[Click eStock] "Studio Dragon, Profit Growth Expected in Second Half"

Daishin Securities Report

[Asia Economy Reporter Minji Lee] Daishin Securities maintained its buy rating and target price of 130,000 KRW for Studio Dragon on the 12th, expecting an expanded improvement in performance in the second half of the year.

Studio Dragon's sales in the second quarter are estimated at 92.2 billion KRW, and operating profit at 13.8 billion KRW, down 43% and 18% respectively compared to the same period last year. This is because some drama production and sales scheduled for the second quarter were postponed to the third quarter or later, leading to downward revisions in sales and profit estimates compared to the previous quarter. The number of drama episodes in the second quarter recorded 63, down 35 episodes from the previous quarter, which is analyzed to be influenced by the absence of original dramas for TVING and Netflix. Kim Hoejae, a researcher at Daishin Securities, said, “Although profits are lower than previous estimates, operating profit margin is expected to improve to 15%, up 5 percentage points from the same period last year, due to continued sales efficiency,” adding, “The number of drama episodes is expected to recover to around 120 episodes from the third quarter.”

This year, production is expected to include 22 titles for tvN and OCN and 9 titles for OTT platforms. The OTT titles were initially planned as 3 for Netflix, 3 for TVING, and 3 for Chinese OTT platforms, but Netflix and Chinese projects each decreased by 2 titles, while TVING’s expansion strategy is expected to add about 2 original dramas for TVING. Researcher Kim said, “Since OTT original dramas compensate for a certain level of production mid-margin, even if the number of productions decreases by about one title, profit fluctuations will not be significant,” and added, “In the second half of the year, a total of 18 productions, including 6 originals, are scheduled, so performance is expected to improve significantly compared to the first half.” Furthermore, one of the tentpole works aired in the first quarter is expected to be sold at a high price to a global OTT in the third quarter, leading to an operating profit of 21.2 billion KRW in the third quarter, which is predicted to be a record high, growing 32% compared to the same period last year.

Moreover, from next year, a leap to becoming a global operator is anticipated. The company announced the official launch of its U.S. project by securing a series order for an original drama for Apple TV+. The work is titled ‘The Big Door Prize,’ with a contract signed for season 1, but with a season system in mind, contracts are expected to be naturally extended to seasons 2 and 3. Researcher Kim Hoejae explained, “Entering the U.S. drama market is important because production costs are about 10 times higher than in Korea and content value is highly regarded, resulting in high mid-margin,” adding, “Although it is difficult to reflect the exact scale of the U.S. project, if a project consists of 10 episodes with a production cost of 10 billion KRW per episode and 5 such projects proceed annually with only season 1, annual sales of about 500 billion KRW could be reflected.”