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Ncsoft (036570 KS) Power of Role-Playing Games

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Company Report Feb 12, 2016 NCsoft (036570 KS) Power of role-playing games 4Q15 review SW/SI Sales came to W237.0bn (+1% YoY), operating profit W74.9bn (-14% YoY), and net profit BUY (M) W42.2bn (-32% YoY). By game, sales of “Lineage” came to W83.2bn (-14% YoY), “Lineage 2” TP: W280,000 (U) W220.0bn (+3% YoY), “Aion” W18.6bn (-11% YoY), “Blade & Soul” W32.4bn (+32% YoY), and “Guild Wars 2” W37.3bn (+94% YoY), with overseas royalty income of W29.2bn (-10% YoY). Sales of Lineage, Lineage 2, Aion, and Blade & Soul were strong thanks to updates and new Share price (won, Feb 11) 240,000 item launches. It is particularly encouraging that sales of old games Lineage 2 and Blade & Paid-in capital (Wbn) 11 Soul have grown for the past three years and that Lineage’s sales broke records. This is Market cap (Wbn) 5,263 thanks to the nature of role-playing games, in which the company excels. Guild Wars 2’s sales BPS (won) 80,707 increased thanks to a feature pack launch, but missed expectations. In terms of expenses, Net debt to equity (%) -54.0 Shares outstanding 21,929,022 marketing and baseball club expenses rose, but earnings of existing games climbed, and thus, total earnings were in line with market estimates. In non-operating terms, the company Avg daily T/O (2M, Wbn) 31 Avg daily vol (2M, shrs) 138,946 booked W18.4bn in impairment of Ntreev Soft goodwill. 52-week high (won) 244,000 52-week low (won) 169,000 1Q16 forecast Foreign ownership (%) 32.6 Earnings are likely to fall given the disappearing effects of game updates and events seen in Major shareholders (%) 4Q15, but the decline is unlikely to be huge, given solid earnings growth of old games. In NPS 13.6 addition, as cumulative users of Blade & Soul, launched on Jan 19 in North America and Europe, have exceeded 2mn, its 1Q16 and 2016 full-year earnings may beat estimates. Stock performance (%) 1M 3M 12M Maintain BUY; revise up target price to W280,000 Absolute 9.1 14.8 14.6 Relative 11.0 23.2 19.7 We believe old games will maintain robust earnings in 2016 thanks to launches in other Abs (US$) 10.2 10.8 5.0 regions (eg, Blade & Soul in Taiwan, North America, and Europe) and higher item sales (Lineage, Lineage 2, Aion, Blade & Soul in Korea, and Guild Wars 2). Moreover, a mobile (won) (%) 300,000 140 game, developed in-house over the about four years, and a new online game “Master X 250,000 120 Master” (MXM), are set to be launched in 2016, and “Lineage Eternal” may also be released. 100 200,000 We believe new game momentum is stronger in 2016 than any other year. In particular, for 80 150,000 60 “Blade & Soul Mobile,” set to be launched in China in Mar 2016, local publisher Tencent is 100,000 40 likely to adopt a marketing blitz to recover mobile RPG market share from rival NetEase. Thus, 50,000 20 0 0 the mobile version may become as popular as its online version. Moreover, demand for online Feb-14 Feb-15 Feb-16 games has stagnated, but launches of new games have also declined (new online game NCsoft(LHS) Rel. to KOSPI(RHS) launches down from 48 in 2011 to 22 in 2014). We cannot rule out the possibility that online games will be more popular than expected. We revise up our target price to W280,000, given Source: Datastream the likely stellar earnings of old games and new mobile and online games in 2016. Quarterly earnings Forecasts and valuations (K-IFRS, consolidate) (Wbn) (Wbn) 4Q15E % YoY % QoQ Consens vs consens (%) FY ends Dec 2013A 2014A 2015E 2016E Sales 237 0.8 21.1 236 0.3 Sales 757 839 838 933 Operating profit 75 -14.3 48.1 73 2.7 Operating profit 205 278 237 274 Pre-tax profit 62 -33.6 19.9 82 -24.0 Net profit, CI 159 230 165 212 Net profit 42 -33.0 38.8 60 -29.9 % YoY 1.9 44.9 -28.2 28.4 P/E (x) 24.0 16.9 31.9 24.8 Op margin (%) 31.6 -5.6 %pt +5.7 %pt 30.9 +0.7 %pt P/B (x) 3.0 2.6 3.0 2.7 Net margin (%) 17.8 -8.9 %pt +2.3 %pt 25.4 -7.6 %pt EV/EBITDA (x) 13.1 9.6 16.0 13.9 Source: Yuanta Securities ROE (%) 14.8 18.4 10.5 11.5 Note: OP = gross profit - SG&A Source: Yuanta Securities NCsoft (036570 KS) NCsoft: 4Q15 review and forecast (Wbn) 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16E 2014 2015 2016E 2017E Sales 235.1 188.1 217.5 195.7 237.0 213.3 838.7 838.3 933.0 1,082.3 Lineage 1 96.7 66.0 85.5 78.2 83.2 78.7 263.1 312.9 296.9 276.3 % YoY 29 61 50 14 -14 19 -9 19 -5 -7 Domestic sales 93.2 64.3 83.6 75.6 80.0 75.9 253.2 303.5 287.2 267.2 Overseas sales 3.5 1.8 1.9 2.6 3.2 2.8 9.9 9.4 9.7 9.1 Lineage 2 19.5 11.0 16.3 15.6 20.1 17.3 59.5 63.0 62.6 57.4 % YoY 25 -5 20 5 3 58 4 6 -1 -8 Domestic sales 11.2 5.9 8.1 6.7 10.0 7.7 30.9 30.7 30.6 26.9 Overseas sales 8.3 5.2 8.1 8.9 10.1 9.7 28.5 32.2 32.0 30.5 Aion 20.9 18.3 20.1 16.8 18.6 17.4 94.4 73.7 75.2 69.1 % YoY 17.5 15.0 17.0 14.1 16.0 14.8 79.2 62.1 62.5 57.5 Domestic sales 3.4 3.3 3.1 2.6 2.6 2.6 15.2 11.6 12.7 11.6 Blade & Soul 24.6 26.8 29.8 24.9 32.4 39.9 82.7 113.9 132.1 111.1 % YoY 18.7 17.0 16.7 15.9 22.0 18.7 71.6 71.6 68.6 60.3 Domestic sales 5.9 9.8 13.1 9.0 10.4 21.2 5.9 42.3 63.5 50.8 Guild Wars 2 19.3 20.0 22.5 20.7 37.3 21.3 85.6 100.5 79.7 70.5 Royalty income 32.4 25.6 21.0 22.9 29.2 22.4 136.8 98.7 95.6 89.7 WildStar 5.5 2.6 2.1 1.7 2.7 2.2 49.5 9.1 5.7 4.3 Mobile games - - - - - - - - 100.0 200.0 MXM, lineage Eternal - - - - - - - - 18.0 136.0 Expenses 147.8 143.2 150.4 145.1 162.1 145.9 560.5 600.8 658.7 740.1 Wages 81.7 85.9 81.4 80.9 76.7 80.5 308.8 324.9 341.3 366.7 Royalties paid 3.0 2.7 2.5 2.0 1.9 2.1 13.2 9.1 12.6 13.5 Payment commission 6.4 8.1 9.3 9.2 9.4 8.1 23.9 36.1 61.5 97.0 Box production 0.4 0.2 0.4 0.2 1.4 0.4 2.3 2.2 2.0 2.1 Freight, BDE, other 3.5 1.6 2.6 1.3 1.8 1.6 8.1 7.3 8.0 7.8 Marketing 8.6 4.3 8.4 8.0 13.5 7.3 32.7 34.2 40.9 48.4 Depreciation/amortization 8.5 8.9 8.3 9.2 7.9 8.9 37.0 34.2 34.2 33.9 Other 35.7 31.5 37.5 34.3 49.6 36.9 134.5 152.9 158.2 170.7 Operating profit 87.4 44.9 67.1 50.6 74.9 67.5 278.2 237.5 274.3 342.2 Operating margin (%) 37 24 31 26 32 32 33 28 29 32 Source: Company data, Yuanta Securities 2 Company Report Target price calculation (won) Net cash and cash equivalents (B) 1,153,758,985,702 Real estate (book value) 240,081,769,977 Real estate (fair value)(C) 329,940,247,977 Acquisition price of Netmarble Games equity on Feb 16, 2015 380,264,907,420 Netmarble Games value as of Feb 16, 2015 3,500,001,735,170 2016E net profit 211,800,000,000 Target P/E (x) 20.2 Value of operations (A) 4,278,360,000,000 EV (A + B + C + D) 6,142,324,141,099 Shares out 21,929,022 Value per share 280,100 Source: Yuanta Securities 3 NCsoft (036570 KS) NCsoft (036570 KS) pro forma financial statements (K-IFRS, consolidated) Statement of comprehensive income Statement of financial position FY ends Dec (Wbn) 2013A 2014A 2015E 2016E 2017E FY ends Dec (Wbn) 2013A 2014A 2015E 2016E 2017E Sales 757 839 838 933 1,082 Current assets 786 1,020 1,083 1,222 1,376 Cost of sales 220 220 203 243 287 Cash & cash equiv 123 203 514 598 687 Gross profit 536 618 636 690 795 Accts rec & other 90 98 92 103 120 SG&A 331 340 398 416 453 Inventory 1 1 1 1 1 Operating profit 205 278 237 274 342 Non-current assets 694 679 1,136 1,191 1,251 EBITDA 241 315 271 302 368 Tangible assets 248 241 233 221 212 Non-op profit/loss 11 11 2 10 20 Investment in affiliate 23 29 36 43 51 Forex gain/loss -2 5 11 11 13 Other non-current 22 27 502 558 614 Net interest inc 16 17 20 23 26 Total assets 1,480 1,699 2,219 2,414 2,627 Equity-meth gain/loss 4 -2 -2 -1 -1 Current liabilities 252 245 338 387 411 Other -8 -9 -28 -23 -18 Accts payable & other 98 97 99 135 147 Net prof before income tax 216 289 239 285 362 ST financial liabilities 3 0 0 0 0 Income tax 58 61 73 71 87 Liquid LT liabilities 0 0 0 0 0 Net profit from cont op 159 228 166 214 275 Non-current liabilities 69 78 92 100 109 Net profit from discont op 0 0 0 0 0 LT financial liabilities 0 0 0 -1 -1 Net profit 159 228 166 214 275 Debentures 0 0 0 0 0 NP for controlling int 159 230 165 212 273 Total liabilities 321 323 430 487 520 Total comprehensive inc 148 224 169 218 280 Equity, controlling int 1,141 1,361 1,769 1,906 2,084 TCI for controlling int 151 228 166 214 276 Paid-in capital 11 11 11 11 11 Note: Operating profit calculation same as K-GAAP (sales - COGS - SG&A).
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