NCsoft (036570 KS) Positive momentum abound in 1Q
Game Strong performances by Blade & Soul China and Guild Wars 2 in the US/Europe NCsoft’s 4Q revenue and operating profit climbed 23.7% and 84.7% QoQ to W210bn Results Comment and W56.7bn, respectively. Operating expenses jumped more than W14bn QoQ on February 14, 2014 contract payments for the company’s pro baseball team and year-end emplo yee bonuses. Regardless, overall earnings improved, boosted by royalty income from Blade & Soul China (estimated at W22bn) and stronger-than-expected revenue from Guild Wars (Maintain) Buy 2 in the US and Europe (W33.5bn in 4Q vs. W24.4bn in 3Q). The first royalty income from Blade & Soul China beat both ou r expectations and the Target Price (12M, W) 310,000 market’s, raising the outlook for 2014 earnings. We believe the sharp growth of Guild Wars 2 in the US and Europe is a testament to the company’s superior profit model and Share Price (02/13/14, W) 215,000 the extensive lifecycles of its games (as previously demonstrated by the success of Lineage in Korea). Expected Return 44% Positive momentum abound in 1Q14
We see a number of positive events and news on the horizon in 1Q14. Blade & Soul OP (13F, Wbn) 205 China will be officially released in 1Q14 following ongoing open beta testing (began Consensus OP (13F, Wbn) 202 November 28, 2013), and will feature additional levels of play and plenty of end-game EPS Growth (13F, %) 1.6 content. We expect to see another huge boost in user indicators after the game’s Market EPS Growth (13F, %) 3.3 official commercialization. P/E (13F, x) 34.3 Also, after much preparation, NCsoft is expected to roll out a number of mobile games Market P/E (13F, x) 12.4 in 1Q14, mostly mid-core and hard-core games based on existing titles like Lineage and KOSPI 1,926.96 Aion .
Market Cap (Wbn) 4,712 The company is also set to launch marketing campaigns ahead of the scheduled Shares Outstanding (mn) 22 commercial release of Guild Wars 2 in China (2Q14) and WildStar in the US and Europe Free Float (%) 76.3 (3Q14). Earnings expectations for 2H should rise as mobile games hit the market and Foreign Ownership (%) 39.1 pre-marketing begins. Beta (12M) 0.24 52-Week Low 133,500 Maintain Buy and TP of W310,000 52-Week High 248,500 For 2014, management has guided revenue at W890-940bn and OP margin at the low- (%)(%)(%) 1M1M1M 6M6M6M 12M12M12M to mid- 30% level. Forecasting the revenue of video game companies is somewhat challenging because of the unpredictable nature of a game’s success. Inde ed, games Absolute -1.4 17.2 60.4 companies tend to either deliver a string of positive surprises, as NCsoft did after the Relative -0.3 16.3 64.5 release of Aion in 2009, or a series of negative surprises, as was the case for WeMade,
200 NCsoft KOSPI Gamevil and Com2uS in 2013. 180 160 In 2014, NCsoft’s long-running games (Lineage I , Guild Wars 2 , etc.) should provide 140 stable support for the company’s earnings, and new revenue streams from Blade & Soul 120 and Guild Wars 2 in China and WildStar in the US and Europe will be a source of upside 100 potential (although the extent of upside remains uncertain). We expect the company’s 80 costs burden (labor costs, etc.) to be more moderate compared to previous years . 2.13 6.13 10.13 2.14 Overall, we are more optimistic on the company’s earnings and new title releases.
Daewoo Securities CCo.,o., Ltd. FY (Dec.) 12/10 12/11 12/12 12/13F 12/14F 12/15F Revenue (Wbn) 650 609 754 757 999 1,243 [Internet/Game/Entertainment] OP (Wbn) 243 136 151 205 389 510
Chang-kwean Kim OP Margin (%) 37.4 22.3 20.0 27.1 38.9 41.0 +822-768-4321 NP (Wbn) 167 121 156 159 368 446 [email protected] EPS (W) 7,656 5,529 7,120 7,236 16,773 20,341
ROE (%) 23.3 14.6 16.8 14.8 27.7 25.9 P/E (x) 27.2 55.6 21.1 34.3 12.8 10.6 P/B (x) 5.0 7.0 3.0 4.4 2.9 2.3
Notes: All figures are based on consolidated K-IFRS; NP refers to net profit attributable to controlling interests Source: Company data, KDB Daewoo Securities Research estimates
Analysts who prepared this report are registered as research analysts in Korea but not in any other jurisdiction, including t he U.S. PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES & DISCLAIMERS IN APPENDIX 1 AT THE END OF REPORT.
February 14, 2014 NCsoft
TableTableTable 111.1. Quarterly earnings and forecasts (Wbn, %) 1Q131Q131Q13 2Q132Q132Q13 3Q133Q133Q13 4Q13P 1Q14F 2Q14F 3Q14F 4Q14F 201220122012 2013P2013P2013P 2014F2014F2014F Revenue 185 192 170 210 206 226 295 270 754 757 999 Lineage I 66 85 62 75 69 69 66 73 205 288 277 Lineage II 14 14 13 16 14 14 14 13 65 57 54 Aion 28 23 23 22 20 20 20 17 141 96 79 Blade & Soul 17 14 20 18 17 17 17 12 62 69 63 Guild Wars 2 36 29 24 34 29 29 29 34 165 123 121 WildStar 0 0 0 0 0 0 52 10 0 0 62 Other 13 14 17 14 15 20 20 19 51 58 74 Royalties 11 13 10 32 42 57 77 93 64 66 270 Revenue breakdown Lineage I 35.7 44.2 36.7 35.6 33.4 30.5 22.3 26.9 27.2 38.0 27.7 Lineage II 7.7 7.4 7.7 7.4 6.7 6.1 4.7 4.7 8.6 7.6 5.4 Aion 15.3 12.1 13.3 10.3 9.9 9.1 6.9 6.3 18.8 12.7 7.9 Blade & Soul 8.9 7.4 12.0 8.5 8.2 7.5 5.7 4.4 8.2 9.1 6.3 Guild Wars 2 19.7 15.1 14.4 16.0 14.1 12.8 9.8 12.6 21.9 16.3 12.1 WildStar 0.0 0.0 0.0 0.0 0.0 0.0 17.6 3.6 6.2
Other 6.9 7.1 10.1 6.8 7.3 8.8 6.8 7.1 6.7 7.6 7.4 Royalties 5.8 6.8 5.8 15.4 20.5 25.3 26.1 34.5 8.5 8.7 27.0 Operating profit 56 62 31 57 69 84 130 106 151 205 389 OP margin 30.0 32.4 18.1 27.0 33.6 36.9 44.0 39.1 20.1 27.1
Net profit 52 34 26 46 57 73 129 109 154 159 368 NP margin 28.3 17.8 15.5 21.8 27.7 32.1 43.7 40.2 20.4 21.0
YoY growth Revenue 31.0 30.8 -6.8 -25.9 11.6 17.9 74.0 28.8 23.8 0.4 32.0 Lineage I 51.3 45.1 62.7 15.2 4.4 -18.7 5.8 -2.7 4.9 40.3 -3.9 Lineage II -22.8 -15.5 -1.8 -5.4 -2.9 -3.5 5.7 -18.2 -35.3 -12.2 -5.2 Aion -46.6 -36.0 -16.1 -13.7 -27.5 -11.9 -9.3 -21.1 -36.7 -32.2 -18.0 Blade & Soul -37.8 -33.5 2.4 19.4 -16.8 -33.9 10.8 -9.2
Guild Wars 2 -46.6 -71.8 -20.2 0.4 18.5 1.4 -25.2 -1.8
Royalties 69.6 -5.8 -3.6 127.0 293.1 339.2 683.7 188.6 400.2 2.9 309.3 Operating profit 348.4 -660.3 -16.5 -49.9 24.8 34.2 323.3 86.5 12.3 35.7 89.4 Net profit 321.7 -537.4 -44.2 -55.2 9.4 112.7 390.4 137.7 28.3 3.2 131.8 QoQ growth Revenue -34.8 3.9 -11.6 23.7 -1.7 9.7 30.5 -8.4
Lineage I 1.8 28.4 -26.5 20.0 -7.8 0.0 -4.4 10.3
Lineage II -13.6 0.6 -8.7 19.2 -11.3 0.0 0.0 -7.8
Aion 12.9 -17.8 -2.8 -4.4 -5.2 0.0 0.0 -16.8
Blade & Soul -38.7 -14.3 43.5 -11.9 -5.5 0.0 0.0 -30.0
Guild Wars 2 -69.4 -20.6 -15.3 37.1 -13.5 0.0 0.0 17.2
Royalties -24.6 21.3 -24.4 228.0 30.6 35.5 35.0 20.8
Operating profit -51.0 12.1 -50.6 84.7 22.1 20.6 55.7 -18.6
Net profit -48.7 -34.6 -23.1 73.8 25.2 27.1 77.3 -15.8
Notes: All figures are based on consolidated K-IFRS. Source: Company data, KDB Daewoo Securities Research estimates
Table 222.2. Earnings forecast revisions (Wbn, W, %, %p) Previous Revised % chg. 2014F2014F2014F 2015F2015F2015F 2014F2014F2014F 2015F2015F2015F 2014F2014F2014F 2015F2015F2015F Revenue 998 1,090 999 1,243 0.1 14.0 Operating profit 389 435 389 510 0.0 17.2 Net profit 373 411 368 446 -1.3 8.5 EPS (W) 17,023 18,752 16,773 20,341 -1.5 8.5 OP margin 39.0 39.9 38.9 41.0 0.0 1.1 Net margin 37.4 37.7 36.8 35.9 -0.5 -1.8 Notes: All figures are based on consolidated K-IFRS. Source: Company data, KDB Daewoo Securities Research estimates
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February 14, 2014 NCsoft
NCsoft (036570 KS/Buy/TP: W310,000)
Comprehensive Income Statement (Summarized) Statement of Financial Condition (Summarized) (Wbn) 12/12 12/13F 12/14F 12/15F (Wbn) 12/12 12/13F 12/14F 12/15F Revenue 754754754 757757757 999999999 1,2431,2431,243 Current Assets 674674674 853853853 1,3081,3081,308 1,8371,8371,837 Cost of SalesSalesSales 226226226 227227227 300300300 373373373 Cash and Cash Equivalents 123 300 578 928 Gross Profit 528528528 530530530 699699699 870870870 AR & Other Receivables 80 80 106 132 SG&A Expenses 376376376 324324324 310310310 360360360 Inventories 2 2 3 3 Operating Profit (Adj) 151151151 205205205 389389389 510510510 Other Current Assets 469 471 621 774 Operating Profit 151151151 205205205 389389389 510510510 NonNonNon-Non ---CurrentCurrent Assets 643643643 611611611 600600600 593593593 NonNonNon-Non ---OperatingOperating Profit 323232 111111 616161 363636 Investments in Associates 21 21 27 34 Net Financial Income 17 21 30 46 Property, Plant and Equipment 426 402 383 367 Net Gain from Inv in Associates 7 0 0 0 Intangible Assets 133 125 119 114 Pretax Profit 183 216 450 546 Total Assets 1,3171,3171,317 1,4651,4651,465 1,9081,9081,908 2,4302,4302,430 Income Tax 29 58 82 100 Current Liabilities 236236236 237237237 308308308 381381381 Profit from Continuing Operations 154 159 368 446 AP & Other Payables 23 23 30 37 Profit from Discontinued Operations 0 0 0 0 Short-Term Financial Liabilities 12 12 12 12 Net Profit 154 159 368 446 Other Current Liabilities 201 202 266 332 Controlling Interests 156 159 368 446 NonNonNon-Non ---CurrentCurrent Liabilities 616161 616161 777777 929292 Non-Controlling Interests -2 0 0 0 Long-Term Financial Liabilities 12 12 12 12 Total Comprehensive Profit 150150150 159159159 368368368 446446446 Other Non-Current Liabilities 49 49 65 80 Controlling Interests 154 163 379 459 Total Liabilities 296296296 297297297 385385385 473473473 Non-Controlling Interests -4 -5 -11 -13 Controlling Interests 1,0011,0011,001 1,1471,1471,147 1,5031,5031,503 1,9371,9371,937 EBITDA 190 237 415 531 Capital Stock 11 11 11 11 FCF (Free Cash Flow) 121 191 446 520 Capital Surplus 220 220 220 220 EBITDA Margin (%) 25.2 31.3 41.5 42.7 Retained Earnings 871 1,017 1,373 1,807 Operating Profit Margin (%) 20.0 27.1 38.9 41.0 NonNonNon-Non ---ControllingControlling Interests 202020 202020 202020 202020 Net Profit Margin (%) 20.7 21.0 36.8 35.9 Stockholders' Equity 1,0211,0211,021 1,1671,1671,167 1,5231,5231,523 1,9571,9571,957
Cash Flows (Summarized) Forecasts/Valuations (Summarized) (Wbn) 12/12 12/13F 12/14F 12/15F 12/12 12/13F 12/14F 12/15F Cash Flows from Op Activities 211 191 446 520 P/E (x) 21.1 34.3 12.8 10.6 Net Profit 154 159 368 446 P/CF (x) 14.3 24.0 10.6 9.0 Non-Cash Income and Expense 77 69 78 76 P/B (x) 3.0 4.4 2.9 2.3 Depreciation 29 24 20 16 EV/EBITDA (x) 14.6 20.0 8.7 5.8 Amortization 10 8 7 5 EPS (W) 7,120 7,236 16,773 20,341 Others 38 37 51 55 CFPS (W) 10,556 10,370 20,325 23,793 Chg in Working Capital 0 1 52 52 BPS (W) 50,384 57,037 73,264 93,059 Chg in AR & Other Receivables -29 0 -25 -25 DPS (W) 600 600 600 600 Chg in Inventories -1 0 -1 -1 Payout ratio (%) 7.8 7.5 3.3 2.7 Chg in AP & Other Payables -3 0 2 2 Dividend Yield (%) 0.4 0.2 0.3 0.3 Income Tax Paid ---40 -404040 ---58-585858 ---82-828282 ---100-100100100 Revenue Growth (%) 23.8 0.4 32.0 24.4 Cash Flows from Inv Activities -146 -2 -149 -151 EBITDA Growth (%) 18.0 24.7 75.1 28.0 Chg in PP&E -89 0 0 0 Operating Profit Growth (%) 11.0 35.8 89.8 31.1 Chg in Intangible Assets -4 0 0 0 EPS Growth (%) 28.8 1.6 131.8 21.3 Chg in Financial Assets 33 -2 -149 -151 Accounts Receivable Turnover (x) 10.1 9.8 11.2 10.9 Others ---86 -868686 000 000 000 Inventory Turnover (x) 456.3 370.4 420.6 409.9 Cash Flows from Fin Activities 6 -12 -12 -12 Accounts Payable Turnover (x) 66.1 33.7 38.3 37.3 Chg in Financial Liabilities 11 0 0 0 ROA (%) 12.6 11.4 21.8 20.6 Chg in Equity 0 0 0 0 ROE (%) 16.8 14.8 27.7 25.9 Dividends Paid -12 -12 -12 -12 ROIC (%) 31.1 33.2 78.2 120.4 Others 777 000 000 000 Liability to Equity Ratio (%) 29.0 25.5 25.3 24.2 Increase (Decrease) in Cash 64 177 278 350 Current Ratio (%) 286.1 360.7 424.2 482.3 Beginning Balance 59 123 300 578 Net Debt to Equity Ratio (%) -52.8 -61.5 -74.7 -83.3 Ending Balance 123123123 300300300 578578578 928928928 Interest Coverage Ratio (x) 174.7 180.3 341.5 448.0 Source: Company data, KDB Daewoo Securities Research estimates
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February 14, 2014 NCsoft
APPENDIX 1
Important Disclosures & Disclaimers 222-2---YearYear Rating and Target Price History
Company (((Code)(Code)Code)Code) DateDateDate RatingRatingRating Target Price (W) NCsoft (036570) 11/26/2013 Buy 310,000 NCsoft 600,000 04/25/2013 Buy 250,000 500,000 02/05/2013 Buy 200,000 400,000 12/17/2012 Buy 280,000 11/07/2012 Buy 310,000 300,000 08/06/2012 Buy 420,000 200,000 02/06/2012 Buy 510,000 100,000 0 Feb 12 Feb 13 Feb 14
Stock Ratings Industry Ratings Buy : Relative performance of 20% or greater Overweight : Fundamentals are favorable or improving Trading Buy : Relative performance of 10% or greater, but with volatility Neutral : Fundamentals are steady without any material changes Hold : Relative performance of -10% and 10% Underweight : Fundamentals are unfavorable or worsening Sell : Relative performance of -10% Ratings and Target Price History (Share price ( ─), Target price ( ▬), Not covered ( ■), Buy ( ▲), Trading Buy ( ■), Hold ( ●), Sell ( ◆)) * Our investment rating is a guide to the relative return of the stock versus the market over the next 12 months. * Although it is not part of the official ratings at Daewoo Securities, we may call a trading opportunity in case there is a technical or short-term material development. * The target price was determined by the research analyst through valuation methods discussed in this report, in part based on the analyst’s estimate of future earnings. * The achievement of the target price may be impeded by risks related to the subject securities and companies, as well as general market and economic conditions.
Disclosures As of the publication date, Daewoo Securities Co., Ltd. has acted as a liquidity provider for equity-linked warrants backed by shares of NCsoft as an underlying asset, and other than this, Daewoo Securities has no other special interests in the covered companies. As of the publication date, Daewoo Securities Co., Ltd. issued equity-linked warrants with NCsoft as an underlying asset, and other than this, Daewoo Securities has no other special interests in the covered companies.
Analyst Certification The research analysts who prepared this report (the “Analysts”) are registered with the Korea Financial Investment Association and are subject to Korean securities regulations. They are neither registered as research analysts in any other jurisdiction nor subject to the laws and regulations thereof. Opinions expressed in this publication about the subject securities and companies accurately reflect the personal views of the Analysts primarily responsible for this report. Daewoo Securities Co., Ltd. policy prohibits its Analysts and members of their households from owning securities of any company in the Analyst’s area of coverage, and the Analysts do not serve as an officer, director or advisory board member of the subject companies. Except as otherwise specified herein, the Analysts have not received any compensation or any other benefits from the subject companies in the past 12 months and have not been promised the same in connection with this report. No part of the compensation of the Analysts was, is, or will be directly or indirectly related to the specific recommendations or views contained in this report but, like all employees of Daewoo Securities, the Analysts receive compensation that is impacted by overall firm profitability, which includes revenues from, among other business units, the institutional equities, investment banking, proprietary trading and private client division. At the time of publication of this report, the Analysts do not know or have reason to know of any actual, material conflict of interest of the Analyst or Daewoo Securities Co., Ltd. except as otherwise stated herein.
Disclaimers This report is published by Daewoo Securities Co., Ltd. (“Daewoo”), a broker-dealer registered in the Republic of Korea and a member of the Korea Exchange. Information and opinions contained herein have been compiled from sources believed to be reliable and in good faith, but such information has not been independently verified and Daewoo makes no guarantee, representation or warranty, express or implied, as to the fairness, accuracy, completeness or correctness of the information and opinions contained herein or of any translation into English from the Korean language. If this report is an English translation of a report prepared in the Korean language, the original Korean language report may have been made available to investors in advance of this report. Daewoo, its affiliates and their directors, officers, employees and agents do not accept any liability for any loss arising from the use hereof. This report is for general information purposes only and it is not and should not be construed as an offer or a solicitation of an offer to effect transactions in any securities or other financial instruments. The intended recipients of this report are sophisticated institutional investors who have substantial knowledge of the local business environment, its common practices, laws and accounting principles and no person whose receipt or use of this report would violate any laws and regulations or subject Daewoo and its affiliates to registration or licensing requirements in any jurisdiction should receive or make any use hereof. Information and opinions contained herein are subject to change without notice and no part of this document may be copied or reproduced in any manner or form or redistributed or published, in whole or in part, without the prior written consent of Daewoo. Daewoo, its affiliates and their directors, officers, employees and agents may have long or short positions in any of the subject securities at any time and may make a purchase or sale, or offer to make a purchase or sale, of any such securities or other financial instruments from time to time in the open market or otherwise, in each case either as principals or agents. Daewoo and its affiliates may have had, or may be expecting to enter into, business relationships with the subject companies to provide investment banking, market-making or other financial services as are permitted under applicable laws and regulations. The price and value of the investments referred to in this report and the income from them may go down as well as up, and investors may realize losses on any investments. Past performance is not a guide to future performance. Future returns are not guaranteed, and a loss of original capital may occur
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February 14, 2014 NCsoft
Distribution United Kingdom: This report is being distributed by Daewoo Securities (Europe) Ltd. in the United Kingdom only to (i) investment professionals falling within Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (the “Order”), and (ii) high net worth companies and other persons to whom it may lawfully be communicated, falling within Article 49(2)(A) to (E) of the Order (all such persons together being referred to as “Relevant Persons”). This report is directed only at Relevant Persons. Any person who is not a Relevant Person should not act or rely on this report or any of its contents. United States: This report is distributed in the U.S. by Daewoo Securities (America) Inc., a member of FINRA/SIPC, and is only intended for major institutional investors as defined in Rule 15a-6(b)(4) under the U.S. Securities Exchange Act of 1934. All U.S. persons that receive this document by their acceptance thereof represent and warrant that they are a major institutional investor and have not received this report under any express or implied understanding that they will direct commission income to Daewoo or its affiliates. Any U.S. recipient of this document wishing to effect a transaction in any securities discussed herein should contact and place orders with Daewoo Securities (America) Inc., which accepts responsibility for the contents of this report in the U.S. The securities described in this report may not have been registered under the U.S. Securities Act of 1933, as amended, and, in such case, may not be offered or sold in the U.S. or to U.S. persons absent registration or an applicable exemption from the registration requirements. Hong Kong: This document has been approved for distribution in Hong Kong by Daewoo Securities (Hong Kong) Ltd., which is regulated by the Hong Kong Securities and Futures Commission. The contents of this report have not been reviewed by any regulatory authority in Hong Kong. This report is for distribution only to professional investors within the meaning of Part I of Schedule 1 to the Securities and Futures Ordinance of Hong Kong (Cap. 571, Laws of Hong Kong) and any rules made thereunder and may not be redistributed in whole or in part in Hong Kong to any person. All Other Jurisdictions: Customers in all other countries who wish to effect a transaction in any securities referenced in this report should contact Daewoo or its affiliates only if distribution to or use by such customer of this report would not violate applicable laws and regulations and not subject Daewoo and its affiliates to any registration or licensing requirement within such jurisdiction.
KDB Daewoo Securities International Network
Daewoo SecuriSecuritiesties Co. Ltd. (Seoul) Daewoo Securities (Hong Kong) Ltd. Daewoo Securities (America) Inc. Head Office Two International Finance Centre 320 Park Avenue, 31st Fl. 34-3 Yeouido-dong, Yeongdeungpo-gu Suites 2005-2012 New York, NY 10022 Seoul 150-716 8 Finance Street, Central Korea Hong Kong United States Tel: 82-2-768-3026 Tel: 85-2-2514-1304 Tel: 1-212-407-1000 Daewoo Securities (Europe) Ltd. Daewoo Securities (Singapore) Pte. Ltd. Tokyo Representative Office Tower 42, Level 41 6 Battery Road, #11-01 7th Floor, Yusen Building 25 Old Broad Street Singapore, 049909 2-3-2 Marunouchi, Chiyoda-ku London EC2N 1HQ Tokyo 100-0005 United Kingdom Japan Tel: 44-20-7982-8016 Tel: 65-6671-9845 Tel: 81-3- 3211-5511
Beijing Representative Office Shanghai Representative OfficeOfficeOffice Ho Chi Minh Representative Office Suite 2602, Twin Towers (East) Unit 13, 28 th Floor, Hang Seng Bank Tower Centec Tower B-12 Jianguomenwai Avenue 1000 Lujiazui Ring Road 72-74 Nguyen Thi Minh Khai Street Chaoyang District, Beijing 100022 Pudong New Area, Shanghai 200120 Ward 6, District 3, Ho Chi Minh City China China Vietnam Tel: 86-10-6567-9699 Tel: 86-21-5013-6392 Tel: 84-8-3910-6000
KDB Daewoo Securities Research 5