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Ncsoft (036570) NCsoft (036570) Solid Revenue Upside Danny Lee Yonghyun Choi Internet & Games / Media Research Associate April 13, 2021 +82-2-6114-2960 [email protected] +82-2-6114-2915 [email protected] Maintain BUY and target price of We maintain BUY on NCsoft and our TP of KRW1,150,000. Although we cut our 2021E KRW1,150,000 revenue forecast by 6.8% and OP by 12.9% to reflect the delayed release of Trickster M and the sluggish revenue generated by Lineage 2M in Japan and Taiwan, we leave our 2022 outlook mostly intact. We expect earnings to rebound from 2Q21 given the launch of Blade & Soul 2 and Trickster M and the full three-month overseas revenue contribution from Lineage 2M. Factors weighing on 1Q21 earnings: We estimate 1Q21 revenue at KRW536.6bn (-4.4% QoQ, -26.6% YoY) and OP at Delayed game rollout, performance- KRW100.5bn (-35.9% QoQ, -58.4% YoY), which is 47.5% below our previous estimate and based bonuses and wage hikes 31.2% below consensus. We attribute the soft revenue to the postponed release of Trickster M (originally expected to launch in February, now in June) and the disappointing performance of Lineage 2M in Japan in Taiwan. Furthermore, daily average revenue for Lineage M appears to have decreased 7.8% QoQ, mostly due to a lack of new content ahead of an update on Apr 7 rather than the effects of a boycott due to pattern update rollbacks. Meanwhile, OP should erode due to a 21.6% YoY in labor costs, including performance bonus payments of approximately KRW30bn and wage hikes. Strong rebound expected from 2Q21 We forecast 2Q21 OP will surge to KRW314.6bn (+213.0% QoQ, +50.6% YoY) fueled by the launch of new games and the full three-month contribution of Lineage 2M in Japan and Taiwan. With the pre-launch character- and community-building event scheduled for Apr 22, we anticipate Blade & Soul 2 will be released in early-June. Of note, Lineage M was launched 36 days after its pre-launch event and Lineage 2M 44 days. Buy Maintain Trading Data Risk & Total Return (annualized over three years) Free float 81.9% Target Price (Maintain) KRW1,150,000 Avg. T/O val. (3m, KRWbn) 103.9 Return 1 2 3 4 High5 Foreign ownership 52.0% Risk Dividend yield* 1.4% 1 FALSE FALSE FALSE FALSE TRUE Total return 27.2% Major shareholders Taek-Jin Kim and 8 others 12.0% 2 FALSE FALSE FALSE FALSE FALSE Current price (Apr 13) KRW914,000 3 FALSE FALSE FALSE FALSE FALSE Consensus target price KRW1,225,217 National Pension Service 10.7% 4High FALSE FALSE FALSE FALSE FALSE Market capitalization USD17.9bn Stock Price Performance 5 FALSE FALSE FALSE FALSE FALSE * 12-month forward (%) 1M 3M 6M 12M Absolute -2.2 -2.8 21.2 40.4 Relative -5.8 -3.4 -8.1 -19.1 Earnings Forecast & Valuation Stock Price & Relative Performance Fiscal year-end 2020A 2021E 2022E 2023E Relative performance (LHS) Revenue (KRWbn) 2,416 3,081 3,797 4,176 Stock price (RHS) % KRW OP (KRWbn) 825 1,178 1,599 1,166 40 1,100,000 NP to control. int. (KRWbn) 587 903 1,217 866 30 EPS (KRW) 26,756 41,152 55,435 39,453 20 EPS growth (%) 63.9 53.8 34.7 -28.8 10 800,000 P/E (x) 34.8 22.2 16.5 23.2 0 EV/EBITDA (x) 21.0 14.0 10.0 13.1 -10 P/B (x) 6.5 5.2 4.2 3.8 -20 ROE (%) 20.8 25.8 28.0 17.2 -30 500,000 Div. yield (%) 0.9 1.4 2.2 3.0 Apr '20 Jul '20 Oct '20 Jan '21 Apr '21 Source(s): Company data, KB Securities Meanwhile, Trickster M is slated for release in June. We forecast 2Q21 daily average revenue from the two games at KRW2.5bn and KRW1.0bn, respectively. Lineage 2M performing well on Lineage 2M has weighed on shares as the game has performed poorly in terms of Google Play Apple iOS revenue rankings since its release in Japan and Taiwan. However, the game has performed well on Google Play, and Lineage 2M has steadily climbed the rankings board. Once the game secures more loyal users, Lineage 2M should generate stable revenue going forward. 2 Investment Opinion & Risks Base-case scenario: Catalysts 1) Lineage 2M 2021E domestic average daily Bull-case scenario KRW1,270,000 (24x P/E) revenue at KRW2.3bn 2) Blade & Soul 2, Trickster M release in 2Q21 Bull-case scenario: Upside risks Base-case scenario (target price) KRW1,150,000 (22.3x P/E) 1) Lineage 2M 2021E domestic average daily revenue at KRW2.5bn Bear-case scenario KRW950,000 (18.0x P/E) 2) Blade & Soul 2/Trickster M release in 2Q21 and become popular Bear-case scenario: Downside risks Current price KRW914,000 1) Lineage 2M 2021E domestic average daily revenue at KRW2.0bn 2) Blade & Soul 2/Trickster M rollouts delayed Revised Earnings Estimates Valuation & Target Price Calculation (KRWbn, %) Previous Revised Change 2021E 2022E 2021E 2022E 2021E 2022E 1) Valuation method: Revenue 3,304 3,864 3,081 3,797 -6.8 -1.7 P/E model OP 1,352 1,608 1,178 1,599 -12.9 -0.6 NP (to control. int.) 1,041 1,234 903 1,217 -12.5 -0.6 2) Target price calculation: Source(s): KB Securities estimates KRW53,036 x 22.3x multiple KB Estimates vs. Consensus 3) Target price range: (KRWbn, %) KB Estimates Consensus Difference KRW950,000 – KRW1,270,000 2021E 2022E 2021E 2022E 2021E 2022E Revenue 3,081 3,797 3,057 3,840 0.8 -1.1 4) ) Valuation at target price: OP 1,178 1,599 1,184 1,613 -0.5 -0.9 22.3x P/E NP (to control. int.) 903 1,217 889 1,203 1.6 1.1 Source(s): FnGuide, 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 Game Royalties 93% Source(s): KB Securities estimates Peer Group Comparison 12m fwd 12m fwd (KRWbn, x, %) Market cap 12m fwd P/E 5y EPS CAGR 5y EBITDA CAGR P/B EV/EBITDA NCsoft 20,066.0 20.8 27.59 4.8 11.3 26.69 Activision Blizzard 83,726.2 25.1 19.61 4.3 15.7 12.42 NetEase 81,365.5 24.5 12.03 4.4 18.2 19.28 Nexon 32,733.1 24.0 0.65 3.7 14.6 9.76 Source(s): Bloomberg consensus, KB Securities 3 Table 1. 1Q21 Earnings Forecast (KRWbn, %, pp) 1Q21E 4Q20 QoQ 1Q20 YoY Previous Diff. Cons. Diff. Revenue 536.6 561.3 (4.4) 731.1 (26.6) 604.7 (11.3) 556.8 (3.6) OP 100.5 156.7 (35.9) 241.4 (58.4) 191.6 (47.5) 146.1 (31.2) OPM 18.7 27.9 (9.2) 33.0 (14.3) 31.7 (13.0) 26.2 (7.5) NP (to control. int.) 83.7 80.6 3.9 195.5 (57.2) 151.4 (44.7) 111.4 (24.9) NPM (to control. 15.6 14.4 1.2 26.7 (11.1) 25.0 (9.4) 20.0 (4.4) int.) Source(s):Company data, FnGuide consensus, KB Securities estimates Table 2. Earnings Forecast (Consolidated) (KRWbn) 1Q20 2Q20 3Q20 4Q20P 1Q21E 2Q21E 3Q21E 4Q21E 2019 2020 2021E 2022E Revenue 731.1 538.6 585.2 561.3 536.6 743.9 900.6 899.4 1,701.2 2,416.2 3,080.5 3,796.6 (QoQ %) 37.0 (26.3) 8.7 (4.1) (4.4) 38.6 21.1 (0.1) (YoY %) 103.8 31.1 47.1 5.2 (26.6) 38.1 53.9 60.2 (0.8) 42.0 27.5 23.2 Games 678.3 476.3 526.3 517.3 493.9 702.5 860.1 860.1 1,503.7 2,198.1 2,916.6 3,650.4 Lineage 1 44.8 34.3 49.9 46.8 43.2 38.5 48.0 45.1 174.1 175.7 174.8 168.7 Lineage 2 26.4 25.8 26.3 26.0 25.8 25.1 25.7 25.3 93.6 104.5 101.9 99.3 Aion 10.1 8.194 8.5 18.8 14.8 14.894 14.4 14.8 46.0 45.6 59.0 57.1 Blade & Soul 19.6 19.8 17.2 15.6 16.6 17.2 16.3 15.4 83.9 72.2 65.4 64.3 Guild Wars 2 12.5 15.6 18.8 14.2 13.8 13.7 13.5 13.4 58.7 61.2 54.4 52.5 Lineage M 212.0 159.9 245.2 211.7 190.8 199.8 220.7 218.0 834.7 828.7 829.3 804.5 Lineage 2M 341.1 197.3 144.5 166.7 159.4 159.5 152.7 210.7 143.9 849.6 892.1 834.8 Other 11.6 15.5 16.0 17.5 29.5 233.9 368.7 317.4 68.9 60.6 739.7 1,569.3 Royalties 52.8 62.3 58.8 44.1 42.6 41.5 40.5 39.4 197.5 218.0 163.9 146.2 OPEX 489.7 329.6 367.5 404.6 436.1 429.3 492.3 545.1 1,222.2 1,591.4 1,902.7 2,197.3 (QoQ %) 24.7 (32.7) 11.5 10.1 7.8 (1.5) 14.7 10.7 (YoY %) 75.4 17.1 36.7 3.0 (11.0) 30.3 34.0 34.7 11.1 30.2 19.6 15.5 Labor 211.8 162.3 159.1 184.9 224.8 179.6 181.4 192.9 555.1 718.2 778.7 833.3 Variable 223.5 138.7 162.2 158.2 153.3 191.6 261.2 287.8 507.9 682.6 893.9 1,114.2 Marketing 39.6 12.9 29.7 44.8 41.6 41.3 32.7 47.1 107.3 127.0 162.6 178.8 D&A 14.8 15.6 16.5 16.7 16.4 16.8 17.1 17.3 52.0 63.7 67.5 71.0 OP 241.4 209.0 217.7 156.7 100.5 314.6 408.3 354.4 479.0 824.8 1,177.8 1,599.3 (QoQ %) 71.0 (13.4) 4.2 (28.0) (35.9) 213.0 29.8 (13.2) - - - - (YoY %) 203.6 61.5 68.9 11.0 (58.4) 50.6 87.6 126.1 (22.1) 72.2 42.8 35.8 OPM(%) 33.0 38.8 37.2 27.9 18.7 42.3 45.3 39.4 28.2 34.1 38.2 42.1 NP (to 195.5 158.2 153.2 80.6 83.7 242.8 312.1 264.8 358.2 587.4 903.4 1,217.0 control.int.) (QoQ %) 260.5 (19.1) (3.2) (47.4) 3.9 190.1 28.5 (15.2) - - - - (YoY %) 163.5 35.9 35.1 48.6 (57.2) 53.5 103.8 228.6 (14.4) 64.0 53.8 34.7 NPM(%) 26.7 29.4 26.2 14.4 15.6 32.6 34.7 29.4 21.1 24.3 29.3 32.1 Source(s): Company data, KB Securities estimates Table 3.
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