Top Pick: Studio Dragon
The author is an analyst of KB Securities. He can be reached at yonghyun.choi@kbfg.com. -- Ed.
Initiating coverage on Korea Media with POSITIVE rating
We initiate coverage on Korea Media with a POSITIVE rating. The media industry in Korea is in the midst of undergoing structural changes where OTT (over-the-top) media service providers are replacing traditional TV as the leading source of entertainment. Content producers should see earnings improve as the rise of OTT services boosts demand for content. Although investor sentiment toward content names have turned sour recently amid concerns over an economic slowdown and a decline in the number of subscribers to global OTT services, the earnings uptrend at Korea’s content companies should remain intact. We recommend accumulating shares in content production companies.
Top pick: Studio Dragon
We recommend Studio Dragon as our top pick for the sector. Investment highlights include: (1) growth in revenue on an increase in number of titles and production scale; (2) pioneering of new markets via production overseas; and (3) a rise in recoup rates upon the expiry of its contract with Netflix.
Broadcast media: Ads and content
Broadcast media companies, for whom TV ads remain a cash cow, should expand into the content production business. Despite a continued decline in viewership, TV ads have seen increases in ad slots and in ad rates following the July 2021 authorization of mid-program commercials for terrestrial TV networks. Effective for mass marketing, TV ads continue to see stable demand from large corporations, for whom branding is critical. Meanwhile, broadcast media companies are expanding into the content production business via their subsidiaries. These subsidiaries should see their values as independent content production companies increase as they offer content to various media outlets.
OTT companies: In the process of evolving into platform providers
Korea’s OTT companies should expand scale through subscription-based businesses, while increasing profitability via strategies for expanding platform businesses in the long term. The competitive landscape of the SVOD (subscription video on demand) OTT market in Korea at present can be characterized as a game of chicken where profits hard to come by. In a bid to lure subscribers, OTT companies have been pursuing strategies for strengthening original content and partnerships, boosting content investments and lowering subscription fees. Despite persistent losses, OTT companies are still worthy of attention, however, given the value of their platform businesses and the substantial room for expansion for OTT services in the long term. While the market for OTT services in Korea has a low penetration rate and is still in the process of development, primarily through subscription-based services, markets overseas with higher penetration rates are seeing expansion into AVOD (advertising-based video on demand) OTT services.