[Click eStock] Studio Dragon, the End of a Tedious Adjustment Approaches

[Asia Economy Reporter Lee Seon-ae] Hana Financial Investment announced on the 6th that it maintains a buy rating and a target price of 140,000 KRW for Studio Dragon.

Lee Ki-hoon, a researcher at Hana Financial Investment, stated, "Despite impeccable indicators such as expanded sales and ASP growth due to intensified industry competition and the global success of tentpole works, the stock price has been sluggish as sales recorded negative growth in three out of the last four quarters due to reduced programming, even though it is a growth stock. However, with about six programs scheduled for both the third and fourth quarters, normalization will occur and sales growth will resume. Additionally, with further momentum expected from additional global orders in the second half, the prolonged period of adjustment is nearing its end."

Second-quarter sales and operating profit were 106 billion KRW (-34% YoY) and 13.8 billion KRW (-18%), respectively, falling short of the consensus (15.1 billion KRW). Due to CJ ENM's production cost efficiency efforts, programming decreased by nearly four shows compared to the previous year, creating adverse conditions that led to significant negative sales growth. However, major works such as and exceeded 10% in viewership ratings, and succeeded in global popularity, ranking 7th according to the Flixpatrol.com index. Profitability improved due to increased ASP and high sales growth driven by improved global references.

In an environment of accelerated growth of global OTTs and intensified content supply competition due to COVID-19, Studio Dragon is recording record-high profitability through consecutive global hits of major works based on premium IP. There is still considerable room for growth: 1) Contract renewal with Netflix is underway, and considering the competitive industry environment, significantly improved contract terms are expected. 2) Recently, they succeeded in securing an order for Apple TV, and in addition, one more global production is becoming visible, with two others in the pre-production stage. Since production costs are 1.5 to 2 times higher than in Korea, substantial high growth is anticipated. 3) Lastly, an additional production beyond is expected for iQIYI Originals. Although not yet confirmed, sales negotiations for targeting the Chinese market are ongoing, indicating an expected increase in sales to Chinese OTTs even without assuming a relaxation of the Hallyu ban.