2019. 11. 22 Company Studio Dragon (253450) Update Long -awaited good news ● Studio Dragon yesterday inked a three-years strategic deal with Netflix, in which Minha Choi the: 1) latter will purchase 4.99% of the Korean firm within a year; and 2) former will Analyst provide the US distributor with at least 21 productions starting from next year. [email protected] ● The partnership should allow Studio Dragon to: 1) produce dramas stably before 822 2020 7798 other global OTT platforms enter Korea or make inroads elsewhere in Asia; and 2) Kwak Hoin enjoy margin growth for its content production and distribution rights sale. Research Associate [email protected] ● We keep the stock as our sector top pick on expectations of its overseas 822 2020 7763 expansion gathering pace. WHAT’S THE STORY? Deal with Netflix...: CJ ENM, Studio Dragon, and Netflix yesterday announced that they had entered a multi-year strategic partnership, under which: 1) CJ ENM can sell up to 4.99% [roughly 1.4m shares] of Studio Dragon to Netflix within a year; 2) Studio Dragon will provide at least 21 original series productions to Netflix, along with their distribution rights sales, for three years starting in 2020. Per-show and distribution rights prices will be determined case by case, while titles are to be selected from a library of IP rights owned by Studio Dragon and distribution rights held by CJ ENM. AT A GLANCE … boasts several positives: This deal will give Studio Dragon stability as it provides Netflix with drama productions for at least three years, while the US firm’s massive budget should help those shows compete worldwide. We also expect this partnership to buy Studio Dragon time until other major OTT service providers ( eg , Disney+, Apple TV+, Target price KRW94,000 (12.7%) and HBO Max) make inroads into Korea and elsewhere in Asia. The Korean firm has Current price KRW83,400 already supplied Neflix with one Original Series and seven dramas for distribution this Market cap KRW2.3t/USD2.0b year, with the figure likely to hit at least seven pa over the next three years, while Shares (float) 28,095,260 (25.3%) production capacity hikes could see this rise even further. Having Netflix in addition to its 52 -week high/low KRW114,100/KRW54,000 captive channel clients is another positive for Studio Dragon, with their partnership Avg daily trading KRW8.4b/ value (60-day) USD7.1m forecast to strengthen further once the aforementioned stake purchase of 4.99% occurs. Despite its scale, we do not anticipate this deal restricting the Korean firm’s drama sales ONE-YEAR PERFORMANCE to terrestrial broadcasters or other OTT platform operators. 1M 6M 12M Studio Dragon 23.2 4.1 -20.4 (Continued on the next page ) (%) Vs Kosdaq (%pts) 25.7 15.3 -12.9 KEY CHANGES (KRW) New Old Diff SUMMARY FINANCIAL DATA Recommend. BUY BUY Target price 94,000 94,000 0.0% 2018 2019E 2020E 2021E 2019E EPS 1,438 1,438 0.0 % Revenue (KRWb) 380 496 598 663 2020E EPS 2,676 2,676 0.0 % Operating profit (KRWb) 40 45 71 86 SAMSUNG vs THE STREET Net profit (adj) (KRWb) 36 40 75 91 EPS (adj) (KRW) 1,278 1,438 2,676 3,247 No of estimates 23 EPS (adj) growth (% y-y) 21.7 12.5 86.1 21.3 Target price 95,043 EBITDA margin (%) 30.3 26.5 30.0 30.7 Recommendation 4.0 ROE (%) 9.3 9.6 15.7 16.2 BUY ★★★ : 5 / BUY: 4 / HOLD: 3 / SELL: 2 / SELL ★★★ : 1 P/E (adj) (x) 65.3 58.0 31.2 25.7 P/B (x) 5.8 5.3 4.5 3.9 EV/EBITDA (x) 19.0 16.3 11.6 9.9 Dividend yield (%) 0.0 0.0 0.0 0.0 Source: Company data, Samsung Securities estimates Studio Dragon 2019. 11. 22 Margin and earnings boosts both probable: Studio Dragon will probably enjoy better margins from Netflix-bound content, with the former’s margins also likely to rise for original content and allow it to raise prices for drama distribution (vs other local streamers), which ought to lift its gross margin and add to earnings momentum. Strengthened competitiveness: Ever since Studio Dragon went public in Nov 2017, CJ ENM has repeatedly said that it might partner with a global content production player or OTT platform to boost the former’s production prowess and market position. Teaming up with the world’s largest OTT service provider as a long-term strategic partner should help Studio Dragon establish a foundation for growth, with the Netflix deal also expected to help its overseas expansion (including the setting up of a US subsidiary in 2020) as OTT platforms go global and quality content enjoys demand growth. We reiterate the stock at BUY and as our sector top pick with an unchanged 12- month target price of KRW94,000. Chart 1. Corporate governance structure Note: Netflix expected to acquire 4.99% of Studio Dragon from CJ ENM within a year (based on yesterday’s announcement) Source: Company data, Samsung Securities 2 Studio Dragon 2019. 11. 22 Table 1. Netflix: Drama line-up airing simultaneously on local channels No. of Title Broadcast dates Channel Provider episodes Man to Man 21 Apr 17 to 10 Jun 17 JTBC 16 Mountain Movement Story, Drama House Studio Dragon, Signal Entertainment, IOK Secret Forest 10 Jun 17 to 30 Jul 17 tvN 16 Media Temporary Idols 27 Nov 17 SBS, Netflix 5 SBS, YG K Plus (Netflix early release) A Korean Odyssey Dec 17 to 4 Mar 18 tvN 20 Studio Dragon, JS Pictures Live 10 Mar 18 to 6 Mar 18 tvN 18 Studio Dragon, GT:st Pretty Sister Who Buys 30 mar 18 to 19 May 18 JTBC 16 Drama House Me Food Mr. Sunshine 7 Jul 18 to 30 Sep 18 tvN 24 Studio Dragon, Hwa&Dam Pictures Sky Castle 28 Nov 18 to 1 Feb 19 JTBC 20 HB Entertainment, Drama House Clean with Passion for 26 Nov 18 to 29 Jan 19 JTBC 16 Drama House, Five brothers Now Hymn of Death 27 Nov 18 to 4 Dec 18 SBS 6 The Story Works Memories of the Alhambra 1 Dec 18 to 20 Jan 19 tvN 16 Studio Dragon, Chorokbaem Media Romance is a Bonus Book 26 Jan 19 to 17 Mar 19 tvN 16 Studio Dragon, Story&Picture Media One Spring Night 22 May 19 to 11 Jul 19 MBC 32 Studio Dragon, JS Pictures Abyss 6 May 19 to 25 Jun 19 tvN 16 Studio Dragon Arthdal Chronicles 1 Jun 19 to 22 Sep 19 tvN 18 Studio Dragon, KPJ The Aide (season 1) 14 Jun 19 to 13 Jul 19 JTBC 10 Studio&NEW Designated Survivor: 60 1 Jul 19 to 20 Aug 19 tvN 16 Studio Dragon Days When the Camellia 18 Sep 19- KBS 16 Pan Entertainment Blooms Vagabond 20 Sep 19- SBS 16 Celltrion Entertainment The Lies Within 12 Oct 19- OCN 16 Studio Dragon My Country 14 Oct 19- JTBC 16 Celltrion Entertainment The Aide (season 2) 11 Nov 19- JTBC 10 Studio&NEW Crash Landing on You 14 Dec 19- tvN 16 Studio Dragon, Culture Depot Note: Highlights denote Studio Dragon production Source: Company data, local media, Samsung Securities Table 2. Studio Dragon-Netflix contract Category Note Types Drama content production and TV sales rights Contract date Nov 21, 2019 Details CJ ENM can sell stake in Studio Dragon (max 1,404,818 shares, 4.99%) to Netflix Period of exercise One year from contract date Firms 1) Content production Studio Dragon and Netflix 2) TV sales rights Studio Dragon, CJ ENM, and Netflix Period Three years from Jan 1, 2020 Business cooperation for three years with at least 21 programs (content production, TV sales Details rights, etc .) 1) Contents production Studio Dragon will provide Netflix with original drama content Studio Dragon will retain IP rights for content produced, CJ ENM will sell content using 2) TV sales rights distribution rights to Netflix as TV sales rights Other Content production costs and TV sales rights prices will differ by program Source: Company data, Samsung Securities 3 Studio Dragon 2019. 11. 22 Table 3. Netflix: Korean original content Program On-air Provider Contents type Episodes Okja Jun 29, 2017 Plan B Entertainment Movie - Ultimate Beastmaster: Season 1 Korean Feb 24, 2017 25/7 Production Variety 10 Yoo Byung Jae: Too Much Information Mar 16, 2018 YG Entertainment Stand-up comedy - Busted! May 4, 2018 Company SangSang Variety 10 Yoo Byung Jae: Aug 17, 2018 YG Entertainment Stand-up comedy - Discomfort Zone Ultimate Beastmaster: Season 3 Korean Aug 31, 2018 25/7 Production Variety 9 YG Electronics Oct 5, 2018 YG Entertainment Variety 8 Larva Island Oct 19, 2018 Tuba Entertainment Animation 13 Kingdom 1 Jan 25, 2019 A-Story Drama 6 Larva Island 2 Mar 1, 2019 Tuba Entertainment Animation 13 Persona Apr 11, 2019 Mystic Story Drama 4 My First First Love Apr 18, 2019 A-Story Drama 8 My First First Love 2 Jul 26, 2019 A-Story Drama 8 Love Alarm Aug 22, 2019 Studio Dragon Drama 8 Park Na-rae: Glamour Warning Oct 16, 2019 Company SangSang Stand-up comedy - Busted! 2 Nov 8, 2019 Company SangSang Variety I am Alone 2019 or 2020 Studio Dragon Drama School Nurse Ahn Eun Young 2020 Oh!boy project Drama Kingdom 2 2020 A-Story Drama Round Six 2020 Siren Pictures Drama Human class 2020 Studio 329 Drama Together 2020 Company SangSang Variety Highway to Heaven 2020 - Movie Love Alarm 2 2020 Studio Dragon Drama Source: Company data, local media, Samsung Securities 4 Studio Dragon 2019.