● Group governance structure; business model shake-up; overseas biz

1) Group governance structure

At present, Showbox`s largest shareholder is Orion, with a 57.2% stake. Orion and Showbox respectively own 62.66% and 11.23% of Supreme Star Investment Limited, which is engaged in the movie theater business in China. After disposing of Megabox (theater operator) and On Media (cable channel), Orion`s only holding in the media content space is Showbox. We expect Orion will use its controlling stake in Showbox and the Chinese theater operator to strategically expand Showbox`s operations.

2) Business model shake-up

In the past, when Showbox relied on Orion Group`s platform, it engaged in quantitative growth, releasing about 20 movies a year. However, the company is now focused on qualitative growth, improving content and releasing about 10 movies a year. Since 2008, the firm has been working to overhaul its business model, including the introduction of a film director channel system. The firm has been steadily producing fewer films since 2012, while raising viewership per film to record highs, allowing the company to remain in the black. Starting this year, Showbox has been strengthening its capabilities for designing and developing intellectual property (IP) to expand its business into production, seeking IP not only in movies, but dramas and webtoons as well.

3) Business with China`s Huayi Brothers

In March 2015, Showbox inked a deal with Huayi Brothers to co-produce at least six movies (in Chinese) over the following three years, with one movie (Beautiful Accident) to be released this year and about four movies to be released next year. Huayi Brothers will pay for the initial development costs, while Showbox Korea (parent) and Huayi Brothers will invest 30% and 70% in the co-production projects, respectively. As for profit sharing for the movies, 37% will be allocated to Showbox (10% for Showbox China and 27% for Showbox Korea). Next year, Showbox is projected to make a partial investment in Huayi Brothers`s own line-up in China.

4) Business with US firm`s Blumhouse and Ivanhoe

In September 2015, Showbox signed a deal with Blumhouse and Ivanhoe of the US to co-produce six Korean language movies (thriller/horror) over the next five years. Showbox will pay for the initial development costs for the co-production projects, while Ivanhoe will fully finance the projects. Blumhouse will have the option to remake the movies in the US, in which, Showbox may make a partial investment. Blumhouse is currently reviewing a film for a remake.

● European investors eye business model shake-up and China business

During our recent non-deal roadshow (NDR) with Showbox in Europe, local institutional investors were keen to know about the effects of its business model shake-up, overseas sales, and Chinese business.

1) Group governance structure

Investors experienced with Asian stocks, including Korean stocks, were familiar with Showbox`s parent company Orion. They were aware that Orion`s confectionary sales in China are on the rise. They showed particular interest in Showbox`s efforts to improve its business qualitatively and expand its overseas presence, after Orion`s sale of media content-related arms (Megabox, On Media).

2) China business and overseas sales

Investors raised many questions about the growth potential of China`s box office, the competitive dynamics facing Showbox`s business partner Huayi Brothers, and future business plan upon the end of its three-year contract with Huayi Brothers. Showbox underscored that: 1) in Korea, people go to the movies on average of 4.2 times per year vs. 0.9 times in China, suggesting that China has significant room for growth; 2) Huayi Brothers has been aggressively building up its IP content; and 3) Showbox may buff up its China business by partnering with other local players after accumulating experience and knowhow.

3) Online sales and business strategy

European investors, who are familiar with global over-the-top (OTT) operators like Netflix, and watch Asian films on the Internet instead of theaters, asked a lot of questions regarding Showbox`s online sales and business strategy. Showbox responded that: 1) it has tapped into different platforms, including online, IPTV and cable TV for additional copyright sales; 2) Korean films generally fetch high prices in China and Japan, but are sold at lower prices elsewhere due to weaker demand; 3) there is a need to develop localized content to boost overseas sales; and 4) in China, it may forge partnerships with local Internet service providers for the production of web dramas.

[Picture from Showbox Homepage]

● Expect 3Q momentum from Goodbye Single and movie releases

1) 3Q earnings momentum expected

We forecast Showbox`s 2Q operating profit to just break even due to a weak line-up. That said, in 1Q, Showbox already earned W7.1bn, equivalent to half of its 2015 record operating profit, from the success of A Violent Prosecutor. Goodbye Single, released on June 29th, is believed to have exceeded breakeven point, and should thus contribute to 3Q earnings. In August, major domestic and Chinese films are due to be released. On August 10th, The Tunnel (directed by Kim Seong-hoon, starring Ha Jeong-woo) is to be released in Korea, and on August 12th, Beautiful Accident (directed by Ho Wi-ding, starring Gwei Lun-Mei), the first co-production film with Huayi Brothers, is to be released in China.

2) Maintain Buy and TP of W11,000

Showbox`s domestic earnings are stabilizing, while it expands overseas. In the near term, the company`s domestic films have exceeded breakeven, and a series of major films are due for release next month. We believe this will serve as a catalyst to its share price. Next year, we believe earnings will improve YoY, given the company`s confirmed tentpoles . Taxi Driver (starring Song Kang-ho) and Special Citizen (starring Choi Min-sik) and the planned release of four films in China. As such, we reaffirm our Buy rating and target price of W11,000 on Showbox.

By Moon Jee-hyun, Analyst at Mirae Asset Daewoo Securities

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