[Kosdaq Star] Netflix behind Studio Dragon’s upbeat Q1 forecast

This is the 51st in a series of articles analyzing major companies traded on the tech-heavy Kosdaq market. -- Ed.

An upbeat forecast for the first quarter of this year appears to have catalyzed the bull run of Studio Dragon, the creator of South Korean megahit series such as “Misaeng,” “Guardian,” “Signal,” and most recently, “A Korean Odyssey.”

Behind the forecast is the projected income from rights sales of latest hit series to global internet entertainment service platform Netflix, which local analysts say would overshadow indicators of its overvaluation.

On Friday, shares of Studio Dragon closed at 87,300 won ($80.60), up 35.4 percent in 60 trading days. The content production firm was the 11th-largest Kosdaq-listed stock, with 2.4 trillion won in market cap. This came after Studio Dragon hit an all-time high of 91,300 won on the previous trading day Wednesday. Institutional investors net purchased 4.4 billion won worth of shares in the past five trading days until Friday, the 17th-largest among all Kosdaq-listed firms.

Spun off from CJ E&M’s TV broadcasting division in May 2016, Studio Dragon made a cosmic Kosdaq debut, hitting the price ceiling on the tech-heavy market on the first day it went public on Nov. 24, 2017. Its closing price doubled that of the initially offered price. 

The gains in stock price soon evaporated, in the wake of a downturn on the lack of upward momentum until late last year. In December, the stock price began to rebound on anticipation of a thaw in the relationship between Korea and China.

However, Studio Dragon soon reacted to the downbeat earnings on-year in the fourth quarter of last year, released on Feb. 7, and its closing price has since rarely reached above 80,000 won.

Partly on the “base effect” from 2016 hit series including “Guardian,” according to Lee Hyo-jin, an analyst at NH Investment & Securities, the firm’s 2017 fourth-quarter net income and operating profit came to 71.9 billion won and 3.5 billion won, respectively, shrinking by 11.7 percent and 35.8 percent on-year. “Guardian,” aired through a cable channel tvN, had breached an unprecedented 20 percent viewership mark.

But optimism for first-quarter earnings abounds, analysts noted.

Kim Hyun-yong, an analyst at e-Best Investment & Securities, cited sales of intellectual property rights to Netflix, which would “significantly reflect” the first-quarter earnings, in a recent note to investors. The quarterly net income and operating profit were forecast to reach 91.6 billion won and 19.1 billion won, up 21.7 percent and 36.4 percent on-year, respectively, according to Kim.

Kim also picked improved viewer ratings of series currently on air in Korea, such as “Cross” and “Mother,” as well as “A Korean Odyssey,” which is set to air until Sunday, compared to the fourth quarter of 2017. He added Studio Dragon was one of the few stocks in the media sector that evaded direct impact from the Kosdaq market correction in early February. Studio Dragon inched down 0.7 percent for two weeks from Jan. 30 to Feb. 12, while the Kosdaq dipped 9 percent.

Over the cited period, other media sector stocks saw plunges.

Entertainment giant CJ E&M, Studio Dragon’s parent company, fell 7.5 percent, advertiser Cheil Worldwide sank 9.5 percent, while broadcaster and producer SBS shrank 11.9 percent. 

Another analyst, Lee Nam-jun of KTB Investment & Securities, also highlighted the projected revenue from Netflix to be at most 13 billion won, on rights sales of “A Korean Odyssey” and the upcoming series “Live.”

Lee estimated the 12-month forward price earnings ratio at 33.4, indicating the firm is overvalued. However, Lee said the valuation of Studio Dragon could be recalculated and earnings are likely to skyrocket, if Studio Dragon manages to enter the Chinese market. Lee added the production company is expected to earn at least 25 billion won in China from the copyrights of series it produced in 2017.

Lee also noted Studio Dragon’s boost in rights sales would drive up the share price of its parent company CJ E&M, which currently owns 70.94 percent of Studio Dragon.

By Son Ji-hyoung 
(consnow@heraldcorp.com)