Studio Dragon (253450 KQ ) On the right trajectory 1Q18 preview: Likely to meet expectations Media We expect Studio Dragon to deliver a decent 1Q18 report, with consolidated revenue of W89.6bn (+19.0% YoY; all growth figures hereafter are YoY) and operating profit of Earnings Preview W14.7bn (+5.3%), in line with the current consensus (revenue of W87.1bn and operating profit of W15.1bn). Despite an elevated base (due to last year’s hit drama Goblin and April 6, 2018 content sales to multiple countries/channels), we believe the company saw positive growth in 1Q18 on the back of strong licensing sales to Netflix (NFLX US/CP: US$293.97). While our forecasts have come down, we still think it was a good quarter overall. Programming revenue likely climbed to W38.1bn (+44.5%), helped by a YoY increase in the (Maintain) Buy number of titles aired (from four to seven, based on our estimate). Licensing rev enue, which is key to profits, likely grew to W38.8bn (+6.4%). Regarding Netflix sales, we believe Target Price (12M, W) 110,000 the company recognized around 80% of sales for A Korean Odyssey (estimated at W9bn) and around half for Live and Bad Guys in 1Q18. Altogether, this comes to more than Share Price (04/05/18, W) 91,700 W10bn in Netflix sales. However, we believe non-Netflix exports and domestic VOD sales were somewhat sluggish due to temporary factors, including sudden cast/storyline Expected Return 20% changes, diversion away from drama buzz, and the Pyeongchang Olympics. Bullish earnings outlook for 2H18 In terms of earnings, we are quite bullish on 2H18. We forecast revenue and operating OP (18F, Wbn) 58 profit to expand to W198.4bn (+32.8%) and W33.6bn (+231.7%), respectively, during Consensus OP (18F, Wbn) 69 the latter half of the year. Two highly anticipated dramas are scheduled for 2H18, one EPS Growth (18F, %) 51.9 in 3Q18 ( Mr. Sunshine ) and the other in 4Q18 ( Memories of the Alhambra ). We expect these new dramas to drive selling price gains and channel expansion. Market EPS Growth (18F, %) 15.8 P/E (18F, x) 57.5 1) Airing in July, Mr. Sunshine is a big-budget drama costing over W1bn pe r episode, more than some of the most expensive dramas previously made ( Goblin , Legend of the Market P/E (18F, x) 9.3 Blue Sea , and Descendants of the Sun ). Given the drama’s budget, subject matter , writer KOSDAQ 868.93 (Kim Eun-sook), and cast (Lee Byung-hun and Kim Tae-ri), we see it as the type of project Market Cap (Wbn) 2,571 that can only be pulled off by a duo like CJ E&M (130960 KQ/Buy/TP: W107,500/CP: W94,000) and Studio Dragon. And considering the intensifying competition among Shares Outstanding (mn) 28 platforms, we see strong potential for a sharp rise in pricing. In our view, the drama has Free Float (%) 23.9 what it takes to increase the size of profits in a seller-driven content market. 2) The Foreign Ownership (%) 0.9 drama Memories of the Alhambra is expected to debut in October. Hyun Bin has recently Beta (12M) 0.77 been confirmed as the male lead, and pre-production looks set to begin soon. 52-Week Low 57,800 On the right trajectory; Buy on near-term weakness 52-Week High 98,600 We maintain Buy on Studio Dragon with a target price of W110,000. Our current estimates (%) 1M 6M 12M model the production of one Netflix original program in 2019 and licensing sales of one Absolute 5.0 - - tentpole title to Netflix per quarter. We see several potential catalysts that could prompt us Relative 2.1 - - to raise our forecasts, including: 1) the production of more originals; 2) sharp price gains; and 3) resumption of licensing sales to China. We think all three catalysts could come to 160 Studio Dragon Corporation pass, given: 1) confirmation of the company’s first Netflix original (set to air in 1H19); 2) the KOSDAQ 140 company’s ample production capabilities (up to 40 titles, vs. 30 titles scheduled in 2019); and 3) recent signs in China, which has begun to allow limited sales (rights to remakes). 120 We believe the overall industry environment will remain favorable to production companies 100 in the long term. In addition to Netflix, new and old media firms alike—including Amazon 80 (AMZN US/CP: US$1,451.75), Walt Disney (DIS US/CP: US$102.11), and Time Warner (TWX 60 US/CP: US$96.39)—are moving into over-the-top (OTT) platforms, while Chinese platform 3.17 7.17 11.17 3.18 providers are rushing to raise funding (e.g., IPO of iQiyi [IQ US/CP: US$16.04]). As the battle for exclusive broadcasting rights inte nsifies, Studio Dragon’s client base should become Mirae Asset Daewoo Co., Ltd. more diversified, lessening its dependence on Netflix. This should be positive to pricing, while also reducing counterparty risks. [ Media ] FY (Dec.) 12/14 12/15 12/16 12/17 12/18F 12/19F Jeong -yeob Park Revenue (Wbn) - - 196 287 363 492 +822 -3774 -1652 OP (Wbn) - - 21 33 58 81 [email protected] OP Margin (%) - - 10.7 11.5 16.0 16.5 NP (Wbn) - - 13 24 45 63 EPS (W) - - 907 1,050 1,595 2,248 ROE (%) - - 9.5 9.5 11.4 14.2 P/E (x) - - - 61.9 57.5 40.8 P/B (x) - - - 4.9 6.2 5.4 Dividend Yield (%) - - - 0.0 0.0 0.0 Note: All figures are based on consolidated K-IFRS; NP refers to net profit attributable to controlling interests Source: Company data, Mirae Asset Daewoo Research estimates April 6, 2018 Studio Dragon Table 1. Target price calculation (Wbn, W, x) 2018F 2019F 12-month forward Notes EBITDA 114 149 140 Avg. of Zhejiang Huace Film & TV, Huayi Brothers Media , Target EV/EBITDA 24.2 19.6 20.7 Beijing Enlight Media , and Ciwen Media Fair EV 2,755 2,917 2,907 Net debt (net cash) -181.6 -181.6 -181.6 Fair market cap 2,937 3,098 3,088 Target price (W) 104,756 110,508 110,155 Source: Mirae Asset Daewoo Research estimates Table 2. Quarterly and annual earnings (Wbn, %, no.) 1Q17 2Q17 3Q17 4Q17 1Q18F 2Q18F 3Q18F 4Q18F 2017 2018F 2019F Revenue 75 62 77 72 90 75 103 96 287 363 492 Programming 26 24 42 39 38 31 41 36 131 146 187 Licensing 36 26 23 26 39 35 47 46 112 166 209 Other 13 12 12 7 13 10 15 13 44 51 65 Original production contracting 0 0 0 0 0 0 0 0 0 0 30 Costs 59 50 67 64 72 62 80 75 240 288 390 Production costs (excl. originals) 24 25 36 39 39 32 43 39 125 153 199 Commission fees 7 5 5 5 8 7 9 9 22 33 42 Depreciation expenses 9 9 10 11 12 14 14 15 39 55 67 on tangible/intangible assets Other 19 10 16 9 12 10 13 12 54 47 59 Production costs for originals 0 0 0 0 0 0 0 0 0 0 24 SG&A 3 3 4 4 3 4 5 5 14 17 20 EBITDA 23 18 17 15 27 23 32 31 72 114 149 Operating profit 14 9 7 3 15 10 18 15 33 58 81 OP margin 18.5 14.3 8.6 4.8 16.4 12.9 17.7 16.1 11.5 16.0 16.6 Pretax profit 13 9 6 2 15 10 18 15 30 57 81 Net profit 13 3 6 2 11 7 14 12 24 45 63 Net margin 17.8 4.5 7.3 2.8 12.7 9.9 13.7 12.4 8.3 12.3 12.8 YoY Revenue 19.0 20.8 32.5 33.2 46.7 26.6 35.4 Programming 44.5 26.8 -2.4 -6.5 49.5 11.2 28.5 Licensing 6.4 31.3 101.5 78.8 48.3 48.7 25.7 Other 1.9 -15.3 20.5 85.1 35.3 16.3 28.3 EBITDA 20.0 28.7 95.0 112.2 - 57.8 30.8 Operating profit 5.3 8.7 172.9 344.6 56.1 75.2 40.5 Net profit -15.2 164.9 147.8 496.5 83.8 87.5 41.0 Major assumptions No. of titles aired 4.0 4.5 6.5 6.5 7.0 6.0 6.5 6.5 21.5 26.0 30.0 No. of titles licensed to Netflix 0.0 1.0 1.0 1.1 2.0 0.5 1.0 1.0 3.1 4.5 5.5 Source: Mirae Asset Daewoo Research estimates Table 3. Earnings forecast revisions (Wbn, %, %p) Previous Revised Change 18F 19F 18F 19F 18F 19F Revenue 383 525 363 492 -5.1 -6.3 Operating profit 62 85 58 81 -6.4 -4.7 Net profit 48 66 45 63 -6.5 -4.8 OP margin 16.2 16.3 16.0 16.6 -0.2 0.3 Net margin 12.5 12.6 12.3 12.8 -0.2 0.2 Note: All figures are based on consolidated K-IFRS Source: Mirae Asset Daewoo Research estimates Mirae Asset Daewoo Research 2 April 6, 2018 Studio Dragon Figure 1.