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Ncsoft (036570 KS ) 2Q19 Earnings to Surprise to the Upside

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Ncsoft (036570 KS ) 2Q19 Earnings to Surprise to the Upside NCsoft (036570 KS ) 2Q19 earnings to surprise to the upside Game Lineage M user and daily revenue growth to be long-lasting Company Report Lineage M exhibited an increase in users and daily revenue after undergoing several April 10, 2019 updates in June, September, and December 2018. Daily revenue subsequently plateaued in January-February 2019, but following the “Eclipse” update on March 6 th , the number of users has returned to levels seen in 4Q17 (when the game was initially released), and daily revenue (W2.4bn in 3Q18 and W2.5bn in 4Q18) has increased. (Maintain) Buy Lineage M unveiled a new update called “World Dungeon: Falling Island” on April 3 rd . In our view, the latest update—a “battle royale” that lets 1,000 players fight in the same Target Price (12M, W) 700,000 space until only one survivor remains—represents a significant improvement in the technology and playability of mobile MMORPGs. Share Price (04/09/19, W) 496,000 Following the sale of “Dragon Stone,” a W55,000 monthl y subscription item launched on March 6 th , Lineage M ’s conversion rate has been rising. As such, we expect the Expected Return 41% recent increase in daily revenue to continue throughout 2019. Lineage M had a 10% conversion rate and monthly ARPU of around W430,000 (our estimate) in 2018. Its player base was previously divided into free players and heavy-paying players, who OP (19F, Wbn) 852 tend to spend millions of won per month. Consensus OP (19F, Wbn) 707 We believe a large portion of the game’s free players (who account for 90% of all EPS Growth (19F, %) 49.9 Lineage M players) are converting to paying players through the purchase of "Dragon Market EPS Growth (19F, %) -13.8 Stone, which is essentially a monthly subscription item. We thus believe the March P/E (19F, x) 17.4 increase in daily average revenue is more structural than temporary. Market P/E (19F, x) 11.7 KOSPI 2,213.56 1Q19 preview: Earnings to be in line with consensus; 2Q18 to surprise to the upside Market Cap (Wbn) 10,882 For 1Q19, we forecast NCsoft to report revenue of W388bn and operating profit of Shares Outstanding (mn) 22 W115bn, in line with consensus expectations (W392.3bn and W121.4bn, respectively), Free Float (%) 81.9 as event effects were limited in the quarter. Foreign Ownership (%) 49.5 Looking to 2Q19, we forecast revenue of W459bn and operating profit of W158bn, Beta (12M) 0.65 which are far above the current consensus (W402.9bn and W125.2bn, respectively). 52-Week Low 332,500 Earnings should be boosted by: 1) effects of the Lineage M March/April updates and 52-Week High 512,000 sale of Dragon Stone; 2) effects of the Lineage Remastered (PC) update on March 27 th ; (%) 1M 6M 12M and 3) revenue from the launch of Lineage M in Japan, expected in May-June. Absolute 15.2 18.0 23.1 Foreign buying continues; maintain Buy and TP of W700,000 Relative 11.3 20.1 35.9 We project earnings to improve much more sharply than market expectations, driven 130 NCsoft KOSPI by existing titles alone. Meanwhile, upcoming title Lineage II M , which is expected to 120 be a full-3D mobile MMORPG, is believed to be in the final stages of development, with 110 the company currently working on improving the game’s graphics. A r ecent inflow of 100 foreign investo rs has raised the foreign ownership in the company to a record 49.46%. 90 In addition to BlackRock, the National Pension Service (NPS) also announced on April 80 8th that it had acquired additional shares in the company. As the cloud gaming market 70 3.18 7.18 11.18 3.19 gains increasing attention, game companies with intellectual properties have seen their values grow, with Nexon (3659 JP/CP: JPY1,729) reportedly valu ed at US$15bn (W17tr) in the M&A market. We maintain our Buy rating and target price of W700,000 Mirae Asset Daewoo Co., Ltd. on NCsoft. [ Internet ] FY (12) 12/16 12/17 12/18 12/19F 12/20F 12/21F Revenue (Wbn) 984 1,759 1,715 2,116 2,353 2,882 Chang -kwean Kim +822 -3774 -1614 OP (Wbn) 329 585 615 852 1,066 1,497 [email protected] OP margin (%) 33.4 33.3 35.9 40.3 45.3 51.9 NP (Wbn) 272 441 422 632 747 1,041 EPS (W) 12,416 20,104 19,061 28,577 33,796 47,429 ROE (%) 14.9 19.1 16.4 23.9 23.3 26.4 P/E (x) 19.9 22.3 24.5 17.4 14.7 10.5 P/B (x) 2.7 3.4 3.7 3.3 2.8 2.3 Dividend yield (%) 1.5 1.6 1.3 1.2 1.2 1.2 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 April 10, 2019 NCsoft Table 1. Quarterly and annual earnings (Wbn, %) 1Q18 2Q18 3Q18 4Q18 1Q19F 2Q19F 3Q19F 4Q19F 2018 2019F 2020F Sales 475 436 404 400 388 459 602 667 1,715 2,116 2,353 Lineage 28 42 40 39 31 49 45 44 150 168 155 Lineage 2 14 13 16 21 16 15 15 17 64 63 59 Aion 19 16 16 13 15 14 14 15 63 57 54 Blade & Soul 34 31 30 25 28 26 27 28 120 108 89 Guild Wars 2 24 20 21 16 14 15 15 13 80 57 55 Mobile games 264 210 216 223 210 270 420 484 913 1,383 1,245 Others 8 13 12 11 12 11 12 12 44 47 45 Royalties 84 92 52 53 63 58 56 54 282 232 257 OP 204 160 139 113 115 158 260 319 615 852 1,066 OPM 42.9 36.5 34.4 28.3 29.7 34.4 43.2 47.8 35.9 40.3 45.3 NI 119 140 94 68 77 113 196 246 422 632 747 Net margin 25.1 32.1 23.4 16.9 19.9 24.6 32.5 36.9 24.6 29.8 31.8 YoY growth Sales 98.3 68.8 -44.5 -24.9 -18.3 5.1 49.2 66.6 -2.5 23.4 11.2 Lineage -45.1 24.5 14.0 15.7 8.5 16.1 11.1 12.4 -3.0 12.3 -7.7 Lineage 2 -22.7 -19.9 0.0 37.0 13.5 15.6 -5.4 -18.3 -2.9 -1.0 -6.8 Aion 41.1 44.3 61.1 0.4 -22.6 -13.0 -14.1 18.3 35.2 -9.9 -5.0 Blade & Soul -23.9 -21.4 -20.8 -36.8 -18.7 -14.3 -10.6 10.5 -25.8 -9.4 -17.8 Guild Wars 2 66.2 46.6 4.0 -55.0 -39.4 -24.4 -30.0 -16.5 -3.2 -28.7 -3.8 Mobile games 1028.2 124.0 -60.7 -31.8 -20.6 28.5 93.9 117.2 -8.2 51.4 -10.0 Others -24.8 -15.6 -6.5 2.2 46.2 -9.8 -7.2 11.2 -11.3 6.4 -3.0 Royalties 32.5 155.8 18.3 -10.3 -24.6 -36.8 8.5 1.7 38.9 -17.5 10.6 OP 569.1 324.8 -57.6 -40.1 -43.3 -1.1 87.0 181.3 5.1 38.6 25.2 NI 584.9 355.0 -65.7 -44.0 -35.2 -19.7 107.4 263.6 -5.0 49.8 18.3 Source: Company data, Mirae Asset Daewoo Research estimates Table 2. Earnings forecast revisions (Wbn, %) Previous Revised %chg. Notes 2019F 2020F 2019F 2020F 2019F 2020F Revenue 2,091 2,339 2,116 2,353 1.2 0.6 Operating profit 847 1,070 0.6 -0.3 852 1,066 Revised Lineage Net profit 629 750 632 747 0.4 -0.4 M revenue forecasts upward OP margin 40.5 45.7 40.3 45.3 - - Net profit 30.1 32 29.8 31.8 - - Source: Company data, Mirae Asset Daewoo Research estimates Mirae Asset Daewoo Research 2 April 10, 2019 NCsoft Figure 1. Lineage M ’s monthly unique visitor trend (08/18-03/19) ('000 persons) 50% increase over 200 January and February 150 100 50 08/18 09/18 10/18 11/18 12/18 01/19 02/19 03/19 Note: Based on Koreanclick’s estimates Source: KoreanClick, Mirae Asset Daewoo Research Figure 2. Quarterly Lineage M revenue trend and forecast (Wbn) 350 327 March 'Eclipse' and April 'World Dungeon' update effects 300 264 258 250 241 223 217 210 200 150 4Q17 1Q18 2Q18 3Q18 4Q18 1Q19(F) 2Q19(F) Note 1: 1Q19F and 2Q19F revenues are based on Sensor Tower’s estimates, which differ from our estimates Note 2: 2Q19 revenue estimates are based on the assumption that revenue will remain the same as the levels in March Source: Sensor Tower, Mirae Asset Daewoo Research Figure 3. Ranking of Lineage Remastered 3/22 3/25 3/28 3/31 4/3 4/6 5 7 9 11 13 15 'Lineage Remastered' released (March 27th) 17 Source: Gametrics, Mirae Asset Daewoo Research Mirae Asset Daewoo Research 3 April 10, 2019 NCsoft Figure 4.
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