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The author is an analyst of NH Investment & Securities. She can be reached at — Ed.

We expect Studio Dragon to report a 4Q22 earnings shock due to subsidiary-related PPA amortization expense and the limited reflection of Island sales. However, the firm has plenty of global OTT original works on standby, and expectations for simultaneous airing in China remain valid. We advise staying focused on Studio Dragon’s abundant investment momentum.

2023: Many anticipated works on horizon + expectations for China

We maintain a Buy rating on Studio Dragon, favorably noting the firm’s differentiating factors, such as its stable captive channel-based quarterly earnings (Q) and ASP (P) growth following contract renewal with Netflix. Netflix original The Glory and the firm’s first effort with Amazon (Island), which were released in December, have both succeeded with global audiences, further strengthening the track record of Studio Dragon. Moving ahead, there are many anticipated works on tap for 2023, including Gyeongseong Creature, Sweet Home S2, and Queen of Tears. Expectations for simultaneous airing in China at end-2023 remain valid.

We maintain our TP of W100,000, applying a 2023 target EV/EBITDA of 15x (previous: 2022E EV/EBITDA of 17x), the 2023F average EV/EBITDA of three global players in the downstream sector (ie, Netflix, Disney, Amazon).

To benefit most from resumption of simultaneous airing in China

In December, Twenty Five Twenty One aired in China on OTT Youku. We view this as being meaningful in that it was the only drama of the year aired on a major platform among the three Korean dramas aired in China in December. Although it is too early to say that China’s ban on Korean content will be completely lifted, it is important that the number of older works permitted for broadcast is gradually rising. We expect Studio Dragon to be the main beneficiary when simultaneous airing in China resumes at end-2023 (at the earliest) or 2024.

4Q22 preview: Subsidiary-related PPA amortization expense + broadcasting centered on general works

Studio Dragon is forecast to post consolidated 4Q22 sales of W198.1bn (+34% y-y) and consensus-missing OP of W5.7bn (-10% y-y), affected by relatively disappointing profitability.

In 4Q22, revenue was recorded in relation to the post-settlement structure for Big Mouth, delivery to Netflix of original The Glory (Part 1, 8 episodes) and Celebrity (12 episodes), and the remaining episodes of The Big Door Prize (3 episodes). However, in the case of tent-pole Island, only the first two episodes were recognized in sales. In 4Q22, there were few TV airings of tent-pole works and no sales of older works. In addition, incentive costs and the reflection of one-time Gill Pictures-related PPA amortization expense were added, which detracted from profitability.





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