April 12, 2011 Company Report
NCsoft (036570 KS) Game
Emerging new game momentum Chang-kwean Kim +822-768-4321 [email protected]
Share performance to be determined by new game momentum Jee-hyun Moon We reiterate Buy on NCsoft with a TP of W330,000. We lowered our 2011 EPS +822-768-3615 estimate by 11.8% to reflect 1) the Japanese earthquake relief donation [email protected]
(JPY500mn) and 2) equity-method losses from ArenaNet (a wholly-owned game- development subsidiary). However, we maintain our TP, as it is based on 2010 EPS
(P/E of 40x, the average P/E for the years in which NCsoft launched new games).
We do not expect sluggish 1Q earnings to considerately affect NCsoftÊs shares. Rather, its share performance will likely be determined by expectations of large- scale CBT for Blade & Soul (scheduled for April~May) as well as imminent Buy (Maintain) announcements of sales contracts in China for Lineage I and II and Blade & Soul. Target Price (12M, W) 330,000 Back in 2003, despite weak second and third quarter earnings, NCsoftÊs share price Share Price (04/11/11, W) 268,000 soared on the back of positive closed-beta testing results for Lineage II. Although the Expected Return (%): 23.1 23.1 companyÊs long-term share performance should be determined by its stream of operating EPS Growth (11F, %) 12.2 profits, its short-term performance seems relatively unaffected by earnings momentum. Market EPS Growth (11F, %) 24.2 P/E (11F, x) 29.9 1Q11 Preview: Sluggish earnings due to increase in expenses Market P/E (11F, x) 10.7 KOSPI 2,122.39 NCsoftÊs 1Q earnings are projected to fall shy of forecasts; sales and OP are Market Cap (Wbn) 5,844 forecast to decline 4.7% and 21.3% YoY. User indicators for the companyÊs games Shares Outstanding (mn) 22 have turned sluggish since the start of school semester in March. The number of Avg Trading Volume (60D, '000) 268 average monthly users for Lineage I and II and Aion have decreased QoQ in 1Q. Avg Trading Value (60D, Wbn) 60 Dividend Yield (11F, %) 0.2 Earnings were also eroded by increased expenses (e.g., equity-method losses from Free Float (%) 65.2 ArenaNet and Japanese earthquake relief donation), as well as the fact that the number of 52-Week Low 141,000 promotional days for the companyÊs microtransaction system for Lineage I decreased. 52-Week High 273,000 Beta (12M, Daily Rate of Return) 0.6 Clearer launch schedules to contribute to new game momentum Price Return Volatility (12M Daily,%,SD) 2.6 Foreign Ownership (%) 28.0 Momentum from new game launches is growing. We once again confirmed Major Shareholder(s): NCsoftÊs schedules for Blade & Soul (closed-beta testing in 1H11; open-beta TJ Kim and et. al (25.44%) testing and commercialization in 2H11). Considering ChinaÊs game approval Treasury stock (9.35%) process has become speedier (Aion was commercially available four months after Mirae Asset Management (5.15%) being commercialized in Korea), Blade & Soul is likely to be commercialized in Price Performance China in 1H12. Guild Wars 2Ês launches in the U.S. and Europe are anticipated to be (%) 1M 6M 12M later than expected (in 1H12), but the console version of the game is likely to be Absolute 7.2 21.0 88.7 rolled out earlier than expected (in 2H12). Relative -1.3 8.7 65.7
§ Earnings & Valuation Metrics Share price 200 KOSPI OP EV/ Sales OP NP EPS EBITDA FCF ROE P/E P/B 180 FY Margin EBITDA (Wbn) (Wbn) (Wbn) (W) (Wbn) (Wbn) (%) (x) (x) 160 (%) (x) 140 12/09 453 200 44.1 183 8,560 213 234 34.8 17.5 5.1 13.3 120 12/10 515 251 48.7 174 7,985 265 194 24.1 26.1 5.7 15.0 100 80 12/11F 567 272 48.0 195 8,962 288 191 21.6 29.9 5.9 17.8 60 12/12F 820 479 58.4 369 16,928 498 381 31.3 15.8 4.3 9.6 40 12/13F 913 548 60.1 436 19,975 568 435 27.8 13.4 3.3 7.7 4/10 8/10 12/10 4/11 Source: Company data, Daewoo Securities Research estimates
Please read carefully important disclosures at the end of this report. April 12, 2011 NCsoft
Figure 1. NCsoftÊs share price and quarterly operating profit trend
(W) (Wbn) 300,000 Adjusted share price (L) 100 Quarterly operating profit (R) 250,000 80 Lineage II Aion Commercialization Commercialization 200,000 60 150,000 40 100,000
20 50,000
0 0 01 02 03 04 05 06 07 08 09 10 11
Note: Adjusted share price (A stock's closing price on any given day of trading that has been amended to include any distributions and corporate actions that occurred at any time prior to the next day's open) Source: Company data, Daewoo Securities Research
Figure 2. NCsoftÊs share price and quarterly operating profit trend when NCsoft launched Lineage II
(W) (Wbn) 120,000 Share price (L) Lineage II 40 Operating profit (R) Lineage II Commercialization CBT 100,000 Lineage II 30 OBT 80,000
60,000 20
40,000 10 20,000
0 0 01 02 03 04
Source: Company data, Daewoo Securities Research
Table 1. NCsoft game release schedule forecast 1H11 2H11 2012 2013 ‘Blade & Soul’ close beta testing ÂBlade & SoulÊ open beta testing ÂBlade & SoulÊcommercialization 'Guild Wars II' 3D version release ÂBlade & SoulÊ, 'Lineage', 'Lineage II' ÂBlade & SoulÊ commercialization : China, Japan, Taiwan, the U.S., Europe ÂBlade & SoulÊ console version release contract of export to China announcement 'Guild Wars2' commercialization : the U.S., Europe, S. Korea, China,
Japan, Taiwan 'Guild Wars 2' console version release Source: Daewoo Securities Research
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April 12, 2011 NCsoft
Table 2. Quarterly and annual earnings trend and outlook (Wbn, %) 1Q10 2Q10 3Q10 4Q10 1Q11F 2Q11F 3Q11F 4Q11F 2009 2010 2011F Sales 132 133 122 127 126 132 135 174 453 515 567 Lineage1 43 48 36 37 34 39 40 39 111 164 153 Lineage2 17 16 16 15 17 17 18 18 80 64 70 Aion and new games 45 42 43 48 49 50 51 91 158 179 241 Overseas 24 25 24 25 25 26 26 26 96 98 103 Sales breakdown Lineage1 32.4 35.7 29.8 29.0 27.3 29.8 29.8 22.4 24.6 31.8 27.0 Lineage2 13.2 12.0 13.0 11.5 13.4 12.8 13.5 10.5 17.7 12.4 12.4 Aion and new games 34.1 31.9 35.3 37.9 39.2 37.7 37.8 52.5 35.0 34.8 42.6 Overseas 18.1 18.7 20.0 19.4 20.1 19.8 18.9 14.7 21.2 19.1 18.1 Operating profit 71 69 58 53 56 59 61 96 200 251 272 OP margin 53.7 51.8 47.6 41.3 44.4 44.7 45.6 55.1 44.1 48.7 48.0 Pretax profit 75 40 61 48 43 54 56 91 227 225 244 Pretax margin 57.1 30.4 49.9 37.8 34.2 40.5 41.8 52.4 50.2 43.7 43.1 Net profit 58 30 47 38 34 43 45 73 183 174 195 NP margin 44.1 22.9 38.7 29.7 27.4 32.4 33.4 42.0 40.3 33.8 34.5 YoY growth Sales 28.1 27.2 15.2 -8.2 -4.7 -0.3 10.4 36.4 259.4 13.7 10.2 Lineage1 68.3 127.1 74.1 -16.1 -19.8 -16.9 10.5 5.1 224.2 47.0 -6.6 Lineage2 -12.3 -10.0 -23.9 -32.3 -2.8 6.4 14.9 23.7 373.3 -20.2 10.0 Aion and new games 5.8 8.0 18.4 20.8 9.5 17.8 18.3 88.6 220.3 13.1 35.0 Overseas 71.2 -1.5 -6.4 -18.5 5.6 5.2 4.5 3.1 279.2 2.4 4.6 Operating profit 63.8 43.7 45.6 -22.9 -21.3 -14.1 5.8 81.6 257.1 25.6 8.6 Pretax profit 66.9 -12.1 21.2 -43.8 -42.9 33.1 -7.5 89.0 427.1 -1.0 8.6 Net profit 67.5 -12.7 10.2 -45.9 -40.8 41.3 -4.7 92.5 429.2 -4.8 12.4 QoQ growth Sales -4.8 0.6 -8.1 4.3 -1.2 5.2 1.8 28.9 Lineage1 -2.9 11.0 -23.4 1.7 -7.1 14.9 1.8 -3.2 Lineage2 -19.9 -8.6 -0.4 -7.1 15.0 0.0 7.6 0.0 Aion and new games 12.8 -6.1 1.7 12.3 2.2 1.0 2.1 79.0 Overseas -21.3 4.2 -1.9 1.3 2.0 3.8 -2.6 -0.1 Operating profit 3.9 -3.0 -15.6 -9.4 6.0 5.9 3.9 55.6 Pretax profit -12.1 -46.6 51.0 -20.9 -10.6 24.5 5.0 61.7 Net profit -16.8 -47.8 55.6 -19.9 -8.9 24.5 5.0 61.7 Source: Company data, Daewoo Securities Research
Table 3. 2011~2012 Earnings forecast revisions (Wbn, W, %) Previous Revised %Diff. 2011F 2012F 2011F 2012F 2011F 2012F Sales 589 820 567 820 -3.7 0.0 Operating profit 294 460 272 479 -7.5 4.1 Net profit 222 390 195 369 -12.2 -5.4 EPS 10,160 17,881 8,962 16,928 -11.8 -5.3 OP margin 49.9 56.1 48.0 58.4 NP margin 37.6 47.5 34.5 45.0 Source: Daewoo Securities Research
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April 12, 2011 NCsoft
NCsoft (036570 KS/Buy/TP: W330,000)
Income Statement (Summarized) Balance Sheet (Summarized) (Wbn) 12/10 12/11F 12/12F 12/13F (Wbn) 12/10 12/11F 12/12F 12/13F Sales 515 567 820 913 Current Assets 662 871 1,281 1,716 Cost of Goods Sold 79 88 110 113 Cash and Cash Equivalents 10 184 221 539 Gross Profit 436 479 710 799 Accounts Receivable 59 79 114 127 SG&A 185 207 231 251 Inventories 0 0 0 0 Operating Profit 251 272 479 548 Other Current Assets 593 607 946 1,049 Non-Operating Income -26 -28 130 154 Non-Current Assets 345 385 438 465 Interest Income/Expense 22 24 34 48 Investment Assets 165 187 225 238 F/X-Related Gain/Loss 2 0 0 0 Property, Plant and Equipment 175 192 207 220 Equity Method Gain/Loss -8 0 148 158 Intangible Assets 4 6 6 7 Asset Disposal Gain/Loss 0 0 0 0 Total Assets 1,006 1,256 1,719 2,181 Other Non-Operating Profit/Loss -42 -52 -52 -52 Current Liabilities 143 193 280 311 Pretax Profit 225 244 461 545 Accounts Payable 0 0 0 0 Tax 51 49 92 109 Short-Term Debt 0 0 0 0 Profit from Continuing Operation 174 195 369 436 Current Long-Term Debt 0 0 0 0 Profit from Discontinued Operation 0 0 0 0 Other Current Liabilities 143 193 280 311 Tax Effect 0 0 0 0 Non-Current Liabilities 58 62 81 88 Net Profit 174 195 369 436 Bonds 0 0 0 0 Residual Income 174 195 369 436 Long-Term Debt 0 0 0 0 EBITDA 265 288 498 568 Other Non-Current Liabilities 58 62 81 88 Free Cash Flow 194 191 381 435 Total Liabilities 201 255 361 399 Gross Profit Margin (%) 84.7 84.4 86.6 87.6 Paid-In Capital 11 11 11 11 EBITDA Margin (%) 51.5 50.8 60.7 62.3 Capital Surplus 212 212 212 212 Operating Margin (%) 48.7 48.0 58.4 60.1 Retained Earnings 682 878 1,235 1,659 Net Margin (%) 33.8 34.5 45.0 47.7 Stockholders' Equity 805 1,001 1,358 1,782
Cash Flow (Summarized) Forecasts/Valuations (Summarized) (Wbn) 12/10 12/11F 12/12F 12/13F 12/10 12/11F 12/12F 12/13F Cash Flow from Operating Activities 225 221 412 465 P/E (x) 26.1 29.9 15.8 13.4 Net Profit 174 195 369 436 P/CF (x) 24.4 27.5 14.9 12.7 Non-Cash Income and Expense 35 16 19 21 P/B (x) 5.7 5.9 4.3 3.3 Tangible Assets Depreciation 12 13 15 17 EV/EBITDA (x) 15.0 17.8 9.6 7.7 Intangible Assets Depreciation 2 2 3 3 EPS (W) 7,985 8,962 16,928 19,975 Others 21 0 0 0 CFPS (W) 8,556 9,570 17,635 20,769 Chg in Working Capital 16 10 24 9 BPS (W) 36,729 45,633 61,983 81,392 Chg in Accounts Receivable -13 -21 -36 -13 DPS (W) 600 600 600 600 Chg in Inventories 0 0 0 0 Payout Ratio (%) 6.8 6.1 3.2 2.7 Chg in Accounts Payable 0 0 0 0 Dividend Yield (%) 0.3 0.2 0.2 0.2 Others 29 31 60 22 Sales Growth (%) 13.7 10.2 44.7 11.3 Cash Flow from Investment Activities -228 -51 -383 -142 EBITDA Growth (%) 24.6 8.7 72.9 14.3 Chg in Tangible Assets -30 -30 -30 -30 Operating Profit Growth (%) 25.7 8.6 76.1 14.3 Chg in Intangible Assets 0 -3 -3 -3 EPS Growth (%) -6.7 12.2 88.9 18.0 Chg in Investment Assets -33 -22 -37 -14 Accounts Receivable Turnover (x) 9.8 8.2 8.5 7.6 Others -164 5 -312 -94 Inventory Turnover (x) - - - - Cash Flow from Financing Acitivities -5 4 8 -6 Accounts Payable Turnover (x) - - - - Chg in Borrowings 0 4 20 6 ROA (%) 19.5 17.3 24.8 22.3 Chg in Equity -5 0 -12 -12 ROE (%) 24.1 21.6 31.3 27.8 Dividends -10 0 -12 -12 ROIC (%) 177.4 145.2 229.2 246.8 Others 0 0 0 0 Liability to Equity Ratio (%) 25.0 25.5 26.6 22.4 Chg in Cash -8 175 37 318 Current Ratio (%) 462.0 450.3 457.9 551.0 Beginning Cash Balance 18 10 184 221 Net Debt to Equity Ratio (%) - - - - Ending Cash Balance 10 184 221 539 Interest Coverage Ratio (x) - - - - Source: Daewoo Securities Research
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April 12, 2011 NCsoft
Important Disclosures & Disclaimers As of the publication date, Daewoo Securities Co., Ltd. has acted as a liquidity provider for equity-linked warrants backed by shares of NCsoft as an underlying asset, and other than this, Daewoo Securities has no other special interests in the covered companies. As of the publication date, Daewoo Securities Co., Ltd. issued equity-linked warrants with NCsoft as an underlying asset, and other than this, Daewoo Securities has no other special interests in the covered companies. Analyst of the subject company or member of the analyst's household does not have any financial interest in the securities of the subject company and the nature of the financial interest (including without limitation, whether it consists of any option, right, warrant, future, long or short position). This report reflects the sole opinion of the analyst without any external influences by third parties.
Buy Relative performance of 20% or greater (W) NCsoft Stock Trading Buy Relative performance of 10% or greater, but with volatility 500,000 Ratings Hold Relative performance of -10% and 10% 400,000 Sell Relative performance of -10% 300,000 200,000 Overweight Fundamentals are favorable or improving Industry 100,000 Neutral Fundamentals are steady without any material changes Ratings 0 4/09 10/09 4/10 10/10 4/11 Underweight Fundamentals are unfavorable or worsening * Ratings and Target Price History (Share price (----), Target price (----), Not covered (■), Buy (▲), Trading Buy (■), Hold (●), Sell (◆)) * Our investment rating is a guide to the relative return of the stock versus the market over the next 12 months. * Although it is not part of the official ratings at Daewoo Securities, we may call a trading opportunity in case there is a technical or short-term material development.
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