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Expectations to begin picking up

Maintain TP at W71,000; attractive entry point

We maintain our target price of W71,000 on Studio Dragon (based on an EV/EBIT valuation). The key drivers of Studio Dragon’s share price are: 1) expectations for earnings improvement; and 2) anticipation surrounding China’s market reopening. In 1H25, earnings were sluggish due to a weaker drama lineup (compared to in 2H25), and news flows related to China have slowed since May, adding to negative sentiment.

However, the stock has already priced in two consecutive quarters of weak earnings. In 2H25, we see potential for a share price recovery, driven by both earnings improvement and a rising likelihood of China’s market reopening. Historically, the stock has rebounded strongly during periods of clear earnings improvement. Additionally, Studio Dragon is actively expanding its reach into new genres/markets, starting with Japan. The company is pursuing a growth strategy centered on Japanese dramas, which are in increasing demand and relatively inexpensive to produce, and high-budget US series capable of generating substantial profits.

2Q25 review: The worst appears to be over

For 2Q25, Studio Dragon reported in-line revenue of W114.5bn (-17% YoY) but swung to an operating loss of W2.9bn, missing estimates due to a higher COGS ratio. Remaining amortization expenses for tentpole dramas―Jeongnyeon: The Star is Born (2H24) and When the Stars Gossip (1Q25)―were likely high. Additionally, the Japanese version of Marry My Husband, which set a viewership record on Amazon Prime Japan, generated relatively low profitability due to profit sharing with a Japanese studio.

2H25 outlook: Clear earnings visibility

Studio Dragon’s earnings are typically stronger in 1H than in 2H. However, due to reduced demand for TV dramas and OTT series since 2H24, operating profit for 1H25 fell to a record low of W1.4bn.

That said, the low base in 1H25 sets the stage for a meaningful rebound in 2H25. Indeed, a recovery is clearly visible, with: 1) the number of dramas scheduled to air on tvN rising from five in 1H25 to eight or nine in 2H25; and 2) the number of OTT originals set to increase from four to 7.5 (reflecting the partial airing of Genie, Make a Wish). In addition, two US original series appear close to being greenlit. Given that US series typically have budgets five times larger than Korean series, each series could generate profits equivalent to those of two to three Korean series, despite profit sharing.