Video content production China presents huge market potential
Domestic content production market to see tailwinds from China
Many domestic video content producers share a number of challenges , including 1) unreasonably low license fees compared to actual production costs , 2) the industry Industry Report practice of networks paying production companies only after a program is aired, and 3) September 30, 2014 the fact that networks rather than production companies often own the rights to content. These challenges stem from the unique structure of the domestic market, in
which only a handful of networks attract the majority of viewership. Daewoo Securities CCCo.,Co., Ltd. However, things are looking better abroad. Recently, China has been overtaking Japan as
[Small Cap] the biggest foreign buyer of Korean content. We believe Korean content production companies will expand their footprint into China’s broadcast network market , which Daewoo Lee remains uncharted territory. Unlike Korea, the balance of power in China is tilted +822-768-4132 towards production companies. Thus, Korean content makers’ advance into China should [email protected] bode well for profitability.
China to expand collaboration with Korean firms to secure content
In China, demand for content has been growing fast, in terms of bo th quantity and quality, in line with the rapid development of new forms of media. At the same time,
dissatisfaction with domestically produced content is widespread among Chinese media consumers. Against this backdrop, we believe demand for Korean dramas will continue to rise going forward.
Tighter regulations to spur coproductions China has continued to strengthen bro adcast regulations, but this has not stopped the country’s broadcast content market from expanding at a fast pace. Recently, government restrictions on online video streaming sites have been causing some stir. Such measures should merely adjust the pace of growth, rather than derail the overall growth trajectory of the market. We believe domestic content producers, for their part, will look towards co production with local Chinese firms to respond to various proposals for cooperation and avoid regulations on foreign-made content.
Stocks to watch: SM C&C, KeyEast, and Pan Entertainment In the domestic video content production segment, we recommend closely watching three stocks: 1) SM C&C (048550 KQ), which we believe has an upper hand in negotiations thanks to its variety entertainment-oriented content, 2) KeyEast (054780 KQ), which is well-poised to enjoy a dominant position in China on t he back of its robust talent roster, and 3) Pan Entertainment (068050 KQ) in light of its attractive valuation and partnership with China’s leading production firm Zhejiang Huace.
Growth of content demanddemand:: MMMobileMobile internet penetration rate in China sharply increasincreasinginginging (mn persons) (%) 600 Mobile internet users in China (L) 100 Mobile users out of total internet users (R) 500 80
400 60 300 40 200
20 100
0 0 2007 2008 2009 2010 2011 2012 2013
Source: CNNIC, KDB Daewoo Securities Research
Analysts who prepared this report are registered as research analysts in Korea but not in any other jurisdiction, including t he U.S. PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURESDISCLOSURES & DISCLAIMERS IN APPENDIX 1 AT THE END OF REPORT.
September 30, 2014 Video content production
China presents huge market potential
1. A challenging domestic environment
The recent bankruptcy of Four Seasons, a well-known documentary producer that has been in the business for over 30 years, underscored the harsh reality facing many Korean video content production companies. Compared to documentary and informational program studios, drama and entertainment show producers are generally better off, as they can sell their programs in secondary markets (IPTV and overseas markets). Still, many domestic video content producers are struggling with a number of common challenges. First, license fees are unreasonably low compared to actual production costs. Second, it is a common industry practice for networks to pay production companies only after a program is aired. Lastly, it is often the network, not the production company, that owns the rights to content. These challenges stem from the unique structure of the domestic market, in which the three major broadcast networks control the majority of viewership.
FigureFigureFigure 111.1. Proportion of Korean content FigureFigureFigure 333.3. Content producers’ operating loss FigureFigureFigure 222.2. Content producers’ OP margin levelslevelslevels producers making operating profitsprofits////losseslosseslosseslosses levelslevelslevels
(%) (%) (%) 50 50 50
40 40 40
30 30 30
20 20 20
10 10 10
0 0 0 Profit BEP Loss
Source: KISDI, KDB Daewoo Securities Research
Dramas have accounted for the bulk of networks’ profits. Indeed, drama programs command higher ad prices and space compared to other types of content.
FigureFigureFigure 444.4. Cost of television aaadvertisingadvertising by programming type
(Wmn/15 seconds) 10 9 8 7 6 5 4 3 2 1 - Children's Sports Drama News Educational
Source: KBAC, KDB Daewoo Securities Research
More importantly, dramas are playing a leading role in driving exports of Korean content. China has been emerging as a major foreign buyer of Korean content, alongside Japan, while exports to other regions like the US and Europe are also on an upward trend.
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Table 111.1... Success of www.dramafever.com highlights popularity of Korean dramas in the US Details on www.dramafever.com
In April 2014 (one-month # of visitors 18mn period ) Launch of webwebwebsiteweb sitesitesite 2009 Growth in # of visitors Over 100% per half-year Over the past five years NonNonNon-Non ---AsianAsian Americans out of 84% Subscribers aged 18-34 total visitors Race White (40%), Hispanic (26%), African American (16%) AgeAgeAge High proportion of subscribers aged 18-24 Gender 63% of subscribers are women Source: KOCCA, KDB Daewoo Securities Research
2. Tailwinds from China
(1) Chinese online video streaming sites are fast growing Demand has been cooling in Japan, which was once the biggest foreign buyer of Korean content, partly due to worsening bilateral relations. Still, we believe Korean dramas are demanding a price of around W100mn per episode in the country. More recently, however, China has been emerging as a major foreign buyer of Korean content. In a short period of time, the price of Korean dramas has doubled from around W100mn per episode to W200mn per episode.
FigureFigureFigure 555.5. Average perper----episodeepisode sales of Korea dramadramassss on CCChineseChinese online streaming sitesitessss
My Love from the Star 40
Three Days 50
Doctor Stranger 80
It's Okay, That's Love 120
Fated to Love You 120
My Lovely Girl 200 (Wmn)
0 50 100 150 200 250
Note: All aired in 2014 except My Love from the Star , which aired in 2013 Source: Company data, KDB Daewoo Securities Research
Such price increases have mostly been led by Chinese online video streaming sites like Youku Tudou and Sohu. The primary catalyst was the popular Korean drama The Heirs , which was serviced on Youku Tudou in 4Q13 and helped attract a greater Chinese audience to Korean dramas. The show’s success was followed by another hit, My Love from the Star , triggering an intense battle among video streaming sites to secure license rights. This quickly pushed up prices, as the growth in traffic to Korean dramas helped Chinese video firms gain major advertisers and raise ad revenue. Thanks to the looser regulations on online media, Chinese streaming sites are able to update content frequently, and many also support video access via mobile devices. We believe Chinese streaming sites will continue to see strong growth for some time on the back of the spread of mobile devices.
Currently, the four largest Chinese online streaming providers—Youku Tudou, Sohu, iQIYI, and Tencent—are looking to set themselves apart by producing original content independently or through outside companies. Youku Tudou is specializing in entertainment shows, Tencent in news and sports, Sohu in documentaries, and iQIYI in lifestyle programs. As of April 2014, Youku Tudou had 33 original programs (total airtime of 414.7 hours or 1.14 hours per day), the largest number among the four sites.
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FigureFigureFigure 666.6. 1) Breakdown of independently produced programming on four largest Chinese online streaming sitesitessss and 2) detailed breakdown of entertainment/music programming
Entertainment/music News Sports Entertainment news Star interviews Talk shows Video editing Documentaries Lifestyle Performance shows Music Talent shows Internet one-act plays Animation Nature shows Large events
2% 2% 2% 4% 12% 6% 7% 44% 8% 1,057.5 hours 24% 653.3hours 62%
10%
25%
Source: KOCCA, KDB Daewoo Securities Research
FigureFigureFigure 777.7. TrafficTraffic----boostingboosting effect of My LLLoveLove from the SSStarStartartar forforfor online FigureFigureFigure 888.8. Revenue breakdown of Chinese online streaming sites streaming site iQIYIiQIYIiQIYI
('000 persons) (%) Other value- 400 0.5 Viewers of My Love from the Star added services MUV 16% 350 0.45 0.4 300 Video services 0.35 3% 250 0.3
200 0.25 Copyright sales 0.2 13% 150 Advertising 0.15 68% 100 0.1 50 0.05 0 0 6/13 8/13 10/13 12/13 2/14 4/14 6/14
Source: Compete.com, TNmS, KDB Daewoo Securities Research Source: iResearch (2012), KCC, KDB Daewoo Securities Research
These online streaming sites share the following characteristics:
1) Entertainment shows account for the largest proportion of their content.
2) They combine content and marketing by actively using product placement advertising; the rapid growth of these sites has been consistent with the fast growth of China’s consumer market.
3) Although many programs are fresh and unique, the sophistication or extent of production expertise still lags far behind that of broadcast networks.
4) Content, not picture quality, plays a key role in determining viewers’ choice of platform.
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FigureFigureFigure 999.9. ChinaChinaChina’China ’’’ss broadcast market growth trendtrendtrend and forecast
(US$bn) (%) 35 Revenue (L) YoY growth (R) 20
15.9 28 14.7 15.1 14.7 16 13.6 13.2
21 10.4 12
7.8 14 6.9 8
7 4
0 0 2008 2010 2012P 2014F 2016F
Note: Revenue from on-line streaming sites is excluded Source: KOCCA, KDB Daewoo Securities Research
FigureFigureFigure 101010.10 . ChinaChinaChina’China ’’’ss online streaming industry growth trend and forecast
(CNYbn) (%) 40 Revenue (L) YoY growth (R) 120 100.1
30 90 78.1
20 60 43.9 41.9 38.7 32.4 26.8 10 22.7 30
0 0 2010 2011 2012 2013F 2014F 2015F 2016F 2017F
Source: iResearch, KDB Daewoo Securities Research
FigureFigureFigure 111111.11 . Reasons cited by internet users for choosing an online streaming site
Recommended by others 17.8
Popularity 29.5
Fewer commercials 32.2
High-speed display 52.0
High resolution 53.4
Diverse content 57.3 (%)
0 10 20 30 40 50 60 70
Source: iResearch, KDB Daewoo Securities Research
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(2) Chinese broadcast market CCTV, China’s major state-run terrestrial broadcaster, holds 25 channels under its umbrella. Meanwhile, provincial satellite broadcasters are estimated to have 35 channels, while provincial terrestrial and local broadcasters (which number about 180) are believed to operate more than 4,000 channels. CCTV and provincial satellite channels produce dramas and entertainment programs, while provincial terrestrial broadcasters and local broadcasters mainly air local news and entertainment programs.
Table 222.2. ChinaChina’’’’ss content market trend and forecast (US$mn, %) 200820082008 200920092009 201020102010 201120112011 2012P2012P2012P 2013F2013F2013F 2014F2014F2014F 2015F2015F2015F 2016F2016F2016F 2017F2017F2017F 201220122012-2012 ---1717 CAGR
Books 22,818 23,995 23,698 26,189 27,167 28,307 29,429 30,559 31,790 33,169 4.1 Comics 213 223 211 246 291 303 315 327 340 355 4.1 Music 559 586 607 627 653 716 772 832 897 960 8.0 Games 4,445 5,233 6,014 6,900 7,804 8,674 9,465 10,118 10,749 11,379 7.8 Movies 1,106 1,428 2,074 2,626 3,264 3,835 4,448 5,117 5,812 6,487 14.7 Animation 184 240 378 380 540 639 748 867 981 1,094 15.2 Broadcasting 10,413 11,498 13,183 15,273 17,354 19,980 22,914 25,940 27,961 29,888 11.5 Advertising 16,639 17,825 21,903 27,549 31,081 35,626 40,524 45,857 50,842 55,681 12.4 Character/license 2,870 3,120 3,452 4,616 5,036 5,785 6,572 7,389 8,126 8,858 12.0 Information 20,407 24,191 30,366 37,055 45,313 53,944 63,047 72,252 81,045 89,716 14.6 Arithmetic total 79,654 88,339 101,886 121,461 138,503 157,809 178,234 199,258 218,543 237,587 11.4 TotalTotalTotal 67,711 75,440 87,763 104,673 120,313 138,207 157,006 176,519 194,147 211,629 12.0 Notes: Totals are calculated by stripping away overlap from arithmetic totals Source: PwC, EPM, Digital Vector, Box Office Mojo, MDRI, ICv2, JBPA, Oricon, SNE, KDB Daewoo Securities Research
Table 333.3. Chinese advertising market trend and forecast (US$mn, %) 200820082008 200920092009 201020102010 201120112011 2012P2012P2012P 2013F2013F2013F 2014F2014F2014F 2015F2015F2015F 2016F2016F2016F 2017F2017F2017F 201220122012-2012 ---1717 CAGR
Directories 367 390 383 385 403 430 461 495 525 557 6.7 Digital 95 96 125 162 198 224 254 283 310 335 11.1 Printed 272 294 258 223 205 206 207 212 215 222 1.6 Trade magazines 71 73 84 120 151 180 212 241 266 287 13.7 Digital - - 3 9 24 39 58 76 92 103 33.8 Printed 71 73 81 111 127 141 154 165 174 184 7.7 Magazines 474 486 549 757 895 1,012 1,132 1,230 1,319 1,399 9.3 Digital - - 5 16 45 71 103 132 157 172 30.8 Printed 474 486 544 741 850 941 1,029 1,098 1,162 1,227 7.6 Films 38 42 46 54 62 72 81 92 104 117 13.5 Internet 2,557 2,718 4,522 7,650 10,052 13,232 16,480 20,269 23,465 26,560 21.4 Mobile 165 206 397 755 1,042 1,490 2,014 2,687 3,370 4,128 31.7 Wired 2,392 2,512 4,125 6,895 9,010 11,742 14,466 17,582 20,095 22,432 20.0 Newspapers 5,363 5,798 5,971 7,346 7,589 7,923 8,345 8,724 9,074 9,431 4.4 Digital 161 200 236 332 393 469 564 673 798 943 19.1 Printed 5,202 5,598 5,735 7,014 7,196 7,454 7,781 8,051 8,276 8,488 3.4 Outdoors 2,843 3,041 4,330 4,418 4,528 4,772 5,120 5,497 5,981 6,512 7.5 Radio 1,158 1,249 1,454 1,753 1,961 2,179 2,434 2,722 3,039 3,385 11.5 TV 3,967 4,242 4,825 5,452 5,943 6,446 7,026 7,506 8,147 8,664 7.8 Multi-channel 122 137 166 196 227 258 294 333 383 426 13.4 Terrestrial 3,845 4,105 4,659 5,256 5,716 6,188 6,732 7,173 7,764 8,238 7.6 Online TV ------Games 58 82 108 133 157 184 212 245 281 320 15.3 Arithmetic total 16,896 18,121 22,272 28,068 31,741 36,430 41,503 47,021 52,201 57,232 12.5 TotalTotalTotal 16,639 17,825 21,903 27,549 31,081 35,626 40,524 45,857 50,842 55,681 12.4 Note: Totals are calculated by stripping away overlap from arithmetic totals Source: PwC, KDB Daewoo Securities Research
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TableTableTable 444.4. TV market size by country (US$mn, %) Classification KoreaKoreaKorea USUSUS UKUKUK Germany France JapanJapanJapan ChinaChinaChina TV subscriptions and license fees 3,516 74,362 12,790 14,242 7,947 12,055 9,450 Subscription TV 3,047 74,362 7,075 4,747 3,807 4,203 9,450 Public TV license fees 469 - 5,715 9,495 4,140 7,852 - TV ad market 2,613 63,796 5,867 5,301 4,635 16,252 5,943 TotalTotalTotal 6,1296,1296,129 138,158 18,657 19,543 12,582 28,307 15,393 % in global market 1.6 37.2 5.0 5.3 3.4 7.6 4.1 Notes: As the numbers are approximate, the sums may not exactly match the totals Source: KOCCA, KDB Daewoo Securities Research
In China, garnering a viewership rating of even 1% is a major achievement due to the vast number of channels from which viewers can choose. However, multiple channels may air the same show at the same time, as reruns are common. Chinese production companies enjoy fat profits, because: 1) they own copyrights in most cases, 2) shows can air on multiple channels from the start of their run (only two channels can air the same program during its original run, while there is no limit on the number of channels that can air reruns of shows that have ended), and 3) production companies have strong negotiating power, which allows them to share in advertising profits. In other words, China’s broadcast content market—unlike Korea’s—is a seller’s market.
Korean video content producers have yet to advance meaningfully into China. Unlike video streaming sites, where relatively loose censorship allows easier access to Korean producers (with production and broadcasting carried out simultaneously, as in Korea), the broadcast network market has higher barriers to entry due to pre-censorship requirements. However, we believe Korean content producers will manage to adapt easily to the Chinese market as long as 1) production costs are paid in advance, and 2) the problem of the time lag between finding product placement advertisers and airing a show can be solved. Some production companies already seem to have launched projects targeting China.
In conclusion, although Korean dramas and entertainment content have so far advanced into China mainly through video streaming sites, which have relatively low barriers to entry, before long we expect this trend to expand to include the broadcast network market, as well. Korean content producers are likely to engage in a greater variety of cooperative activities with Chinese broadcasters and video steaming sites. Such cooperation should help Korean production companies overcome the limitations of the domestic market, such as the small market size and unfavorable business structure. The cooperation should also help improve Korean content producers’ revenue structure by giving them exposure to China’s superior video content revenue structure.
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3. Chinese companies’ cooperation with Korean production companies to expand
We expect Chinese broadcasters and video streaming sites to expand their cooperation with Korean content producers for two reasons:
1) The rapid growth of media has led to rising demand for content.
2) China’s domestic content production has limitations.
(1) Rapid growth of media, including the internet
Figure 121212.12 . Number of internet users and internet penetration in China over time
(mn persons) (%) 800 Chinese internet users (L) 50 Internet penetration rate (R) 40 600
30 400 20
200 10
0 0 2005 2006 2007 2008 2009 2010 2011 2012 2013
Source: CNNIC, KDB Daewoo Securities Research
As of end-2013, the number of Internet users in China stood at 618mn, up by 53.68mn from the previous year. In fact, in each year since 2005, the number of Chinese internet users has increased by a number exceeding Korea’s population. The State Council of the People's Republic of China has been trying to spread broadband internet facilities and online application programs, particularly in rural areas. As part of these efforts, the council announced a “Broadband China” strategy and action plan in August 2013. Furthermore, a new policy objective to advance internet use has been added for areas with saturated internet penetration. As such, mobile internet penetration is currently rising more rapidly than overall internet penetration in China.
Figure 131313.13 . Device usage among new internet users in 2013
(%) 80
60
40
20
0 Desktop Notebook Smartphone
Source: CNNIC, KDB Daewoo Securities Research
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FigureFigureFigure 141414.14 . MMMobileMobile internet users in China and ratio of mobile users out of total internet users
(mn persons) (%) 600 Mobile internet users in China (L) 100 Mobile users out of total internet users (R) 500 80
400 60 300 40 200
20 100
0 0 2007 2008 2009 2010 2011 2012 2013
Source: CNNIC, KDB Daewoo Securities Research
FigureFigureFigure 151515.15 . Chinese internet usersusers’’’’ aaaverageaverage weekly timetimetime spent using the internet (in hours)
(hours)
30
25
20
15
10
5
0 2010 2011 2012 2013
Source: CNNIC, KDB Daewoo Securities Research
While the number of people who watch video content on PCs grew 0.5% from December 2012 to November 2013, the number who did so via mobile applications jumped 72.9% during the same period. As a result, the proportion of mobile watchers to PC video watchers rose from 21.5% to 37.1%. This trend suggests that N-Screen services are spreading rapidly in China. The penetration of PCs and mobile internet devices as well as TVs should boost both the amount of time spent on media consumption and the amount of content consumed per unit of time, leading to quantitative growth in the content market. The sharp penetration of the internet and mobile phones in China is driving the market’s rapid expansion.
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FigureFigureFigure 161616.16 . 2012 London Olympics audienceaudience’’’’ss as averagea verage daily media usage FigureFigureFigure 171717.17 . NNN-N---screenscreen to increase perper----hourhourhourhour consumption of content
(minutes) 600 Tablet Phone 500 PC TV 400
300 5hours spent using 5 hours spent watching TV VS. = 4hours of content+ 1hour of advertisements multiple platforms (Smartphone+ TV + PC + Tablet) = More content 200
100
0 TV only TV + PC TV + PC + Phone TV + PC + Phone + Tablet
Note: PC includes both desktop and laptop Source: KOCCA, KDB Daewoo Securities Research Source: KPCB, ComScore, KDB Daewoo Securities Research
In addition, qualitative improvement is evident in the content market, owing to the increase in choices afforded to content consumers by the spread of internet technology. While traditional broadcast media provided only limited choices, the internet offers many more options, including foreign content, and is thus fueling demand for higher-quality content. The wide popularity of Korean dramas in China sparked by The Heirs seems to be attributable to the solid fan base for Korean dramas and the growing popularity of Korean TV stars.
In sum, internet penetration in China is leading to sharp growth in content demand, in terms of both quantity and quality.
(2) Limited content production capability Despite the expansion of China’s broadcast content market and the growing demand for higher-quality content in the country, Chinese content producers still seem to have rather limited capabilities.
In 2013, a total of 15,000 drama episodes were produced in China, a YoY decline of 2,000 episodes—the first YoY decline in 13 years. Despite the huge number of dramas produced, only about 7,000 episodes are aired annually, of which about 75% gain viewership ratings of less than 0.5%. Among dramas that aired on satellite TV channels in 2013, the percentage that achieved viewership ratings of 1% or more is estimated to be below 10%.
Meanwhile, out of the approximately 600 dramas that aired on satellite TV channels in 2013 during primetime (7:00 to 10:00 p.m.), only 260 were newly produced, the others being reruns of previously popular dramas. This figure highlights the doubt that exists in the Chinese TV broadcast market regarding the quality and success of dramas made by Chinese producers.
Against this backdrop, Chinese content producers and streaming site operators are expanding their cooperation with Korean companies, as the quality of Korean-produced content is higher and production costs are lower. In addition, the relatively strong control that Korean writers and producers enjoy could help reduce risks in the production process and secure effective quality control. Chinese TV broadcasters and content producers appear to have strong desire to improve content quality in order to fully utilize the primetime TV segment.
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4. Regulations and coproduction
Table 555.5. ChinaChina’’’’ss restrictions on imports of foreign TV content Details - Imports of news and current affairs programs are banned - Daily broadcasting of foreign movies and dramas cannot exceed 25% of total broadcasting hours, and they cannot be broadcast during primetime (7:00-10:00 p.m.) - Imports of foreign dramas having more than 50 episodes are banned - Daily broadcasting of foreign content other than dramas and movies cannot exceed 15% of total broadcasting hours - Annual imports of foreign program formats are limited to one, and broadcasting approval for a program in an imported format should be sought at least two months before broadcasting Source: KOCCA, KDB Daewoo Securiteis Research
China has among the world’s strongest broadcast regulations. The State Administration of Radio, Film, and Television (SARFT) has steadily tightened broadcast regulations related to content and advertising. Despite the tighter regulations, the Chinese broadcast content market has grown rapidly. We believe the strengthening of broadcast regulations points to the increased influence of the broadcast industry, and—given the nature of the Chinese regime— strong regulations are unavoidable for maintaining social order and ensuring that the industry matures.
For example, in 2014, SARFT restricted the simultaneous broadcast of a drama’s first airing to only two satellite TV networks. This measure is aimed at lowering dependence on top-tier content producers and encouraging production companies to focus on the quality of content. In addition, the Chinese government recently introduced regulatory measures related to online content imports, as it believes traffic to video streaming sites has reached a significant level. Given the rapid growth of the Chinese broadcast content market and video streaming sites, this regulation should be interpreted as merely adjusting the pace of growth, rather than dampening market expansion.
In particular, the regulations related to online content 1) limit imported content to 30% of total content on video streaming sites and 2) introduce prior review. We believe the impact of these regulations will be minimal, as 1) on average, imported content on video streaming sites stands at around 30%, and 2) the government is unlikely to apply the same review process (production -> review -> broadcasting) used for conventional broadcast content.
In addition, online content regulations should be limited, given that 1) the Chinese government has been firmly committed to increasing internet penetration, and 2) video streaming sites are contributing significantly to the spread of internet use.
In conclusion, although regulations on broadcast content and video steaming sites have continued to strengthen, China’s broadcast content market and cooperation with Korean production companies are also likely to continue to expand.
We believe that coproduction with local partners is the most viable strategy for Korean content producers seeking to expand their footprint in China, in light of the following:
1) China is a vast market where foreign producers stand very little chance of success without the help of local partners. Moreover, production companies are at a critical juncture, as they now need to up the ante by trying out new projects instead of focusing only on streaming video services; they already appear to have a host of new business proposals in hand. In this sense, partnerships with various local producers are crucial for them to expand their presence in the Chinese video content market.
2) The Chinese government has promised not to subject coproduced content to foreign content regulations. This currently applies only to movies, but coproduced TV broadcast content is expected to be exempted soon, as well. In China, foreign movies and soap operas cannot exceed 25% of the daily TV broadcast time (15% for other types of foreign content). Moreover, no foreign TV shows are allowed to air during primetime hours.
Coproduction partnerships will serve the interests of both Korean and Chinese companies, as 1) Chinese broadcasters are believed to have a strong desire to improve their primetime TV show content, and 2) China’s TV production and broadcasting processes are different from Korea’s.
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5. Promising stocks: SM C&C, KeyEast, and Pan Entertainment
In the video content production sector, SM C&C (048550 KQ), KeyEast (054780 KQ), and Pan Entertainment (068050 KQ) look promising. These companies have seen progress in joint projects with Chinese partners.
SM C&C, a subsidiary of SM Entertainment (041510 KQ), mainly engages in video content production, and also runs various businesses that include artist management, tour services, and music production. In the content production business, the company focuses on entertainment programs, which attract more sponsors than dramas in China. The firm is believed to be discussing with its Chinese partner(s) a plan to produce shows on which SM artists will star. The profit structure of its Chinese operations will be different from that of domestic operations, as the firm will generate revenue mainly from advertising rather than transmission fees.
KeyEast operates various businesses, including artist management, merchandising, mobile content production, and drama production. Considering Chinese broadcasters’ aversion to risks, their demand for artists with already-established reputations and popularity in the Chinese market should continue to remain robust. The company is expected to secure a strong market share in China’s content market on the back of its strong artist lineup (artists with immense popularity in China and Japan). Chinese companies are also showing keen interest in business partnerships with KeyEast. Indeed, a subsidiary of one of China’s four largest video streaming sites has already decided to invest W15bn (6.4%) in the company.
Pan Entertainment produces dramas and manages singers. Its recent partnership with a top-tier Chinese drama producer (Zhejiang Huace) has brightened our outlook for the company’s profitability growth. Casting delays (for a drama being coproduced with Zhejiang Huace) have weighed on the stock recently, but the impact should be limited. The company’s domestic operations are anticipated to generate stable earnings through the end of this year (four dramas are scheduled to be aired by year-end). Moreover, the stock looks cheap at the current price level.
FigureFigureFigure 191919.19 . Relative share performances of SM C&C, KeyEastKeyEast,,,, and Pan FigureFigureFigure 181818.18 . RRRelativeRelative share performances of global peers Entertainment
(-6M=100) (-6M=100) 250 Huayi Brothers 350 KeyEast Zhejiang Huace Film & TV SM C&C Beijing HualuBaina Film & TV 300 Pan Entertainment 200 Kadokawa Corporation China Star Entertainment 250
150 200
150 100
100 50 50
0 0 9/13 11/13 1/14 3/14 5/14 7/14 9/14 9/13 11/13 1/14 3/14 5/14 7/14 9/14
Source: Bloomberg, KDB Daewoo Securities Research Source: Bloomberg, KDB Daewoo Securities Research
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APPENDIX 1
Important Disclosures & Disclaimers Disclosures As of the publication date, Daewoo Securities Co., Ltd and/or its affiliates do not have any special interest with the subject company and do not own 1% or more of the subject company's shares outstanding.
Analyst Certification The research analysts who prepared this report (the “Analysts”) are registered with the Korea Financial Investment Association and are subject to Korean securities regulations. They are neither registered as research analysts in any other jurisdiction nor subject to the laws and regulations thereof. Opinions expressed in this publication about the subject securities and companies accurately reflect the personal views of the Analysts primarily responsible for this report. Daewoo Securities Co., Ltd. policy prohibits its Analysts and members of their households from owning securities of any company in the Analyst’s area of coverage, and the Analysts do not serve as an officer, director or advisory board member of the subject companies. Except as otherwise specified herein, the Analysts have not received any compensation or any other benefits from the subject companies in the past 12 months and have not been promised the same in connection with this report. No part of the compensation of the Analysts was, is, or will be directly or indirectly related to the specific recommendations or views contained in this report but, like all employees of Daewoo Securities, the Analysts receive compensation that is impacted by overall firm profitability, which includes revenues from, among other business units, the institutional equities, investment banking, proprietary trading and private client division. At the time of publication of this report, the Analysts do not know or have reason to know of any actual, material conflict of interest of the Analyst or Daewoo Securities Co., Ltd. except as otherwise stated herein.
Disclaimers This report is published by Daewoo Securities Co., Ltd. (“Daewoo”), a broker-dealer registered in the Republic of Korea and a member of the Korea Exchange. Information and opinions contained herein have been compiled from sources believed to be reliable and in good faith, but such information has not been independently verified and Daewoo makes no guarantee, representation or warranty, express or implied, as to the fairness, accuracy, completeness or correctness of the information and opinions contained herein or of any translation into English from the Korean language. If this report is an English translation of a report prepared in the Korean language, the original Korean language report may have been made available to investors in advance of this report. Daewoo, its affiliates and their directors, officers, employees and agents do not accept any liability for any loss arising from the use hereof. This report is for general information purposes only and it is not and should not be construed as an offer or a solicitation of an offer to effect transactions in any securities or other financial instruments. The intended recipients of this report are sophisticated institutional investors who have substantial knowledge of the local business environment, its common practices, laws and accounting principles and no person whose receipt or use of this report would violate any laws and regulations or subject Daewoo and its affiliates to registration or licensing requirements in any jurisdiction should receive or make any use hereof. Information and opinions contained herein are subject to change without notice and no part of this document may be copied or reproduced in any manner or form or redistributed or published, in whole or in part, without the prior written consent of Daewoo. Daewoo, its affiliates and their directors, officers, employees and agents may have long or short positions in any of the subject securities at any time and may make a purchase or sale, or offer to make a purchase or sale, of any such securities or other financial instruments from time to time in the open market or otherwise, in each case either as principals or agents. Daewoo and its affiliates may have had, or may be expecting to enter into, business relationships with the subject companies to provide investment banking, market-making or other financial services as are permitted under applicable laws and regulations. The price and value of the investments referred to in this report and the income from them may go down as well as up, and investors may realize losses on any investments. Past performance is not a guide to future performance. Future returns are not guaranteed, and a loss of original capital may occur.
Distribution United Kingdom: This report is being distributed by Daewoo Securities (Europe) Ltd. in the United Kingdom only to (i) investment professionals falling within Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (the “Order”), and (ii) high net worth companies and other persons to whom it may lawfully be communicated, falling within Article 49(2)(A) to (E) of the Order (all such persons together being referred to as “Relevant Persons”). This report is directed only at Relevant Persons. Any person who is not a Relevant Person should not act or rely on this report or any of its contents. United States: This report is distributed in the U.S. by Daewoo Securities (America) Inc., a member of FINRA/SIPC, and is only intended for major institutional investors as defined in Rule 15a-6(b)(4) under the U.S. Securities Exchange Act of 1934. All U.S. persons that receive this document by their acceptance thereof represent and warrant that they are a major institutional investor and have not received this report under any express or implied understanding that they will direct commission income to Daewoo or its affiliates. Any U.S. recipient of this document wishing to effect a transaction in any securities discussed herein should contact and place orders with Daewoo Securities (America) Inc., which accepts responsibility for the contents of this report in the U.S. The securities described in this report may not have been registered under the U.S. Securities Act of 1933, as amended, and, in such case, may not be offered or sold in the U.S. or to U.S. persons absent registration or an applicable exemption from the registration requirements. Hong Kong: This document has been approved for distribution in Hong Kong by Daewoo Securities (Hong Kong) Ltd., which is regulated by the Hong Kong Securities and Futures Commission. The contents of this report have not been reviewed by any regulatory authority in Hong Kong. This report is for distribution only to professional investors within the meaning of Part I of Schedule 1 to the Securities and Futures Ordinance of Hong Kong (Cap. 571, Laws of Hong Kong) and any rules made thereunder and may not be redistributed in whole or in part in Hong Kong to any person. All Other Jurisdictions: Customers in all other countries who wish to effect a transaction in any securities referenced in this report should contact Daewoo or its affiliates only if distribution to or use by such customer of this report would not violate applicable laws and regulations and not subject Daewoo and its affiliates to any registration or licensing requirement within such jurisdiction.
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Daewoo Securities Co. Ltd. (Seoul) Daewoo Securities (Hong Kong) Ltd. Daewoo Securities (America) Inc. Head Office Two International Finance Centre 320 Park Avenue 34-3 Yeouido-dong, Yeongdeungpo-gu Suites 2005-2012 31st Floor
Seoul 150-716 8 Finance Street, Central New York, NY 10022 Korea Hong Kong, China United States Tel: 82-2-768-3026 Tel: 85-2-2845-6332 Tel: 1-212-407-1000
Daewoo Securities (Europe) Ltd. Daewoo Securities (Singapore) Pte. Ltd. Tokyo Branch 41st Floor, Tower 42 Six Battery Road #11-01 7th Floor, Yusen Building 25 Old Broad St. Singapore, 049909 2-3-2 Marunouchi, Chiyoda-ku London EC2N 1HQ Tokyo 100-0005 United Kingdom Japan Tel: 44-20-7982-8000 Tel: 65-6671-9845 Tel: 81-3- 3211-5511
Beijing Representative Office Shanghai Representative Office Ho Chi Minh Representative Office 2401A, 24th Floor, East Tower, Twin Towers Room 38T31, 38F SWFC Suite 2103, Saigon Trade Center B-12 Jianguomenwai Avenue 100 Century Avenue 37 Ton Duc Thang St,
Chaoyang District, Beijing 100022 Pudong New Area, Shanghai 200120 Dist. 1, Ho Chi Minh City, China China Vietnam Tel: 86-10-6567-9299 Tel: 86-21-5013-6392 Tel: 84-8-3910-6000 Daewoo Investment Advisory (Beijing) Co., Ltd. Daewoo Securities (Mongolia) LLC PT. Daewoo Securities Indonesia 2401B, 24th Floor, East Tower, Twin Towers #406, Blue Sky Tower, Peace Avenue 17 Equity Tower Building Lt.50 B-12 Jianguomenwai Avenue, 1 Khoroo, Sukhbaatar District Sudirman Central Business District Jl.
Chaoyang District, Beijing 100022 Ulaanbaatar 14240 Jendral Sudirman Kav. 52-53, Jakarta Selatan China Mongolia Indonesia 12190 Tel: 86-10-6567-9699 Tel: 976-7011-0807 Tel: 62-21-515-1140
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