[Click eStock] "Studio Dragon to Widen Gap with Latecomers"

Latecomers Keep Emerging... Gap Widens Through Naver Collaboration and Entry into Chinese Market

[Asia Economy Reporter Gong Byung-sun] An analysis has emerged that Studio Dragon's acquisition of intellectual property (IP) from Naver will be a factor in widening the gap with latecomers. It is interpreted that by reducing dependence on writers and using production costs efficiently, medium- to long-term qualitative growth is expected. The Chinese market is also expected to be an opportunity. Accordingly, Shinhan Investment Corp. raised Studio Dragon's target stock price from the previous 120,000 won to 127,000 won, maintaining a 'buy' investment rating.

Currently, new competitors are emerging in the content sector. The benefits of the overseas distribution market, led by Studio Dragon and J Contentree, have expanded to small and medium-sized production companies, becoming a driving force for the development of latecomers. Large platforms such as Naver, SK Telecom, and Kakao have already started creating synergy with existing content they own or vertical integration through internalizing production capabilities. Naver exchanged shares with CJ, SK Telecom established a native online video service (OTT) called 'Wavve,' and Kakao officially launched Kakao Entertainment by merging Kakao Page and Kakao M. The webtoons and web novels they already own are expected to be growth drivers for Kakao.

However, Shinhan Investment Corp. predicts that Studio Dragon will rather widen the gap with latecomers through collaboration with Naver. Even if the IP of hit webtoons and web novels is expensive, it does not exceed 1 billion won, making it more efficient than labor costs, which accounted for 30% of the total production cost. Hong Se-jong, a researcher at Shinhan Investment Corp., said, "Even if only 10% of Studio Dragon's production costs are reduced, the annual profit increase exceeds 30 billion won," adding, "Considering that Studio Dragon's operating profit last year was below 50 billion won, this is a significant amount."

The Chinese market is also expected to be an opportunity for Studio Dragon. Shinhan Investment Corp.'s analysis is that initial benefits are concentrated in the top one or two companies. In particular, since China is a partially open country, it will take more time for a trickle-down effect to occur for latecomers. If it is decided to air only 6 to 9 domestic contents annually, it is highly likely that the core domestic dramas will be purchased first. Studio Dragon has already agreed to provide 2 to 3 original contents to China this year and has achieved results by selling 2 titles to the Chinese OTT market.

Accordingly, Shinhan Investment Corp. predicts that the period of rapid profit leverage for Studio Dragon will come within 1 to 2 years. Researcher Hong evaluated, "Cash flow and economies of scale are important in the work of producing original dramas," adding, "Studio Dragon has overwhelming competitiveness in the form of IP and studios." Furthermore, he predicted, "Considering production cost efficiency and partial market opening in China, the company's operating profit is likely to exceed 100 billion won," and "The market capitalization will surge in the phase where profitability improves."