Gap with Latecomers to Widen Even Further

The author is an analyst of Shinhan Investment Corp. He can be reached at sejonghong@shinhan.com. -- Ed.

 

Competitors seeking to dethrone the domestic market leader

Studio Dragon, a subsidiary of CJ Group’s media business unit CJ ENM, has been the undisputed leader of the domestic content industry with massive human and material resources invested over the past ten plus years driving economies of scale in an industry where success is measured by popularity. Before the COVID-19 pandemic, the gap between Studio Dragon and its competitors was seen “uncrossable.”

Recently, however, Studio Dragon has been facing growing competition from long-time major rivals Jcontentree and Seoul Broadcasting System, as well as small/mid-size production houses and internet/telecom service providers that are newly expanding their footing in the market. With the pandemic causing disruptions to mainstream content production carried out in the US and Europe, small/mid-size production houses are tapping OTT platforms to secure multi-year content supply and original production contracts that were only granted to top-tier producers in the past. Meanwhile, internet and telecom service providers are focusing on strengthening in-house content studios by leveraging on already-established digital IP assets and platforms. Stiffening market competition has been one of the main investor concerns weighing on shares of Studio Dragon compared to peers in recent trading.

Shift in directionality & market conditions to widen gap even further

Contrary to investor concerns, we highly expect Studio Dragon to widen the gap with certain latecomers over the next 1-2 years for two reasons. First, the company is set to shift gears from quantitative to qualitative growth. Backed by the steady supply of high quality IP assets through its partnership with NAVER, Studio Dragon is expected to emerge as the first content provider to report visible improvement in margins. Expectations are high for a shift in mid/long-term directionality with the company to focus on lowering its reliance on the handful of popular writers in the domestic market and improving production cost efficiency. Competitors without access to quality webtoon/webnovel IP assets and a large pool of artists are set to see the gap with Studio Dragon continue to widen going forward.

Second, we strongly expect that initial benefits from the easing of China’s ban on Korean media contents will be concentrated on one or two market leaders, including Studio Dragon. If China chooses to remove its ban on Korean content in gradual steps, it should take longer for latecomers to see trickle-down benefits. In the process, the profit gap between market leaders and latecomers should increase even further.

Content top pick; Recommend concentrating on industry leaders

We believe Studio Dragon will remain the domestic content industry leader of the past, present and future. Reducing the portfolio weight of the stock in light of its lower beta vs. small/mid-size peers could be a very risky strategy. Studio Dragon is our content sector top pick as we recommend concentrating on industry leaders in media/ads. For the ad sector, focus should be placed on the leaders as well, with ample upside seen for Incross and Wider Planet given strong growth in digital ad and big data businesses.

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