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Ncsoft (036570) NCsoft (036570) New Title Launches to Resume with Trickster M Danny Lee Yonghyun Choi Internet & Games / Media Research Associate May 10, 2021 +822-6114-2960 [email protected] +822-2-6114-2915 [email protected] Maintain BUY; Revise down TP to We maintain BUY and revise down our TP by 4.5% to KRW1,100,000 for NCsoft. We have KRW1,100,000 revised down 2021E revenue and OP by 8.8% and 15.8%, respectively, to reflect sluggish results for mobile games in 1Q21, as well as delays in the rollouts of key game titles (e.g., Blade & Soul 2, Aion 2). We have also revised our valuation method from P/E to DCF model in order to better reflect the company’s long-term growth potential. Our revised TP implies 12m fwd P/E of 24.1x. Earnings shock attributable to NCsoft reported 1Q21 revenue of KRW512.5bn (-8.7% QoQ, -29.9% YoY) and OP of sluggish mobile game revenue and KRW56.7bn (-63.8% QoQ, -76.5% YoY), with OP missing the market consensus increase in labor expenses (KRW125.8bn) by 54.9%. We attribute the QoQ decline in revenue to lower revenues for Lineage M and Lineage 2M (-18.4% and -8.7% QoQ, respectively). The shock to OP came on the back of: (1) an increase in labor expenses upon wage hikes and one-off incentive payments (+25.8% QoQ to KRW232.5bn); and (2) higher marketing expenses due to new game rollouts (+22.6% QoQ to KRW55.0bn). Delays in new title launches New game rollouts will begin, starting with the release of Trickster M on May 20, but disappointing, but revenue forecast schedules for other key titles have been pushed back. We believe it highly likely that the for Blade & Soul 2 revised up release of Blade & Soul 2 will be pushed back from June to 3Q21, and both Project TL (The Lineage) and Aion 2 from 4Q21 to 2022. However, we expect Blade & Soul 2 to generate higher revenue than previously expected, given that pre-registrations indicate a wider range of age groups among users, as well as a higher number of characters compared to Lineage 2M during the same time period. As such, we have revised up our Buy Maintain Trading Data Risk & Total Return (annualized over three years) Free float 81.9% Target Price (Lowered) KRW1,100,000 Avg. T/O val. (3m, KRWbn) 92.2 Return 1 2 3 4 High5 Foreign ownership 52.1% Risk Dividend yield* 1.3% 1 FALSE FALSE FALSE FALSE TRUE Total return 26.6% Major shareholders Taek-Jin Kim and 8 others 12.0% 2 FALSE FALSE FALSE FALSE FALSE Current price (May 10) KRW878,000 3 FALSE FALSE FALSE FALSE FALSE Consensus target price KRW1,207,647 NPS 10.5% 4High FALSE FALSE FALSE FALSE FALSE Market capitalization USD17.3bn Stock Price Performance 5 FALSE FALSE FALSE FALSE FALSE * 12-month forward (%) 1M 3M 6M 12M Absolute -5.1 -14.5 10.2 29.3 Relative -8.5 -18.4 -16.8 -22.6 Earnings Forecast & Valuation Stock Price & Relative Performance Fiscal year-end 2020A 2021E 2022E 2023E Relative performance (LHS) Revenue (KRWbn) 2,416 2,811 3,301 3,631 Stock price (RHS) % KRW OP (KRWbn) 825 992 1,287 1,014 40 1,160,000 NP to control. int. (KRWbn) 587 799 1,004 757 30 EPS (KRW) 26,756 36,376 45,709 34,474 20 EPS growth (%) 63.9 36.0 25.7 -24.6 10 880,000 P/E (x) 34.8 24.1 19.2 25.5 0 EV/EBITDA (x) 21.0 16.1 12.0 14.7 -10 P/B (x) 6.5 5.1 4.3 3.9 -20 ROE (%) 20.8 23.1 24.2 16.0 -30 600,000 Div. yield (%) 0.9 1.3 1.8 2.3 May '20 Aug '20 Nov '20 Feb '21 May '21 Source(s): Company data, KB Securities daily average revenue forecast (for the initial phase of launch) for the title from KRW2.5bn to KRW3.0bn. Share price to gain ground ahead of While share price performance has been sluggish upon concerns over 1Q21 results, Blade & Soul 2 rollout delays in new game rollouts, as well as the resumption of short selling, we believe it should gain ground ahead of new title releases (Trickster M, Blade & Soul 2). We also expect OP to normalize in 2Q21 (KRW167.2bn, +194.7% QoQ). 2 Investment Opinion & Risks Base-case scenario: Catalysts 1) Lineage 2M 2021E average daily revenue at Bull-case Scenario KRW1,320,000 (28.9x 12m fwd P/E) KRW1.8bn 2) Trickster M, Blade & Soul 2 released in 2Q21, 3Q21 Base-case scenario (target price) KRW1,100,000 (24.1x 12m fwd P/E) Bull-case scenario: Upside risks 1) Lineage 2M 2021E average daily revenue at KRW2.3bn Bear-case Scenario KRW880,000 (19.3x 12m fwd P/E) 2) Trickster M, Blade & Soul 2 released in 2Q21, 3Q21 and become popular Current price KRW878,000 Bear-case scenario: Downside risks 1) Lineage 2M 2021E average daily revenue at KRW1.5bn 2) Trickster M, Blade & Soul 2 rollouts delayed Revised Earnings Estimates Valuation & Target Price Calculation (KRWbn, %) Previous Revised Change 2021E 2022E 2021E 2022E 2021E 2022E 1) Valuation method: Revenue 3,080.5 3,796.6 2,810.8 3,300.6 -8.8 -13.1 DCF model OP 1,177.8 1,599.3 991.9 1,286.8 -15.8 -19.5 NP (to control. int.) 903.4 1,217.0 798.6 1,003.5 -11.6 -17.5 2) Target price calculation: Source(s): KB Securities estimates Target market cap. KRW24.1tn KB Estimates vs. Consensus 3) Target price range: (KRWbn, %) KB Estimates Consensus Difference KRW878,000 – KRW1,320,000 2021E 2022E 2021E 2022E 2021E 2022E 4) ) Valuation at target price: Revenue 2,810.8 3,300.6 2,985.7 3,799.5 -5.9 -13.1 24.1x 12m fwd P/E OP 991.9 1,286.8 1,102.3 1,561.1 -10.0 -17.6 NP (to control. int.) 798.6 1,003.5 830.1 1,160.6 -3.8 -13.5 Source(s): Quantiwise, KB Securities estimates Revenue Composition (2021E) Earnings Sensitivity Analysis (%) EPS Change 2021E 2022E +1% in FX rate +0.1 +0.1 7% +1pp in interest rate +1.0 +1.0 Games Royalties 93% Source(s): KB Securities estimates Peer Group Comparison (KRWbn, x, %) Market Cap. 12m fwd P/E 5y EPS CAGR 12m fwd P/B 12m fwd EV/EBITDA 5y EBITDA CAGR NCsoft 19,275.6 20.2 27.59 4.6 10.9 26.69 Activision Blizzard 82,177.9 24.1 19.61 4.2 15.0 12.42 NetEase 82,236.7 24.8 12.03 4.5 18.2 19.28 Nexon 31,581.2 23.5 0.65 3.6 14.0 9.76 Source(s): Bloomberg consensus, KB Securities 3 Table 1. 1Q21 Earnings Results (KRWbn, %, pp) 1Q21P 4Q20 QoQ 1Q20 YoY Previous Diff. Cons. Diff. Revenue 512.5 561.3 (8.7) 731.1 (29.9) 536.6 (4.5) 545.9 (6.1) OP 56.7 156.7 (63.8) 241.4 (76.5) 100.5 (43.6) 125.8 (54.9) OPM 11.1 27.9 (16.8) 33.0 (22.0) 18.7 (7.7) 23.0 (12.0) NP (to control. int.) 80.9 80.6 0.4 195.5 (58.6) 83.7 (3.4) 90.6 (10.7) NPM (to control. int.) 15.8 14.4 1.4 26.7 (11.0) 15.6 0.2 16.6 (0.8) Source(s):Company data, Quantiwise, KB Securities estimates Table 2. Earnings Forecast (consolidated) (KRWbn) 1Q20 2Q20 3Q20 4Q20 1Q21P 2Q21E 3Q21E 4Q21E 2019 2020 2021E 2022E Revenue 731.1 538.6 585.2 561.3 512.5 570.0 849.7 878.5 1,701.2 2,416.2 2,810.8 3,300.6 (% QoQ) 37.0 (26.3) 8.7 (4.1) (8.7) 11.2 49.1 3.4 (% YoY) 103.8 31.1 47.1 5.2 (29.9) 5.8 45.2 56.5 (0.8) 42.0 16.3 17.4 Games 678.3 476.3 526.3 517.3 467.0 525.7 806.2 836.1 1,503.7 2,198.1 2,634.9 3,141.0 Lineage 1 44.8 34.3 49.9 46.8 48.9 44.8 48.0 45.1 174.1 175.7 186.9 180.2 Lineage 2 26.4 25.8 26.3 26.0 26.2 25.1 25.7 25.3 93.6 104.5 102.3 99.8 Aion 10.1 8.194 8.5 18.8 23.4 21.6 20.4 22.8 46.0 45.6 88.2 84.9 Blade & Soul 19.6 19.8 17.2 15.6 14.1 17.2 16.3 15.4 83.9 72.2 62.9 61.9 Guild Wars 2 12.5 15.6 18.8 14.2 16.3 16.2 16.0 15.9 58.7 61.2 64.5 62.2 Lineage M 212.0 159.9 245.2 211.7 172.6 175.9 220.7 218.0 834.7 828.7 787.2 763.6 Lineage 2M 341.1 197.3 144.5 166.7 152.2 182.7 157.2 162.1 143.9 849.6 654.3 630.7 Other 11.6 15.5 16.0 17.5 13.2 42.2 301.9 331.4 68.9 60.6 688.7 1,257.8 Royalties 52.8 62.3 58.8 44.1 45.5 44.4 43.5 42.5 197.5 218.0 175.8 159.6 OPEX 489.7 329.6 367.5 404.6 455.8 402.9 459.7 500.5 1,222.2 1,591.4 1,818.9 2,013.8 (% QoQ) 24.7 (32.7) 11.5 10.1 12.6 (11.6) 14.1 8.9 (% YoY) 75.4 17.1 36.7 3.0 (6.9) 22.2 25.1 23.7 11.1 30.2 14.3 10.7 Labor 211.8 162.3 159.1 184.9 232.5 188.6 184.9 203.1 555.1 718.2 809.1 866.0 Variable 223.5 138.7 162.2 158.2 147.3 148.2 220.9 228.4 507.9 682.6 744.9 858.2 Marketing 39.6 12.9 29.7 44.8 55.0 45.1 32.7 47.1 107.3 127.0 179.8 197.8 D&A 14.8 15.6 16.5 16.7 20.9 20.9 21.2 22.0 52.0 63.7 85.0 91.8 OP 241.4 209.0 217.7 156.7 56.7 167.2 390.0 378.0 479.0 824.8 991.9 1,286.8 (% QoQ) 71.0 (13.4) 4.2 (28.0) (63.8) 194.7 133.3 (3.1) - - - - (% YoY) 203.6 61.5 68.9 11.0 (76.5) (20.0) 79.2 141.2 (22.1) 72.2 20.3 29.7 OPM (%) 33.0 38.8 37.2 27.9 11.1 29.3 45.9 43.0 28.2 34.1 35.3 39.0 NP 195.5 158.2 153.2 80.6 80.9 135.6 299.3 282.8 358.2 587.4 798.6 1,003.5 (to control.
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