Next Entertainment World (160550 KQ) Descendants of the Sun to help cushion earnings Media Descendants of the Sun off to a strong start Descendants of the Sun : Next Entertainment World’s (NEW) first drama production Company Update Descendants of the Sun has been drawing huge audiences since its simultaneous premiere in Korea (KBS) and China (Baidu’s streaming site iQIYI). We believe the drama’s March 7, 2016 total production costs (W13bn for 16 episodes) will be fully recovered by the advance sales of airing rights and revenue from copyrights. The deal with iQIYI is believed to include incentives if the show exceeds a certain number of views, in addition to a fixed (Maintain) Trading Buy payment, suggesting additional profits may lie ahead. Drama business: NEW’s drama business is in its infancy and its project lineup is not yet Target Price (12M, W) 16,000 decided. But we think chances are high the company will continue its drama business , given its ownership structure and need for content diversification. NEW’s second- Share Price (03/04/16, W) 14,000 largest shareholder is Huace Media (13.03% stake), China’s largest drama production company. NEW also has an 11% stake in the domestic drama studio Victory Production Expected Return 14% & Company, which is expected to book revenue from the dramas Goodbye Mr. Black (Wednesday/Thursday nights on MBC) and Monster (Monday/Tuesday nights on MBC) , which will start airing in March after last year’s delays. OP (15F, Wbn) -2 Consensus OP (15F, Wbn) 1 Key earnings variables: Dramas in 1H and tentpole films in 2H Dramas in 1H16: We believe 1H16 earnings will be drive n by TV dramas, rather than EPS Growth (15F, %) -76.4 films. We expect sluggish film earnings in 1Q16 due to remaining losses from the The Market EPS Growth (15F, %) 20.0 Tiger (released in late 2015) and losses from A Melody to Remember (released in P/E (15F, x) 287.8 January). The company, which began recognizing production revenue for Descendants Market P/E (15F, x) 11.5 of the Sun in 3Q15, should book the remaining production revenue, as well as revenue KOSDAQ 673.84 from copyright sales and incentives from iQIYI, in 1H16. The company’s remaining film lineup for 1H16 mostly consists of low-budget thrillers and dramas. Market Cap (Wbn) 384 Shares Outstanding (mn) 27 Films in 2H16: Most of the company’s highly anticipated films are set for release in Free Float (%) 61.8 2H16. Last year, NEW chose not to release any major films in the critical month of Foreign Ownership (%) 13.6 August, instead betting on the year-end holiday movie The Tiger . This year, however, Beta (12M) 1.64 the company plans to release a major title in each prime season . We expect the movie 52-Week Low 9,260 Busan Bound (starring Gong Yu) to serve as the company’s tentpole film for the summer, Pandora (starring Kim Myung-min) for the Chuseok holidays, and The King 52-Week High 15,376 (starring Jo In-sung and Jung Woo-sung) for the year-end holidays. The company is also (%)(%)(%) 1M1M1M 6M6M6M 12M12M12M working on Chinese co-productions through its joint venture with Huace Media , and the Absolute 32.1 26.1 27.1 first of them (Witch ) could hit theaters as early as the end of the year. Relative 34.0 21.7 18.9 Retain Trading Buy and Cut TP to W16,000 150 Next Entertainment World KOSDAQ We maintain our Trading Buy call on NEW. Film investment losses have raised 130 uncertainty about the box-office performance of the company’s films, but the drama business ( Descendants of the Sun ) is providing a cushion against the weakness in films, 110 and has the potential to bring in additional profits. We are cutting our target price to 90 W16,000 (from W17,000), reflecting our earnings and multiple revisions. Our target price is based on a P/S ratio of 4x, the low end of the recent two-year range. 70 3.15 7.15 11.15 3.16 Daewoo Securities CCo.,o., Ltd. FY (Dec.) 12/12 12/13 12/14 12/15F 12/16F 12/17F Revenue (Wbn) 43 122 54 76 82 89 [Telecom Service / Media] OP (Wbn) 5 20 6 -2 3 6 Jee-hyun Moon OP margin (%) 12.2 16.2 10.2 -2.2 3.2 6.2 +822-768-3615 NP (Wbn) 5 12 4 1 4 6 [email protected] EPS (W) 325 690 155 36 161 234 ROE (%) 40.5 62.6 5.6 0.8 3.5 4.8 Nu-ri Ha +822-768-4130 P/E (x) - - 58.4 287.8 86.8 59.9 [email protected] P/B (x) - - 2.0 2.3 2.9 2.8 Notes: All figures are based on non-consolidated K-IFRS Source: Company data, KDB Daewoo Securities Research estimates 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 DISCLOSURES & DISCLAIMERS IN APPENDIX 1 AT THE END OF REPORT. March 7, 2016 Next Entertainment World Key highlights Figure 111.1. Descendants of the Sun isisis airingairingairing simultaneously on KBS and iQIYIiQIYIiQIYI Source: KBS, iQIYI, KDB Daewoo Securities Research Figure 222.2. Descendants of the Sun has much higher ratings than competitor programprogramssss airairairingair inginging at the same time (%) 30 Descendants of the Sun SBS drama airing at same time 25 MBC drama airing at same time 20 15 10 5 0 1st episode (Feb. 24) 2nd episode (Feb. 25) 3rd episode (Mar. 2) 4th episode (Mar. 3) Source: AGB Nielsen Korea, KDB Daewoo Securities Research TableTableTable 111.1. NNNEW’NEW’EW’EW’ss expected 201620162016 film lineup Release date TitleTitleTitle Director CastCastCast Jan. 21 A Melody to Remember Lee Han Yim Si-wan, Go Ah-sung Mar. 3 No Tomorrow Lee Ji-seung Park Hyu-joo, Bae Sung-woo, Lee Hyun-wook Mar. 10 Waiting for You Mo Heung-jin Sim Eun-kyung, Yoon Je-moon Apr. Letter from Jail Kwon Jong-kwan Kim Myung-min, Kim Sang-ho, Kim Hyang Gi Apr. The Last Ride Nam Dae-joong Ryu Deok-hwan, Kim Dong-young, An Jae-hong May Because I Love Joo Ji-hong Cha Tae-hyun, Kim Yoo-jung, Sung Dong-il Jun. The Guru Show (tentative) Heo Jeong Yum Jung-ah Summer BusanBusanBusan Bound Yeon Sang-ho Gong Yu, Ma Dong-seok, Jung Yu-mi 2H Pandora Park Jeong-woo Kim Nam-gil, Kim Myung-min 2H Seoul Station Yeon Sang-ho Ryu Seung-ryong, Shim Eun-kyung, Lee Jun Undecided One Line (tentative) Yang Kyung-mo Yim Si-wan, Jun Goo, Lee Dong-hwi Undecided Lucid Dream Kim Joon-seong Ko Soo, Seol Gyung-goo, Kang Hye-jung Undecided The King Han Jae-lim Jo In-sung, Jung Woo-sung, Kim Ah-joong China co- Witch Leste Chen Not finalized (remake of Kang Full’s web-based cartoon) productions Beauty Inside Baek Jong-yeol Not finalized (Chinese version) (Huace & NEW JV) The Phone Not finalized Not finalized (Chinese version) Notes: Release dates are subject to change; Films with higher production costs are in bold Source: Company data, media reports, KDB Daewoo Securities Research KDB Daewoo Securities Research 2 March 7, 2016 Next Entertainment World Earnings and forecasts TableTableTable 222.2. Annual earnings (Wbn, %) 201220122012 201320132013 201420142014 201520152015P2015 PPP 2016F2016F2016F Revenue 43 122 54 76 82 Film 43 118 49 69 73 Domestic – Theater 43 104 38 57 57 distribution Domestic – IP 0 14 11 9 10 Exports 0 0 1 4 6 Performance - 4 5 - - Other 0 0 0 7 9 Operating profit 5 20 6 -2 3 OP margin 12.2 16.2 10.2 -2.2 3.2 Net profit 5 12 4 1 4 Net margin 11.8 9.9 7.8 1.3 5.4 YoYYoYYoY Revenue 182.6 -55.4 39.7 8.0 Film 174.9 -58.4 40.2 5.9 Performance 34.5 -100.0 0.0 Other -12.0 74.9 2580.3 28.8 Operating profit 276.8 -72.0 TTR TTB Net profit 135.5 -64.8 -76.4 338.5 Major assumptions Admissions 23,304 39,005 15,990 17,469 17,644 (‘000 persons) The Grand Heist , Miracle in Cell No. 7 , The Attorney, Northern Limit Line , Busan Bound , Major titles All About My Wife New World Haemoo The Great Tiger Pandora Notes: All figures are based on non-consolidated K-IFRS; Performance business spun off after establishment of SHOW & NEW in May 2014; Other revenue includes revenue from drama productions; Revenue of individual business units is on a non-consolidated basis Source: Company data, FSS, KOFIC, KDB Daewoo Securities Research estimates TableTableTable 333.3. Earnings forecast revisions (Wbn, W, %) Previous Revised % chg. NotesNotesNotes 20202016F20 16F16F16F 20202017F20 17F17F17F 20202016F20 16F16F16F 20202017F20 17F17F17F 20202016F20 16F16F16F 20202017F20 17F17F17F Revenue 89 91 82 89 -7.9 -2.2 - Revised down estimated number of admissions - Revised up COGS to reflect upward trend in Operating profit 7 7 3 6 -57.1 -14.3 production cost s Net profit 9 9 4 6 -55.6 -33.3 EPS 318 310 161 234 -49.4 -24.5 OP margin 8.2 7.7 3.2 6.2 Net margin 10.1 9.9 5.4 7.2 Notes: All figures are based on non-consolidated K-IFRS. Source: KDB Daewoo Securities Research Figure 333.3... 1Q1Q1Q161Q 161616 main lineuplineup:: A Melody to Remember andandand Figure 444.4..