang Si-hyuk (founder of HYBE) to prosecution for stock market fraud of nearly 200 billion won in profits.

• The main positive catalyst facing HYBE is the comeback of BTS with a new album and a world tour in the spring of 2026.

Although the news about the alleged stock market fraud by HYBE's founder Bang Si-hyuk have been discussed in the market in the past several months, HYBE's share price has continued to increase this year (up 41% YTD as of 9 July 2025). This negative news has been offset by the company's improving operating results in 1Q 2025 along with the expectation of BTS comeback in the spring of 2026.

The main issue involving Bang Si-hyuk is less about the money (since he is a billionaire) but more about potential jail imprisonment. His 31.6% stake in HYBE is currently worth 3.6 trillion won (US$2.7 billion).

According to the current Capital Markets Act, it stipulates that if the profits obtained or avoided through illegal acts exceed 5 billion won, the person could be subject to life imprisonment of imprisonment for at least five years.

At this point, it is highly unlikely for Bang Si-hyuk to receive life imprisonment but there is an increasing probability that he could face some jail time (although it may not be up to five years). In the latter case, there could be some vacuum of management leadership at HYBE which could result in a loss of positive momentum on the company.

The main charge against Bang Si-hyuk is that he deceived existing investors into selling stocks by saying that there were no plans to list HYBE on the stock market during the listing process, and then earned 200 billion won in listing profits.