Aiming to Become a Global Production Studio
The author is an analyst of KB Securities. He can be reached at yonghyun.choi@kbfg.com. -- Ed.
Maintain BUY; raise target price to KRW93,000
We maintain BUY on Studio Dragon and raise our TP to KRW93,000 (+3.3%) to reflect a change to applied year and WACC adjustment (10.66→9.26%). Our DCF-based TP implies 37.9x 2023E P/E. The company disappoints in terms of profitability but remains attractive based on growth momentum (e.g., increase in OTT clients).
4Q22 preview: Margin to decline, as usual
We forecast 4Q22 revenue at KRW155.0bn (4.8% YoY, -32.3% QoQ) and OP at KRW10.1bn (59.0% YoY, -46.7% QoQ), which is below the market consensus by 41.2%. Revenue should remain sound, with (1) Distribution revenue at KRW104.8bn thanks to the airing of four original works (The Glory, Island ep. 2, The Big Door Prize ep. 3, Celebrity) and four multi-platform works (Little Women, Behind Every Star, Missing: The Other Side, Under the Queen’s Umbrella) and (2) Programming revenue holding at KRW41.2bn amid a decline in no. of episodes aired. We see 4Q22 margin falling, which is usual in 4Q; revenue from two of the four multi-platform works should be booked, while earnings should remain burdened by depreciation of write-offs for Alchemy of Souls and goodwill amortization regarding Gill Pictures (4-5 years; acquired at KRW32.0bn).
Focus on revenue growth in push to become global production studio
We see Studio Dragon focusing on revenue growth this year in its push to become a global production studio; annual no. of episodes produced should rise by 1-2 YoY, with increases in original works, no. of contract renewals and series deals with Netflix (six original works, six full seasons). OPM should remain flat YoY, as an increase in proportion of original works (lower profit margins) should negate an increase in recoup rate (six renewed deals for multi-platform works with Netflix). We see significant long-term growth potential based on preparation of forays into the U.S./Japan and possible sales of new content in China.