13 July 2016 Asia Pacific/Japan Equity Research Internet
Nexon (3659 / 3659 JT) Rating OUTPERFORM* Price (12 Jul 16, ¥) 1,444 INITIATION
Target price (¥) 1,900¹ Chg to TP (%) 31.6 Market cap. (¥ bn) 629.93 (US$ 6.10) Initiating at OUTPERFORM due to stability Enterprise value (¥ bn) 440.12 Number of shares (mn) 436.24 from new titles, diverse portfolio Free float (%) 35.0 52-week price range 2,065 - 1,401 ■ Action: We initiate coverage of Nexon with an OUTPERFORM rating and a *Stock ratings are relative to the coverage universe in each ¥1,900 target price (potential return 31.6%). analyst's or each team's respective sector. ¹Target price is for 12 months. ■ Investment case: Impairment for consolidated subsidiary gloops has now Research Analysts been fully booked, greatly reducing future impairment risk. Amortization is Keiichi Yoneshima also down following the full amortization of IP for Dungeon Fighter Online 81 3 4550 9740 (Arad Senki) in August 2015, which had been ¥700mn/month. Looking at [email protected] revenues, existing games are doing well, and Nexon is preparing to release game iterations under existing strong brand titles. Even though the rising yen is negative for earnings, we think Nexon’s foundations in online gaming make its earnings quite reliable, and we rate the shares OUTPERFORM. ■ Catalysts/risk: Potential catalysts include new title launch dates, and new title earnings contributions. Risks include earnings deterioration in existing titles, especially in China and Korea, and a stronger yen. In addition, results of the investigation by Korean prosecutors announced on 12 July may weigh on the share price. ■ Valuation: We derive our target price using a DCF model. Our forecast period runs through FY12/20 and in estimating enterprise value from FY12/21 onward, we use a 5.0x EBITDA. Our WACC assumption is 8.45%.
Share price performance Financial and valuation metrics
Year 12/15A 12/16E 12/17E 12/18E Price (LHS) Rebased Rel (RHS) Sales (¥ bn) 190.3 181.7 184.0 194.8 2000 200 Operating profit (¥ bn) 62.3 44.7 74.3 84.0 1500 150 Pre-tax profit (¥ bn) 68.0 39.0 74.3 84.0 1000 100 Net income (¥ bn) 55.6 22.6 55.7 63.0 500 50 EPS (¥) 127.9 51.9 129.3 146.0 0 0 Jul-14 Nov-14 Mar-15 Jul-15 Nov-15 Mar-16 Change from previous EPS (%) n.a. IBES Consensus EPS (¥) n.a. 96.8 143.3 147.3 The price relative chart measures performance against the EPS growth (%) 88.1 -59.4 148.9 12.9 TOPIX which closed at 1285.73 on 12/07/16 P/E (x) 11.3 27.8 11.2 9.9 On 12/07/16 the spot exchange rate was ¥103.3/US$1 Dividend yield (%) 0.52 0.69 0.69 0.69 EV/EBITDA(x) 8.4 8.5 5.3 5.1 Performance over 1M 3M 12M P/B (x) 2.2 1.6 1.4 1.3 Absolute (%) -14.2 -16.6 -10.3 ROE(%) 15.6 6.0 13.7 13.6 Relative (%) -10.8 -13.1 10.1 Net debt/equity (%) net cash net cash net cash net cash
Source: Company data, Thomson Reuters, IFIS, Credit Suisse estimates.
DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, LEGAL ENTITY DISCLOSURE AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS BEYOND INFORMATION® Client-Driven Solutions, Insights, and Access
13 July 2016 Table of contents
Key charts 3 Investment opinion 4 Initiate at OUTPERFORM with ¥1,900 TP 4 Initiating with OUTPERFORM; diverse portfolio, strong pipeline of new titles 4 (1) Diverse portfolio but exposed to forex risk 4 (2) Strong pipeline of new titles 4 (3) No risk of impairment losses, lower IP amortization costs 4 Earnings estimates 5 Rationale behind our OUTPERFORM rating 5 Valuation 7 Risks 7 Company overview 8 Company history 8 Executives 9 Shareholders 10 Company and group status 10 Business portfolio 12 China and Korea account for 80% of sales 12 Weighting by region 12 Weighting by platform 12 Dungeon Fighter Online a key revenue source in China; seasonal swings a major factor (40% of sales) 13 FIFA 3 and mobile games drive earnings in Korea; PC games firm (40% of sales) 14 Business continues to shrink in Japan; Nexon writes down goodwill from gloops in full (11% of sales) 15 North America and Europe/other regions 15 Cost breakdown: High margins despite variations stemming from sales mix 16 Outlook 17 Expecting sales and profit growth to continue 17 Release of new titles could mean further upside 18 Status of license agreements 20 Earnings forecasts 21
Nexon (3659 / 3659 JT) 2 13 July 2016 Key charts
Figure 1: Weighting by region (% of total sales) Europe and Europe and others FY12/14 others FY12/15 3% 4% North America North America 3% 5%
Japan Japan China 17% China 11% 39% 40%
Korea Korea 38% 40%
Source: Company data, Credit Suisse
Figure 2: Sales trends: Actual and estimates Figure 3: OP trends: Actual and estimates Sales Operating profits 250,000 120,000 218,823 105,549 206,413 190,263 194,829 100,000 94,339 200,000 181,725 184,007 172,930 83,955 155,338 80,000 74,333 150,000 62,290 60,000 50,705
45,509 44,660 (JPYmn) (JPYmn) 100,000 40,000
50,000 20,000
0 0 12/13 12/14 12/15 12/16E 12/17E 12/18E 12/19E 12/20E 12/13 12/14 12/15 12/16E 12/17E 12/18E 12/19E 12/20E Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates
Figure 4: Pipeline – 2016 and onward
Source: Company data
Nexon (3659 / 3659 JT) 3 13 July 2016 Investment opinion Initiate at OUTPERFORM with ¥1,900 TP
Figure 5: Nexon (3659) – Earnings summary Nexon (3659) Earnings Summary EV 12-Jul-16 Sales Operating profit Recurring profit Net profit EPS P/E /EBITDA ¥1,444 ¥mn YoY (%) ¥mn YoY (%) ¥mn YoY (%) ¥mn YoY (%) ¥ YoY (%) (x) (x) Consolidated FY Dec-15 A 190,263 10.0% 62,290 36.9% 68,006 29.1% 55,601 89.0% 127.9 88.1% 8.4 11.3 Dec-16 CS E (new) 181,725 -4.5% 44,660 -28.3% 38,950 -42.7% 22,591 -59.4% 51.9 -59.4% 8.5 27.8 CoE NA NA NA NA IBES E 195,489 2.7% 55,811 -10.4% 55,133 -18.9% 41,876 -24.7% 96.8 -24.3% 7.8 14.9 Dec-17 CS E (new) 184,007 1.3% 74,333 66.4% 74,333 90.8% 55,750 146.8% 129.3 148.9% 5.3 11.2 IBES E 206,679 5.7% 74,920 34.2% 81,000 46.9% 62,952 50.3% 143.3 48.1% 5.4 10.1 Dec-18 CS E (new) 194,829 5.9% 83,955 12.9% 83,955 12.9% 62,966 12.9% 146.0 12.9% 5.1 9.9 IBES E 216,590 4.8% 79,008 5.5% 86,600 6.9% 64,810 3.0% 147.3 2.8% 5.3 9.8 Source: Company data, I/B/E/S, Credit Suisse estimates Initiating with OUTPERFORM; diverse portfolio, strong pipeline of new titles Nexon is involved in PC and mobile online gaming on a global basis with a notable presence in China and Korea. Game business volatility is normally high, but Nexon’s game portfolio coverage is quite diverse across regions, devices, titles, and delivery channels, giving it an extraordinary degree of stability in the context of the industry. Within our coverage universe, its momentum on a local-currency basis is notable if we exclude its susceptibility to forex impact (estimated for 2Q FY12/16 at ¥300mn in sales and ¥100mn in OP for each ¥1/$ rate change). Existing titles are doing well and we anticipate a number of new releases over the long term (including existing titles released in new regions). We therefore take a quite positive view of Nexon within the online gaming industry. Consequently, we initiate coverage of Nexon with an OUTPERFORM rating. We are focusing on the following three points: (1) Diverse portfolio but exposed to forex risk Nexon is one of only a handful of online game developers in Japan with a diverse business portfolio in terms of markets, devices, genres and distribution channels. The company’s free-to-play (F2P) model means short-term earnings fluctuate due to the timing of billing events, but earnings have been stable over longer timeframes due to its diverse business portfolio. The company is exposed to forex risk, as accounts are settled in yen. A strong yen is negative for earnings and a weak yen is positive. (2) Strong pipeline of new titles Nexon has a strong pipeline of new titles. The timing of new releases is likely to be a share price catalyst. Promising IP titles include Dungeon & Fighter mobile (jointly developed with China’s Tencent), Final Fantasy XI mobile and LEGO mobile. Launch dates are still unclear, but we expect all three to contribute to earnings due to their popular IP content and Nexon’s proven capabilities in game operation. (3) No risk of impairment losses, lower IP amortization costs Nexon completed writedowns on consolidated subsidiary gloops in 1Q FY12/16, ending concerns about impairment risk related to the subsidiary. Nexon also completed Dungeon & Fighter IP amortization in August 2015, reducing annual costs by more than ¥8bn. The sales outlook depends on the timing of new releases and sales trends for existing titles, but these moves eliminate the risk of impairment losses and reduce fixed costs, which is likely to reassure investors about earnings.
Nexon (3659 / 3659 JT) 4 13 July 2016
Earnings estimates Based on steady forex rates, we forecast revenues will continue to grow in the mid-to-high single digits. However, for 2Q FY12/16 onward, we assume ¥103/USD, a significantly stronger yen than in FY12/15, when the rate was ¥121/USD. Factoring in the stronger yen, we forecast a small drop in revenues in FY12/16, modest growth in FY12/17 and growth in the mid-single digits thereafter. In Korea, we forecast sustained growth in revenues, with strong business expansion likely to cancel out any negative impact from forex rates. We anticipate firm growth in revenues from both PC and mobile games. In China, we forecast weaker revenues in FY12/16 due to forex factors but expect revenues to stabilize or grow in FY12/17. The release date and expected earnings impact of Dungeon & Fighter mobile is unclear at this point, but we think the company will launch the mobile title before the PC version sees a steep drop off in popularity. Nexon has already booked impairment losses of ¥22.6bn for FY12/16 (resulting in an operating loss under IFRS). Due to this factor, we forecast OP will decline 28% YoY. Excluding extraordinary items, we forecast OP growth of roughly 10% YoY. Rationale behind our OUTPERFORM rating Positives
■ The last amount of impairment for consolidated subsidiary gloops was booked in 1Q FY12/16, greatly reducing future impairment risk, which had been a concern.
■ Although the exact timing is unclear, Nexon is preparing to release new game iterations for mobile under existing strong brand titles. This includes Dungeon Fighter Mobile, Lego Mobile, and Final Fantasy XI Mobile.
■ IP amortization for Dungeon Fighter Online, which had been ¥700mn/month (over ¥8bn annually) came to an end in August 2015. Its absence has been lifting earnings YoY. Negatives
■ Yen appreciation depresses earnings. The company’s forex assumption for its 2Q FY12/16 forecast is ¥109.83/$ and we estimate earnings sensitivity at ¥300mn in sales and ¥100mn in OP for each ¥1/$ rate change. Our estimates are based on JPY103/USD.
■ Nevertheless, we think investors are more interested in local-currency based earnings trends for this name than in forex effects.
Nexon (3659 / 3659 JT) 5 13 July 2016
Figure 6: Nexon (3659) – Share price vs. TOPIX (January 2012=1.0)
NEXON ¥2,500 TOPIX relative (RHS) 1.6 1.4 ¥2,000 1.2
¥1,500 1.0 0.8 ¥1,000 0.6 0.4 ¥500 0.2
¥0 0.0
Jul-12 Jul-13 Jul-14 Jul-15
Jan-12 Jan-13 Jan-14 Jan-15 Jan-16
Oct-12 Oct-13 Oct-14 Oct-15
Apr-12 Apr-13 Apr-14 Apr-15 Apr-16
Source: Company data, Credit Suisse
Figure 7: FY2 forward EV/EBITDA Figure 8: FY2 forward P/E Colopl GungHo 30 x 8 x mixi GREE Colopl GungHo DeNA Nexon mixi GREE 7 x 25 x DeNA Nexon 6 x 20 x 5 x 17.8 x 4.5 x 15 x 15.0 x
4.2 x PER 4 x 3.8 x EV/EBITDA 3.3 x 3 x 10.6 x 3.1 x 10 x 9.3 x 8.5 x 2 x 7.2 x 1.8 x 5 x 1 x
0 x
Jun-15 Jun-16
Oct-15
Apr-15 Apr-16
Feb-16 Feb-15
Dec-14 Dec-15
Aug-15
Jul-14 Jul-15 Jul-16
Jan-14 Jan-15 Jan-16
Oct-14 Oct-15
Apr-15 Apr-16 Apr-14 Note: Excluded mixi's current multiple in calculating the average Source: Thomson Reuters, Credit Suisse Source: Thomson Reuters, Credit Suisse
Nexon (3659 / 3659 JT) 6 13 July 2016 Valuation We derive our target price for Nexon using a DCF model. Our assumptions include a market risk premium of 6.5% and a 0.0% risk free rate. We model internet businesses as cash flow generative with zero debt. Our beta assumption is 1.3 and WACC assumption 8.45%. Our forecast period runs through FY12/20 and in estimating enterprise value from FY12/21, we apply a 5.0x multiple and our FY12/20 EBITDA forecast. In addition to Nexon’s existing global presence in gaming, notably in China and Korea, it continues to expand its business portfolio in both PC and mobile gaming. It also has a substantial pipeline of big-name game titles and new catalysts are likely to continue landing. We consider its earnings quite steady and sustainable within the context of online gaming industry growth. Our target multiple of 5x therefore reflects a 25% premium applied to the I/B/E/S average FY2 EV/EBITDA of 4x for six domestic online gaming companies, including Colopl and GREE. This results in a theoretical share price of ¥1,870, and we set our target price at ¥1,900, which equates to 33.5x FY12/16E EPS, 14.1x FY12/17E EPS, and 12.8x FY12/18E EPS, all based on our EPS forecasts. (The FY12/16 multiple is higher due to the impairment hit to earnings at gloops).
Figure 9: DCF analysis FCF estimates (Unit : JPYmn） 12/16E 12/17E 12/18E 12/19E 12/20E OP 44,660 74,333 83,955 94,339 105,549 # of shares 431,176,948 Tax rate 21% 25% 25% 25% 25% Net Debt(12/15) (189,808) EBIAT 35,241 55,750 62,966 70,754 79,162 Exit EV/EBITDA Multiple 5.00 Depreciation & Amortization 5,540 5,540 5,540 5,540 5,540 Interest rate 0% Other non-cash cost 0.0% 0.0% 0.0% 0.0% 0.0% Risk free rate 0.00% EBITDA 50,200 79,873 89,495 99,879 111,089 Mkt. Risk Premium 6.5% Net working capital 9,285 -654 -1,293 -1,385 -654 Beta 1.3 CAPEX 3,640 3,640 3,640 3,640 3,640 Cost of Equity 8.5% FCF 46,426 56,996 63,573 71,269 80,408 Cost of Liability before tax 1.00% Year 1.00 2.00 3.00 4.00 5.00 Tax rate 25% Discount rate 1.08 1.18 1.28 1.38 1.50 Cost of Liability after tax 0.8% Present Value 42,808 48,460 49,841 51,521 53,598 WACC 8.5% (a) DCF (Forecast period) 246,229 (b) TV (Present Value) 370,248 (c) Enterprise Value (a)+(b) 616,477 (d) Net Debt (189,808) (e) Market Value (c)-(d) 806,285 (f) Estimated Fair Price (f) / # of shares 1,870 Source: Company data, Credit Suisse estimates Risks Risks include lower earnings from existing game titles (particularly in China and South Korea, which account for 80% of sales), delays to new title development, limited earnings contributions from new titles, further downturn in the Japanese, European and US markets, strained relationships with partners, earnings decline from licencing agreements reaching the end of term or being terminated, and substantial yen appreciation. In addition, Korean prosecutors have begun an investigation (announced 12 July) into an exchange of NXC shares in 2005 between that company, Nexon’s largest shareholder, and another party. NXC is cooperating with the investigation, but the other party involved is one of its board members. The investigation poses reputational risk depending on its outcome and may have a negative impact on earnings.
Nexon (3659 / 3659 JT) 7 13 July 2016 Company overview Company history NEXON Corporation, founded in Korea, established Nexon Japan as a Japanese subsidiary in December 2002. The company moved its headquarters from NEXON Corporation (currently NEXON Korea Corporation) to Nexon Japan in October 2005. Nexon Japan changed its company name to NEXON Co., Ltd. in April 2009 and listed on the First Section of the TSE in December 2012. Both the company and the group have worked to enhance their games portfolio by leveraging M&A deals. The group acquired NEOPLE in August 2008, NDOORS in May 2010, and GameHi in July 2010 to expand its games portfolio
Figure 10: Company history Year Month History 1994 Dec NEXON Corporation (current NEXON Korea Corporation) founded in Korea NEXON Korea Corporation had capital tie-up with Solid Networks, Inc. and started servicing online games 2000 Sep in Japan NEXON Corporation (current NEXON Korea Corporation) dissolved alliance with Solid Networks, Inc. and 2002 Dec established NEXON Japan Co., Ltd. as a subsidiary in Japan. 2003 Nov Moved company location to 2-3-1 Shinkawa, Chuo-ku, Tokyo 2005 Sep Established NX Games Inc. (current NEXON America Inc.) in the United States 2005 Oct Moved headquarters from NEXON Corporation (current NEXON Korea Corporation) 2008 Aug NEXON Corporation (current NEXON Korea Corporation) acquired NEOPLE INC. 2009 Apr Changed the company name to NEXON Co., Ltd. 2010 May NEXON Corporation (current NEXON Korea Corporation) acquired NDOORS Corporation 2010 Jul NEXON Corporation (current NEXON Korea Corporation) acquired GameHi Co., Ltd (current NEXON GT 2010 Nov Established NEXON Europe S.à r.l. in Luxembourg 2011 Feb NEXON Corporation changed its company name to NEXON Korea Corporation 2011 Dec Listed on the First Section of the Tokyo Stock Exchange 2012 Oct Acquired gloops, Inc. 2014 Mar Owen Mahoney assumed office as President and Chief Executive Officer 2015 Mar Established Nexon Europe GmbH in Germany Note: As of December 2015 Source: Company data, Credit Suisse estimates
Nexon (3659 / 3659 JT) 8 13 July 2016
Executives The company has ten executive officers—seven directors and three corporate auditors. Two of the seven directors are external directors. Owen Mahoney, formerly with Electronic Arts, was appointed as Representative Director and President in March 2014 and Shiro Uemura, the company CFO, became a Representative Director in March 2015.
Figure 11: Nexon's directors and statutory auditors Title Name Date History Representative Director, President and CEO November 2000 Appointed Chief Vice President of Electronic Arts, Inc. Owen Mahoney August 2010 Appointed CFO of Nexon Co., Ltd. September 2010 Appointed Director of Nexon Co., Ltd. March 2014 Appointed President and CEO of Nexon Co., Ltd. (current position) Representative Director and CFO December 2000 Joined Deloitte Touche Tohmatsu Shiro Uemura July 2011 Joined Nexon Co., Ltd. March 2014 Appointed Chief Financial and Chief Administrative Officer of Nexon Co., Ltd. (current position) March 2015 Appointed Representative Director of Nexon Co., Ltd. (current position) Director June 2003 Joined Nexon Corporation (now NXC Corp.) Jiwon Park September 2010 Appointed Director of Nexon Co., Ltd. (current position) March 2014 Appointed Representative Director and CEO of Nexon Korea Corp. (current position) July 2015 Appointed Operations Department Head of Nexon Co., Ltd. (current position) Director December 1994 Joined Nexon Corporation (now NXC Corp.) Jungju Kim June 2005 Appointed Director of NXC Corp. (current position) September 2010 Appointed Director of Nexon Co., Ltd. (current position) Director April 1996 Joined Black Software Corporation Dohwa Lee August 1998 Joined Nexon Corporation (now Nexon Korea Corp.) September 2009 Appointed Manager of Accounting and Finance Division of Nexon Co., Ltd. October 2012 Appointed Director of NXC Corp. (current position) March 2016 Appointed Director of Nexon Co., Ltd. (current position) External Director July 1971 Joined Victor Company of Japan, Ltd. Satoshi Honda June 1992 Appointed Director of Victor Entertainment, Inc. March 2012 Appointed Director of Nexon Co., Ltd. (current position) External Director April 1982 Joined Oh-Ebashi LPC & Partners Shiro Kuniya April 2002 Appointed Managing Partner of Oh-Ebashi LPC & Partners (current position) March 2012 Appointed Director of Nexon Co., Ltd. (current position) Full-time Auditor April 1963 Joined Onward Kashiyama Co., Ltd. Toshishige Tanaka October 1998 Appointed Representative Director and CEO of Oak Co., Ltd. March 2006 Appointed Statutory Auditor at Nexon Co., Ltd. (current position) Statutory Auditor April 1968 Joined Shell Oil (now Showa Shell Sekiyu K.K.) Iwao Otomo September 1985 Joined Price Waterhouse Japan November 2003 Opened Otomo Accounting Office (current position) March 2006 Appointed Statutory Auditor at Nexon Co., Ltd. (current position) Statutory Auditor September 2003 Became Partner in Eichi Law Offices Ryoji Mori March 2006 Appointed Statutory Auditor at Nexon Co., Ltd. (current position) Note: As of December 2015 Source: Company data, Credit Suisse
Nexon (3659 / 3659 JT) 9 13 July 2016
Shareholders NXC Corporation (formerly NEXON Corporation) and its affiliates own roughly 58% of shares.
Figure 12: Major shareholders Name of Shareholders Number of Shares Ratio (Top 10) (Thousand Shares) (%) NXC Corporation 167,631 38.61 NXMH B.V.B.A. 83,593 19.26 CBHK-KOREA SECURITIES DEPOSITORY-SAMSUNG 20,619 4.75 Japan Trustee Services Bank, Ltd. (Trust Account) 8,520 1.96 CBNY-ORBIS SICAV 8,095 1.86 Min Seo 7,607 1.75 The Master Trust Bank of Japan, Ltd. (Trust Account) 5,367 1.24 CHASE MANHATTAN BANK GTS CLIENTS ACCOUNT ESCROW 5,088 1.17 STATE STREET BANK AND TRUST COMPANY 5,067 1.17 CBNY-ORBIS FUNDS 4,069 0.94 Note: As of December 2015 Source: Company data, Credit Suisse estimates Company and group status Consolidated payroll as of end-December 2015 totaled 5,033, including 251 employees at the parent. Most employees are based in Korea and engaged in software development. There are 21 consolidated subsidiaries.
Figure 13: No. of employees as of 31 December 2015 N o. of em ployees Permanent Tem porary Japan 674 106 Korea 3,796 31 C hina 268 0 N orth Am erica 241 32 O thers 54 0 Total 5,033 169 Source: Company data, Credit Suisse
Nexon (3659 / 3659 JT) 10 13 July 2016
Figure 14: Changes in capital ties As of Dec 2002 former NEXON Corporation (current NXC Corporation) 100% NEXON Co., Ltd. (Established (new) NEXON Japan Co., Ltd)
As of Dec 2002 NEXON Holding Corporation
100% 100% (New) NEXON Corporation NEXON Co., Ltd. (Established through a company split) (current NEXON Korea Corporation)
As of Oct 2005 (former) NEXON Corporation (current NXC Corporation) 100% NEXON Corporation 100% (New) NEXON Corporation (current NEXON Korea Corporation)
As of Mar 2016 NXC Corporation 57.9% (*) NEXON Corporation 100% (New) NEXON Corporation (current NEXON Korea Corporation) (*) Percentage of shares held (including indirect shareholdings) as of 31 December 2015 Source: Company data, Credit Suisse
Figure 15: Royalty income flow within Nexon Group
Source: Company data
Nexon (3659 / 3659 JT) 11 13 July 2016 Business portfolio China and Korea account for 80% of sales PC and online games are the main sources of Nexon’s earnings. The company’s business segments are classified according to region and platform. Weighting by region A look at weighting by region (FY12/15) shows that China and Korea (each accounting for around 40%) together represent 80% of Nexon’s sales. Japan accounted for 11% of sales, while the North America and Europe/other regions weighed in with around 5% each. Compared with FY12/14, the company registered growth in all regions excluding Japan. However, we note that although Nexon’s China sales include license revenues (net basis), underlying gross income from games is probably the highest in China
Figure 16: Weighting by region Europe and Europe and others FY12/14 others FY12/15 3% 4% North America North America 3% 5%
Japan Japan China 17% China 11% 39% 40%
Korea Korea 38% 40%
Source: Company data, Credit Suisse Weighting by platform By platform, PC online games accounted for around 78% of sales and mobile 22% in FY12/15, with the mobile share rising versus FY12/14. Lifted by the success of its mobile games in Korea, the mobile platform also registered a 23% growth rate. On the other hand, Japan's weighting continues to shrink in the absence of hit titles in smartphone games.
Figure 17: Breakdown of sales (FY15) Figure 18: Breakdown of mobile sales (FY15)
PC online Mobile Japan ex-Japan 190,263 41,992
41,992
26,113
148,271 (JPYmn)
15,879
FY12/2015 FY12/2015 Source: Company data, Credit Suisse Source: Company data, Credit Suisse
Nexon (3659 / 3659 JT) 12 13 July 2016
Figure 19: Breakdown of mobile sales
Japan Korea Others
20,000
13,139 12,443 10,153 10,330
10,000 8,370 ()JPYmn)
0 1Q 2Q 3Q 4Q 1Q FY2015 FY2016
Source: Company data, Credit Suisse Dungeon Fighter Online a key revenue source in China; seasonal swings a major factor (40% of sales) In China, Nexon is mainly licensing out PC online games, and Dungeon Fighter Online (DFO), licensed to Tencent, probably accounts for the bulk of revenues. Nexon is licensing DFO to Tencent. PC online games are highly susceptible to seasonal factors throughout the year. In China in particular, events and updates tend to coincide with the Chinese New Year, which means higher sales in 1Q. As updates around summer vacations and the National Day holidays in China also have a high impact, sales in 3Q are second only to 1Q, while 2Q and 4Q mark the lean period in sales. Sales are prone to significant swings, as effects from updates tend to vary depending on the timing. DFO has been available in China since 2007 and appears to have reached saturation, but the fact that sales remains steady with continued growth testifies to Nexon’s and Tencent’s exceptional operational and marketing prowess. Chinese sales consist of net income from license fees rather than gross revenues from game title sales. Due to this, the income booked is smaller than that from sales of games titles, but as margins tend to be higher on net revenues, swings in China earnings tend to have a larger profit impact than in other regions.
Figure 20: China sales
China
30,000 25,829 25,000 22,697 20,409 21,302 20,247 20,000 16,441 15,962 15,685 15,994 16,450 15,477 13,530
15,000 12,065 (JPYmn) 10,000
5,000
0 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q FY2013/12 FY2014/12 FY2015/12 FY2016/12
Source: Company data, Credit Suisse
Nexon (3659 / 3659 JT) 13 13 July 2016
FIFA 3 and mobile games drive earnings in Korea; PC games firm (40% of sales) In Korea, Nexon also offers DFO, Sudden Attack, and other longstanding titles in PC games in addition to MapleStory. The earnings contribution from FIFA Online 3 (FIFA 3), which Nexon started streaming in January 2013, has lifted overall earnings. US-based Electronic Arts and Nexon concluded a Korea-specific publishing contract for this game, which benefited from the 2014 FIFA World Cup, leading to a substantial increase in the game’s uptake. The game continued to deliver strong performance in 2015. Meanwhile, mobile game space is expanding rapidly in Korea. While we believe the mobile version of FIFA 3 is partly responsible for this growth, other successes including HIT and DomiNations have started driving earnings since 2014.
Figure 21: Korea sales
Korea
PC Mobile
25000 22,555 19,976 20,464 20,163 20000 16,749 16,251 15,251 20,086 15000 13,433 12,15111,654 10,589 8,605
(JPYmn) 10000
5000
0 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q FY2013/12 FY2014/12 FY2015/12 FY2016/12
Source: Company data, Credit Suisse
Nexon (3659 / 3659 JT) 14 13 July 2016
Business continues to shrink in Japan; Nexon writes down goodwill from gloops in full (11% of sales) The situation in Japan appears particularly challenging compared with Nexon’s strong showing in Korea and China. In addition to being small, PC online gaming is on a sustained downtrend. Even in mobile games, the company continues to face difficulties in creating new hit titles to cover for sales attrition in existing titles. Due to an earnings slump at gloops, which develops and operates mobile games in Japan, Nexon booked a goodwill charge of ¥22.6bn in 1Q FY12/16. This is Nexon’s second writedown on gloops, following a goodwill charge of ¥11.0bn booked in 4Q FY12/14, and takes the outstanding goodwill on gloops to zero. The acquisition of gloops did not yield any direct benefits in Japan, but with mobile games coming to the market at a rapid pace, particularly in Korea, we think mobile games are turning into a success for the company overall.
Figure 22: Japan sales
Japan
Mobile PC 9,927 9,398 10000 8,755 8,274 8,121 7,656 7,232 6,929 5,858 5,455 4,972 4,740
5000 4,561 (JPYmn)
0 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q FY2013/12 FY2014/12 FY2015/12 FY2016/12
Source: Company data, Credit Suisse North America and Europe/other regions Sales rose in 2Q FY12/15 due to the addition of mobile games, but performance has continued flat in the absence of major hit titles since then. Also, smaller operational scale in these regions means the impact they have on consolidated earnings is minor.
Figure 23: North America and Europe/other
North America, Europe and others
North America Europe and others
6000 5000
4000 2150 2123 2389 3000 2384 2021 (JPYmn) 1258 2000 1698 1651 1472 1300 1190 1273 1144 2814 2417 1000 1695 2045 2163 1418 1446 1364 1201 1345 1131 1420 1623 0 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q FY2013/12 FY2014/12 FY2015/12 FY2016/12
Source: Company data, Credit Suisse
Nexon (3659 / 3659 JT) 15 13 July 2016
Cost breakdown: High margins despite variations stemming from sales mix COGS include royalties or license fees for streaming games online, salaries for game developers, server and network charges, and amortization. Given that royalties vary by game, the COGS ratio changes according to sales mix and is currently tracking at around 20–30%. We note an increase in the COGS ratio from FY12/13 and believe this is linked to the timing of the earnings contribution from FIFA 3. We estimate royalty payments are much higher for FIFA 3 than other games. SG&A mainly consists of commissions, advertising and promotional costs, amortization, and wages. Commissions are mainly settlement charges and are likely to rise slightly in tandem with higher uptake of mobile devices. Advertising and promotional costs tend to vary depending on when a particular game title is launched. Amortization also includes amortization of game titles; because IP amortization of DFO, which has accounted for the bulk of the amortization costs, ended in August 2015, we expect a substantial reduction in amortization costs in FY12/16 and subsequent years. Although the theory may sound somewhat rash, we believe commissions and royalty fees (in case of revenue share) represent real variable costs in game sales, while other costs are probably akin to fixed costs.
Figure 24: Income statement (actual)
12/11 12/12 12/13 12/14 12/15 (JPYmn)
Sales 87,613 108,448 155,338 172,930 190,263 YoY 26% 24% 43% 11% 10% Cost of goods sold 14,948 18,551 34,152 44,335 49,701 Cost of goods sold/sales% 17% 17% 22% 26% 26% Gross profits 72,665 89,897 121,188 128,595 140,562 Gross profits /sales% 83% 83% 78% 74% 74% SG&A expense 34,415 42,022 59,575 68,600 74,212 Marketing expense 4,698 6,178 9,700 8,970 14,551 PG fee 4,199 5,040 8,820 12,497 20,280 Depreciation & Amortization 7,909 7,964 10,349 11,466 9,427 HR cost 6,770 8,527 12,068 16,587 14,463 R&D expenses 2,408 2,566 3,817 5,831 7,232 Other 6,024 8,503 14,820 13,249 8,259 Other income - - 1,636 1,210 1,621 Other expense - - 12,545 15,696 5,681 Operating profits 38,249 47,875 50,705 45,509 62,290 Source: Company data, Credit Suisse
Nexon (3659 / 3659 JT) 16 13 July 2016 Outlook Expecting sales and profit growth to continue We regard the game business as highly volatile, but expect Nexon, which has rolled out Free to Play (F2P) games on PC and mobile platforms and has diverse earnings sources stemming from multiple hit game titles, to attain strong revenue growth. Taking into account yen appreciation in FY12/16 versus a year earlier and the peak-out in FIFA 3, we forecast sales to remain on par with FY12/15, but based on our outlook for an improvement in amortization costs since the completion of DFO’s IP amortization in August 2015, we expect that Nexon will continue generating profit growth, excluding one- off factors such as writedowns. Also, Nexon has a lower corporate tax rate as its Korean subsidiary is based in Jejudo, a special economic zone offering preferential corporate tax rates for businesses. In forex sensitivity, the impact from each ¥1/$ moved total ¥300mn in and ¥100mn in OP in 2Q FY12/16. A decline in the yen versus other currencies is positive for Nexon’s earnings (assuming KRW and CNY move in tandem with the dollar-yen rate).
Figure 25: Sales estimate Figure 26: Operating profit estimate Sales Operating profits 250,000 120,000 218,823 105,549 206,413 190,263 194,829 100,000 94,339 200,000 181,725 184,007 172,930 83,955 155,338 80,000 74,333 150,000 62,290 60,000 50,705
45,509 44,660 (JPYmn) (JPYmn) 100,000 40,000
50,000 20,000
0 0 12/13 12/14 12/15 12/16E 12/17E 12/18E 12/19E 12/20E 12/13 12/14 12/15 12/16E 12/17E 12/18E 12/19E 12/20E Source: Company data, Credit Suisse estimate Source: Company data, Credit Suisse estimate
Figure 27: Adjusted operating profit estimate Adjusted Operating profits 120,000 103,431 100,000 94,162 85,576 77,613 80,000 71,858 66,350 61,614 59,995
60,000 (JPYmn) 40,000
20,000
0 12/13 12/14 12/15 12/16E 12/17E 12/18E 12/19E 12/20E
Source: Company data, Credit Suisse
Nexon (3659 / 3659 JT) 17 13 July 2016
Release of new titles could mean further upside We view release of new titles as an upside catalyst. Mobile games, an area we focus on in particular, consists of strong IP titles including DFO Mobile, Final Fantasy XI Mobile, and LEGO Mobile. Tencent will roll out DFO Mobile in China as the publisher—a success here could substantially boost growth momentum in China. Meanwhile, the release of Final Fantasy XI Mobile and LEGO Mobile, both globally renowned IPs, represents a major opportunity, in our view. However, the launch timing of the two titles remains uncertain at present. Among current mobile games, FIFA 3 Mobile remains strong, while HIT, Dominations, and other titles appear to be on the decline. Among PC games, we focus on hit title sequels including Sudden Attack 2, Kokaku Kido Tai - GHOST IN THE SHELL and Japanese animation titles.
Figure 28: Pipeline – 2016 and onward
Source: Company data
Nexon (3659 / 3659 JT) 18 13 July 2016
Figure 29: 2016 Tier 1 content update schedule
Source: Company data
Figure 30: Major titles sales ranking
Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 0
20
40
60 # ranking # 80 FIFA ONLINE 3 M by EA SPORTS 100 Heroes of Incredible Tales DomiNations 120
Note: South Korea Google play sales ranking in game category Source: AppAnnie, Credit Suisse
Nexon (3659 / 3659 JT) 19 13 July 2016
Status of license agreements Nexon’s online games also include titles licensed to other companies. Among these, we regard the license agreement with Tencent (for DFO in China) as the most important. Considering that the license is valid until June 2026, we see little risk in the near term. For games currently generating robust earnings, we see little reason for licensors to choose a licensee other than Nexon, which we believe has outstanding development and operating capabilities.
Figure 31: List of agreements Shanghai Posts & Exclusive license for online gam e N exon Korea China 14 Sep 2004 14 Sep 2004–13 Sep 2017 Telecom m unications Technology M abinogi (license out) Shanghai Posts & Exclusive license for online gam e N exon Korea China 18 Nov 2005 18 Nov 2005–17 Nov 2017 Telecom m unications Technology Kart Rider (license out)
Exclusive license for Dungeon N eople Tencent China 16 Nov 2007 Fighter Online/Arad Senki (license 16 Nov 2007–16 Jun 2026 out)
Exclusive license for M aple Story N exon Korea Lansha Inform ation Technology China 21 Apr 2004 21 Apr 2004–30 Jun 2016 (license out) Japan Korea China H ong Kong M acau Taiwan Singapore M alaysia Thailand Vietnam 18 M ay 2007–31 Aug 2015 with N exon Korea Valve 18 M ay 2007 Exclusive license for Counter Philippines autom atic annual renew al thereafter Strike Online (license in) Indonesia Laos Cam bodia M yanm ar Brunei Turkey G erm any Cyprus Azerbaijan Com pany nam e tradem ark license 1 Jul 2011–31 Dec 2015 with autom atic N exon Korea NXC G lobal 29 Jun 2011 (license in) renew al every three years thereafter Exclusive license for FIFA Online 3 Autom atically renew s for two years if N exon Korea Electronic Arts Korea 14 M ay 2012 (license in) certain conditions are m et after three years from com m ercialization date Source: Company data, Credit Suisse
Nexon (3659 / 3659 JT) 20 13 July 2016 Earnings forecasts
Figure 32: Nexon (3659) – Profit and loss statement 12/11 12/12 12/13 12/14 12/15 12/16E 12/17E 12/18E 12/19E 12/20E (JPYmn) Sales 87,613 108,448 155,338 172,930 190,263 181,725 184,007 194,829 206,413 218,823 YoY 26% 24% 43% 11% 10% -4% 1% 6% 6% 6% Cost of goods sold 14,948 18,551 34,152 44,335 49,701 51,075 51,712 51,912 52,112 52,312 Cost of goods sold/sales% 17% 17% 22% 26% 26% 28% 28% 27% 25% 24% Gross profits 72,665 89,897 121,188 128,595 140,562 130,650 132,295 142,917 154,301 166,511 Gross profits /sales% 83% 83% 78% 74% 74% 72% 72% 73% 75% 76% SG&A expense 34,415 42,022 59,575 68,600 74,212 61,683 57,962 58,962 59,962 60,962 Marketing expense 4,698 6,178 9,700 8,970 14,551 13,709 11,200 11,200 11,200 11,200 PG fee 4,199 5,040 8,820 12,497 20,280 19,541 20,700 20,700 20,700 20,700 Depreciation & Amortization 7,909 7,964 10,349 11,466 9,427 3,188 3,188 3,188 3,188 3,188 HR cost 6,770 8,527 12,068 16,587 14,463 14,391 14,791 15,191 15,591 15,991 R&D expenses 2,408 2,566 3,817 5,831 7,232 6,947 7,347 7,747 8,147 8,547 Other 6,024 8,503 14,820 13,249 8,259 3,907 736 936 1,136 1,336 Other income - - 1,636 1,210 1,621 147 0 0 0 0 Other expense - - 12,545 15,696 5,681 24,454 0 0 0 0 Operating profits 38,249 47,875 50,705 45,509 62,290 44,660 74,333 83,955 94,339 105,549 YoY 26.7% 25.2% 5.9% -10.2% 36.9% -28.3% 66.4% 12.9% 12.4% 11.9% Operating profits/sales % 44% 44% 33% 26% 33% 25% 40% 43% 46% 48% Pretax profits 35,500 40,616 48,648 52,671 68,006 38,950 74,333 83,955 94,339 105,549 Taxes 9,953 15,285 18,343 23,250 12,405 8,215 18,583 20,989 23,585 26,387 tax rate% 28% 38% 38% 44% 18% 21% 25% 25% 25% 25% Net profits 25,755 25,401 30,305 29,421 55,601 22,591 55,750 62,966 70,754 79,162 Owners of the parent 25,547 25,526 30,132 29,316 55,132 22,398 55,750 62,966 70,754 79,162 Non-controlling interests 208 -125 173 105 469 193 0 0 0 0 EBITDA 49,140 60,452 64,761 61,131 75,350 50,200 79,873 89,495 99,879 111,089 EBITDA/sales% 56.1% 55.7% 41.7% 35.4% 39.6% 27.6% 43.4% 45.9% 48.4% 50.8% EPS 71.65 57.48 67.71 67.98 127.86 51.95 129.30 146.03 164.10 183.59 Diluted EPS 68.32 57.18 67.70 67.98 128.08 51.91 128.09 144.67 162.57 181.88
Revenue by region (JPY mn) 12/11 12/12 12/13 12/14 12/15 12/16E 12/17E 12/18E 12/19E 12/20E Japan 13,016 19,192 36,353 29,938 21,025 17,311 15,300 15,300 15,300 15,300 yoy (%) 7% 47% 89% -18% -30% -18% -12% 0% 0% 0% % of total sales 15% 18% 23% 17% 11% 10% 8% 8% 7% 7% 1) PC online total 13,016 12,745 9,340 6,925 5,146 3,857 3,300 3,300 3,300 3,300 yoy (%) 7% -2% -27% -26% -26% -25% -14% 0% 0% 0% 2) Mobile (gloops + inBlue) - - 27,013 23,013 15,879 13,454 12,000 12,000 12,000 12,000 yoy (%) - - NA -15% -31% -15% -11% 0% 0% 0% Korea 28,613 28,744 42,999 65,409 76,964 78,694 81,875 86,787 91,994 97,514 yoy (%) 16% 0% 50% 52% 18% 2% 4% 6% 6% 6% % of total sales 33% 27% 28% 38% 40% 43% 44% 45% 45% 45% Sales (KRWmn) 479,853 648,941 719,105 858,225 909,719 964,302 1,022,160 1,083,490 LC basis NA 35% 11% 19% 6% 6% 6% 6% China 32,785 48,390 63,913 66,958 75,388 69,512 69,572 73,746 78,171 82,861 yoy (%) 52% 48% 32% 5% 13% -8% 0% 6% 6% 6% % of total sales 37% 45% 41% 39% 40% 38% 38% 38% 38% 38% Sales (RMBmn) 4,086 3,898 3,889 4,376 4,638 4,916 5,211 5,524 LC basis NA -5% 0% 13% 6% 6% 6% 6% North America 6,337 5,371 5,429 5,519 8,971 7,813 8,716 10,024 11,528 13,257 yoy (%) 13% -15% 1% 2% 63% -13% 12% 15% 15% 15% % of total sales 7% 5% 3% 3% 5% 4% 5% 5% 6% 6% Sales(USDmn) 56 52 74 74 85 97 112 129 (yoy%):Local currency base NA -7% 42% -1% 15% 15% 15% 15% Others 6,861 6,749 6,643 5,106 7,915 8,395 8,544 8,971 9,420 9,891 yoy (%) 20% -2% -2% -23% 55% 6% 2% 5% 5% 5% % of total sales 8% 6% 4% 3% 4% 5% 5% 5% 5% 5% Sales(USDmn) 68 48 65 79 83 87 91 96 (yoy%):Local currency base NA -29% 35% 21% 5% 5% 5% 5% Total 87,613 108,448 155,337 172,930 190,263 181,725 184,007 194,829 206,413 218,823 Source: Company data, Credit Suisse estimates
Nexon (3659 / 3659 JT) 21 13 July 2016
Figure 33: Nexon (3659) – Balance sheet (JPYmn) 12/11 12/12 12/13 12/14 12/15 12/16E 12/17E 12/18E 12/19E 12/20E Current Asset Cash and cash equivalents 132,491 84,736 138,843 117,729 194,225 235,720 288,371 347,598 414,522 489,753 Trade and other receivables 13,845 21,787 22,469 32,280 33,362 30,194 31,700 33,558 35,549 37,684 Total current assets 150,722 155,164 217,799 258,125 331,670 359,847 414,003 475,089 544,004 621,370 Property, Plant and equipment 16,016 10,527 22,080 24,039 22,027 18,247 14,743 11,239 7,735 4,231 Goodwill 11,595 46,475 45,802 35,426 35,387 15,673 15,673 15,673 15,673 15,673 Intangibles 32,479 30,800 26,653 16,574 7,520 9,446 11,050 12,654 14,258 15,862 Total non-current assets 85,043 165,024 201,052 178,897 93,916 71,129 69,229 67,329 65,429 63,529 235,765 320,188 418,851 437,022 425,586 430,976 483,232 542,418 609,433 684,899 Liabilities and equity Trade and other payables 981 6,967 10,063 10,214 10,874 8,796 9,648 10,213 10,819 11,469 Current borrowings 3,003 11,505 13,408 13,180 1,916 1,666 1,666 1,666 1,666 1,666 Deferred income (current) 8,841 9,356 10,718 9,558 8,931 8,931 8,931 8,931 8,931 Current provisions 1,296 1,248 2,323 2,246 621 621 621 621 621 Accrued income taxes 8,502 12,836 7,135 6,844 9,561 9,661 9,761 9,861 Total current liabilities 24,562 44,320 50,453 57,023 36,884 32,895 33,747 34,312 34,918 35,568 Deferred income (non-current) 5,265 4,778 2,440 1,985 4,119 4,119 4,119 4,119 4,119 Non-current borrowings 18,567 42,670 34,605 23,244 2,501 1,668 1,668 1,668 1,668 1,668 Total non-current liabilities 33,316 53,623 55,339 34,522 9,021 10,895 10,895 10,895 10,895 10,895 Total equity attributable to owners 191,219of parent 218,728 308,482 340,380 374,447 382,021 433,426 492,046 558,455 633,271 Non-controlling interests 3,451 3,517 4,577 5,097 5,234 5,165 5,165 5,165 5,165 5,165 Total equity 194,670 222,245 313,059 345,477 379,681 387,186 438,591 497,211 563,620 638,436 Total liabilities and equity 235,765 320,188 418,851 437,022 425,586 430,976 483,232 542,418 609,433 684,899 Source: Company data, Credit Suisse estimates
Nexon (3659 / 3659 JT) 22 13 July 2016
Companies Mentioned (Price as of 12-Jul-2016) COLOPL Inc (3668.T, ¥2,194) DeNA (2432.T, ¥2,712) Electronic Arts, Inc (EA.OQ, $79.51) GungHo Online (3765.T, ¥302) Mixi (2121.T, ¥4,295) NXC Corporation (Unlisted) Nexon (3659.T, ¥1,444, OUTPERFORM, TP ¥1,900) Tencent Holdings (0700.HK, HK$180.9) gloops, Inc. (Unlisted) Please see Figures 10-12 for other companies mentioned.
Disclosure Appendix Important Global Disclosures I, Keiichi Yoneshima, certify that (1) the views expressed in this report accurately reflect my personal views about all of the subject companies and securities and (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.
3-Year Price and Rating History for Nexon (3659.T)
3659.T Closing Price Target Price Date (¥) (¥) Rating 18-Jul-13 1,230 1,400 O 16-Apr-14 824 1,100 03-Apr-15 1,255 NR * Asterisk signifies initiation or assumption of coverage.
OUTPERFORM N O T RAT ED
The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities As of December 10, 2012 Analysts’ stock rating are defined as follows: Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark* over the next 12 months. Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months. Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months. *Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ra tings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin American and non-Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiveness of a stock’s total return potential within an analyst’s coverage universe. For Australian and New Zealand stocks, the expected total return (ETR) calculation includes 12-month rolling dividend yield. An Outperform rating is assigned where an ETR is greater than or equal to 7.5%; Underperform where an ETR less than or equal to 5%. A Neutral may be assigned where the ETR is between -5% and 15%. The overlapping rating range allows analysts to assign a rating that puts ETR in the context of associated risks. Prior to 18 May 2015, ETR ranges for Outperform and Underperform ratings did not overlap with Neutral thresholds between 15% and 7.5%, wh ich was in operation from 7 July 2011. Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances. Not Rated : Credit Suisse Equity Research does not have an investment rating or view on the stock or any other securities related to the company at this time. Not Covered (NC) : Credit Suisse Equity Research does not provide ongoing coverage of the company or offer an investment rating or investment view on the equity security of the company or related products.
Nexon (3659 / 3659 JT) 23 13 July 2016
Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward.
Analysts’ sector weightings are distinct from analysts’ stock ratings and are based on the analyst’s expectations for the fundamentals and/or valuation of the sector* relative to the group’s historic fundamentals and/or valuation: Overweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is favorable over the next 12 months. Market Weight : The analyst’s expectation for the sector’s fundamentals and/or valuation is neutral over the next 12 months. Underweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is cautious over the next 12 months. *An analyst’s coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cover multiple sectors.
Credit Suisse's distribution of stock ratings (and banking clients) is:
Global Ratings Distribution Rating Versus universe (%) Of which banking clients (%) Outperform/Buy* 51% (41% banking clients) Neutral/Hold* 36% (17% banking clients) Underperform/Sell* 13% (38% banking clients) Restricted 0% *For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, and Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdings, and other individual factors.
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Target Price and Rating Valuation Methodology and Risks: (12 months) for Nexon (3659.T)
Method: We derive our ¥1,900 target price for Nexon using a DCF model. Our earnings forecast period runs through FY12/20; for FY12/21 onward, we apply a multiple of 5x to our FY12/20 EBITDA forecast. Our target multiple reflects a 25% premium applied to the I/B/E/S average two- year EV/EBITDA of 4x for six domestic online gaming companies such as Colopl and Gree. This premium reflects our view that earnings will be more stable than at rivals due to Nexon's fuller offering of new titles and its greater portfolio diversity. We assume a WACC of 8.45%, a 0.0% risk free rate, a 6.5% equity risk premium, a beta of 1.3, and a D/E ratio of 0%. Since Nexon's earnings are more stable than rival online gaming companies and its lineup of new titles fuller, we expect growth in earnings and valuation. We rate the shares OUTPERFORM in light of our 12-month expected return and the context of our coverage universe. Risk: Risks to our ¥1,900 target price and OUTPERFORM rating for Nexon Risks include lower earnings from existing game titles (particularly in China and South Korea, which account for 80% of sales), delays to new title development, limited earnings contributions from new titles, further downturn in the Japanese, European and US markets, strained relationships with partners, earnings decline from licencing agreements reaching the end of term or being terminated, and substantial yen appreciation. In addition, Korean prosecutors have begun an investigation (announced 12 July) into an exchange of NXC shares in 2005 between that company, Nexon’s largest shareholder, and another party. NXC is cooperating with the investigation, but the other party involved is one of its board members. The investigation poses reputational risk depending on its outcome and may have a negative impact on earnings.
Please refer to the firm's disclosure website at https://rave.credit-suisse.com/disclosures for the definitions of abbreviations typically used in the target price method and risk sections.
See the Companies Mentioned section for full company names
For a history of recommendations for the subject company(ies) featured in this report, disseminated within the past 12 months, please refer to https://rave.credit-suisse.com/disclosures/view/report?i=236464&v=-2spdudf5zdjwvnsp2iagdaa3s . Important Regional Disclosures Singapore recipients should contact Credit Suisse AG, Singapore Branch for any matters arising from this research report.
Nexon (3659 / 3659 JT) 24 13 July 2016
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Nexon (3659 / 3659 JT) 25 13 July 2016
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