J Contentree: Growing Pains at Broadcasting Division

The author is an analyst of NH Investment & Securities. She can be reached at hzl.lee@nhqv.com. -- Ed.

J Contentree posted a 2Q21 earnings shock due to the accelerated amortization of copyright. However, it should be highlighted that the accelerated depreciation is attributable to both an increase in the number of pre-sold works worldwide and an ongoing rise in selling price per work. Both the growth of the broadcasting division and the recovery of the theater division look positive. We maintain a Buy rating.

Both broadcasting division growth and theater division recovery are on the right track

We maintain a Buy rating and TP of W63,000 on J Contentree.

While earnings volatility at the broadcasting division has increased in recent quarters due to a rise in copyright amortization costs, we view this as being an inevitable growing pain from its expansion of global sales. The uptick in copyright amortization is attributable to both an increase in the number of concurrently broadcast works worldwide and an ongoing rise in selling price per work. In the future, if top-line expansion is secured on a q-q rise in the number of episodes aired, profitability improvement through enhanced operating leverage is likely. Both the growth of the broadcasting division and the recovery of the theater division look to be on the right track.

2Q21 review: Posts earnings shock due to accelerated amortization of copyright

J Contentree posted consolidated 2Q21 sales W106.7bn (+40% y-y) and an operating loss of W18.7bn (RR y-y). We attribute the earnings shock to the accelerated amortization of copyright at the broadcasting division.

Broadcasting: The broadcasting division delivered a 2Q21 operating loss of W800mn (TTL y-y). Sales declined due to the absence of Monday/Tuesday dramas, and the burden of accelerated amortization for copyrights continued. As the period for sales recognition has shortened due to increased global concurrent airing, the period of copyright amortization has also shortened (18 months → 6 months). In 2H21, brisk global sales are to continue, centered on highly anticipated dramas such as Gugyeongi and Seolganghwa, and top-line expansion is to begin in earnest with the start of sales for Netflix originals. As divisional challenges look to be short-term issues, we believe it is too early for disappointment.

Theater: The theater division delivered an operating loss of W17.9bn (RR y-y). Box office performance, which had stagnated due to Covid-19, is recovering thanks to the release of Hollywood blockbusters such as Fast and Furious 9 and Cruella. Alongside the success of Black Widow and Mogadishu in 2H21, popular series such as Kingsman and Spider-Man are also scheduled for release. With vaccination efforts accelerating, business setbacks due to Covid-19 mutations should be limited.