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NCSOFT (036570 KS) Strong Momentum to Come from New Releases and 1Q Earnings

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NCSOFT (036570 KS) Strong Momentum to Come from New Releases and 1Q Earnings NCSOFT (036570 KS) Strong momentum to come from new releases and 1Q earnings Game Raising 1Q16F OP on higher-than-expected Blade & Soul US revenue We now forecast NCSOFT’s 1Q revenue at W229bn (+21.8% YoY) and operating profit Company Update at W85bn (+90.5% YoY), which is well above the current consensus (W67.3bn). We March 11, 2016 adjusted up our 1Q earnings estimate, as we expect revenue from Blade & Soul US (launched on January 19 th ) to be higher than previously anticipated, given the title’s stabilizing traffic trends. (Maintain) Buy We upped our Blade & Soul US revenue estimates from W10bn to W20bn for 1Q and from W10bn to W15bn for 2Q-4Q each. But even with the revision s, our assumptions Target Price (12M, W) 420,000 appear conservative compared with the revenues recorded from Blade & Soul Taiwan and Guild Wars 2 . Share Price (03/10/16, W) 263,500 We see a chance of Blade & Soul US revenue exceeding W30bn in 1Q, if we model the Expected Return 59% revenue per server from Blade & Soul Taiwan (released on November 26, 2014 based on a microtransaction model) into our estimates (13 servers in Taiwan vs. 34 in the US). OP (15F, Wbn) 237 Traditional titles, including Lineage and Blade & Soul , are also showing stable traffic. Consensus OP (15F, Wbn) 238 Meanwhile, we did not incorporate potential earnings from the upcoming Lineage I microtransaction event (scheduled for March 16 th ) and from Blade & Soul Mobile in EPS Growth (15F, %) -26.9 China (non-wipe launch on March 7 th ; no. 1 downloaded iOS game in China as of March Market EPS Growth (15F, %) 20.0 10 th ) in our revised 1Q estimates due to the lack of visi bility on both fronts. We hence P/E (15F, x) 27.8 see further upside risks to our 1Q forecasts. Market P/E (15F, x) 11.5 KOSPI 1,969.33 New title momentum to continue into 2Q Market Cap (Wbn) 5,778 The launch of Blade & Soul US in January and Blade & Soul Mobile in China this March Shares Outstanding (mn) 22 served as upside share catalysts in 1Q. Looking ah ead, we see more momentum coming Free Float (%) 83.3 from new titles in 2Q. Beta tests for two mobile titles based on Lineage I intellectual Foreign Ownership (%) 33.4 property (IP)—Lineage Red Knights (RK) and Lineage on Mobile (which are due for Beta (12M) 0.90 commercial release in 2H)—as well as for the highly anticipated PC title Lineage Eternal 52-Week Low 169,000 and the new AMP Project , are all scheduled to take place in 2Q. The company is also set 52-Week High 263,500 to publish one or two mobile titles during the quarter. (%)(%)(%) 1M1M1M 6M6M6M 12M12M12M Looking further ahead, a mobile title based on Lineage II IP currently being developed by Absolute 9.8 35.8 53.6 Netmarble is expected to be rolled out in 3Q. Master X Master (MXM) is also set for Relative 6.9 35.3 54.8 commercialization in 3Q, after completing beta testing (March 9 th to 22 nd ) in Korea, 160 NCSOFT KOSPI Japan, and Taiwan. 140 Raise TP to W420,000 in light of visible earnings momentum 120 We remain Buy on NCSOFT and raise our target price to W420,000 (from W400,000). 100 We adjusted up our 2016F EPS by 5.5%, reflecting our 1Q earnings revision. If the traffic stabilization of Blade & Soul US and Blade & Soul Mobile in China extends into March, we 80 3.15 7.15 11.15 3.16 see a high possibility of further upward adjustments to our 1Q estimates. Daewoo Securities CCo.,o., Ltd. FY (Dec.) 12/12 12/13 12/14 12/15F 12/16F 12/17F Revenue (Wbn) 754 757 839 838 970 1,084 [Internet/Game/Entertainment] OP (Wbn) 151 205 278 238 348 406 Chang-kwean Kim OP margin (%) 20.0 27.1 33.1 28.4 35.9 37.5 +822-768-4321 NP (Wbn) 156 159 230 168 280 329 [email protected] EPS (W) 7,120 7,245 10,487 7,669 12,785 14,996 ROE (%) 16.8 14.8 18.4 11.9 17.9 18.2 Jeong-yeob Park +822-768-4124 P/E (x) 21.1 34.3 17.4 27.8 20.6 17.6 [email protected] P/B (x) 3.0 4.4 2.7 3.0 3.2 2.8 Notes: All figures are based on consolidated K-IFRS; NP refers to net profit attributable to controlling interests Source: Company data, KDB Daewoo Securities Research estimates Analysts who prepared this report are registered as research analysts in Korea but not in any other jurisdiction, including t he U.S. PLEASE SEE ANALYST CERTIFICATIONS AND IMPORIMPORTANTTANT DISCLOSURESDISCLOSURES & DISCLAIMERS IN APPENDIX 1 AT THE END OF REPORT. March 11, 2016 NCSOFT Earnings and forecasts Table 111.1. Quarterly and annual earnings (Wbn, %) 1Q11Q11Q151Q1 555 2Q12Q12Q152Q1 555 3Q13Q13Q153Q1 555 4Q14Q14Q154Q1 555 1Q11Q11Q16F1Q1 6F6F6F 2Q12Q12Q16F2Q1 6F6F6F 3Q13Q13Q16F3Q1 6F6F6F 4Q14Q14Q164Q1 666FFFF 2012012014201 444 2012012015201 555 2012012016201 666FFFF Revenue 188 218 196 237 229 230 244 267 839 838 970 Lineage I 66 85 78 83 80 85 77 81 263 313 324 Lineage II 11 16 16 20 19 18 19 22 59 63 78 Aion 18 20 17 19 17 19 18 20 94 74 74 Blade & Soul 27 30 25 32 47 42 43 41 83 114 174 Guild Wars 2 20 22 21 37 23 20 22 20 86 101 85 WildStar 3 2 2 3 2 2 1 1 50 9 6 MXM 0 0 0 0 0 0 14 21 0 0 35 Royalties 26 21 23 29 27 25 25 29 137 99 106 Other 18 20 15 14 15 19 24 32 67 67 89 Revenue proproproportionpro portion Lineage I 35.1 39.3 40.0 35.1 35.0 37.1 31.7 30.4 31.4 37.3 33.4 Lineage II 5.9 7.5 8.0 8.5 8.3 7.9 7.8 8.2 7.1 7.5 8.1 Aion 9.7 9.2 8.6 7.8 7.5 8.3 7.3 7.5 11.3 8.8 7.6 Blade & Soul 14.2 13.7 12.7 13.7 20.5 18.2 17.8 15.5 9.9 13.6 17.9 Guild Wars 2 10.6 10.3 10.6 15.8 9.8 8.8 9.1 7.5 10.2 12.0 8.8 WildStar 1.4 1.0 0.9 1.1 0.8 0.7 0.6 0.2 5.9 1.1 0.6 MXM 0.0 0.0 0.0 0.0 0.0 0.0 5.7 7.8 0.0 0.0 3.6 Royalties 13.6 9.6 11.7 12.3 11.8 10.9 10.2 10.9 16.3 11.8 10.9 Other 9.5 9.4 7.6 5.7 6.4 8.1 9.7 12.0 8.0 7.9 9.2 Operating expenses 143 150 145 162 144 152 152 175 561 601 622 Operating profit 45 67 51 75 85 78 92 93 278 237 348 OP margin (%) 23.9 30.8 25.9 31.6 37.3 33.7 37.8 34.6 33.2 28.3 35.8 Net profit 36 58 31 42 70 64 72 72 227 166 277 Net margin (%) 18.9 26.6 15.7 17.8 30.6 27.8 29.4 26.8 27.1 19.8 28.6 YoY growth Revenue 5.6 1.7 -7.5 0.8 21.8 5.7 24.7 12.7 10.8 -0.1 15.7 Lineage I 61.0 50.3 14.2 -14.0 21.3 -0.1 -1.1 -2.3 -8.6 18.9 3.6 Lineage II -5.0 19.9 5.2 3.0 73.0 10.9 22.0 9.5 4.1 5.8 24.1 Aion -17.8 9.5 -49.1 -11.2 -6.4 -5.0 6.7 7.6 -1.4 -21.9 0.5 Blade & Soul 39.2 55.6 26.1 31.9 75.2 40.8 74.2 27.3 20.1 37.7 52.4 Guild Wars 2 -20.3 1.2 5.1 93.7 12.4 -9.7 7.3 -46.5 -30.6 17.4 -15.5 WildStar - -92.6 -89.3 -51.4 -28.0 -24.4 -15.0 -75.2 - -81.7 -38.6 Royalties -42.5 -44.2 3.1 -10.1 5.2 19.0 8.8 -0.5 107.5 -27.9 7.3 Other 23.9 13.1 -16.1 -16.4 -18.0 -8.9 59.6 135.4 15.9 -0.6 33.3 Operating profit 0.8 3.3 -37.8 -14.3 90.5 15.5 82.3 23.5 35.5 -14.6 46.4 Net profit -2.7 9.3 -59.5 -32.2 97.0 10.4 134.3 69.5 43.4 -26.9 66.8 Notes: All figures are based on consolidated K-IFRS Source: Company data, KDB Daewoo Securities Research estimates Table 222.2. Earnings forecast revisions (Wbn, W, %, %p) Previous Revised Change 2016F2016F2016F 2017F2017F2017F 2016F2016F2016F 2017F2017F2017F 2016F2016F2016F 2017F2017F2017F Revenue 950 1,074 970 1,084 2.1 0.9 Operating profit 329 395 348 406 5.8 2.8 Net profit 266 320 280 329 5.3 2.8 EPS 12,123 14,596 12,785 14,996 5.5 2.7 OP margin 34.6 36.8 35.9 37.5 1.2 0.7 Net margin 28.0 29.8 28.9 30.4 0.9 0.6 Notes: All figures are based on consolidated K-IFRS Source: Company data, KDB Daewoo Securities Research estimates KDB Daewoo Securities Research 2 March 11, 2016 NCSOFT New games: Blade & Soul US and Blade & Soul China mobile Table 333.3.
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