Equity Research Paradox Interactive

Buy Results Analysis Leisure Sweden 13 November 2018

Buy case intact Despite few new releases in Q3, sales grew 25% y/y, underlining the strength of the DLC model and the PDX-community. Paradox is growing and will move to new premises in 2019; we have lowered our EPS estimates 2-6% on a higher cost base. The outlook remains strong and we expect 2019 will deliver high revenue growth paired with gross margin expansion. We expect this should be the trough for the share price and reiterate Buy. Key Data (2018E) Price (SEK) 120.60 2018 EPS cut 6%, target price cut slightly to SEK 147 Target price (SEK) 147.00 Following the Q3 results, we have cut our EPS estimates by 2-6% explained by a - changed from (SEK) 150.00 slightly higher opex run rate, and decreased our DCF target price from SEK 150 to Recommendation Buy SEK 147; we reiterate our Buy rating. We continue to view Paradox Interactive as Risk Normal an attractive long-term growth case. Reuters PDXI.ST Bloomberg PDX:SS Few releases and continued growth in Paradox organization Market cap (SEKm) 12,735 Revenue of SEK 225m were below our SEK 262m forecast but in line with Market cap (USDm) 1,392 consensus of SEK 222m and correspond to 25% growth y/y. With only 1 PC DLC Market cap (EURm) 1,241 released in Q3 this is impressive and underlines the strength of the DLC model and Net debt (SEKm) (354) the community. The gross margin recovered to 59.4% in Q3 vs 55.4% in Q2 as the mix shifted back to a more normalized split between own and external IP. Paradox Shares fully dil. (m) 105.6 is growing and opex came in higher than expected. The company closed the quarter Avg daily turnover (SEKm) 13.3 with 365 employees vs 269 at beginning of the year. In autumn 2019, the company Free float 42% will move to new bigger premises in Stockholm.

Strong 2019 outlook, share has likely troughed We forecast SEK 1.5bn in revenue for 2019 and expect strong sales growth to be Estimate Revisions (%) paired with gross margin expansion as sales will be driven by internally developed 2018E 2019E 2020E Revenues (3) 0 0 games. Forward looking comments from management are sparse, but the CEO says Adj. EBIT (6) (2) (2) in the report that more title announcements might be coming, which would be Adj. EPS (6) (2) (2) positive for the case, "...we’re looking forward to seeing results from more titles – both revealed and yet-to-announce – in the months to come". Share Price (12M) Financials (SEK) Year end: Dec 2016 2017 2018E 2019E 2020E 230 Revenues (m) 654 814 1,091 1,503 2,013 Adj. EBIT 308 340 411 707 896 180 Pre-tax profit (m) 308 340 411 707 896 EPS 2.56 2.51 3.03 5.23 6.62 130 Adj. EPS 2.79 2.68 3.29 5.51 7.00 DPS 1.00 1.00 1.25 1.50 2.00 80 Revenue growth (%) 8.2 24.5 34.1 37.7 33.9 Nov Jan Mar May Jul Sep Nov Adj. EBIT growth (%) 27.5 10.2 21.1 72.0 26.6 Adj. EPS growth (%) 56.3 (3.9) 22.5 67.7 27.0 Absolute (green) / Relative to Sweden (purple). Adj. EBIT margin (%) 47.2 41.8 37.7 47.1 44.5 ROE (%) 76.3 51.0 45.2 53.9 46.5 ROCE (%) 86.8 65.4 58.2 69.1 59.6 Analyst Mathias Lundberg PER (x) 18.2 34.8 36.7 21.9 17.2 (46) 8 522 29794 Free cash flow yield (%) 5.2 2.0 1.7 3.1 4.1 [email protected] Dividend yield (%) 2.0 1.1 1.0 1.2 1.7 P/BV (x) 12.18 16.41 15.65 10.32 7.18

EV/Sales (x) 7.82 11.71 11.35 8.06 5.84 EV/Adj. EBITDA (x) 12.4 19.9 20.9 13.1 10.2

EV/Adj. EBIT (x) 16.6 28.0 30.1 17.1 13.1 Operating cash flow/EV (%) 8.0 4.4 4.1 6.1 7.9

Net debt/Adj. EBITDA (x) (0.60) (0.67) (0.60) (0.67) (0.85) Source for all data on this page: SEB (estimates) and SIX/Thomson Reuters (prices) research.sebgroup.com/equity Important. All disclosure information can be found on pages 14 – 16 of this document Results Analysis Paradox Interactive 13 November 2018 2

Buy case intact Results deviation Revenue of SEK 225m was below our SEK 262m forecast but in line with consensus of SEK 222m and corresponds to 25% growth y/y. As we highlighted in our preview comment, we anticipated that a slower release pace this quarter would have had an impact on revenue generation, but our estimate still proved a little optimistic. The company reported that it released one PC DLCs and one console DLC in the quarter and the title Cities on Nintendo Switch. The gross margin recovered to 59.4% in Q3 vs 55.4% in Q2 as the mix shifted back to a more normalized split between own and external IP. Opex was slightly higher than consensus expectation at SEK 66m vs SEK 51m, explained by the continued organizational ramp up; our estimate was SEK 65m. The EBIT margin was 30.4% vs our forecast of 37.8% and consensus of 35.9%. There were no write downs in the quarter.

Deviation from estimates

Actual SEB est. Deviation SEB Cons. (Reuters) Deviation Cons. Actual (SEKm) Q3/18 Q3/18E Abs Rel (%) Q3/18E Abs Rel (%) Q3/17 y/y (%)

Sales 225 262.0 -37 -14% 222 4 2% 180.7 25% - growth (%) 24.5% 45.0% 22.6% COGS -91.3 -106.1 15 -80.0 14% Gross profit 133.6 155.9 -14% 131 265% 2% 100.7 33% Opex -66.1 -64.7 -1 -47.8 38% - Selling -19.9 -23.6 -16.027 24% - Admin -44.9 -39.2 -22.372 101% - Other -0.5 0.0 0.2 n.a. EBIT 68.3 91.2 -23 -25% 80 -11 -14% 52.9 29% Fico 0.0 0.0 0 -0.3 n.a. Tax -15.4 -20.1 5 -12.0 n.a. Net Income 52.9 71.1 -18 -26% 62 -9 -15% 40.6 30% EPS 0.50 0.67 0.58 0.38 31%

NRI ( & Write downs) 0 -7 0 0 -6

Adj. EBIT 68 98.2 -30 -30% 80 -11 -14% 59 15% Adj. EPS 0.50 0.74 -0.2 -32% 0.58 -0.08 -15% 0.44 13%

Gross margin (%) 59.4% 59.5% -0.1% 59.1% 0.3% 55.7% EBIT margin (%) 30.4% 34.8% -4.4% 35.9% -5.5% 29.3% Adj. EBIT margin (%) 30.4% 37.5% -7.1% 35.9% -5.5% 32.8% Source: SEB., Reuters

Employees at quarter end Opex cost split 400 (90.0)

(80.0) 350 (70.0) 300 (60.0) 250 (50.0)

200 (40.0)

(30.0) 150 (20.0) 100 (10.0) 50 0.0

0 10.0 Q1/15Q2/15Q3/15Q4/15Q1/16Q2/16Q3/16Q4/16Q1/17Q2/17Q3/17Q4/17Q1/18Q2/18Q3/18 of which administrative of which selling expense FTE at quarter end of which other income of which other costs Source: SEB, Paradox Source: SEB, Padarox

Equity Research Results Analysis Paradox Interactive 13 November 2018 3

Valuation We value Paradox through a DCF model, with a 6.5% WACC, and derive a target price of SEK 147. At the current trading range, around SEK 120, Paradox trades at an EV/EBIT of 17x for next year, which is slightly below its international PC gaming peer group average of 17.5x and attractive given its stronger growth profile with additional kicker in the form of M&A potential.

DCF summary

DCF valuation (SEKm) Weighted average cost of capital (%)

NPV of FCF in explicit forecast period 4,318 Risk free interest rate 2.5 NPV of continuing value 10,862 Risk premium 4.0 Value of operation 15,180 Cost of equity 6.5

Net debt (354) After tax cost of debt 1.8 Share issue/buy-back in forecast period - Value of associated companies - WACC 6.5 Value of minority shareholders' equity - Value of marketable assets - Assumptions DCF value of equity 15,534 Number of forecast years 10 DCF value per share (SEK) 147 EBIT margin - steady state (%) 40.7 Current share price (SEK) 120.60 EBIT multiple - steady state (x) 11.0 DCF performance potential (%) 22 Continuing value (% of NPV) 71.6 Source: SEB

DCF sensitivity analysis

5.5 6.0 6.5 7.0 7.5 80 229 208 190 174 161 Equity capital 90 201 182 166 152 141 weight (%) 100 178 161 147 135 125 100 178 161 147 135 125 100 178 161 147 135 125

Absolute change in EBITDA margin - all years (%)

-2% -1% 0 +1% +2% -2% 126 129 133 136 139 Abs. change in -1% 133 136 140 143 146 sales growth - 0 140 143 147 151 154 all years (%) +1% 147 151 155 159 163 +2% 155 159 163 167 171 Source: SEB

DCF – assumption details

Average Average Average (SEKm) 2018E 2019E 2020E 2021E 2022E year 6 year 7-8 year 9-10

Sales growth (%) 34.1 37.7 33.9 18.0 16.0 14.0 11.0 4.0 EBITDA margin (%) 54.3 61.3 57.4 56.7 56.2 55.7 54.9 53.9 EBIT margin (%) 37.7 47.1 44.5 43.7 43.2 42.7 42.0 41.0 Gross capital expenditures as % of sales 33.6 22.9 20.5 20.5 20.5 20.5 20.5 20.5 Working capital as % of sales 1.1 2.3 3.1 3.0 3.0 2.9 2.8 2.7

Sales 1,091 1,503 2,013 2,375 2,755 3,141 3,693 4,124 Depreciation (181) (214) (259) (309) (358) (408) (480) (536) Intangibles amortisation 0 0 0 0 0 0 0 0 EBIT 411 707 896 1,038 1,190 1,341 1,549 1,689 Taxes on EBIT (123) (212) (269) (311) (357) (402) (465) (507) Increase in deferred taxes 0 0 0 0 0 0 0 0 NOPLAT 288 495 627 727 833 939 1,084 1,182

Gross capital expenditure (366) (344) (413) (488) (566) (645) (758) (847) Increase in working capital 5 (23) (28) (10) (10) (10) (8) (2) Free cash flow 108 343 445 538 616 692 798 869

ROIC (%) 35.4 40.1 35.3 37.0 38.2 38.7 38.1 34.1 ROIC-WACC (%) 28.9 33.6 28.8 30.5 31.7 32.2 31.6 27.6 Share of total net present value (%) 0.0 2.2 2.6 3.0 3.2 3.4 7.1 6.9 Source: SEB

Equity Research Results Analysis Paradox Interactive 13 November 2018 4

Peer group valuation

Sales Mkt cap PER EV/EBIT EV/Sales CAGR EBIT margin (%) Mobile game developers (SEK) -3M -12M 2018E 2019E 2020E 2018E 2019E 2020E 2018E 2019E 2020E 2017-20 2018E 2019E 2020E

GLU 10,116 20% 98% - 29.3 22.4 27.7 20.0 12.6 3.7 2.7 2.4 17.0 9.9 11.8 16.3 Zynga 27,909 -7% -9% 21.2 21.5 16.8 16.0 15.7 11.9 2.8 2.5 2.3 11.7 17.4 15.8 19.1 G5 1,589 -52% -44% 11.7 8.0 6.3 9.4 6.4 5.0 1.0 0.8 0.7 26.7 10.1 12.2 13.2 Netmarble 84,265 0% -34% 42.2 23.6 20.9 28.0 13.8 12.2 3.9 3.0 2.8 6.9 14.0 21.5 22.8 Rovio 3,463 -22% -63% 14.0 11.9 8.0 7.3 5.7 3.4 0.8 0.7 0.5 6.1 10.7 11.4 15.6 Stillfront 3,569 -33% 25% 21.4 13.6 11.3 13.4 8.9 7.6 2.9 2.4 2.2 122.6 22.0 26.5 28.3 Average -12% -10% 22.2 18.9 14.9 17.7 12.3 9.0 2.4 1.9 1.7 13.7 12.4 14.6 17.4

PC & Console EA 242,260 -33% -22% 20.5 19.2 16.9 14.3 14.0 12.3 4.6 4.5 4.1 4.4 32.2 31.8 33.7 Activision Blizzard 376,140 -24% -14% 20.6 19.1 16.7 16.0 14.8 13.0 5.4 5.2 4.8 6.3 33.8 35.3 36.9 Ubisoft 84,186 -23% 6% 41.5 24.4 21.3 28.8 19.2 15.7 4.7 4.0 3.6 15.5 16.5 20.8 23.0 Take-Two 113,567 -15% -6% 33.4 21.9 21.1 24.6 16.2 15.4 5.9 3.9 4.1 15.3 24.1 24.0 26.5 Tencent 3,008,783 -27% -30% 29.3 24.3 18.6 24.5 19.7 15.3 7.4 5.6 4.4 30.1 30.3 28.7 29.0 CD Project 34,687 -30% 20% 101.0 24.6 16.1 79.4 14.7 13.4 31.6 8.3 8.3 51.5 39.8 56.5 61.7 Paradox 12,735 -38% 31% 34.5 21.4 16.9 28.2 16.7 12.8 11.0 8.0 5.8 35.2 38.9 48.1 45.3 THQ 13,191 -11% 127% 45.0 21.8 18.7 26.3 13.3 11.6 3.0 2.3 2.1 119.2 11.2 17.5 18.5 Starbreeze 1,879 -36% -27% 20.2 58.2 6.4 21.2 29.7 5.2 2.6 2.0 1.2 70.2 12.3 6.6 22.0 Average -28% 12% 38.0 25.6 17.0 29.1 17.5 12.8 8.7 5.2 4.4 38.3 27.8 31.7 34.2

All gaming -22% 3% 32.4 22.7 16.0 24.4 15.3 11.2 6.3 3.9 3.4 34.8 22.4 25.7 28.3 Nordic -31% 15% 25.3 15.3 12.2 16.9 10.2 8.1 3.7 2.8 2.3 62.0 18.6 23.2 24.2 International -15% 1% 38.7 23.1 19.0 28.8 16.5 13.5 7.8 4.4 4.1 17.6 24.2 27.4 29.9 Source: SEB

Estimates We have lowered our EPS estimates 2-6% based on a higher opex run rate. In the past nine months Paradox has hired 100 new staff members and as a result the cost base has increased. The company will move to new larger premises in Stockholm in autumn 2019 according to a press release from AMF.

Earnings revision (SEK) 2018E 2019E 2020E Revenues (m) Old 1,128 1,503 2,013 New 1,091 1,503 2,013 Change (%) (3) 0 0

Operating profit (m) Old 439 723 913 New 411 707 896 Change (%) (6) (2) (2)

Pre-tax profit (m) Old 439 723 913 New 411 707 896 Change (%) (6) (2) (2)

EPS (reported) Old 3.23 5.34 6.74 New 3.03 5.23 6.62 Change (%) (6) (2) (2)

EPS (adjusted) Old 3.50 5.62 7.12 New 3.29 5.51 7.00 Change (%) (6) (2) (2) Source: SEB

Equity Research Results Analysis Paradox Interactive 13 November 2018 5

Interim financial forecasts

Year end: 31 December (SEKm) Q1/17 Q2/17 Q3/17 Q4/17 Q1/18 Q2/18 Q3/18 Q4/18E 2017 2018E 2019E 2020E

Sales 121.3 289.4 180.7 222.4 267.0 298.8 225.0 300.2 813.8 1,091.0 1,502.6 2,012.7 COGS (50.1) (65.4) (80.0) (85.3) (73.4) (133.4) (91.3) (120.1) (280.9) (418.2) (451.6) (704.5) Gross profit 71.1 224.0 100.7 137.1 193.6 165.4 133.6 180.1 532.9 672.8 1,051.0 1,308.3 Opex (33.2) (61.7) (47.8) (50.4) (53.1) (66.0) (65.3) (77.1) (193.1) (266.1) (331.5) (398.5) of which Selling costs (9.7) (18.8) (16.0) (20.5) (20.5) (28.1) (19.9) (24.8) (65.1) (93.2) (131.7) (177.8) Admin costs (22.0) (31.5) (22.4) (30.8) (35.2) (46.5) (44.9) (46.2) (106.7) (172.9) (199.8) (220.8) Other (1.5) (11.4) (9.4) 0.9 2.6 8.5 (0.5) (6.1) (21.4) 4.6 (12.0) (14.0) Non-recurring items (2.9) (3.3) (6.4) (5.4) 0.0 (20.6) 0.0 (6.7) (18.0) (27.3) (30.1) (40.3) EBITDA 65.2 195.2 93.0 126.6 173.5 159.3 113.1 146.3 479.9 592.2 921.7 1,155.2 Depreciation & amort. (27.2) (32.9) (40.1) (39.9) (33.0) (59.9) (44.8) (43.2) (140.1) (180.9) (214.2) (259.4) EBIT 38.0 162.3 52.9 86.7 140.5 99.4 68.3 103.1 339.8 411.3 707.5 895.8 EBIT excl. Non-recurring items 40.9 165.6 59.3 92.1 140.5 120.0 68.3 109.7 357.8 438.6 737.5 936.0 Net financials 0.0 0.0 (0.3) 0.0 0.0 (0.1) 0.0 0.1 0.0 0.0 0.0 0.0 Pre-tax profit 38.0 162.3 52.6 86.7 140.5 99.3 68.3 103.2 339.8 411.3 707.5 895.8 Total taxes (8.8) (36.0) (12.0) (17.8) (32.0) (21.6) (15.4) (22.7) (74.6) (91.7) (155.6) (197.1) Net profit (reported) 29.2 126.3 40.6 68.8 108.6 77.6 52.9 80.5 265.1 319.6 551.8 698.7 EPS reported 0.28 1.20 0.38 0.65 1.03 0.74 0.50 0.76 2.51 3.03 5.23 6.62 EPS adjusted 0.30 1.23 0.44 0.70 1.03 0.93 0.50 0.83 2.68 3.29 5.51 7.00

Sales growth (%) 30.0 23.2 42.1 12.1 120.2 3.2 24.5 35.0 24.5 34.1 37.7 33.9 Gross profit growth (%) 38.3 27.8 25.2 12.3 172.2 (26.1) 32.7 31.4 24.2 26.3 56.2 24.5 EBIT growth (%) 50.8 13.9 (3.1) 0.7 270.2 (38.7) 29.2 18.9 10.2 21.1 72.0 26.6 EBIT growth excl. Non-recurring costs (%) 62.3 16.3 1.5 (13.3) 244.0 (27.5) 15.2 19.2 7.7 22.6 68.2 26.9 Pre-tax profit growth (%) 50.9 14.0 (3.6) 0.6 270.1 (38.8) 29.8 19.1 10.2 21.1 72.0 26.6 EPS growth (%) 0.5 (0.1) (0.0) 0.0 2.7 (0.4) 0.3 0.2 (2.2) 20.7 72.6 26.6 COGS growth (%) 19.8 9.7 71.2 11.7 46.4 103.9 14.1 40.7 25.1 48.9 8.0 56.0 Opex growth (%) 26.4 87.7 84.8 40.3 60.0 7.0 36.7 52.9 59.7 37.8 24.6 20.2 SG&A cost growth (%) 23.7 36.3 40.4 40.0 75.6 48.2 68.8 38.3 59.7 37.8 24.6 20.2

Gross margin (%) 58.7 77.4 55.7 61.6 72.5 55.4 59.4 60.0 65.5 61.7 69.9 65.0 EBITDA ex NRI margin (%) 56.1 68.6 55.0 59.3 65.0 60.2 50.3 50.9 61.2 56.8 63.3 59.4 EBIT ex NRI margin (%) 33.7 57.2 32.8 41.4 52.6 40.2 30.4 36.6 44.0 40.2 49.1 46.5 EBITDA margin (%) 53.7 67.4 51.5 56.9 65.0 53.3 50.3 48.7 59.0 54.3 61.3 57.4 EBIT margin (%) 31.3 56.1 29.3 39.0 52.6 33.3 30.4 34.3 41.8 37.7 47.1 44.5 Pre-tax margin (%) 31.3 56.1 29.1 39.0 52.6 33.2 30.4 34.4 41.8 37.7 47.1 44.5 Net margin (%) 24.1 43.6 22.5 31.0 40.7 26.0 23.5 26.8 32.6 29.3 36.7 34.7

COGS as % of sales 41.3 22.6 44.3 38.4 27.5 44.6 40.6 40.0 34.5 38.3 30.1 35.0 SG&A as % of sales 26.2 17.4 21.3 23.1 20.9 25.0 28.8 23.7 23.7 24.4 22.1 19.8 Total opex as % of sales 27.4 21.3 26.4 22.7 19.9 22.1 29.0 25.7 23.7 24.4 22.1 19.8 Tax rate (%) 23.1 22.2 22.9 20.6 22.8 21.8 22.5 22.0 22.0 22.3 22.0 22.0

Annualized SG&A as % of sales -19.5% -19.8% -19.9% -21.1% -20.4% -22.7% -24.3% -24.4%

No of shares (m) 105.6 105.6 105.6 105.6 105.6 105.6 105.6 105.6 105.6 105.6 105.6 105.6 Source: SEB

Revenue scenario for 2019

Copies (m) Price (USD) USD/SEK Turnover -Dist. Fee (%) Revenue GM (%) Gross profit

DLC runrate 9.0 1000 70% 700 75% 525 Imperator Rome 0.9 49 9.0 397 70% 278 80% 222 Age of Wonders:Planetfall 0.9 49 9.0 397 70% 278 80% 222 Publishing 1 0.4 49 9.0 176 70% 123 33% 41 Publishing 2 0.4 49 9.0 176 70% 123 33% 41 1,503 70% 1,051 Source: SEB

Equity Research Results Analysis Paradox Interactive 13 November 2018 6

Sales per annum and EBIT margin Sales per quarter and EBIT margin 2,500 50.0 70 350 47.2 47.1 45.0 44.5 60 60.6 300 41.8 2,013 57.2 2,000 40.0 40.0 53.5 52.6 37.7 50 250 35.0 47.7 44.6 45.9 1,503 41.4 1,500 30.0 40 40.2 200 37.6 37.2 (%) 36.6 25.0 33.7 32.8 1,091 30 30.4 150 27.0 1,000 20.0 814 20 100 15.0 604 654 500 10.0 10 50

5.0 0 0 0 0.0 2015 2016 2017 2018E 2019E 2020E Sales EBIT margin Sales EBIT margin, underlying (%) Source: SEB Source: SEB

Revenue bridge to 2020 Game releases vs revenue 2500 10 350.0 9 IP licensing 1 300.0 M&A? + Publishing? 8 2000 150 7 2 250.0

6 200.0 1500 1 1 922 5 1 1 150.0 4 2 1 1000 2bn 3 6 100.0 209 5 5 1 -82 2 2 4 4 3 3 1 50.0 1 500 2 2 814 1 1 1 1 732 0 0.0

0 2017 Non-recurring DLC long tail Geographical New releases Channel 2020E revenue expansion migration DLC Console New Mobile Revenue Source: SEB Source: SEB

Revenue per quarter and annualised Stellaris sales trajectory from release 500.0 1500 1800 450.0 1300 1600 400.0 Release of Surviving Mars 1.5 after 20 months 1100 1400 Release of Steel Division and 6 DLCs 350.0 Release of Stellaris and Hearts of Iron IV 900 300.0 1200 Release of Cities: Skylines 250.0 700 1000 200.0 500 800 150.0 300 100.0 600 100 500 copies the first month 50.0 400 0.0 -100

200 200 copies the first day

Sales Annualized sales 0 0 5 10 15 20 25 30 35 Source: SEB Source: SEB

Equity Research Results Analysis Paradox Interactive 13 November 2018 7

Write downs Operational Cash flow (25.0) -20% 600.00

-18% 500.00 (20.0) -16%

-14% 400.00

(15.0) -12% 300.00 -10%

(10.0) -8% 200.00

-6% 100.00 (5.0) -4%

-2% 0.00

0.0 0% Write downs % of sales Annualized OCF Operational cash flow Source: SEB Source: SEB

Equity Research Results Analysis Paradox Interactive 13 November 2018 8

Overview

Being vertically integrated, from development to distribution, enables the company Investment case to have high profit margins, especially thanks to its focus on digital distribution. Being close to its fan base allows it to be agile in its go to market strategy and a lot of revenue is generated through downloadable content (DLC) and expansions, which shift the boom-bust revenue cycle to a more stable "long tail". Looking ahead, new titles, new geographies and new platforms are set to continue to drive revenue growth.

Paradox Interactive is a medium sized game developer/publisher in the global arena, Company profile but strong in its niche segments. Grand Strategy, City Building and RPG. The company primarily develops games for PC but is expanding its portfolio to other mediums such as console and mobile. The portfolio includes more than75 titles and several different IP and brand rights. The most important titles include Stellaris, Europa Universalis, Hearts of Iron, Crusader Kings, Cities: Skylines, Tyranny and Magicka. The majority of the portfolio is own-developed and owned titles, but the company also acts as a publisher for third party studios. Today, close to 1.5million gamers play a Paradox game each month.

We base our target price on a DCF model and earnings multiples of closest peers. Valuation approach Low visibility into portfolio performance and future pipeline combined with the timing Target price risks of individual game releases makes quarter on quarter forecasting difficult and the financial performance may be volatile quarter on quarter which could spill over to the share price. Write downs on large development projects or launches failing to attract popularity pose risks to the investment case.

Revenues by region, Q3 2018 Revenues by division, Q3 2018 Rest of Europé Rest of World Other Mobile 1% Console 1% 0% 11% 13% Sweden 3%

USA PC 85% 86%

Source: SEB Source: SEB

Equity Research Results Analysis Paradox Interactive 13 November 2018 9

PER - 12 month forward P/BV - 12 month forward

50 3,000 2,500 40 2,000 30

1,500 (x) 20 (%) 1,000 10 500 0 0 2016 2017 2018 2019 2016 2017 2018 2019

PER - 12 month forward P/BV - 12 month forward

Source: SEB Source: SEB

EV/Sales - 12 month forward EV/EBITA - 12 month forward

20.0 50 45 40 15.0 35 30

10.0 25 (x) (x) 20 15 5.0 10 5 0.0 0 2016 2017 2018 2019 2016 2017 2018 2019

EV/Sales - 12 month forward EV/EBITA - 12 month forward

Source: SEB Source: SEB

Net sales & EBITDA margin EBIT & Operating margin

6,000 70.0 2,000 50.0

5,000 60.0 40.0 1,500 50.0 4,000 30.0 40.0

3,000 1,000 (%) 30.0 (%) 20.0

2,000 (SEKm) (SEKm) 20.0 500 10.0 1,000 10.0 0 0.0 0 0.0 2015 2016 2017 2018E 2019E 2020E 2015 2016 2017 2018E 2019E 2020E Net sales EBITDA margin EBIT Operating margin Source: SEB Source: SEB

Comparison with sector index - 1 year Comparison with THQ - 1 year 240 240 220 220 200 200 180 180 160 160 140 140 120 100 120 80 100 60 80 40 Nov 17 Jan 18 May 18 Aug 18 Oct 18 Nov 17 Jan 18 May 18 Aug 18 Oct 18 Paradox Interactive Rel European Leisure Paradox Interactive Rel THQ Source: SIX Source: SIX

Equity Research Results Analysis Paradox Interactive 13 November 2018 10

Profit & loss statement - Paradox Interactive (SEKm) 2015 2016 2017 2018E 2019E 2020E Net Sales 604 654 814 1,091 1,503 2,013 Other revenues 0 0 0 0 0 0 Total revenues 604 654 814 1,091 1,503 2,013

Total expenses (312) (242) (334) (499) (581) (858) Profit before depreciation 292 411 480 592 922 1,155

Depreciation - Fixed assets (2) (4) (4) (4) (5) (6) Depreciation - Other assets (49) (100) (137) (177) (209) (253) Amortisation - Goodwill 0 0 0 0 0 0 Amortisation - Other intangibles 0 0 0 0 0 0 Operating profit 242 308 340 411 707 896

Net interest expenses 0 0 0 0 0 0 Foreign exchange items 0 0 0 0 0 0 Other financial items 0 0 0 0 0 0 Value changes - Fixed assets 0 0 0 0 0 0 Value changes - Financial assets 0 0 0 0 0 0 Value changes - Other assets 0 0 0 0 0 0 Reported pre-tax profit 242 308 340 411 707 896

Minority interests 0 0 0 0 0 0 Total taxes (53) (37) (75) (92) (156) (197) Reported profit after tax 189 271 265 320 552 699

Discontinued operations 0 0 0 0 0 0 Extraordinary items 0 0 0 0 0 0 Net Profit 189 271 265 320 552 699

Adjustments: Discontinued operations 0 0 0 0 0 0 Interest on convertible debt 0 0 0 0 0 0 Minority interests (IFRS) 0 0 0 0 0 0 Value changes 0 0 0 0 0 0 Goodwill/intangibles amortisations 0 0 0 0 0 0 Restructuring charges 0 0 0 0 0 0 Other adjustments 0 24 18 27 30 40 Tax effect of adjustments 0 0 0 0 0 0 Adjusted profit after tax 189 295 283 347 582 739

Margins, tax & returns Operating margin 40.0 47.2 41.8 37.7 47.1 44.5 Pre-tax margin 40.0 47.2 41.8 37.7 47.1 44.5 Tax rate 22.0 12.2 22.0 22.3 22.0 22.0 ROE 139.6 76.3 51.0 45.2 53.9 46.5 ROCE 178.9 86.8 65.4 58.2 69.1 59.6

Growth rates y-o-y (%) Total revenues n.a. 8.2 24.5 34.1 37.7 33.9 Operating profit n.m. 27.5 10.2 21.1 72.0 26.6 Pre-tax profit n.m. 27.5 10.2 21.1 72.0 26.6 EPS (adjusted) 0.0 56.3 (3.9) 22.5 67.7 27.0

Cash flow (SEKm) 2015 2016 2017 2018E 2019E 2020E Net profit 189 271 265 320 552 699 Non-cash adjustments 50 103 140 181 214 259 Cash flow before work cap 239 374 405 501 766 958

Ch. in working capital / Other (68) 37 14 5 (23) (28) Operating cash flow 171 411 420 505 743 930

Capital expenditures (154) (130) (221) (287) (344) (413) Asset disposals 0 0 0 0 0 0 L/T financial investments 0 0 0 0 0 0 Acquisitions / adjustments 0 0 (35) (79) 0 0 Free cash flow 17 281 163 139 399 517

Net loan proceeds 0 0 0 0 0 0 Dividend paid (32) (71) (106) (106) (132) (158) Share issue 0 0 0 0 0 0 Other (0) 0 (0) 0 0 0 Net change in cash (15) 211 58 34 267 359

Adjustments C/flow bef chng in work cap 239 374 405 501 766 958 Adjustments 0 0 0 0 0 0 Int on conv debt net of tax 0 0 0 0 0 0 Cash earnings 239 374 405 501 766 958

Per share information Cash earnings 2.26 3.54 3.84 4.74 7.25 9.07 Operating cash flow 1.62 3.89 3.97 4.79 7.04 8.81 Free cash flow 0.16 2.66 1.55 1.32 3.78 4.9

Investment cover Capex/sales (%) 0.0 0.0 0.0 0.0 0.0 0.0 Capex/depreciation (%) 0 0 11 0 0 0

Source for all data on this page: SEB

Equity Research Results Analysis Paradox Interactive 13 November 2018 11

Balance sheet - Paradox Interactive (SEKm) 2015 2016 2017 2018E 2019E 2020E Cash and liquid assets 50 247 320 354 621 979 Debtors 49 71 73 90 124 165 Inventories 0 0 0 0 0 0 Other 128 55 50 35 35 35 Current assets 226 373 442 478 779 1,180

Interest bearing fixed assets 0 0 0 0 0 0 Other financial assets 3 3 3 20 20 20 Capitalized development cost 101 138 247 357 493 652 Goodwill 0 0 0 0 0 0 Other intangibles 61 55 78 139 139 139 Fixed tangible assets 17 14 11 8 3 (3) Other fixed assets 0 0 0 0 0 0 Fixed assets 183 210 340 525 655 809

Total assets 409 583 782 1,003 1,434 1,989

Creditors 16 12 22 30 41 55 Other trade financing 0 0 5 0 0 0 S/T interest bearing debt 0 0 0 0 0 0 Other 91 83 79 83 83 83 Current liabilities 108 95 106 113 124 138

L/T interest bearing debt 0 0 0 0 0 0 Other long-term liabilities 11 11 11 11 11 11 Convertible debt 0 0 0 0 0 0 Pension provisions 0 0 0 0 0 0 Other provisions 0 0 0 0 0 0 Deferred tax 19 36 65 65 65 65 Long term liabilities 31 47 77 77 77 77

Minority interests 0 0 0 0 0 0

Shareholders' equity 270 440 600 814 1,234 1,774

Total liabilities and equity 409 583 782 1,003 1,434 1,989

Net debt (m) (50) (247) (320) (354) (621) (979) Working capital (m) 68 31 17 12 34 62 Capital employed (m) 270 440 600 814 1,234 1,774 Net debt/equity (%) (19) (56) (53) (43) (50) (55) Net debt/EBITDA (x) (0.2) (0.6) (0.7) (0.6) (0.7) (0.8) Equity/total assets (%) 66 76 77 81 86 89 Interest cover 0.0 0.0 0.0 0.0 0.0 0.0

Valuation (SEK) 2015 2016 2017 2018E 2019E 2020E

No of shares, fully dil. (y/e) 105.6 105.6 105.6 105.6 105.6 105.6 No of shares, fully dil. avg. 105.6 105.6 105.6 105.6 105.6 105.6 Share price, y/e 50.8 93.3 120.6 120.6 120.6 Share price, high 67.8 98.0 234.0 Share price, low 40.2 51.0 91.5 Share price, avg 52.5 71.0 148.8 EPS (reported) 1.79 2.56 2.51 3.03 5.23 6.62 EPS (adjusted) 1.79 2.79 2.68 3.29 5.51 7.00 Cash earnings/share 2.26 3.54 3.84 4.74 7.25 9.07 Dividend/share 0.67 1.00 1.00 1.25 1.50 2.00 Enterprise value/share 48 90 117 115 111 Book value/share 2.6 4.2 5.7 7.7 11.7 16.8 Adjusted equity/share 2.6 4.2 5.7 7.7 11.7 16.8 PER (adjusted) 18.2 34.8 36.7 21.9 17.2 CEM 14.3 24.3 25.4 16.6 13.3 Dividend yield 2.0 1.1 1.0 1.2 1.7

EV/EBITDA 12.4 19.9 20.9 13.1 10.2 EV/EBITA 16.6 28.0 30.1 17.1 13.1 EV/EBIT 16.6 28.0 30.1 17.1 13.1 EV/Sales (x) 7.82 11.71 11.35 8.06 5.84 Price/Book value 12.18 16.41 15.65 10.32 7.18 Price/adjusted equity 12.18 16.41 15.65 10.32 7.18

Free cash flow/Market cap (%) 5.2 2.0 1.7 3.1 4.1 Operating cash flow/EV (%) 8.0 4.4 4.1 6.1 7.9 EV/Capital employed (x) 11.6 15.9 15.2 9.8 6.6

Main shareholders Management Company information Name (%) Votes Capital Title Name Contact COB Internet 0.0 CEO Vester Fredrik Phone number 0 CFO Andras Vajlok IR

Source for all data on this page: SEB

Equity Research Results Analysis Paradox Interactive 13 November 2018 12

Target prices and risks Target price definition and associated risks Our target price is the analyst's assessment of what total return an investor should expect over the coming six to 12 months. The target is based on fundamental equity research and other factors at the analyst's discretion.

Our current target price of SEK 147 was set today (13 Nov 2018). The main risk to our target price on Paradox Interactive is as follows. Low visibility into portfolio performance and future pipeline combined with the timing of individual game releases makes quarter on quarter forecasting difficult and the financial performance may be volatile quarter on quarter which could spill over to the share price. Write downs on large development projects or launches failing to attract popularity pose risks to the investment case.

Risk levels The risk level is the analyst’s view of the uncertainty in the earnings forecasts based on an assessment of the company’s business model, operating risk as well as financial risk. We use two risk levels with the following explanations:

● Normal risk: All forecasts involve uncertainty and we view companies in this risk level to have normal forecast risks ● High risk: The earnings forecasts are more uncertain than for an average instrument due to business model, operating risk, financial risk or any other reason at the analyst’s discretion. All instruments with shorter track record than 12 months as a listed company are by definition classified as high risk according to SEB.

Equity Research Results Analysis Paradox Interactive 13 November 2018 13

Authors' statement of independence (Analyst Certification) We, the authors of this report, hereby confirm that notwithstanding the existence of any potential conflicts of interest referred to herein, the views expressed in this report accurately reflect our personal views about the companies and securities covered. We further confirm that we have not been, nor are or will be, receiving direct or indirect compensation in exchange for expressing any of the views or the specific recommendation contained in the report. We are not registered or qualified as research analysts, representatives or associated persons under the rules of any US exchange, regulatory organization or State.

This statement affects your rights This report is confidential and may not be reproduced, redistributed or republished by any recipient for any purpose or to any person.

Producers and Recipients SEB Research is approved and issued by Skandinaviska Enskilda Banken AB (publ) (“SEB”), a bank organized under the laws of the Kingdom of Sweden, on behalf of itself and its affiliates for institutional investors. SEB is not a registered Broker- Dealer under the US Securities and Exchange Act of 1934. When SEB Research is issued by an SEB subsidiary, the subsidiary itself is subject to this disclaimer.

Use This research report is produced for the private information of recipients - if you are not a client of ours, you are not entitled to this research report, and should destroy it. The document is not, and should not be construed as, an offer to sell or solicitation of an offer to buy any securities. Opinions contained in the report represent the author's present opinion only and may be subject to change. In the event that the author's opinion should change or a new analyst with a different opinion becomes responsible for our coverage of the company concerned, we shall endeavour (but do not undertake) to disseminate any such change, within the constraints of any regulations, applicable laws, internal procedures within SEB, or other circumstances. If you are in doubt as to the meaning of the recommendation system used by SEB in its research, please refer to the "Disclaimer" section of SEB Research website, to which our clients are granted access.

Good faith and limitations All information, including statements of fact, contained in this research report have been obtained and compiled in good faith from sources believed to be reliable. However, no representation or warranty, express or implied, is made by SEB with respect to the completeness or accuracy of its contents, and it is not to be relied upon as authoritative and should not be taken in substitution for the exercise of reasoned, independent judgement by you. Recipients are urged to base their investment decisions upon such investigations as they deem necessary. To the extent permitted by applicable law, no liability whatsoever is accepted by SEB for any direct or consequential loss arising from the use of this document or its contents.

Distribution This research report has been prepared by SEB or its affiliates and is being distributed by SEB offices in Stockholm, Copenhagen, Oslo, Helsinki, Frankfurt, London, Tallinn, Vilnius, Riga and Hong Kong. Research reports are prepared and distributed in Lithuania by AB SEB bankas and in Estonia by AS SEB Pank in accordance with the requirements of the local laws and Financial Supervision Authority’s conduct of business rules. It is being distributed in the United States by SEB Securities Inc. ('SEBSI'), a wholly owned subsidiary of SEB organized under the laws of the State of Delaware, USA. Any United States institutional investor receiving the report, who wishes to obtain further information or to effect a transaction in any security discussed in the report, should do so only through SEBSI and not its affiliates. Addresses and Phone numbers for each office can be found at the end of the report.

Equity Research Results Analysis Paradox Interactive 13 November 2018 14

The SEB Group: members, memberships and regulators SEB is a member of, inter alia, Nasdaq OMX Nordic, Oslo Stock Exchange, the London Stock Exchange, NYSE Euronext, SIX Swiss Exchange, Frankfurt Stock Exchange, Tallinn Stock Exchange as well as certain European MTF’s such as BATS-Chi-X, Turquoise and Burgundy. SEB is regulated by Finansinspektionen in Sweden and, for the conduct of investment services business, in (i) Denmark by Finanstilsynet, (ii) Norway by Finanstilsynet, (iii) Finland by Finanssivalvonta, (iv) Germany by Bundesanstalt für Finanzdienstleistungsaufsicht, (v) the UK by the Financial Conduct Authority and Prudential Regulation Authority (details about the extent of our regulation by the Financial Conduct Authority and Prudential Regulation Authority are available from us on request), (vi) Estonia by the Estonian Financial Supervision Authority, (vii) Lithuania by the Bank of Lithuania , (viii) Latvia by the Financial and Capital Markets Commission and (ix) Hong Kong by Securities and Futures Commission. SEBSI is a U.S. broker-dealer, registered with the Financial Industry Regulatory Authority (FINRA). SEBSI is a subsidiary of SEB. SEBSI is authorized to engage in the underwriting of securities but does not make markets or otherwise engage in any proprietary trading in any securities.

SEB’s research reports are prepared in accordance with the industry standards and codes of conduct applicable to financial analysts in the countries where they are based. In Denmark, Finland, Norway and Sweden, analysts act in accordance with the rules of ethics of each country’s Society of Financial Analysts. Analysts comply with the recommendations and industry standards of the Danish, Norwegian and the Swedish Securities Dealers Associations and with those of the Federation of Finnish Financial Services. Analysts certified by the CFA Institute also comply with the Code of Ethics of the CFA Institute. The author of this report is not registered or qualified as a research analyst with FINRA and therefore may not be subject to the FINRA Rule 2241 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account.

Prevention and avoidance of conflicts of interest All research reports are produced by SEB’s Research department, which is separated from the rest of its activities by an Information Barrier; as such, research reports are independent and based solely on publicly available information. Following standard practice, recommendations and target share prices are removed from research on companies which are the subject of public offers on which SEB is advising. The remuneration of staff within the Research department is determined exclusively by research management and senior management and may include discretionary awards based on the firm’s total earnings, including investment banking and markets (sales and trading businesses) income; however, no such staff receive remuneration based upon specific investment banking or markets transactions. SEB’s Compliance department monitors the production of research and the observance of the group's procedures designed to prevent any potential conflicts of interest from affecting the content of research; the latter are described in greater detail in the "Statement of Policies for dealing with potential conflicts of interest surrounding our Research activities" which is available on our SEB Research website. Your attention is also drawn to the fact that: The current market price of the securities shown in this report is the price prevailing at the close of the business day preceding the date of publication, save where such price was more than 5% different from the price prevailing as at the time of publication, in which case it is the latter. Unless explicitly stated otherwise in this report, SEB expects (but does not undertake) to issue updates to this report following the publication of new figures or forecasts by the company covered, or upon the occurrence of other events which could potentially have a material effect on it. The securities discussed in this research report may not be eligible for sale in all countries, and such securities may not be suitable for all types of investors. Offers and sales of securities discussed in this research report, and the distribution of this report, may be made only in countries where such securities are exempt from registration or qualification or have been so registered or qualified for offer and sale, and in accordance with applicable broker-dealer and agent/salesman registration or licensing requirements. Additional recommendation history for the issuer is available at https://research.sebgroup.com/equity

A full list of disclosures for other companies mentioned herein (in which SEB has research coverage), can be found on our SEB Research website

Equity Research Results Analysis Paradox Interactive 13 November 2018 15

Methodology Our target price is based on valuation approaches described in the Overview section of this report, unless our estimates are in the process of being updated. Final consideration as to any valuations, projections and forecasts contained in this report are based on a number of assumptions and estimates and are subject to contingencies and uncertainties, and their inclusion in this report should not be regarded as a representation or warranty by or on behalf of the Group or any person or entity within the Group that they or their underlying assumptions and estimates will be met or realized. Different assumptions could result in materially different results. Past performance is not a reliable indicator of future performance. Foreign currency rates of exchange may adversely affect the value, price or income of any security or related investment mentioned in this report. In addition, investors in securities, such as ADRs, whose values are influenced by the currency of the underlying security, effectively assume currency risk.

Company specific disclosures and potential conflicts of interest A member of, or an entity associated with, SEB or its affiliates, officers, directors, employees or shareholders of such members (a) is not, and has never been, represented on the board of directors or similar supervisory entity of Paradox Interactive, (b) has from time to time bought or sold the securities issued by the company or options relating to the company, and (c) SEB does not hold any short / long position exceeding 0.5% of the total issued share capital of Paradox Interactive as of 31 Oct 2018.

The analyst(s) responsible for this research report (jointly with their closely related persons) hold(s) 0 shares in Paradox Interactive and do(es) not have holdings in other instruments related to the company.

Current recommendation for Paradox Interactive - Buy - was set on 31 Oct 2018, changed from Hold. The dates of previous recommendation changes in relation to Paradox Interactive can be found on our Research Online website.

Equity Research

SEB’s standardised recommendation structure

Consolidated distribution Clients to whom SEB has provided Clients from whom SEB has received as per 30 Sep 2018 (%) material investment services, last 12M (%) investment banking income, last 12M (%)

Buy 49.6 19.2 10.2 Hold 40.4 9.2 6.7 Sell 10 1.2 2.3

Buy Attractive risk/reward - at least 10% upside to target price. Hold Fairly valued – the security / instrument is trading close to target price. Sell Unattractive risk/reward - security / instrument is trading above target price. Unrated Company not covered, or we are not allowed to have a recommendation for compliance reasons Source: SEB

Please note, in the chart to the Target price and recommendation revision history right: 220 2 1

1=Buy 200 2=Hold 180 3=Sell 160 The grey spots mark the point where target prices have been 140 changed. The price chart is not 120 adjusted for dividends paid, 100 whereas our recommendations are based on expected return 80 including dividends 60 40 Jan 16 Jan 17 Jan 18

PDXI.ST Target price revisions

Source: Thomson Reuters / SIX / SEB

Skandinaviska Enskilda Banken AB (publ). All rights reserved.

Copenhagen Frankfurt Helsinki Hong Kong Bernstorffsgade 50 Stephanstrasse 14-16 Eteläesplanadi 18 17/F Jardine House P.O. Box 100 D-60313 Frankfurt am Main P.O. Box 630 1 Connaught Place DK-1577 Copenhagen V FIN-00101 Helsinki Central, Hong Kong Island Hong Kong

Telephone: (45) 3328 2828 Telephone: (49) 69 9727 7740 Telephone: (358) 9 616 28700 Telephone: (852) 3919 2600 London New York Oslo Stockholm One Carter Lane 245 Park Avenue, 33rd Floor Filipstad Brygge 1, Kungsträdgårdsgatan 8 London, EC4V 5AN New York P.O. Box 1363 Vika S-106 40 Stockholm NY 10167 NO-0113 Oslo Telephone: (44) 20 7246 4000 Telephone: (1) 212 692 4760 Telephone: (47) 2100 8500 Telephone: (46) 8 522 29500

Tallinn Tornimäe 2 EE-Tallinn 15010

Telephone: (372) 665 7762

SEB Equity Research research.sebgroup.com/equity