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NCSOFT (036570 KS ) MMORPG Strength to Shine NCSOFT (036570 KS ) MMORPG strength to shine Game 2Q18 review: Revenue and net profit beat consensus Results Comment For 2Q18, NCsoft reported revenue and net profit that were better than consensus expectations. August 16, 2018 Positives: Revenue from the PC game Lineage - which had continued to decline since the launch of Lineage M , due to cannibalization - was stronger than expected in 2Q18 , recovering 49% QoQ, thanks to promotions and the introduction of a specialized (Maintain) Buy server. Royalty revenue also topped expectations. We believe the company received a one-time incentive payment from Lineage M ’s Taiwanese publisher Gamania following the game’s success in the country. Target Price (12M, W) 500,000 Negatives: Revenues from PC titles Aion and Blade & Soul were disappointing. Lineage Share Price (08/14/18, W) 385,000 M revenue also missed our expectation, despite the massive update in June marking the mobile title’s one-year anniversary. We estimate Lineage M ’s daily average revenue Expected Return 30% at around W2.3bn in 2Q18. Among expense items, labor and marketing expenses were higher than anticipated, the former due to a one-off incentive payout, and the latter due to promotions for Lineage M ’s gunman class update. OP (18F, Wbn) 615 Massive updates for Lineage IP titles and share buybacks in 2H18 Consensus OP (18F, Wbn) 643 NCsoft has no major new releases planned in 2H18. Instead, the company is preparing EPS Growth (18F, %) 9.4 a large-scale content update for Lineage M in 3Q18, and another for Lineage (PC) in Market EPS Growth (18F, %) 9.5 4Q18 to mark the PC title’s 20 th anniversary. For Project TL (a new PC/console title), the P/E (18F, x) 17.5 company plans to conduct closed beta testing (CBT) later this year during winter break . Market P/E (18F, x) 8.9 During the void in new releases, we believe that share repurchases, together with th e KOSPI 2,258.91 updates of flagship titles, will provide downside support to the stock. Between August th th Market Cap (Wbn) 8,447 14 and November 13 , NCsoft will buy back 658,000 of its shares (worth W237.5bn), in Shares Outstanding (mn) 22 order to enhance shareholder value. Expectations on new title releases should b egin to Free Float (%) 84.8 gain traction in November. The company is likely to unveil the concept for its new mobile titles in November, around the same time of the G-Star show in Korea, while the Foreign Ownership (%) 50.3 CBT launch for Project TL in the following month could further boost expectations. Beta (12M) 0.94 52-Week Low 332,500 New releases concentrated in 2019; confidence in true MMORPGs 52-Week High 488,000 New mobile titles, including Aion Tempest , Blade & Soul II , and Lineage II M , are (%) 1M 6M 12M scheduled for release next year. With the company highlighting its focus on developing Absolute -2.5 -3.8 -0.8 “true MMORPGs” that feature open fields and engage large numbers of players , we Relative -0.3 3.2 2.5 expect mobile game revenue to double YoY in 2019. 140 NCSOFT KOSPI Maintain Buy and TP of W500,000 130 We reiterate our Buy rating and target price of W500,000 on NCsoft. We believe that 120 robust revenue from existing titles and royalties will support profitability this year, and 110 expect growth to resume next year with the launch of large-scale new titles. 100 90 80 8.17 12.17 4.18 8.18 Mirae Asset Daewoo Co., Ltd. [ Internet/Game/Advertising ] FY (Dec.) 12/15 12/16 12/17 12/18F 12/19F 12/20F Revenue (Wbn) 838 984 1,759 1,698 2,619 2,785 Jee -hyun Moon +822 -3774 -1640 OP (Wbn) 237 329 585 615 1,210 1,299 [email protected] OP margin (%) 28.3 33.4 33.3 36.2 46.2 46.6 NP (Wbn) 165 272 441 482 897 962 EPS (W) 7,542 12,416 20,100 21,981 40,894 43,865 ROE (%) 10.6 14.9 19.1 17.4 28.2 24.9 P/E (x) 28.2 19.9 22.3 17.5 9.4 8.8 P/B (x) 2.6 2.7 3.4 2.8 2.3 1.9 Dividend yield (%) 1.3 1.5 1.6 2.1 3.8 4.1 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 August 16, 2018 NCSOFT Earnings and forecasts Table 1. 2Q18 review (Wbn, %) 2Q18 Growth 2Q17 1Q18 Preliminary Mirae Asset Daewoo Consensus YoY QoQ Revenue 259 475 436 434 447 68.8 -8.1 Operating profit 38 204 160 162 172 324.8 -21.7 OP margin 14.5 42.9 36.5 37.3 38.5 Net profit 31 119 140 119 126 355.0 17.7 Notes: All figures are based on consolidated K-IFRS; net profit is attributable to controlling and non-controlling interests Source: Company data , FnGuide, Mirae Asset Daewoo Research Table 2. Quarterly and annual earnings (Wbn, %) 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18F 4Q18F 2017 2018F 2019F Revenue 240 259 727 533 475 436 386 400 1,759 1,698 2,619 Lineage 51 34 35 34 28 42 40 46 154 156 154 Lineage II 18 17 16 15 14 13 13 13 66 54 53 Aion 13 11 10 13 19 16 15 16 47 66 62 Blade & Soul 45 39 38 40 34 31 30 31 161 126 113 Guild Wars 2 14 14 20 35 24 20 19 19 83 81 73 Mobile games 23 94 551 327 264 210 202 189 995 864 1,627 Other 11 15 13 11 8 13 12 12 50 45 75 Royalties 64 36 44 60 84 92 55 75 203 307 461 Operating profit 30 38 328 189 204 160 131 121 585 615 1,210 OP margin 12.7 14.5 45.1 35.5 42.9 36.5 33.8 30.2 33.3 36.2 46.2 Net profit 17 31 275 121 119 140 107 117 444 484 899 Net margin 7.3 11.9 37.8 22.6 25.1 32.1 27.8 29.3 25.2 28.5 34.3 YoY Revenue -0.6 7.5 234.3 87.4 98.3 68.8 -46.9 -24.9 78.8 -3.5 54.2 Lineage -34.8 -64.2 -57.8 -71.5 -45.1 24.5 13.0 35.1 -58.9 1.0 -1.0 Lineage II 7.7 -12.6 -24.1 -26.0 -22.7 -19.9 -14.7 -13.6 -14.7 -18.0 -2.0 Aion -33.9 -38.5 -36.8 -29.6 41.1 44.3 46.1 30.3 -34.6 40.0 -5.0 Blade & Soul -17.5 -20.2 -5.2 0.5 -23.9 -21.4 -21.0 -21.4 -11.6 -22.0 -10.0 Guild Wars 2 -53.4 -14.7 31.5 134.8 66.2 46.6 -5.8 -46.4 8.1 -2.0 -10.0 Mobile 51,113.1 110,771.6 1,613.2 1,028.2 124.0 -63.4 -42.3 4,935.0 -13.2 88.3 Other -1.5 -14.9 -22.2 -17.4 -24.8 -15.6 -10.0 12.4 -15.1 -10.0 68.2 Royalties 116.1 33.8 80.2 43.2 32.5 155.8 27.2 26.0 66.0 51.4 50.0 Operating profit -59.8 -56.4 403.4 86.0 569.1 324.8 -60.2 -36.1 77.8 5.1 96.9 Net profit -73.7 -65.9 474.3 80.7 584.9 355.0 -61.0 -3.0 63.6 9.0 85.8 Notes: All figures are based on consolidated K-IFRS; revenue from Lineage M , which was released on June 21, 2017, is included in mobile game revenue; Lineage M’s daily average revenue is estimated at W2.4bn in 2018; new releases, including Aion Tempest , B&S II, Lineage II M and Project TL are reflected in 2019; Lineage II: Revolution (Netmarble) and Lineage M (Taiwan) are included in royalties revenue; net profit is attributable to controlling and non-controlling interests Source: Company data , Mirae Asset Daewoo Research Table 3. Earnings forecast revisions (Wbn, W, %) Previous Revised % chg. Notes 18F 19F 18F 19F 18F 19F Upward revisions to our Lineage and royalty revenue estimates; Revenue 1,820 2,728 1,698 2,619 -6.7 -4.0 downward revision to our mobile gaming revenue forecast Upward revisions to our labor cost estimates; downward revision to Operating profit 696 1184 615 1,210 -11.7 2.2 our marketing expense estimates Net profit 506 861 484 899 -4.4 4.4 EPS (W) 23,005 39,180 21,981 40,894 -4.5 4.4 OP margin 38.2 43.4 36.2 46.2 Net margin 27.8 31.6 28.5 34.3 Notes: Net profit is attributable to controlling and non -controlling interests , EPS is based on net profit attributable to controlling interests ; Source: Mirae Asset Daewoo Research Mirae Asset Daewoo Research 2 August 16, 2018 NCSOFT Key variables Table 4. NCsoft’s major game launch schedules Date Games Notes 3Q18 Lineage M (mobile) Content update Lineage (PC) Likely to update to mark the game’s 20 th anniversary (launched in Sept.
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