In recent years, Korean Wave has become an influential global phenomenon that has captured the hearts of all generations, raising the entire South Korean entertainment industry to a whole new level. Right within the entertainment industry is Spackman Entertainment Group (Spackman), a Korean theatrical film production group with over 85.7 percent of business revenue coming from the film industry.

Whenever tourists visit South Korea and passes by the Gangnam district, “Op, op, op, op, Oppa Gangnam style” would be playing in one’s head, reminiscing the catchy beat yet amusing dance moves by Psy, a South Korean musician. This viral K-pop music video went on to break several records and held the title of most-viewed video on YouTube with over three billion views for a period of three years till July 2017.

U.S. President Barack Obama also once mentioned the success of “Gangnam Style” as an instance of how people across the globe have been impacted by the Korean Wave.

Ever since the inception of “Gangnam Style”, local South Korean movies have attracted more than 100 million audiences annually over the past six years, which further highlights the positive impacts Korean Wave have brought to the film industry.

Contrarily, South Korea’s film industry seems to have reached its pinnacle in 2017 as box office revenue recorded a 3.5 percent increase to KRW1.76 trillion and 1.4 percent gains in tickets sales to 220 million, indicating a relatively flat performance. In light of higher competition faced from streaming services such as Video-On-Demand (VOD), much uncertainty lies ahead for the film industry.

Business Focus

Spackman’s core operation revolves mainly around theatrical film as an investor, producer, presenter and distributor for their film projects. The company also owns 100 percent of Zip Cinema and 51 percent of Novus MediaCorp, both notable for Korean film productions.

In addition, it is actively investing into entities and funds within the entertainment sector which allows strategic integration with its existing core operation. This includes 32.1 percent owned Spackman Media Group, a talent agency with over 60 award-wining actors and actresses and the 60.2 percent acquisition of Noon pictures, a professional photography studio.

Financial Status

Recent financial performance for 9M17 has been exceptional with a turnaround from net loss of US$2.3 million to net profit of US$3.6 million. Revenue rose by 19 percent to US$12.2 million from higher distribution of films and equipment leasing business by wholly-owned subsidiary, Frame Pictures.

Cost of sales fell by 46% to US$6.2 million primarily due to fewer motion films distributed and lower film production costs for the period. There was a reversal of gross loss margin of 11% to gross profit margin of 49% due to US$4 million share of profit for producing blockbuster film, MASTER.

Over a year period, Spackman’s stock price has fallen over 44.6 percent to trade at $0.10 as at 9 February 2018, with a price-to-book ratio (P/B) of 1.43 times. Comparing with mm2 Asia, whose stock price fell by 6 percent year-on-year to trade at $0.48 as of 9 February 2018, with a P/B of 2.76 times, investors may perceive that Spackman is trading at a substantial discount with higher potential earnings and the lesser P/B ratio, warrants an attractive investment opportunity.

Upcoming Expansionary Plans

Using the Blockchain Technology, Spackman intends to launch its own Korean entertainment utility tokens, K Coins. The cryptocurrency is to help fund artist and content projects by enabling holders’ access to exclusive content, concerts, fan meetings and star merchandise.

Presently, the company is aggressively seeking for opportunities to partake in Korean drama series production in order to capitalise from the rising popularity of Korean drama in Southeast Asia.

The recent full acquisition of Frame Pictures, an equipment leasing business, together with Constellation Agency, an overseas talent management agency, demonstrate the capability of Spackman’s diversification into new businesses that allows integration with its existing core operations, even as it ventures into a new revenue segment through drama production.

Spackman - 2

Digital Challenges & Mitigations

According to Goldman Sachs head of Global Investment Research Steve Strongin, it is believed that most of the cryptocurrencies will ultimately fall to zero value as high transaction costs and weak cybersecurity continue to plague the current cryptocurrency system. The cryptocurrency boom has been also widely compared to the 1637 Tulip mania due to the extreme volatility nature and enormous surge in percentage gains.

However, we view this as an innovative approach with minimal risk as it strives to diversify. K coins lean more towards a digital credit that allows consumer to participate in fundraising for content projects and artists with a reward system, instead of a cryptocurrency that attempts to disrupt the traditional monetary system.

Online streaming giant, Netflix has recently hit a record of 117.6 million subscribers and its international subscribers surpassed domestic for the first time in 2017. Okja, a film directed by South Korean director Bong Joon-ho, recently banned by Korean theatres as Korean exhibitors CJ CGV, Lotte Cinema and Megabox, are unhappy with distribution model for the film as Okja, was set to premiere in theatres and Netflix on the very same day.

That said, Spackman and Novus Mediacorp have co-presented a film, The Outlaws. The film surpassed KRW11 billion in VOD sales within two months, breaking the record previously held by Disney’s Frozen which took ten months. Additionally, Frame Pictures also recently won a camera equipment deal for Netflix’s first Korean original production.

Our verdict on Spackman is leaning towards the positive with the success of management strategy to capitalise on the emerging technology and market demand despite growing concerns within the industry. Investors who are interested in Korean entertainment should not give Spackman a miss!