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NCSOFT (036570.KS) Lineage 2M Enters Launch Phase

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NCSOFT (036570.KS) Lineage 2M Enters Launch Phase NCSOFT (036570.KS) Lineage 2M enters launch phase Company Note │Aug 5, 2019 NCSOFT has recently announced that Lineage 2M will hit the market by year-end. We expect that as part of the firm’s pre-launch marketing, an exact launch date will be revealed. Buy (maintain) TP W750,000 (maintain) Enjoying new game momentum as non-cyclical play unaffected by CP (’19/08/02) W520,000 external variables Sector Game Kospi/Kosdaq 1,998.13 / 615.70 We maintain a Buy rating and TP of W750,000 on NCSOFT, our top pick in the Market cap (common) US$9,477.00mn game sector. With Lineage 2M’s 2019 launch plan having been officially Outstanding shares (common) 21.9mn announced, marketing activities should kick off in the near future, in turn 52W high (’19/04/30) W526,000 low (’18/08/13) W356,000 driving up expectations for the new game. Average trading value (60D) US$27.99mn Dividend yield (2019E) 1.16% As the games industry remains relatively insulated from external variables, Foreign ownership 50.4% Lineage 2M’s upcoming release positions NCSOFT as both a growth stock and Major shareholders a defensive play at the same time—factors which should warrant a strong NPS 12.6% valuation given recent domestic stock market uncertainties. TJ Kim & 8 others 12.0% Share perf 3M 6M 12M Anticipating a successful launch, NCSOFT is projecting that Lineage 2M sales Absolute (%) -0.4 9.7 40.5 will be similar to those enjoyed by Lineage M. In addition, NCSOFT’s Relative (%p) 10.3 21.0 59.7 expansion into foreign markets is to begin in earnest with Lineage 2M, with the 2018 2019E 2020F 2021F game’s global version slated for release in 1H20 after a 4Q19 domestic release. Sales 1,715 1,689 2,890 3,481 Chg -2.5 -1.5 71.1 20.4 OP 614.9 489.0 1,036 1,326 2Q19 review: Records earnings surprise Chg 5.1 -20.5 111.9 28.0 NCSOFT recorded 2Q19 sales of W410.8bn (-5.9% y-y, +14.5% q-q) and OP of OPM 35.9 29.0 35.8 38.1 W129.4bn (-18.9% y-y, +62.7% q-q), with OP beating consensus (W117.0bn). NP 418.2 408.7 808.7 1,030 EPS 19,061 18,623 36,848 46,928 Sales of mobile games totaled W223.8bn (+6.6% y-y, +12.6% q-q), showing a Chg -5.2 -2.3 97.9 27.4 return to growth, while sales of Lineage 1 reached W215.1bn (+6.2% q-q), P/E 24.5 27.9 14.1 11.1 maintaining a steady rise. Even two years after its launch, Lineage 1 is P/B 4.3 4.3 3.4 2.7 generating consistent user traffic and sales. We expect Lineage M to become EV/EBITDA 15.5 20.7 9.8 7.3 greatly contributing IP to the company’s earnings over the mid/long term. ROE 16.4 16.3 27.1 27.5 Debt/equity 23.6 26.7 22.5 18.4 Net debt -267.1 -443.5 -846.2 -1,450 Unit: Wbn, %, won, x Note 1: NP excludes minority interests Note 2: EPS, P/E, P/B, ROE based on NP (excl minority interests) Source: NH I&S Research Center estimates 2Q19 review (Unit: Wbn, %) 2Q19P 2Q18 3Q18 4Q18 1Q19 3Q19E Actual y-y q-q Estimate Consen Sales 436.5 403.8 399.7 358.8 410.8 -5.9 14.5 397.1 400.1 398.9 OP 159.5 139.0 112.6 79.5 129.4 -18.9 62.7 117.3 117.0 110.8 OPM 36.5 34.4 28.2 22.2 31.5 - - 29.5 29.3 27.8 Pre-tax profit 192.5 141.9 106.6 98.2 147.1 -23.6 49.8 128.3 144.2 123.0 NP (excl minority 139.9 92.9 66.6 74.2 116.4 -16.8 56.9 88.6 106.8 86.9 Jaemin Ahn, Analyst interests) 822)768-7647, [email protected] Note: K-IFRS consolidated basis Source: NCSOFT, FnGuide, NH I&S Research Center estimates NCSOFT www.nhqv.com If Lineage 2M sales In its recent conference call, NCSOFT stated that it expects Lineage 2M sales to reach match those of the level of Lineage M’s sales, indicating that the company has confidence in the new Lineage M… title. We believe that the firm’s positive outlook is warranted, considering NCSOFT’s two decades of business experience and outstanding MMORPG development capabilities. In the 12 months after its debut in Jun 2017, Lineage M displayed sales of W1.39tn. If Lineage 2M generates annual sales of over W1tn, NCSOFT’s earnings and share price are forecast to rise to the 2017 level. Of note, our earnings estimates for the firm reflect Lineage 2M’s first 12-month sales forecast of W961bn. Lineage 2M to Lineage 2M is likely to be well-received by both Korean gamers and global RPG fans, as perform well the MMORPG is a full-3D seamless open world experience that boasts graphics and overseas concurrent player count in line with current PC game standards. We expect that the title will fare well not only in Asia but also in North America and Europe, where RPGs have typically proved relatively less successful. We foresee that Lineage 2M will hit the domestic market in 4Q19, and then will be released in Asia in 1H20 and in North America and Europe in early 2021. Lineage M’s first 12-month sales vs Lineage 2M’s first 12-month sales forecast (Wbn) Lineage M's quarterly sales Lineage 2M's quarterly sales (Wbn) 700 Lineage M's first 12-month sales (RHS) Lineage 2M's first 12-month sales (RHS) 1,600 1,386 600 1,400 544 1,200 500 961 1,000 400 323 800 270 300 243 258 219 202 197 600 200 120 400 82 100 200 0 0 Q+1 Q+2 Q+3 Q+4 Q+5 Note: First 12-month sales on a weighted average basis Source: NH I&S Research Center 2 NCSOFT www.nhqv.com 2Q19 OP beats NCSOFT posted 2Q19 sales of W410.8bn (-5.9% y-y, +14.5% q-q) and OP of W129.4bn consensus (-18.9% y-y, +62.7% q-q), with OP beating the market projection of W117.0bn by a large margin. Such robust earnings are attributable to: 1) a jump in Lineage M sales; and 2) a rebound in Lineage 1 sales after a sluggish run-up to the launch of Lineage: Remastered. Mobile game sales came to W223.8bn (+6.6% y-y, +12.6% q-q), with Lineage M sales reaching W215.1bn (+6.2% q-q). Even two years after its release, Lineage M’s user traffic and sales remain solid. We foresee that as is the case with Lineage 1, Lineage M will contribute greatly to the company’s earnings over the mid/long term. Lineage 1 sales soared 141.8% q-q from W20.7bn in 1Q19 to W50.1bn in 2Q19. User traffic has more than doubled since the launch of Lineage: Remastered, and both user traffic and sales for the title should remain robust in 3Q19 and beyond. Of note, Lineage: Remastered’s new class (Fencer) was made available in July, and the firm plans to continue providing updates, a factor that should bolster sales growth. User traffic soaring following release of Lineage: Lineage: Remastered’s new class (Fencer) Remastered (minutes) Total playtime Portion out of MMORPGs 160,000 20% 140,000 18% 16% 120,000 Launch of Lineage Remastered 14% 100,000 12% 80,000 10% 60,000 8% 6% 40,000 4% 20,000 2% 0 0% '18.10 '18.12 '19.2 '19.4 '19.6 '19.8 Source: Gametrics, NH I&S Research Center Source: NCSOFT, NH I&S Research Center 3 NCSOFT www.nhqv.com Earnings forecasts (IFRS consolidated) (Unit: Wbn, x, won, %) 2018 2019E 2020F 2021F Sales - Revised 1,715 1,689 2,890 3,481 - Previous - 1,677 2,936 3,504 - Change - 0.7 -1.6 -0.7 OP - Revised 614.9 489.0 1,036 1,326 - Previous - 494.9 1,056 1,345 - Change - -1.2 -1.9 -1.4 OPM - Revised 35.9 28.9 35.8 38.1 EBITDA 642.8 530.9 1,077 1,375 NP (excl minority interests) 418.2 408.7 808.7 1,030 EPS - Revised 19,061 18,623 36,848 46,928 - Previous - 17,368 35,074 44,579 - Change - 7.2 5.1 5.3 P/E 24.5 27.9 14.1 11.1 P/B 4.3 4.3 3.4 2.7 EV/EBITDA 15.5 20.7 9.8 7.3 ROE 16.4 16.3 27.1 27.5 Note: EPS, P/E, P/B, and ROE based on NP (excluding minority interests) Source: NH I&S Research Center estimates Quarterly earnings forecasts (Unit: Wbn, %) 1Q18 2Q18 3Q18 4Q18 1Q19 2Q19P 3Q19E 4Q19F 2018 2019E 2020F Sales 475.2 436.5 403.8 399.7 358.8 410.8 398.9 520.7 1,715.1 1,689.1 2,889.8 Game 391.0 344.0 352.3 346.3 301.3 359.2 348.8 469.0 1,433.6 1,478.3 2,668.6 PC 126.9 134.1 135.8 123.5 102.6 135.4 130.7 122.6 520.3 491.2 554.6 Lineage 1 28.3 42.1 40.3 39.0 20.7 50.1 48.0 44.0 149.7 162.8 169.1 Lineage 2 14.2 13.3 15.6 20.7 21.6 21.2 20.4 20.1 63.9 83.2 76.0 Aion 18.8 15.6 16.4 12.7 12.3 12.4 12.7 11.6 63.4 49.0 44.3 B&S 33.9 30.6 30.1 25.0 23.3 21.1 23.5 22.2 119.6 90.1 83.0 Guild Wars 2 23.6 19.9 21.0 15.7 16.3 15.9 14.5 13.1 80.2 59.8 45.6 Mobile 264.1 209.9 216.5 222.8 198.8 223.8 218.1 346.4 913.3 987.1 2,114.1 Lineage RK 0.6 0.3 0.3 0.2 0.2 0.2 0.2 0.0 1.4 0.6 0.0 Final Blade 0.5 0.4 0.3 0.2 0.2 0.2 0.2 0.2 1.5 0.8 0.5 H2 3.2 4.7 3.9 4.7 5.2 5.4 3.5 5.2 16.5 19.4 19.9 Lineage M 258.0 202.4 210.1 215.3 191.6 215.1 212.0 200.8 885.9 819.6 730.5 Lineage 2M - - - - - - - 120.0 - 120.0 928.5 B&S S - - - - - - - 18.0 - 18.0 83.6 Royalties 84.2 92.4 51.6 53.4 57.4 51.6 50.1 51.8 281.6 210.8 221.2 Lineage 2:R 17.8 14.0 12.1 10.2 7.2 6.9 6.7 6.4 54.1 27.2 23.6 Lineage M Taiwan 34.4 17.3 17.2 17.3 13.4 12.7 12.1 11.5 86.2 49.7 40.5 Operating expenses 271.3 277.0 264.8 287.1 279.2 281.4 288.1 351.4 1,100.2 1,200.1 1,854.0 Labor costs 125.0 146.9 128.9 135.7 128.1 105.5 118.3 127.3 536.4 479.2 503.2 Marketing costs 10.8 15.0 16.5 15.9 19.0 24.2 27.2 33.8 58.2 104.2 123.4 OP 203.8 159.5 139.0 112.6 79.5 129.4 110.8 169.3 614.9 489.0 1,035.8 OPM 42.9 36.5 34.4 28.2 22.2 31.5 27.8 32.5 35.9 28.9 35.8 Pre-tax profit 196.4 192.5 141.9 106.6 98.2 147.1 123.0 182.4 637.3 550.7 1,100.1 NP 118.8 139.9 92.9 66.6 74.2 116.4 86.9 131.2 418.2 408.7 808.7 Source: NCSOFT, NH I&S Research Center 4 NCSOFT www.nhqv.com Game lineup Title Genre Developer Launch date Lineage 2: Blood Alliance MMORPG Snail Games Jul 28, 2016 Lineage RK RPG NCSOFT Dec 8, 2016 Final Blade Side-scrolling RPG Sky People Feb 14, 2017 Pro Baseball H2 Sports NTREEV Mar 30, 2017 Lineage M MMORPG NCSOFT Jun 21, 2017 B&S Mobile IP-based game Web game Tencent Aug 8, 2017 (B&S: Hongmoon Rising, China) Arami Puzzventure Puzzle NCSOFT Aug 17, 2017 PangYa Mobile (Southeast Asia) Sports Ntreev Feb
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