Korea/Asia, Events, IPOs, Douglas Research Advisory

Douglas Kim

Korea/Asia, Events, IPOs

Equity Capital Markets

Studio Dragon has received the regulatory approval to proceed with its IPO in November. This is the biggest IPO in the Korean entertainment sector in 2017. Studio Dragon is the largest TV drama producing studio in Korea. Studio Dragon generated 49.7 billion won in EBITDA in 2016 and its estimated EBITDA in 2017 is 87.2 billion won using its annualized 1H17 results.  Using EV/EBITDA multiples (15.3x in 2017 and 18.2x in 2016) derived from its comps, this suggests an implied market cap of 1.1 trillion won (prior to discount) and implied IPO price of 41,112 won. The bankers applied another IPO discount range of 14.9% and 24.8%, resulting in implied IPO price range of 30,900 won to 35,000 won.  The Korean entertainment sector has been negatively impacted by the THAAD related political conflict with China. As a result, many Korean entertainment stocks have underperformed in the past year. However, Netflix has been aggressively trying to expand in Korea. One of Netflix's strategies has been to find great contents (including Korean movies and dramas) and showcase them to its global audience. Dragon should be one of the key beneficiaries in Korea of capitalizing on the huge power of Netflix to reach the global audience. For example, Studio Dragon recently sold its popular TV drama called "Stranger" (Secret Forest) to <a href="https://www.smartkarma.com/entities/20451" target="_blank" data-smartkarma-citation="entities:20451:1">Netflix Inc (NFLX US)</a> (16 episodes &amp; US$0.2m for one episode). <h2>Deal Specifics of the Studio Dragon IPO:</h2><ul><li>Lead manager of the IPO: Mirae Asset Daewoo Securities</li><li>Expected IPO offer price per share:  30,900 won (low)/ 35,000 won (high)</li><li>Number of Shares for IPO: 6.0m shares </li><li>IPO base deal size: US$164m (low);  US$186m (high)</li><li>Expected market cap range (post-IPO): 871 billion won; US$771 million (low)/ 987 billion won; US$873 million (high)</li></ul>

Studio Dragon has received the regulatory approval to proceed with its IPO in November. This is the biggest IPO in the Korean entertainment sector in 2017. Studio Dragon is the largest TV drama producing studio in Korea. Studio Dragon generated 49.7 billion won in EBITDA in 2016 and its estimated EBITDA in 2017 is 87.2 billion won using its annualized 1H17 results.  Using EV/EBITDA multiples (15.3x in 2017 and 18.2x in 2016) derived from its comps, this suggests an implied market cap of 1.1 trillion won (prior to discount) and implied IPO price of 41,112 won. The bankers applied another IPO discount range of 14.9% and 24.8%, resulting in implied IPO price range of 30,900 won to 35,000 won.  The Korean entertainment sector has been negatively impacted by the THAAD related political conflict with China. As a result, many Korean entertainment stocks have underperformed in the past year. However, Netflix has been aggressively trying to expand in Korea. One of Netflix's strategies has been to find great contents (including Korean movies and dramas) and showcase them to its global audience. Dragon should be one of the key beneficiaries in Korea of capitalizing on the huge power of Netflix to reach the global audience. For example, Studio Dragon recently sold its popular TV drama called "Stranger" (Secret Forest) to Netflix Inc (NFLX US) (16 episodes &amp; US$0.2m for one episode). Deal Specifics of the Studio Dragon IPO:Lead manager of the IPO: Mirae Asset Daewoo SecuritiesExpected IPO offer price per share:  30,900 won (low)/ 35,000 won (high)Number of Shares for IPO: 6.0m shares IPO base deal size: US$164m (low);  US$186m (high)Expected market cap range (post-IPO): 871 billion won; US$771 million (low)/ 987 billion won; US$873 million (high)

Studio Dragon IPO Preview (Part 2) - Biggest Korean Entertainment IPO in 2017

<ul><li>Studio Dragon is expected to complete its IPO in 4Q17/1Q18. <a href="https://www.smartkarma.com/entities/9719" target="_blank" data-smartkarma-citation="entities:9719:1">CJ E&amp;M Corp (130960 KS)</a> owns a 90.8% stake in Studio Dragon, which was spun-off as a wholly owned subsidiary in May 1st, 2016. There are a lot of things that Korea is well known for including smartphones, DRAMs, cosmetics, and an army of top-ranking female professional golfers. In addition, Korea also has a loyal following for its well-made TV dramas all around the world, including in the US, Japan, China, and Southeast Asia. The company has produced many hit TV dramas in the past several years, including The Goblin, Cheese in the Trap, and Misaeng.</li><li>Studio Dragon is one of the top companies in Korea that makes these addictive Korean dramas and its upcoming IPO is likely to attract a high number of interested investors. Mirae Asset Daewoo Securities is currently the lead banker for this IPO deal.</li><li>Equity Rights Offering in 2016 - The company completed an equity rights offering raising 56 billion won at about 275,000 won per share issuing 0.2m new shares in 2016. This would put the value of Studio Dragon at nearly 605 billion won.</li><li>Implied Valuations - Given the limited financials on the company, it is difficult to assess the value of the company. The company generated a net profit of 8.1 billion won in the last eight months of 2016. If we estimate annualized net profit of 12 billion and apply the rights offering valuation of 605 billion, this would suggest a trailing P/E multiple of 50x, which is quite high.  We would need to see additional financials in 2017 to derive a more realistic assessment of the company's intrinsic valuation.</li></ul>

Studio Dragon is expected to complete its IPO in 4Q17/1Q18. CJ E&amp;M Corp (130960 KS) owns a 90.8% stake in Studio Dragon, which was spun-off as a wholly owned subsidiary in May 1st, 2016. There are a lot of things that Korea is well known for including smartphones, DRAMs, cosmetics, and an army of top-ranking female professional golfers. In addition, Korea also has a loyal following for its well-made TV dramas all around the world, including in the US, Japan, China, and Southeast Asia. The company has produced many hit TV dramas in the past several years, including The Goblin, Cheese in the Trap, and Misaeng.Studio Dragon is one of the top companies in Korea that makes these addictive Korean dramas and its upcoming IPO is likely to attract a high number of interested investors. Mirae Asset Daewoo Securities is currently the lead banker for this IPO deal.Equity Rights Offering in 2016 - The company completed an equity rights offering raising 56 billion won at about 275,000 won per share issuing 0.2m new shares in 2016. This would put the value of Studio Dragon at nearly 605 billion won.Implied Valuations - Given the limited financials on the company, it is difficult to assess the value of the company. The company generated a net profit of 8.1 billion won in the last eight months of 2016. If we estimate annualized net profit of 12 billion and apply the rights offering valuation of 605 billion, this would suggest a trailing P/E multiple of 50x, which is quite high.  We would need to see additional financials in 2017 to derive a more realistic assessment of the company's intrinsic valuation.

Studio Dragon IPO Preview (Part 1) - Beneficiary of the Addictive Korean Dramas

South Korea

Studio Dragon Corporation owns and operates drama studios. The Company produces television content, shows, and dramas. Studio Dragon serves customers in South Korea.

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Studio Dragon (253450 KS)

Studio Dragon IPO Preview (Part 2) - Biggest Korean Entertainment IPO in 2017

Studio Dragon has received the regulatory approval to proceed with its IPO in November. This is the biggest IPO in the Korean entertainment sector...

Douglas Kim

Studio Dragon IPO Preview (Part 1) - Beneficiary of the Addictive Korean Dramas

Studio Dragon is expected to complete its IPO in 4Q17/1Q18. CJ E&M Corp (130960 KS) owns a 90.8% stake in Studio Dragon, which was spun-off...

Douglas Kim

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