4Q22 Forecast: Momentum to Come from Overseas
The author is an analyst of KB Securities. He can be reached at yonghyun.choi@kbfg.com. -- Ed.
Maintain BUY but cut target price to KRW90,000
We cut our TP by 18.2% to KRW90,000 (34.6x 2023E P/E; 42.4% upside), as we revise down 2022E OP by 10% and lift WACC (9.17%→10.59%). We maintain BUY, however, given growth potential abroad and profitability gains at home.
3Q22 forecast: High base to weigh on earnings
We forecast 3Q22 revenue at KRW146.6bn (+26.3% YoY) and OP at KRW18.9bn (+29.7% YoY), which is below consensus. We see Programming revenue at KRW50.8bn (+16.1% QoQ) on more titles (107 in 2Q22→131 in 3Q22). Distribution revenue should fall 18.8% QoQ to KRW84.4bn, largely on the base effect from 2Q22 sales to Disney despite 3Q22 sales of new titles (e.g., Stock Struck, Unicorn) and nine old to Amazon. OP should plunge 30.0% QoQ with continuation of D&A for simultaneously aired titles with high production cost (began 2Q22; normally take six months to complete booking).
4Q22 forecast: Momentum to come from overseas
For 4Q22, we expect top-line growth to be supported by more original works bound for OTT platforms, such as Netflix (3), Disney (2), Amazon (1) and Apple (1). The Big Door Prize (Apple TV in 4Q22) should mark entry into overseas markets. We see momentum building once overseas production for pipelines such as The Plotters begins in earnest. Large-scale overseas production indicates top-line growth ahead.
Netflix contract renewal to bring better recoup rate
In Korea, we see Netflix contract renewal with better terms and higher recoup rate. Studio Dragon normally offers six titles per year. Simultaneously aired titles contribute to profitability improvement, as their production costs are higher than those of domestic dramas; Assuming avg. production cost of KRW20.0bn for Netflix-bound content, six titles and a 10% increase in recoup rate, we estimate a 2023 GP gain of KRW12.0bn YoY.