A Leading Drama Producer in High Demand
The author is an analyst of Shinhan Investment Corp. He can be reached at sejonghong@shinhan.com. -- Ed.
3Q20 operating profit forecast at KRW10.1bn (-7.4% YoY)
We expect Studio Dragon to have posted consolidated operating profit of
KRW10.1bn (-7.4% YoY) on sales of KRW144.3bn (+10.0% YoY) for 3Q20.
With most hit drama series sold to Netflix in 1H20, earnings are likely to decline in 3Q compared to the previous quarter. But earnings are not a key share price indicator at this point. Studio Dragon has recently released a disclosure announcing that it signed two licensing deals with CJ ENM and iQIYI for Mount Jiri co-produced with Astory, which prove the strong demand for Korean drama contents in Southeast Asia.
A leading production house in high demand
Studio Dragon is in high demand in the global contents market. The company has achieved economies of scale in content production based on: 1) a creative workforce of 226 artists including 114 writers; 2) production of about 30 dramas a year; and 3) a solid captive market (CJ ENM). Its low dependence on specific artists and capability to turn all genres of intellectual properties into video content have made Studio Dragon the best production house to partner with for both domestic and overseas platform providers.
We focus on the following three momentums going forward. First, Studio Dragon seeks original drama production deals with US-based platforms like HBO, Apple, and Amazon that spend trillions of won in content production every year. Second, collaboration is expected with domestic OTT platforms. Telcos and internet platforms are focusing on developing original contents to compete with Netflix and YouTube, and need to partner with a production house that can turn hundreds of IPs into video content. Third, expectations for China-bound exports are once again on the rise. Chinese President Xi Jinping’s visit to Korea may lead to the removal of China’s ban on Korean media contents. Studio Dragon is also free of COVID-19 impact. Exports of dramas that are already produced mean no additional cost for the company.
Target price raised to KRW120,000 for media sector top pick
We raise our target price for Studio Dragon to KRW120,000. The leading content provider driving the Korean Wave in pop culture is our media sector top pick in view of: 1) fast-paced growth of overseas distribution revenue; 2) strong demand for video contents in the domestic market; and 3) recent share price correction. We expect Studio Dragon shares to enjoy a rally in 4Q.