Expanding Global Reach Will Establish Leadership In International Content Production

Key Takeaways

• Diversification and expanding global reach aim to enhance growth, stabilize revenues, and boost investor confidence through pre-sales and strategic partnerships.
  
• Optimizing creator contracts and processes aims to improve efficiency, profitability, and position Studio Dragon as a leader in global content production.
  
• The challenging media environment, high leverage, and strategic conflicts could pressure Studio Dragon's earnings and financial sustainability.

Catalysts

A drama studio, produces and provides drama contents worldwide.

• Studio Dragon plans to diversify its platforms domestically and internationally, expanding its lineup and enhancing global business opportunities to lay a foundation for high growth, which could drive future revenue increases.
  
• The introduction of cost-plus models and efforts to secure high-grade creators, such as S or A-level creators, for productions is expected to optimize processes and improve operating efficiency, potentially leading to higher net margins.
  
• The company's strategy to pre-sell entire lineups of new titles is anticipated to improve sales efficiency and profitability, positively impacting earnings and reducing financial risk.
  
• Studio Dragon aims to increase its proportion of content pre-sales by expanding its global reach, which could lead to a more stable and predictable revenue stream and hence, higher investor confidence in future earnings.
  
• The commitment to exploring new global business opportunities and optimizing resources could establish Studio Dragon as a leader in international content production, potentially driving significant revenue growth and market expansion.

Studio Dragon Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Studio Dragon's revenue will grow by 8.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 1.0% today to 8.8% in 3 years time.
• Analysts expect earnings to reach ₩64.2 billion (and earnings per share of ₩2076.25) by about February 2028, up from ₩5.5 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting ₩73.0 billion in earnings, and the most bearish expecting ₩41.0 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 30.7x on those 2028 earnings, down from 222.3x today. This future PE is greater than the current PE for the KR Entertainment industry at 26.9x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.48%, as per the Simply Wall St company report.

Studio Dragon Future Earnings Per Share Growth

Risks

• Studio Dragon experienced a 40.4% decline in its annual lineup compared to the previous year, which could lead to reduced revenue and earnings.
  
• The company is facing a challenging media environment impacting the drama production industry, which may affect its net margins and profitability.
  
• The accumulated loss over a decade amounts to approximately ₩1 trillion, and high leverage at ₩1.7 trillion could pressure future earnings due to financial constraints.
  
• Additional investments, such as ₩150 billion in content and losses from the LiveCity project, raise concerns about financial sustainability and could impact net margins.
  
• There's potential for cannibalization or conflict of interest between TVING's global expansion plans and Studio Dragon's partnerships with other OTT platforms, potentially affecting revenue generation.

Valuation

• The analysts have a consensus price target of ₩51466.667 for Studio Dragon based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₩64000.0, and the most bearish reporting a price target of just ₩35000.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₩732.2 billion, earnings will come to ₩64.2 billion, and it would be trading on a PE ratio of 30.7x, assuming you use a discount rate of 8.5%.
  
• Given the current share price of ₩41000.0, the analyst price target of ₩51466.67 is 20.3% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.