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NC Soft Bloomberg: 036570 KS, Reuters: 036570.KS Regional Company Focus NC Soft Bloomberg: 036570 KS, Reuters: 036570.KS Refer to important disclosures at the end of this report DBS Group Research . Equity 20 Nov 2018 BUY, KRW467,500 KOSPI: 2,100.6 2019’s top pick (Closing price as of 19/11/18) • Lineage M updates and year-end events to boost 4Q18 Price Target 12-mth: KRW550,000 (prev. KRW510,000) revenue Reason for Report: 3Q18 earnings review • Lineage M’s revenue stabilising at c. KRW2bn, and Potential catalyst: Lineage 2 M making a big hit earnings from Lineage 2 M to be reflected in 2019 Where we differ: We are more positive than the market for FY19F, but • Reiterate BUY, TP raised to KRW550,000 more conservative for FY20F Lineage M revenue rebounded. NC Soft posted 3Q18 revenue of Analyst Regional Research Team KRW403.8bn (-44.5% y-o-y, -7.5% q-o-q) and OP of KRW139bn (- [email protected] 57.6% y-o-y, -12.8% q-o-q), which outperformed consensus OP estimate by 9%. Lineage M’s domestic revenue rebounded q-o-q, Price Relative putting an end to its downtrend. The average daily domestic 600,000 310 revenue for Lineage M was KRW2.37bn in 3Q18, up 3% q-o-q. We 500,000 260 assume the effects of the Gunman class update (end-May) was 400,000 210 present in 3Q18 and the recent Fighter class update (28 Sep) also 300,000 160 contributed to the rebound. With the impact of Fighter class update 200,000 and year-end promotions and events, Lineage M revenue is 100,000 110 th 0 60 projected to grow slightly q-o-q in 4Q18. There will also be a 20 Nov-14 May-15 Nov-15 May-16 Nov-16 May-17 Nov-17 May-18 anniversary event for the PC-based Lineage in 4Q18. Stock price(LHS,KRW) Rel. to KOSPI(RHS,pts) Lineage M’s Taiwan revenue fell, but downtrend likely to cease Forecasts and Valuation FY Dec (KRW bn) soon. Lineage M revenue from Taiwan decreased in 3Q18, due to 2017A 2018F 2019F 2020F Revenue 1,758.7 1,735.4 2,089.2 2,356.7 absence of one-off incentive paid by the Taiwanese publisher. In EBITDA 615.0 680.5 856.2 982.3 terms of royalties, the game’s Taiwan revenue declined from Operating profit 585.0 649.4 824.8 949.9 KRW54.3bn in 2Q18 to KRW19.3bn in 3Q18. Removing the impact Pre-tax Profit 610.2 686.1 881.3 1,006.5 of the one-off incentive, actual revenue dropped by 2% q-o-q in Net Profit 444.0 470.3 661.0 754.8 Net Pft (Pre Ex.) 444.0 470.3 661.0 754.8 3Q18. In 4Q18, Lineage M’s Taiwan revenue is expected to fall 15% Net Pft Attributable to q-o-q, and stabilise in the quarters ahead. However, if we assume Controlling Interest 441.0 460.1 646.6 738.4 Lineage M’s revenue trend will be similar both in Korea and Taiwan, EPS (KRW) 20,105 20,971 29,470 33,655 the downtrend in the game’s Taiwan revenue should cease from EPS Pre Ex. (KRW) 20,245 21,439 30,128 34,406 Dec (one-year anniversary in Taiwan). EPS Gth (%) 61.9 4.3 40.5 14.2 EPS Gth Pre Ex (%) 63.6 5.9 40.5 14.2 Lineage 2 M’s release expected in 1H19 (by May). Given i) NC Soft’s Diluted EPS (KRW) 20,105 20,971 29,470 33,655 strength in mobile MMORPG development and operation and ii) Net DPS (KRW) 7,280 7,750 9,330 10,660 BV Per Share (KRW) 121,648 135,648 157,691 182,379 rival game’s maturity, we think Lineage 2 M is likely to be a hit. We PE (X) 22.3 22.3 15.9 13.9 estimate the game’s average daily revenue will be KRW3bn in May- PE Pre Ex. (X) 22.1 21.8 15.5 13.6 June, and assume the revenue will decrease by 30% q-o-q in the P/Cash Flow (X) 15.6 20.7 15.1 13.3 following two quarters. Given Lineage M’s user base, EV/EBITDA (X) 13.7 12.6 9.6 7.8 cannibalisation with Lineage 2 M should be limited. Net Div Yield (%) 1.6 1.7 2.0 2.3 P/Book Value (X) 3.7 3.4 3.0 2.6 Top pick in the gaming sector. We changed our basis period to Net Debt/Equity (X) CASH CASH CASH CASH derive our TP to 2019F. Applying a target 2019F PE of 18.2x (global ROE (%) 19.3 16.4 20.2 20.0 major gaming companies’ 2019F PE average), we raise our TP by Earnings Rev (%): (2.1) 9.8 14.8 8% to KRW550,000. Consensus EPS (KRW): 20,951 29,062 36,758 Other Broker Recs: B : 29 S : 1 H : 6 At A Glance ICB Industry: Software Issued Capital (m shrs) 21.94 ICB Sector: Technology Mkt. Cap (KRWbn/US$m) 10,257/9,097 Principal Business: NCSoft develops and markets on-line games that Major Shareholders enable users to play over the Internet and computer software, such Kim Taek-jin and 8 others (%) 12.0 as web editing software. The company also designs and constructs Free Float (%) 64.26 databases, Intranet, and commercial Internet access systems. Avg. Daily Vol.(‘000) 70 Source of all data: Company, DBS Bank, Bloomberg Finance L.P ed: JS / sa: JC, CS, AH Company Focus NC Soft Earnings review Unit: KRW bn, % Preliminary earnings Vs. our estimates y-o-y q-o-q Vs. consensus estimates ‘18.09P ‘18.09F Diff. (%) ‘17.09A Diff. (%) ‘18.06A Diff. (%) ‘18.09F Diff. (%) Revenue 403.8 380.4 6.1 727.3 (44.5) 436.5 (7.5) 386.0 4.6 OP 139.0 117.0 18.8 327.8 (57.6) 159.5 (12.8) 128.1 8.6 NP 94.4 108.8 (13.2) 275.1 (65.7) 140.3 (32.7) 104.3 (9.5) Margin (%) OP margin 34.4 30.8 45.1 36.5 33.2 Net margin 23.4 28.6 37.8 32.1 27.0 Difference (ppts) OP margin 3.7 (10.6) (2.1) 1.3 Net margin (5.2) (14.4) (8.7) (3.6) Note: Based on consolidated K-IFRS Source: DBS Bank NC Soft: TP calculation Value Remarks 2019F controlling-interest NP (KRW bn) 659.6 Target PE (x) 18.2x Global major game companies' 2019F PE average Target market cap (KRW bn) 12,026.2 No. of shares ('000 shares) 21,939.0 Fair price (KRW) 548,165 Target price (KRW) 550,000 Current price (KRW) 467,500 Upside potential 17.6% Source: DBS Bank Page 2 Company Focus NC Soft NC Soft: Earnings estimates (KRW bn) 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 4Q18F 1Q19F 2Q19F 3Q19F 4Q19F 2017 2018F 2019F Revenue 239.5 258.6 727.3 533.3 475.2 436.5 403.8 419.9 412.7 575.6 566.6 534.4 1,758.7 1,735.4 2,089.2 Game revenue 176.0 222.5 683.7 473.8 391.0 344.7 352.2 364.5 350.7 516.9 513.5 481.3 1,555.9 1,452.4 1,862.3 Lineage 51.5 33.8 35.4 33.8 28.3 42.1 40.3 48.4 45.9 43.6 41.5 45.6 154.4 159.0 176.7 Lineage II 18.4 16.7 15.6 15.1 14.2 13.3 15.6 15.8 15.6 15.5 15.3 15.5 65.8 59.0 61.9 Aion 13.3 10.8 10.2 12.7 18.8 15.6 16.4 16.7 16.5 16.4 16.2 16.5 47.0 67.4 65.6 Blade & Soul 44.6 39.0 38.0 39.5 33.9 30.6 30.1 30.8 30.1 29.5 28.9 29.6 161.2 125.4 118.1 Guild War 2 14.2 13.6 20.1 34.9 23.6 19.9 21.0 21.0 21.0 21.0 21.1 21.1 82.8 85.5 84.2 Wild Star 0.5 1.0 1.0 1.0 0.5 0.5 0.0 0.0 0.0 0.0 0.0 0.0 3.5 1.0 0.0 MXM 2.0 1.2 0.5 0.5 0.5 0.4 0.4 0.4 0.4 0.3 3.2 3.2 3.7 Mobile games 23.4 93.7 551.0 327.1 264.1 209.9 216.5 219.3 208.3 377.1 376.2 337.8 995.2 909.8 1,299.3 Lineage M 80.0 541.1 319.5 259.2 206.1 212.9 216.0 205.2 194.9 185.2 203.7 940.6 894.2 789.0 Lineage 2 M 180.0 189.0 132.3 501.3 Others 10.1 13.9 10.4 8.5 7.1 12.3 11.9 12.1 12.7 13.4 14.1 14.8 42.9 42.1 52.7 Royalties revenue 63.5 36.1 43.6 59.5 84.2 91.8 51.6 55.4 62.0 58.7 53.2 53.1 202.7 283.0 227.0 Lineage M (Taiwan) 15.8 40.5 54.3 19.3 16.4 17.2 18.1 17.2 16.3 15.8 130.5 68.7 IP lending 38.0 19.8 26.3 24.0 17.8 14.0 12.1 16.3 20.7 18.9 17.3 15.7 108.1 60.2 72.6 Others 25.5 16.3 17.3 19.7 26.0 23.4 20.2 22.7 24.1 21.7 18.7 21.1 78.9 92.3 85.7 Operating expenses 209.2 221.0 399.5 344.1 271.3 277.0 264.8 273.0 284.1 336.0 327.5 316.9 1,173.7 1,086.1 1,264.5 Labour cost 132.4 113.5 155.5 161.0 125.0 146.9 128.9 131.9 153.7 136.3 138.1 140.1 562.3 532.7 568.1 Paid commissions 15.2 35.3 173.8 105.2 85.1 69.1 71.1 74.2 70.8 123.9 123.5 111.5 329.6 299.6 429.7 Royalties 2.8 2.3 1.6 1.2 1.2 0.8 1.0 0.9 0.9 1.3 1.3 1.2 7.9 3.8 4.5 Marketing cost 12.7 24.1 22.0 24.2 10.8 15.0 16.5 18.2 10.5 25.8 15.4 14.4 83.0 60.5 66.2 Others 46.0 45.8 46.6 52.5 49.2 45.2 47.3 47.8 48.2 48.7 49.2 49.7 190.9 189.5 195.9 Operating profit 30.4 37.6 327.8 189.2 203.9 159.5 139.0 146.9 128.6 239.6 239.1 217.5 584.9 649.3 824.8 OPM 12.7% 14.5% 45.1% 35.5% 42.9% 36.5% 34.4% 35.0% 31.2% 41.6% 42.2% 40.7% 33.3% 37.4% 39.5% Net profit 17.3 30.8 275.1 120.6 119.2 140.3 94.4 116.4 107.0 190.3 190.0 173.7 443.9 470.3 661.0 NPM 7.2% 11.9% 37.8% 22.6% 25.1% 32.1% 23.4% 27.7% 25.9% 33.1% 33.5% 32.5% 25.2% 27.1% 31.6% Source: NC Soft, DBS Bank Revision to annual earnings forecasts (KRW bn) Previous Revised Diff.
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