Superb Production Capabilities
The author is an analyst of KB Securities. He can be reached at drlee@kbfg.com. -- Ed.
Company summary
Jcontentree is a holding company that creates TV shows, film and broadcast content. The subsidiary Megabox (90.8% stake) owns multiplex movie theaters and offers value-added services, and JTBC Studios (68% stake) produces and distributes K-dramas.
Earnings hampered by slowing film revenue
For the period 1Q20-3Q20, Jcontentree delivered revenue of KRW272.5bn (-31.9% YoY), but OP entered negative territory YoY at –KRW37.7bn. Film revenue plummeted 66% YoY because of COVID-19, while broadcast revenue rose 23.6% YoY to KRW189.3bn thanks to an increase in distribution revenue amid growing content demand.
Key positives: Superb production capabilities; foray into OTT platform business; prospect of entry into China
First, Jcontentree’s superb production capabilities have resulted in a rich library of successful titles that include Sky Castle (2018), Itaewon Class (2020) and The World of the Married (2019). The fact that the company has attracted investments from Tencent Holdings (China) and Praxis Capital (Korea) attests to the strong value of its content. The proceeds should be used to boost content competitiveness.
Second, Jcontentree has already made its foray into the OTT platform business. JTBC Studios has invested KRW20.0bn (KRW6.0bn via rights offering, KRW14.0bn via convertible bonds) in the Korean streaming platform TVing (16.67% stake). Third, Tencent Holdings, which owns the Chinese streaming platform Tencent Video, has subscribed to a portion of JTBC Studio’s rights issue, paving the way for Jcontentree’s entry into the Chinese market. Also, Jcontentree is diversifying its client base globally, having recently submitting four proposals to Netflix (as of 3Q20). We see fiercer competition among global OTT platforms; Disney’s recent announcement of its entry into Korea should act as a tailwind for Jcontentree.
Key negatives: Intensifying competition; deterioration of free cash flow; stock dilution
First, Jcontentree’s film business is struggling with a growing no. of production companies entering the fray as well as fallout from COVID-19. In addition, free cash flow is deteriorating and there is potential for stock dilution. The company currently has convertible bonds worth KRW50.0bn, equivalent to 1,621,481 shares or about 9.9% of total shares issued (conversion price: KRW30,836; rights exercisable from Nov 27, 2021).