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Ncsoft Reported 1Q18 Operating Profit That Topped the Consensus and an OP Margin May 11, 2018 of Over 40%

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Ncsoft Reported 1Q18 Operating Profit That Topped the Consensus and an OP Margin May 11, 2018 of Over 40% NC soft (036570 KS ) New title releases pushed back , but existing IP remains popular Game 1Q18 review: OP tops consensus on strong royalties Results Comment NCsoft reported 1Q18 operating profit that topped the consensus and an OP margin May 11, 2018 of over 40%. Positives: Margin expansion was driven by strong royalties, which grew 33% YoY and 41% QoQ to a record W84.2bn thanks to Lineage M revenue in Taiwan (launched on December 11, 2017). Six months into its release, Lineage M remains the top-grossing (Maintain) Buy game on both Android and iOS in Taiwan, where Lineage intellectual property (IP) enjoys huge popularity. Target Price (12M, W) ▼ 500,000 Among PC titles, Aion was a standout performer, boosted by in creased usage following the conversion of the title’s business model from subscription-based to Share Price (05/10/18, W) 347,000 microtransaction-based on January 17 th . Despite the launch of a major rival title, marketing spend actually fell QoQ and YoY. Expected Return 44% Negatives: Revenue from Lineage M (the company’s flagship mobile title) declined QoQ. We estimate daily average revenue slipped from W3.6bn in 4Q17 to W2.9bn in OP (18F, Wbn) 696 1Q18. In addition, revenue fell more than expected for PC titles Lineage , Lineage II , Consensus OP (18F, Wbn) 786 and Guild Wars 2 . EPS Growth (18F, %) 14.5 Major new releases pushed back to 2019; Performance of current games will Market EPS Growth (18F, %) 16.2 be key near-term variable P/E (18F, x) 15.1 New release schedule pushed back: NCsoft said it had pushed back the release of its Market P/E (18F, x) 9.4 highly anticipated new title Blade & Soul II (B&S II ) from 2018 to 2019. B&S II is a KOSPI 2,464.16 mobile MMORPG with a follow-up storyline to the original PC title Blade & Soul . We Market Cap (Wbn) 7,613 believe the company recently overhauled its team to further enhance the game’s Shares Outstanding (mn) 22 quality amid increasing competition in the domestic market. The launch of Lineage II Free Float (%) 84.8 M, which was originally scheduled for this year, has also been moved to next year. We Foreign Ownership (%) 48.1 expect Lineage II M to come out in 1H19, followed by B&S II in 2H19. Beta (12M) 0.69 Lineage M plans: Next month will mark the one-year anniversary of the release of 52-Week Low 342,000 Lineage M , which has become NCsoft’s new cash cow. The company will unveil massive 52-Week High 488,000 content updates and other plans for the mobile title at an upcoming press event on th (%) 1M 6M 12M May 15 . We believe such moves could help invigorate Lineage M ’s ecosystem. Absolute -12.8 -17.4 -4.3 2H18 plans: Aion Legions , a mobile strategy RPG, is set to be launched in North Relative -13.3 -14.7 -11.8 America and Europe this year. For Project TL (The Lineage ), which is currently under development for PCs/consoles, the company plans to conduct closed beta testing (CBT) 140 NCSOFT KOSPI 130 in 2H18 and unveil its development status. 120 Maintain Buy, but lower TP to W500,000 in light of new release schedule 110 100 We revised down our 2018-19 earnings estimates due to the delays to new title 90 releases. As such, we lower our target price to W500,000 (from W600,000). 80 4.17 8.17 12.17 4.18 We maintain our Buy rating on the stock. We anticipate Lineage M and royalties to support earnings stability. Valuation also looks inexpensive. In 2H18, we expect to gain Mirae Asset Daewoo Co., Ltd. further clarity on the new title release schedule. [ Internet/Game/Advertising ] FY (Dec.) 12/15 12/16 12/17 12/18F 12/19F 12/20F Revenue (Wbn) 838 984 1,759 1,820 2,728 2,864 Jee -hyun Moon +822 -3774 -1640 OP (Wbn) 237 329 585 696 1,184 1,245 [email protected] OP margin (%) 28.3 33.4 33.3 38.2 43.4 43.5 NP (Wbn) 165 272 441 505 860 905 EPS (W) 7,542 12,416 20,100 23,005 39,180 41,231 ROE (%) 10.6 14.9 19.1 17.2 24.6 21.9 P/E (x) 28.2 19.9 22.3 15.1 8.9 8.4 P/B (x) 2.6 2.7 3.4 2.3 1.9 1.7 Dividend yield (%) 1.3 1.5 1.6 2.4 4.0 4.3 Note: All figures are based on consolidated K-IFRS; NP refers to net profit attributable to controlling interests Source: Company data, Mirae Asset Daewoo Research estimates May 11, 2018 NCsoft Earnings and forecasts Table 1. 1Q18 review (Wbn, %) 1Q18P Growth 1Q17 4Q17 Mirae Asset Preliminary Consensus YoY QoQ Daewoo Revenue 240 533 475 511 474 98.3 -10.9 Operating profit 30 189 204 192 177 569.1 7.6 OP margin 12.7 35.5 42.9 37.6 37.3 Net profit 17 121 119 142 135 584.9 -1.3 Notes: All figures are based on consolidated K-IFRS; net profit is attributable to controlling and non-controlling interests Source: Company data, FnGuide, Mirae Asset Daewoo Research estimates Table 2. Quarterly and annual earnings (Wbn, %) 1Q17 2Q17 3Q17 4Q17 1Q18P 2Q18F 3Q18F 4Q18F 2017 2018F 2019F Revenue 240 259 727 533 475 447 446 452 1,759 1,820 2,728 Lineage 51 34 35 34 28 28 26 26 154 108 107 Lineage II 18 17 16 15 14 14 14 13 66 56 55 Aion 13 11 10 13 19 18 17 17 47 70 67 Blade & Soul 45 39 38 40 34 32 31 32 161 129 116 Guild Wars 2 14 14 20 35 24 18 16 17 83 75 67 Mobile games 23 94 551 327 264 261 259 254 995 1,038 1,879 Other 11 15 13 11 8 8 8 8 50 32 63 Royalties 64 36 44 60 84 67 75 85 203 312 374 Operating profit 30 38 328 189 204 172 172 148 585 696 1,184 OP margin 12.7 14.5 45.1 35.5 42.9 38.5 38.4 32.9 33.3 38.2 43.4 Net profit 17 31 275 121 119 126 125 136 444 506 861 Net margin 7.3 11.9 37.8 22.6 25.1 28.1 28.1 30.2 25.2 27.8 31.6 YoY Revenue -0.6 7.5 234.3 87.4 98.3 72.7 -38.6 -15.3 78.8 3.5 49.9 Lineage -34.8 -64.2 -57.8 -71.5 -45.1 -18.1 -25.6 -23.5 -58.9 -30.0 -1.0 Lineage II 7.7 -12.6 -24.1 -26.0 -22.8 -14.8 -9.2 -11.8 -14.7 -15.0 -2.0 Aion -33.9 -38.5 -36.8 -29.6 41.1 64.6 66.7 33.4 -34.6 50.0 -5.0 Blade & Soul -17.5 -20.2 -5.2 0.5 -23.9 -17.4 -19.5 -18.5 -11.6 -20.0 -10.0 Guild Wars 2 -53.4 -14.7 31.5 134.8 66.2 33.8 -19.3 -52.7 8.1 -10.0 -10.0 Mobile 51,113.1 110,771.6 1,613.2 1,028.2 178.9 -53.0 -22.4 4,935.0 4.3 81.0 Other -1.5 -14.9 -22.2 -17.4 -24.8 -46.3 -39.7 -23.6 -15.1 -35.0 94.4 Royalties 116.1 33.8 80.2 43.2 32.5 86.3 72.9 42.7 66.0 53.8 20.0 Operating profit -59.8 -56.4 403.4 86.0 569.1 358.4 -47.6 -21.5 77.8 19.0 70.1 Net profit -73.7 -65.9 474.3 80.7 584.9 307.7 -54.5 12.9 63.6 14.0 70.1 Notes: All figures are based on consolidated K-IFRS; revenue from Lineage M , which was released on June 21, 2017, is included in mobile game revenue; Lineage M’s daily average revenue is estimated at W2.7bn in 2018; new releases, including B&S II, Lineage II M and Project TL are reflected in 2019; Lineage II: Revolution (Netmarble) and Lineage M (Taiwan) are included in royalties revenue; net profit is attributable to controlling and non-controlling interests Source: Company data, Mirae Asset Daewoo Research estimates Table 3. Earnings forecast revisions (Wbn, W, %) Previous Revised % chg. Notes 18F 19F 18F 19F 18F 19F - Revised mobile game revenue estimates , Revenue 2,290 3,055 1,820 2,728 -20.5 -10.7 factoring in timing of new game release s Operating profit 905 1238 696 1,184 -23.1 -4.4 - Revised down marketing spend Net profit 666 908 506 861 -24.0 -5.1 EPS (W) 30,142 41,158 23,005 39,180 -23.7 -4.8 OP margin 39.5 40.5 38.2 43.4 Net margin 29.1 29.7 27.8 31.6 Notes: All figures are based on consolidated K-IFRS; EPS is based on net profit attributable to controlling interests Source: Mirae Asset Daewoo Research estimates Mirae Asset Daewoo Research 2 May 11, 2018 NCsoft Figure 1. Lineage M (Taiwan) is the top-grossing game on Figure 2.
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