Company Note April 3, 2017
NCsoft (036570)
12M rating BUY (Maintain) NDR takeaways – Mobile MMORPG shortage compared to demand 12M TP W370,000 from W370,000
Up/downside +21% Successful mobile game market entry Stock Data We conducted an NDR in the US with NCsoft, and met with 15 institutional investors over three days starting from March 28. While falling Lineage 1 sales KOSPI (Mar 31, pt) 2,160 fueled some concerns, the focus was mostly on the mobile game strategy, Stock price (Mar 31, KRW) 305,000 Market cap (USD mn) 5,980 including Lineage M. Going forward, management plans to focus on growing its Shares outstanding (mn) 22 exposure to mobile MMORPG, which has higher average revenue per paying user 52-Week high/low (KRW) 316,000/218,000 (ARPPU) than PC-based games. Meanwhile, expectations for NCsoft’s mobile 6M avg. daily turnover (USD mn) 41.1 capabilities have grown following the sustained success of Lineage Revolution, Free float / Foreign ownership (%) 84.3/42.2 Lineage RK and Final Blade (publishing game). Given a low weighting of China Major shareholders (%) NPS 12.5 sales and low expectations for Lineage RK, we believe the ongoing THAAD Taek-Jin Kim and 7 others 12.0 controversy will have only a limited impact.
Performance Mobile MMORPG supply falling short of demand 1M 6M 12M Absolute (%) 11.3 3.2 20.3 By reflecting mobile MMORPG market trends, e.g., auto gameplay, in addition to Relative to KOSPI (%p) 8.0 (2.5) 12.1 sophisticated graphics utilizing the Unreal 4 engine, Lineage Revolution has become the leading domestic mobile MMORPG. And, demand for the mobile 12MF PE trend MMORPG market has grown sharply, but supply is still limited. As such, we believe (X) 12MF PER (LHS) (W' 000) 400 price (RHS) there is still significant demand for Lineage M, the second game to be developed 25 350 domestically. Of the Lineage Revolution users, less than 30% are Lineage 1 300 20 players. And, Lineage M should secure a robust user base among existing online 250 game users. Of note, the core target market is older players familiar with Lineage 1, 15 200
150 rather than younger players in their 20s-30s. As such, relatively poor graphics on 10 100 Lineage Revolution should have only a marginal impact. Furthermore, the item 5 50 trading function, which was unveiled through the third teaser image, is not
0 0 available in any other mobile game yet, and should set Lineage Revolution apart. Apr-14 Apr-15 Apr-16 Source: WISEfn consensus Mobile position firms with successful launches Despite concerns, NCsoft is reinforcing its position in the mobile game market. Lineage RK ranked first in both domestic app markets despite a negative initial response. Furthermore, Final Blade and H2 (sports genre) are also beating expectations. As such, expectations are rising for Lineage M. If the game is a success, this should lift hopes for Aion Mobile, which is scheduled to launch in 2H17. Overall, momentum concerns should fade sharply after the launch of Lineage M. Backed by the successful games, we believe NCsoft will secure: 1) high-quality IP, 2) solid publishing games, and 3) a robust developer workforce.
Yr to Sales OP NP EPS % chg EBITDA PE EV/EBITDA PB ROE DY Dec (W bn) (W bn) (W bn) (KRW) (YoY) (W bn) (x) (x) (x) (%) (%) 2015A 838 237 165 7,633 (33.7) 272 27.9 13.7 2.6 10.6 1.3 2016A 984 329 272 12,783 67.5 361 19.4 12.3 2.7 14.9 1.5 2017F 1,297 482 391 18,416 44.1 511 16.6 10.6 2.8 19.1 1.8 Andy Kim 2018F 1,479 573 465 21,907 19.0 604 13.9 8.4 2.4 19.3 2.2 822-3276-6158 2019F 1,736 716 580 27,305 24.6 748 11.2 6.3 2.1 20.5 2.7 [email protected] Note: Net profit and EPS are based on figures attributed to controlling interest Analysts who prepared this report are registered as research analysts in Korea but not in any other jurisdiction, including the U.S. PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES & DISCLAIMERS AT THE END OF THIS REPORT. NCsoft (036570)
PC game division to remain stable Lineage 1 sales should normalize from 2Q17. Dragon treasure box sales should not be reflected in 1Q17, and this should weigh on results. However, traffic appears to have recovered in March after falling since the start of the year. Furthermore, a fall in item prices does not indicate a share drop in traffic. Overall, 2017 sales of existing PC games, including Lineage 1, should be flat YoY. Guild Wars 2 sales should rebound on the launch of expansion packs in 2H17, and MxM should begin contributing to PC sales. And, there are still hopes for Lineage Eternals, which will be released after additional closed beta testing (CBT) in 2H17. While the response to the first CBT was negative, we believe Lineage Eternals may beat expectations backed by heavy MMORPG users as no major MMORPG title has been released due to the success of League of Legends (MOBA genre) and Overwatch (shooter genre) recently.
Maintain BUY, hopes continue to grow for Lineage M We maintain BUY with a TP of W370,000 (19.7x 12MF PE) as concerns over a delayed Lineage M launch have faded. Furthermore, NCsoft should benefit given: 1) a robust user base given 3.8mn dormant users, 2) Lineage M will be the only domestic mobile MMORPG, excluding Lineage Revolution, and 3) Lineage M sales may beat market expectations due to the item trading function, which was a core element to Lineage 1. Furthermore, the success of H2 has further confirmed NCsoft’s mobile competitiveness, as sales exceed that of other baseball games.
Table 1.Quarterly earnings (W bn) 1Q16 2Q16 3Q16 4Q16 1Q17F 2Q17F 3Q17F 4Q17F 2015 2016 2017F Sales 240.8 240.5 217.6 284.6 268.0 324.1 348.0 357.2 838.3 983.6 1,297.4 Lineage 78.9 94.4 83.8 118.4 62.9 87.9 80.0 92.2 312.9 375.5 323.0 Lineage II 17.1 19.1 20.6 20.4 18.9 19.7 21.4 20.8 63.0 77.1 80.8 AION 20.1 17.6 16.1 17.9 17.4 18.2 16.6 17.6 73.7 71.7 69.7 B&S 54.0 48.9 40.1 39.4 39.2 41.1 39.3 40.8 113.9 182.3 160.4 Guild War 2 30.6 15.9 15.3 14.9 14.7 14.4 14.1 13.7 100.5 76.6 56.9 Others 10.8 17.7 17.6 32.1 45.8 79.0 114.9 115.6 66.6 73.6 355.4 Royalty 29.4 27.0 24.2 41.5 69.1 63.8 61.8 56.4 98.7 122.1 251.1 Operating expense 165.1 154.4 152.4 182.9 185.5 204.6 210.5 214.8 600.8 654.8 815.4 Labor cost 99.3 91.4 93.5 99.2 108.9 102.4 104.0 104.8 324.9 383.3 420.1 Commissions 10.1 9.9 9.6 9.5 9.1 9.8 9.6 10.1 36.1 39.2 38.6 Marketing 8.8 5.1 6.8 14.3 8.3 19.4 13.9 13.9 34.2 35.0 55.6 Others 46.8 47.9 42.6 60.0 59.2 73.0 83.0 85.9 205.7 197.3 301.1 OP 75.8 86.1 65.1 101.7 82.6 119.5 137.6 142.4 237.5 328.8 482.0 OPM 31.5% 35.8% 29.9% 35.7% 30.8% 36.9% 39.5% 39.9% 28.3% 33.4% 37.2% EBT 81.0 97.5 63.4 104.2 91.3 128.9 147.3 152.3 239.5 346.1 519.9 NP 66.2 90.4 47.9 66.8 68.5 96.7 110.5 114.2 166.3 271.4 389.9 NPM 27.5% 37.6% 22.0% 23.5% 25.5% 29.8% 31.8% 32.0% 19.8% 27.6% 30.1%
Source: Company data, Korea Investment & Securities
Table 2. Release dates Game Release date Lineage M Released in 1H17 Pangya Mobile Released in 1H17 Girl’s rumble Released in 1H17 B&S mobile Released in 2017 Soft launching in 2Q17 Aion regions 3Q17 Lineage eternal 2nd test and release plan within the year Released in Korea 1Q17 MxM Released in U.S. 2Q17 Released in China 2H17 Lineage eternal mobile US studio under development, time frame similar to PC version Source: Company data, Korea Investment & Securities
2 NCsoft (036570)
Figure 1. Lineage RK Korea sales ranking Figure 2. Final Blade sales ranking
(Rank) Google Play iOS (Rank) Google Play iOS 0 0
10 2
20 4
30 6
40 8
50 10
12 60
14 70 Mar.13 Mar.16 Mar.19 Mar.22 Mar.25 Mar.28 Mar.31 Dec.10 Dec.30 Jan.19 Feb.08 Feb.28 Mar.20 Source: Appannie, Korea Investment & Securities Source: Appannie, Korea Investment & Securities
Figure 3. March PC cafe M/S rises compared to February Figure 4. Lineage 1 Aden price trends by server
(Market Share %) (KRW) Rodemai Phoenix 3.0% 10,000 Defrost Heine Oak Valakas
2.5% 8,000
2.0% 6,000
1.5%
4,000 1.0%
2,000 0.5%
0.0% 0 Jan.17 Jan.17 Jan.17 Feb.17 Feb.17 Mar.17 Mar.17 Feb.17 Mar.17 Mar.17 Mar.17 Mar.17 Mar.17 Source: Gametrics, Korea Investment & Securities Source: Itembay, Korea Investment & Securities
Figure 5. Item trade function at Lineage M Figure 6. Domestic sports genre gross ranking of H2
Source: Company data, Korea Investment & Securities Source: Appannie, Korea Investment & Securities
3 NCsoft (036570)
Company overview & Glossary NCsoft was established in 1997 and went public in 2000. It is mobile developing company and possesses some of its well-known games, such as Lineage (1998), Lineage 2 (2003), AION (2008), Guild War 2 (2012), Wildstar (2014), and other MMORPG games. With Blade & Soul mobile , which was released in March 2016, the company is planning to actively release mobile games based on its well-known IP.
Changes to recommendation and price target
Company (Code) Date Recommendation Price target NCsoft (036570) 07-17-15 BUY W320,000 02-26-16 NR - 06-03-16 BUY W310,000 08-11-16 BUY W360,000 01-02-17 BUY W320,000 01-19-17 BUY W370,000
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4 NCsoft (036570)
Balance sheet Income statement
FY-ending Dec. (W bn) 2015A 2016A 2017F 2018F 2019F FY-ending Dec. (W bn) 2015A 2016A 2017F 2018F 2019F
Current assets 1,083 1,192 1,521 1,883 2,304 Sales 838 984 1,297 1,479 1,736
Cash & cash equivalent 248 145 396 688 1,041 COGS 203 188 324 370 434 Accounts & other receivables 99 167 182 207 226 Gross profit 636 796 973 1,109 1,302 Inventory 1 1 1 1 1 Non-current assets 1,136 1,169 1,267 1,326 1,410 SG&A expense 398 467 491 536 585
Investment assets 557 629 653 685 729 Operating profit 237 329 482 573 716 Tangible assets 234 225 229 234 239 Financial income 21 25 29 36 44 Intangible assets 64 53 65 74 87 Total assets 2,219 2,361 2,789 3,208 3,715 Interest income 20 22 25 32 40 Current liabilities 338 284 381 418 454 Financial expense 1 14 6 6 6 Accounts & other payables 95 119 143 163 182 Interest expense 0 3 6 6 6 ST debt & bond 0 0 0 0 0 Other non-operating profit (16) (1) 8 8 9 Current portion of LT debt 0 0 0 0 0 Gains (Losses) in associates, (2) 7 7 8 8 Non-current liabilities 93 181 181 186 192 subsidiaries and JV Debentures 0 150 150 150 150 Earnings before tax 240 346 520 618 771 LT debt & financial liabilities 1 0 0 0 0 Income taxes 73 75 130 155 193 Total liabilities 430 465 562 604 646 Net profit 166 271 390 464 578 Controlling interest 1,770 1,886 2,218 2,598 3,064 Capital stock 11 11 11 11 11 Net profit of controlling interest 165 272 391 465 580 Capital surplus 441 432 432 432 432 Other comprehensive profit 5 58 58 58 58 Other Reserves (10) (153) (153) (153) (153) Total comprehensive profit 171 329 448 522 636 Retained earnings 1,330 1,544 1,818 2,140 2,548 Total comprehensive profit of Minority interest 19 10 8 7 5 169 329 449 524 638 controlling interest Shareholders' equity 1,789 1,896 2,226 2,605 3,069 EBITDA 272 361 511 604 748
Cash flow Key financial data
FY-ending Dec. (W bn) 2015A 2016A 2017F 2018F 2019F FY-ending Dec. 2015A 2016A 2017F 2018F 2019F C/F from operating 241 112 431 485 598 per share data (KRW) EPS 7,633 12,783 18,416 21,907 27,305 Net profit 166 271 390 464 578 BPS 81,257 93,096 108,246 125,585 146,847 Depreciation 28 27 24 24 24 DPS 2,747 3,820 5,520 6,750 8,100 Amortization 7 6 5 6 7 Growth (%) Sales growth (0.1) 17.3 31.9 14.0 17.3 Net incr. in W/C 6 (154) 32 (0) (3) OP growth (14.6) 38.4 46.6 18.9 25.0 Others 34 (38) (20) (9) (8) NP growth (28.1) 64.6 43.7 19.0 24.6 C/F from investing (517) (139) (64) (51) (74) EPS growth (33.7) 67.5 44.1 19.0 24.6 EBITDA growth (13.5) 32.6 41.6 18.0 23.9 CAPEX (18) (17) (31) (31) (31) Profitability (%) Decr. in fixed assets 1 2 2 2 2 OP margin 28.3 33.4 37.2 38.8 41.3 Incr. in investment (503) (119) 42 34 22 NP margin 19.7 27.7 30.2 31.5 33.4 EBITDA margin 32.5 36.7 39.4 40.8 43.1 Net incr. in intangible assets 1 (2) (17) (15) (20) ROA 8.5 11.9 15.1 15.5 16.7 Others 2 (3) (60) (41) (47) ROE 10.6 14.9 19.1 19.3 20.5 C/F from financing 310 (74) (116) (142) (170) Dividend yield 1.3 1.5 1.8 2.2 2.7 Dividend payout ratio 36.3 29.8 30.0 30.8 29.7 Incr. in equity 391 6 0 0 0 Stability Incr. in debts 0 150 (0) 0 0 Net debt (W bn) (952) (835) (1,128) (1,455) (1,846) Dividends (69) (60) (81) (117) (143) Int.-bearing debt/equity (%) 0.1 7.9 6.7 5.7 4.9
Others (12) (170) (35) (25) (27) Valuation (X) PE 27.9 19.4 16.6 13.9 11.2 C/F from others 11 (3) 0 0 0 PB 2.6 2.7 2.8 2.4 2.1 Increase in cash 45 (103) 251 292 353 EV/EBITDA 13.7 12.3 10.6 8.4 6.3
Note: Based on K-IFRS (consolidated)
5 NCsoft (036570)
■ Guide to Korea Investment & Securities Co., Ltd. stock ratings based on 12-month forward share price performance relative to the market index ò BUY: Expected to outperform the market index by 15%p or more ò Hold: Expected to underperform or outperform the market index by less than 15%p ò Underweight: Expected to underperform the market index by 15%p or more ò Korea Investment & Securities does not offer target prices for stocks with Hold or Underweight ratings.
■ Guide to Korea Investment & Securities Co., Ltd. stock rating allocation (as of Dec 31, 2016)
BUY Hold Underweight (Sell) 77.6% 21.1% 1.3% Note: % of companies under coverage with this rating
■ Guide to Korea Investment & Securities Co., Ltd. sector ratings for the next 12 months ò Overweight: Recommend increasing the sector’s weighting in the portfolio compared to its respective weighting in the Kospi (Kosdaq) based on market capitalization. ò Neutral: Recommend maintaining the sector’s weighting in the portfolio in line with its respective weighting in the Kospi (Kosdaq) based on market capitalization. ò Underweight: Recommend reducing the sector’s weighting in the portfolio compared to its respective weighting in the Kospi (Kosdaq) based on market capitalization.
■ Analyst Certification I/We, as the research analyst/analysts who prepared this report, do hereby certify that the views expressed in this research report accurately reflect my/our personal views about the subject securities and issuers discussed in this report. I/We do hereby also certify that no part of my/our compensation was, is, or will be directly or indirectly related to the specific recommendations or views contained in this research report.
■ Important compliance notice As of the end of the month immediately preceding the date of publication of the research report or the public appearance (or the end of the second most recent month if the publication date is less than 10 calendar days after the end of the most recent month), Korea Investment & Securities Co., Ltd., or its affiliates does not own 1% or more of any class of common equity securities of NCsoft.
There is no actual, material conflict of interest of the research analyst or Korea Investment & Securities Co., Ltd., or its affiliates known at the time of publication of the research report or at the time of the public appearance.
Korea Investment & Securities Co., Ltd., or its affiliates has not managed or co-managed a public offering of securities for NCsoft in the past 12 months;
Korea Investment & Securities Co., Ltd., or its affiliates has not received compensation for investment banking services from NCsoft in the past 12 months; Korea Investment & Securities Co., Ltd., or its affiliates does not expect to receive or intend to seek compensation for investment banking services from NCsoft in the next 3 months.
Korea Investment & Securities Co., Ltd., or its affiliates was not making a market in NCsoft’s securities at the time that the research report was published.
Korea Investment & Securities Co., Ltd. does not own over 1% of shares of the companies mentioned in this report as of April 3, 2017. Korea Investment & Securities Co., Ltd. has not provided this report to various third parties. Neither the analyst/analysts who prepared this report nor their associates own any shares of the company/companies mentioned in this report as of April 3, 2017. Korea Investment & Securities Co., Ltd. has issued ELW with underlying stocks of NCsoft and is the liquidity provider.
Prepared by: Andy Kim
6 NCsoft (036570)
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