COMPANY ANALYSIS 31 August 2017

Summary

THQ Nordic (THQNO.ST)

List: The best is yet to come! Market Cap: 5,294 MSEK  The Q2 report beat our projections on all accounts, primarily due Industry: Gaming CEO: Lars Wingefors to solid catalog sales. The pipeline and release schedule for H2 Chairman: Kicki Wallje-Lund 2017 looks extremely promising; we continue to believe that the

sales during Q4 will be on par or above the total sales of 2016.

The best is yet to come! OMXS 30 THQ Nordic

 Prior and in conjunction with the game conference Gamescom, 90 THQ Nordic revealed two new upcoming releases; Black Mirror 80 70 and BIOMUTANT. The company also has acquired the fifty men 60 strong development studio Black Forest Games and the smaller 50 40 Pieces Interactive. THQ Nordic continues to expand their game 30 20 portfolio and enhance their capacity to develop first class asset. 10 0  We have made some positive adjustments to our long-term 22-Nov 20-Feb 21-May 19-Aug

projections. Our Fair Value estimated is adjusted to 81 (69) SEK

per share. We view THQ Nordic as relatively fairly valued, but a quality growth company like this seldom comes at a bargain. Like

the “Oracle of Omaha” says; “It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”

Redeye Rating (0 – 10 points)

Management Ownership Profit outlook Profitability Financial strength

8.0 points 9.0 points 7.0 points 6.0 points 8.0 points

Key Financials

2015 2016 2017E 2018E 2019E Share information Revenue, MSEK 213 302 607 851 1,010 Share price (SEK) 73.5

Growth 0% 42% 101% 40% 19% Number of shares (m) 72.0 EBITDA 105 132 285 401 482 Market Cap (MSEK) 5,294 EBITDA margin 49% 44% 47% 47% 48% Net debt (MSEK) -161

EBIT 67 95 198 286 340 Free float (%) 50 % EBIT margin 31% 31% 33% 34% 34% Daily turnover (’000) 40 Pre-tax earnings 66 93 197 286 340 Net earnings 51 72 153 223 265 Net margin 24% 24% 25% 26% 26%

Analysts: Kristoffer Lindstrom 2015 2016 2017E 2018E 2019E

Dividend/Share 0.00 0.00 0.00 0.00 0.00 [email protected]

2015 2016 2017E 2018E 2019E EPS adj. 0.00 1.00 2.12 3.09 3.68 P/E adj. 0.0 33.0 34.7 23.8 20.0 Tomas Otterbeck EV/S -0.1 7.4 8.5 6.0 5.0 [email protected] EV/EBITDA -0.1 16.9 18.0 12.7 10.4

Important information: All information regarding limitation of liability and potential conflicts of interest can be found at the end of the report.

Redeye, Mäster Samuelsgatan 42, 10tr, Box 7141, 103 87 Stockholm. Tel +46 8-545 013 30. E-post: [email protected] THQ Nordic

Redeye Rating: Background and definitions

The aim of a Redeye Rating is to help investors identify high-quality companies with attractive valuation.

Company Qualities

The aim of Company Qualities is to provide a well-structured and clear profile of a company’s qualities (or operating risk) – its chances of surviving and its potential for achieving long-term stable profit growth.

We categorize a company’s qualities on a ten-point scale based on five valuation keys; 1 – Management, 2 – Ownership, 3 – Profit Outlook, 4 – Profitability and 5 – Financial Strength.

Each valuation key is assessed based a number of quantitative and qualitative key factors that are weighted differently according to how important they are deemed to be. Each key factor is allocated a number of points based on its rating. The assessment of each valuation key is based on the total number of points for these individual factors. The rating scale ranges from 0 to +10 points.

The overall rating for each valuation key is indicated by the size of the bar shown in the chart. The relative size of the bars therefore reflects the rating distribution between the different valuation keys.

Management Our Management rating represents an assessment of the ability of the board of directors and management to manage the company in the best interests of the shareholders. A good board and management can make a mediocre business concept profitable, while a poor board and management can even lead a strong company into crisis. The factors used to assess a company’s management are: 1 – Execution, 2 – Capital allocation, 3 – Communication, 4 – Experience, 5 – Leadership and 6 – Integrity.

Ownership Our Ownership rating represents an assessment of the ownership exercised for longer-term value creation. Owner commitment and expertise are key to a company’s stability and the board’s ability to take action. Companies with a dispersed ownership structure without a clear controlling shareholder have historically performed worse than the market index over time. The factors used to assess Ownership are: 1 – Ownership structure, 2 – Owner commitment, 3 – Institutional ownership, 4 – Abuse of power, 5 – Reputation, and 6 – Financial sustainability.

Profit Outlook Our Profit Outlook rating represents an assessment of a company’s potential to achieve long-term stable profit growth. Over the long-term, the share price roughly mirrors the company’s earnings trend. A company that does not grow may be a good short-term investment, but is usually unwise in the long term. The factors used to assess Profit Outlook are: 1 – Business model, 2 – Sale potential, 3 – Market growth, 4 – Market position, and 5 – Competitiveness.

Profitability Our Profitability rating represents an assessment of how effective a company has historically utilised its capital to generate profit. Companies cannot survive if they are not profitable. The assessment of how profitable a company has been is based on a number of key ratios and criteria over a period of up to the past five years: 1 – Return on total assets (ROA), 2 – Return on equity (ROE), 3 – Net profit margin, 4 – Free cash flow, and 5 – Operating profit margin or EBIT.

Financial Strength Our Financial Strength rating represents an assessment of a company’s ability to pay in the short and long term. The core of a company’s financial strength is its balance sheet and cash flow. Even the greatest potential is of no benefit unless the balance sheet can cope with funding growth. The assessment of a company’s financial strength is based on a number of key ratios and criteria: 1 – Times-interest-coverage ratio, 2 – Debt-to-equity ratio, 3 – Quick ratio, 4 – Current ratio, 5 – Sales turnover, 6 – Capital needs, 7 – Cyclicality, and 8 – Forthcoming binary events.

Company analysis 2 THQ Nordic

Stronger than expected

The Q2 report beat our projections on all accounts, primarily due to solid catalog sales. The pipeline and release schedule for H2 2017 looks extremely promising; we continue to believe that the sales during Q4 will be on par or above the total sales of 2016.

Estimates vs Outcome THQ Nordic 2016- 2017- 2017E- Diff % MSEK Q2 Q2 Q2

Net sales 53 86 62 37% of which New releases 15 13 of which Catalog 71 49 Gross profit 47 78 54 EBITDA 25 40 26 53% EBIT 16 30 16 91%

Revenue growth 40% 62% 19% Gross profit margin 90% 91% 86% EBITDA margin 48% 46% 41% EBIT margin 31% 35% 25%

Source: Redeye Research

The reported net sales exceeded our estimates by a wide margin, mainly due to robust catalog sales of SEK 71m. The catalog churn compared to Q1 amounted to low 86%. During Q2 THQ Nordic announced that they are working on and will release Darksiders 3 during 2018, which is one of the company’s prime franchises. After the announcement, THQ Nordic conducted some successful promotion activity and experienced a significant upswing in sales of older Darksiders titles, which explains the large deviation to our projections. The strong catalog sales also show the strength of THQ Nordic´s business model with a focus on asset care as new releases and sequels will boost the value of the whole IP. The company also experienced strong sales of This Is the Police and Spellforce – Anniversary Edition during the period.

As THQ Nordic has great operational leverage, the result outperformed our estimates to an even larger extent than the sales figures. The gross margin was also on record levels due to a significant share own IP sales and digital sales.

Company analysis 3 THQ Nordic

THQ Nordic: Sales from new releases (r12m), Catalog sales (r12m) & CAPEX (r12m)

700 300 Forecast 600 250

500 200 407 400 150

300 120 98 Sales Sales mSEK

118 CAPEX mSEK 88 93 100 200 79 75 72 254 252 214 223 218 50 100 180 138 147 156

0 0 2015-Q4 2016-Q1 2016-Q2 2016-Q3 2016-Q4 2017-Q1 2017-Q2 2017E-Q3 2017E-Q4

Catalog sales (r12m) Sales from new releases (r12m) CAPEX (r12m)

Source: THQ Nordic & Redeye Research

The investments into development continued at a high phase and amounted to SEK 58.6m during the period. The pipeline and release schedule for H2 2017 looks extremely promising. The major part of H2 sales will be during Q4 as the company will release a handful of titles.

Gamescom news: BIOMUTANT and Black Mirror Before the Gamescom conference, THQ Nordic revealed to new previously undisclosed projects; BIOMUTANT and Black Mirror.

BIOMUTANT – Publishing deal and new IP Biomutant is a new IP where THQ Nordic will be the publisher. The game is developed by Experiment101, a Swedish based game studio consisting of industry veterans from, among others, Just Cause creator Avalanche Studios. The studio is owned by the Goodbye Kansas Entertainment Group and the Head of Studio Stefan Ljungqvist.

Company analysis 4 THQ Nordic

The title is an open-world, post-apocalyptic kung-fu fable RPG. Open world RPG games have risen in popularity the last years, and our first impression of the gameplay is positive. The game is set to be released during 2018, likely H1. The game will be available for PlayStation4, Xbox One and on Windows PC. During the first 18 hours, the teaser trailer has been viewed over 300 000 times, given that this is a new IP and from a “new” game studio the numbers must be seen as compelling.

BIOMUTANT YouTube data

BIOMUTANT Announcment Trailer, IGN

Views: 300k during first 18 hours

Source: Youtube

Black Mirror – Horror returns Is a reboot of the old Black Mirror franchise and the new game will tell a new and independent story. The game is a Gothic horror adventure. The first title in the franchise was released in 2004 with sequels in 2009 and 2011.

Sales potential and forecast Today we have only limited information regarding both the titles. We will likely get a better understanding of the sales potential the coming months as we see reviews, interest for gameplay clips, etc. Black Mirror replaces Aquanox in the 2017 release schedule and the sales potential for the new title, according to THQ Nordic, is similar to Aquanox. Compared to other upcoming releases we count both Black Mirror and Aquanox as minor ones.

Creating forecasts for BIOMUTANT today is extremely speculative, and we will only make conservative assumptions. We will gradually develop a better understanding of the game when more content is released. We know however that the game has been under development for more than two years by a highly dedicated and experienced team. Today we will assume that BIOMUTANT will create an income of about SEK 45m during 2018 for THQ Nordic. We have already accounted for coming releases such as

Company analysis 5 THQ Nordic

BIOMUTANT in our estimates, thus the reveal do not lead to any larger forecast adjustment.

Sales model video game sales Case: Base Release price: 600 Game: BIOMUTANT Price long-tail 300

Sold copies (m): 0.5 Release date: 2018 Base 0.50 Platforms: Cross Bear 0.30 Formats: On-& offline Bull 1.00 Digital share: 55%

Release period Catalog period Weight 60% 40% Retail revenue (msek) 180 108 VAT 15% 15% Gross revenue (msek) 153 92 Platform/wholesaler cut 35% 35% THQ Nordic IP share 45% 45% Net sales THQ Nordic (msek) 45 27

Source: Redeye Research

Acquisition of Black Forest Games After the release of the Q2 numbers, THQ Nordic announced the acquisition of the German design studio Black Forest Games and with it the IP rights to their whole game portfolio with brands like; Giana Sisters, Helldorado, and Rouge Stormers. The company is currently developing an open-world RPG, more details about the project will be revealed in the near-term according to THQ Nordic. The price for Black Forest Games, with the fifty men strong crew, amounts to EUR 0.9m, with and earn-out consideration of EUR 0.45m. Black Forest Games portfolio and data from steamspy Score rank(Userscore / Game Release date Owners Metascore) Giana Sisters: Twisted Dreams Oct 22, 2012 62% (86%/77%) 640,891 ±22,967 Giana Sisters: Twisted Dreams - Rise of the Owlverlord Sep 26, 2013 64% (87%/84%) 149,606 ±11,103 Rogue Stormers Apr 21, 2016 25% (68%/68%) 79,546 ±8,096 Helldorado Apr 30, 2009 N/A (N/A/65%) 41,821 ±5,871 Airline Tycoon Deluxe Nov 14, 2014 28% (70%) 29,318 ±4,915 Giana Sisters: Dream Runners Aug 26, 2015 N/A (N/A) 21,341 ±4,194 Giana Sisters 2D Oct 23, 2015 33% (73%) 13,581 ±3,345 Source: steamspy

Overall we find that the price for the studio must be viewed as relatively cheap when considering that THQ Nordic now have a large internal studio they can be used for further asset care projects. We do not have any financial information regarding the studio or the current pipeline, so we do not make any adjustments to our forecasts today.

Company analysis 6 THQ Nordic

Another studio under the THQ Nordic brand THQ Nordic has also acquired the Swedish studio Pieces Interactive, known for working on games on the Magicka series. The price tag amounts to a mere SEK 2.8m, a low price for a 13 men strong studio according to us. Pieces are working on content for a development project owned by THQ Nordic. If we look closer in the annual report, Pieces Interactive that is, the project is codenamed “RED PANDA.” Most of the newly acquired company’s earlier projects have been games played in a top- down view. Likely “RED PANDA” is a title in that genre.

Forecast adjustments Overall we find the report was surprisingly strong, mainly due to the successful digital promotions of the Darksiders franchise; we will not make any larger adjustments to our forecast for Q3 and Q4 as the deviation occurred due to “non-recurring factors.” However, we have adjusted our long-term growth and margins slightly upwards as the portfolio of IPs continue to expand, the internal development workforce has increased, and the investment rate in new projects is ramping up.

Estimate revisions MSEK 2017E 2018E 2019E Net sales Old 608 841 1 015 New 607 851 1 010 % change 0% 1% -1% EBITDA Old 283 394 480 margin 47% 47% 47% New 285 401 482 margin 47% 47% 48% % change 1% 2% 0% EBIT Old 196 280 340 margin 32% 33% 33% New 198 286 340 margin 33% 34% 34% % change 1% 2% 0% Source: Redeye Research

Company analysis 7 THQ Nordic

The next quarter: Only minor releases The only announced release during Q3 is the remaster Sine Mora EX; overall we find the sales potential as relatively low for the title. The game was released on August the 8th and has currently about 10k players as such; we do not expect any larger revenue contribution from the release during Q3.

Sine Mora EX, number of players on Steam & price

12000 12

10000 10

8000 8

6000 6

4000 4

2000 2

0 0

Number of players Price ($)

Source: steamspy

As visible in the table below; the release schedule during Q4 is very crowded, where we believe that ELEX, Battle Chasers, SpellForce 3 holds the greatest sales potential. The Guild 3 will be released as an early access instead of a full game during Q4. The release schedule is updated frequentley and can be seen here.

THQ Nordic release pipeline Sales Release Name IP-owner Platform Chanel potential date (1-5) Sine Mora EX THQ Nordic PC/PS4/XB1 On- & offline 1 Q3 2017 Baja:Edge of Control HD THQ Nordic PC/PS4/XB1 On- & offline 1 Q4 2017 Battle Chasers: Nightwar Airship Syndicate PC/MAC, XB1, PS4, NS On- & offline 3 Q4 2017 Black Mirror THQ Nordic PC/MAC/LINUX, XB1, PS4 On- & offline 2 Q4 2017 ELEX THQ Nordic PC/PS4/XB1 On- & offline 3.5 Q4 2017 Rad Rodgers THQ Nordic PC/PS4/XB1 On- & offline 1 Q4 2017 SpellForce 3 THQ Nordic PC On- & offline 3 Q4 2017 The Guild 3 (Early access) THQ Nordic PC On- & offline 3 Q4 2017 The Hunter - Call of the Wild Expansive Worlds AB PS4/XB1 Offline 2 Q4 2017 The Muscle Hustle Shuck Games iOS/Android Online 1 Q4 2017 This is the Police THQ Nordic iOS/Android Online 1 Q4 2017 We Sing Pop Wired Productions PS4/XB1 On- & offline 2 Q4 2017 Wreckfest Bugbear PC/PS4/XB1 On- & offline 2 Q4 2017 Aquanox THQ Nordic PC/PS4/XB1 On- & offline 2 2018 BIOMUTANT Experiment101 PC/PS4/XB1 On- & offline 3 2018 Darksiders 3 THQ Nordic PC/PS4/XB1 On- & offline 5 2018

Source: THQ Nordic & Redeye Research

Company analysis 8 THQ Nordic

We believe the sales figures for Q3 will be lower than the ones we saw during Q2, and also likely less than Q3 2016 due to only minor releases. As stated by the company; the major part of the sales during H2’17 will be generated during Q4.

Quarterly estimates THQ Nordic 2016- 2017E- MSEK Q3 Q3

Net sales 78 54 of which New releases 29 7 of which Catalog 49 47 EBITDA 25 22 EBIT 16 13

Revenue growth 95% -31% EBITDA margin 33% 41% EBIT margin 21% 24%

Source: Redeye Research

For Q3 we expect to see net sales in the region of SEK 54m, of which new releases SEK 7m and catalog sales of SEK 47m. We believe the catalog sales, which are an effect of earlier releases, will drop quite significantly from the sales levels during Q2 as that period was positively affected by the Darksiders promotion bundles. We expect that the company will produce an EBIT of SEK 13m which corresponds to a healthy EBIT margin of 24%. We urge investors to view THQ on a longer time frame and not based on quarterly growth numbers, the company is investing heavily in development, and this will continue to drive the income levels to new heights in the coming years.

Net sales and EBIT margin

1400 36%

1200 35%

1000 34%

800 33%

600 1236 32%

1010 EBIT margin Net(mSEK) sales 400 851 31% 607 200 30% 302 213 0 29% 2015 2016 2017e 2018e 2019e 2020e

Net sales EBIT margin

Source: THQ Nordic & Redeye Research

Company analysis 9 THQ Nordic

Investment case

We initiated coverage of THQ Nordic relatively recently. The full initiation report can be found here. Since our first report the stock has continued to outperform, but find still that THQ Nordic is an attractive growth case where the market has yet to understand the inherent value of the assets and what the future will bring for the company. We believe that the short history of the company has a publically traded entity and an overall low understanding of the Gaming industry creates an opportunity to acquire shares in the company at a fair price compared to future fundamentals. The following bullet points summarize our investment thesis;

 Despite producing SEK 302m in income during 2016, the major part of the portfolio potential is still untapped. Significant development projects will be released in the years 2017, 2018 and 2019. This will take revenues to completely new levels. By the end of Q2’17 THQ Nordic had 30 ongoing development projects, where 12 is disclosed.

 THQ Nordic’s core strategy is to acquire IPs at depressed prices and then enhancing their value. This focus will continue to keep risks at low levels and create significant investment returns for shareholders going onwards

 The management team owns 60%+ of capital, has extensive experience from the industry and is highly committed to building “something big”. We believe there should be a premium on the valuation because of the strong shareholder focus

 THQ Nordics extensive games portfolio with 75 game franchises and over 200 games create a great opportunity for stable cash flows in the years to come. We believe one of the most important ways to monetize on the company’s games portfolio will be through the subscription-based model currently offered by the biggest players in the industry

Untapped portfolio potential A large part of the IP portfolio is currently being developed and do not generate any income today. This will change over the coming years when the company releases their first internally developed IPs and sequels to their strongest game franchises. We believe that the company will now move up to the next level, which could also boost business opportunities and proposals from players in the industry. The post on the balance sheet for projects under development, games still to be released, increased by

Company analysis 10 THQ Nordic roughly 240% from 2015 to 2016. A large part of these assets will start generating income during late 2017 and 2018.

Projects and Intagible asset

35 400

30 350 300 25 8 14 7 13 250 20 200 15 150 21 Numberofprojects 10 20

18 17 100 Intagible asset (mSEK) 5 50

0 0 2016-Q3 2016-Q4 2017-Q1 2017-Q2

Undiscloused projects Announced projects Intagible asset (mSEK)

Source: THQ Nordic

We know that THQ Nordic is developing Darksiders 3, a sequel within their most prominent franchise. One major development project remains undisclosed but the title have the same type of development budget like Darksiders 3, so the potential should be similar. We see great value in doing sequels to MX vs. ATV, Red Faction, Delta Force and more.

Focus on long-term value and buying cheap THQ Nordic is what we like to call an owner-operator company where the founders, in total controlling more than 60% of capital, are focused on creating long-term value for the fellow shareholders. The team of the company and the business mind of Lars Wingefors, largest owner (50% of the shares) and founder should not be underestimated.

THQ Nordic’s core business strategy is to buy IPs, companies and game franchises at depressed prices and then enhancing their value. In those cases management has patiently waited for the right opportunities. The approach creates low investment needs in relation to potential financial success and less risk. We can take the THQ IP portfolio acquisition, described thoroughly further down in the analysis, as an example. The asset was acquired for about SEK 40m, we approximate that between 2013 and 2016 the IPs has generated roughly SEK 400m in revenues, that’s about 10 times the initial investment (development and marketing excluded).

Company analysis 11 THQ Nordic

Sales return on THQ asset

450 400 400 350 300 250 10x mSEK 200 150 100 40 50 0 Acquisition of THQ's Accumulated sales IP portfolio of the IP asset acquired (2013- 2016) Source: Redeye Research

Our forecast, and therefore also our DCF valuation, does not factor in possible future value-adding acquisitions of IPs or companies, but it is a fact that THQ Nordic will continue to acquire, and will do so with bravura.

Company analysis 12 THQ Nordic

Counterarguments (Bear-points) It is always sensible to develop some counterarguments to an investment thesis. Below, we present some bear-points that an investor should consider and have in mind if the future development is not favorable.

 Title risks of larger releases – Despite THQ’s extensive portfolio there is always some title risk when releasing larger projects. Disappointing releases and/or reviews could dampen investors’ enthusiasm and hurt the company’s financials.  Rising competition in bidding for acquisitions – As THQ Nordic is entering a new level as a company, so will the future acquisitions in terms of size and target reputation. Going from an unknown player to a more established company might make it harder to find cheap deals.  Management is paramount – Just as much we love a strong and committed management team, it is also a fact that relying on a few key individuals also poses a risk.

Company analysis 13 THQ Nordic

Valuation

In our Base-case scenario, we model that the investment in new releases continues at a high phase, which boosts the growth rates. We want to highlight that our Base-case assumes moderate success for THQ Nordic’s larger projects; this is to keep a “margin of safety” in our favor. Despite our relatively conservative estimates, we anticipate a CAGR of sales of 23% during the next ten years. We will see a significant boost in sales levels during the coming two years was the company enters the “next” level from the upcoming releases of major sequels and new IPs. Profitability wise we believe it is possible that the gross margins will expand as the revenue streams from the own IPs will grow faster than the publishing revenue. We also see that the significant scalability inherit by THQ Nordic’s business model, and lower other expenses in relation to sales in the coming years. We model an average EBIT margin of 35% during our forecast period.

In the terminal year we use the conservative assumption of an FCF growth of 2% and an EBIT margin of 36%, this indicated an “exit” EV/EBIT multiple of 1x, lower than what other diversified Gaming companies trade at today. We believe these assumptions warrant a large degree of safety. Our estimate does not take into account any future value-creating acquisitions of IPs or game studios.

THQ Nordic: Base-case Assumptions 2016-26 DCF-value CAGR Sales 23% WACC 7.5% EBIT margin (avg) 35% Net presenst value FCF 1 346 ROIC (avg) 30% Net present value of Terminal 4 361

Terminal EV 5 707 Terminal growth FCF 2.0% Net cash 139 Terminal EBIT margin 36% Value minorities 0 Exit EV/EBIT multiple 10x DCF-value 5 846 Estimated Fair value 81 Todays share price 73.0 Potential/Risk 11%

Source: Redeye Research

Our assumption generates a Fair value estimate, in Base-case of 81 (69) SEK per share. We believe the market is yet to grasp the fact that THQ Nordic is entering the next phase with the upcoming releases of sequels an entirely new IPs. We also find that the valuation of today puts too little premium on the competent management team and the possibility of future value enhancing acquisitions and deals.

Company analysis 14 THQ Nordic

Peer valuation In the same manner, as how we treat our other Gaming companies, we have divided our peer-valuation into peer groups of Swedish and International Gaming to display valuation differences between sub-segments in the gaming industry better. Our prime valuation metric is EV/EBIT as it, at least in some way, take into account the investment needs of gaming companies.

Swedish Gaming: At Redeye we also have coverage of Stillfront and G5, analyst research on the Starbreeze and Paradox Interactive are quite low, no projections are even available for Paradox. Overall, the companies within this peer group are expected to deliver healthy profit growth in the coming years. Our projections indicate that THQ Nordic will both outgrow this peer group and deliver higher profitability.

International Gaming: The companies in this peer -group are the “whales” of the gaming industry. Most of these enterprises act both as publisher, developers and platform owners. Most of them are also active in all sub-segments of the industry (cross platform in all genres). THQ Nordic is similar to these companies as they have an extensive cross-selling IP portfolio. Still the size of these firms makes a comparison not directly applicable. If our estimates become a reality, THQ Nordic will outperform this group of companies.

Peer valuation SALES EV/Sales EV/EBIT EBIT margin CAGR EV Company (MSEK) 2017E 2018E 2017E 2018E 2019E 16-19E 2017E 2018E 2019E Swedish Gaming Paradox Interactive 7 086 n.m. n.m. n.m. n.m. n.m. n.m. n.m. n.m. n.m. G5 Entertainment 3 343 3.0x 2.6x n.m. 18.8x 14.4x 43% n.m. n.m. n.m. Starbreeze 3 307 7.3x 3.1x n.m. 13.7x n.m. 47% -15% 22% 6% Stillfront 508 3.1x 1.8x 16.0x 6.0x 6.3x 34% 20% 30% 29%

Median 3 325 3.1x 2.6x 16x 14x 10x 43% 2% 26% 17% International Gaming Tencent 3 068 971 11.1x 8.3x 34.8x 27.1x 21.6x 34% 32% 31% 30% Activision 384 694 7.1x 6.6x 21.8x 18.0x 15.0x 4% 33% 37% 40% Nintendo 305 999 4.5x 3.5x 36.1x 19.9x 14.1x 38% 12% 18% 23% EA 261 040 6.3x 5.8x 18.7x 15.4x 14.1x 9% 34% 37% 39% Take-Two 71 845 5.2x 3.3x 24.2x 13.6x 15.9x 24% 21% 24% 20% Ubisoft 58 614 3.6x 3.0x 24.5x 15.9x 13.0x 17% 15% 19% 21% Bandai Namco 43 097 0.9x 0.9x 8.7x 7.9x 7.4x 7% 11% 11% 12% CD projekt 16 139 15.7x 9.9x 33.8x 21.2x 8.8x 37% 46% 47% 56% Median 166 442 5.7x 4.6x 24x 17x 14x 21% 27% 28% 27%

Peer Group median 84 884 4.4x 3.6x 20x 15x 12x 32% 14% 27% 22% THQ Nordic 5 098 8.4x 6.0x 26x 18x 15x 50% 33% 34% 34%

Source: Bloomberg & Redeye Research

Today THQ Nordic trades EV/EBIT2018E of 15x, which is a little below the large international gaming companies. We also find that the owner- operator team and possible future value-adding acquisition should warrant a premium. Overall we find THQ Nordic as fairly valued in a relative perspective.

Company analysis 15 THQ Nordic

Scenario analysis At Redeye we emphasize on the use of scenario-based analysis, as such, we always present a Base, Bear and Bull-case valuation. Our different cases create a Valuation range, which can be used to gauge implied future fundamental development at various share prices.

Bear-case In our Bear-case we have used much more conservative assumptions regarding the success of the larger upcoming releases and that ELEX will be a disappointment. We also model a much slower growth long-term growth of new release revenue, as in this scenario the earlier disappointments makes the company more cautious of new larger projects. However, the catalog revenue continues to develop at a healthy phase. The lower assumed growth leads to less operational leverage, and we model a less aggressive margin uptake. In our Bear-case, we expect a CAGR of 12% the coming ten years with an average EBIT margin of about 30%.

THQ Nordic: Bear-case Assumptions 2016-26 DCF-value CAGR Sales 14% WACC 7.5% EBIT margin (avg) 31% Net presenst value FCF 693 ROIC (avg) 23% Net present value of Terminal 1 890

Terminal EV 2 582 Terminal growth FCF 2.0% Net cash 139 Terminal EBIT margin 32% Value minorities 0 Exit EV/EBIT multiple 10x DCF-value 2 721 Estimated Fair value 38 Todays share price 73.0 Potential/Risk -48%

Source: Redeye Research

Our Bear-case assumptions generate an estimated value of 38 SEK per share. Given our assumptions and that THQ Nordic is truly committed to making value-adding acquisition and investments, the scenario must be seen as clearly conservative.

Company analysis 16 THQ Nordic

Bull-case In our Bull-case we assume a larger success for the upcoming major releases during 2017, 2018 and 2019, the company then reinvest those cash flows into even greater projects, which also works out well. We also model some success for the mobile venture within the Group. In this scenario, we assume a more rapid growth rate and higher margins due to operational leverage. The estimated CAGR amounts to 31% the coming ten years with an EBIT margin of about 38%. Our assumptions in the Bull-case regarding commercial success for the larger upcoming releases should not be seen as any “Blue-sky” scenario with overly positive estimates. For example, we assume that ELEX would sell 1.5 million copies during its lifetime and Darksiders 3 sells 3.2 million units. These assumptions are within reasonable bounds, but of course on the positive side of the spectrum.

THQ Nordic: Bull-case Assumptions 2016-26 DCF-value CAGR Sales 31% WACC 7.5% EBIT margin (avg) 38% Net presenst value FCF 2 440 ROIC (avg) 36% Net present value of Terminal 8 392

Terminal EV 10 832 Terminal growth FCF 2.0% Net cash 139 Terminal EBIT margin 38% Value minorities 0 Exit EV/EBIT multiple 10x DCF-value 10 971 Estimated Fair value 152 Todays share price 73.0 Potential/Risk 109%

Source: Redeye Research

Our Bull-case assumptions generate an estimated value of 152 SEK per share. Our scenario still does not take into account any future value enhancing acquisitions of IPs or game studios, which we will treat, act as a positive value adding option.

THQ Nordic: Fair value range

0 50 100 150 200 Last price 73.0

0 Bear-case: 5038 Base-case: 81100 Bull-case:150 152 200

We believe that THQ Nordic is entering its next phase as during 2017, 2018 and 2019 the company will release their first newly developed and fully owned sequels on the main franchises and an entirely new IP. The releases will bring the income levels to new heights and create new business opportunities.

Company analysis 17 THQ Nordic

Summary Redeye Rating

The rating consists of five valuation keys, each constituting an overall assessment of several factors that are rated on a scale of 0 to 2 points. The maximum score for a valuation key is 10 points.

Rating changes in the report No changes in Rating.

Management 8.0p The management team of THQ Nordic is by our measures highly competent with extensive experience from the Gaming industry. The company continuously put emphasis on a shareholder focus to generate long-term value creation by keeping to their core strategy; acquiring IPs at the cheap and increase their value by asset care. The operational team with Klemenz Kreuzer and Reinhard Pollice at the helm has been within the Gaming industry their entire professional life and shows profound experience. Lars Wingefors is an entrepreneur by heart; he started his first business at the age of 13 and has been selling video games for more than 20 years. We find the management of THQ Nordic as trustworthy as they have never tried to misguide the market; instead, they always make conservative statements and educate the market about their business.

Ownership 9.0p The ownership structure of THQ Nordic is, in our view, one of its key strengths. All the key personnel has substantial holdings in the company with the founder Lars Wingefors controlling more than 62% of the votes. The significant holdings create a focus on long-term value creation and not meeting short-term financial goals that a company led by “hired guns.” In addition to the substantial holdings of the management team, some of the most renowned institutional owners show up on the shareholder's list of THQ Nordic. Given the fact that the company is listed on Nasdaq First North this is quite the feat, as that listing reduces the possibility for institutional funds to own shares in the firm. Profit outlook 7.0p THQ Nordic has a large portfolio of game franchises with multiple streams of income and a massive player base. Some of the IPs, like Darksiders, Spellforce, Red Faction and MX vs. ATV has a large following and good reputation in the gamer community; this creates a pricing power and demand for new products. THQ Nordic is one of the larger game publishers/developers in Sweden. However, as the gaming industry is so massive, they are still a relatively small player.

Profitability 6.0p

During the past years, THQ Nordic has been growing heavily and still producing more than satisfying margins and return on asset. The future profitability levels will vary due to game release schemes as the business model inherits a high degree of scalability. Long-term increasing margins as the company continues to grow and the revenue streams from their own IPs increase even further.

Financial strength 8.0p THQ Nordic is an unleveraged company with a strong cash position. One of the company’s core strategies is to acquire game IPs from companies in financial distress; this has led to a conservative approach regarding putting on debt. The income streams are diversified with a large portfolio of IPs and different games. Overall the video game industry is not sensitive to the business cycle which dampens the financial risk of downturns.

Company analysis 18 THQ Nordic

Income statement 2015 2016 2017E 2018E 2019E DCF valuation Cash flow, MSEK Net sales 213 302 607 851 1,010 WACC (%) 7.5 % NPV FCF (2017-2019) 126 Total operating costs -108 -170 -322 -450 -528 NPV FCF (2020-2026) 1213 EBITDA 105 132 285 401 482 NPV FCF (2027-) 4245 Non-operating assets 167 Depreciation 0 0 0 0 0 Interest-bearing debt -29 Amortization -38 -37 -86 -116 -142 Fair value estimate MSEK 5722 Impairment charges 0 0 0 0 0 Assumptions 2017-2023 (%) EBIT 67 95 198 286 340 Average sales growth 21.1 % Fair value e. per share, SEK 81 EBIT margin 34.5 % Share price, SEK 73.5 Share in profits 0 0 0 0 0 Net financial items -1 -2 -1 0 0 Exchange rate dif. 0 0 0 0 0 Profitability 2015 2016 2017E 2018E 2019E Pre-tax profit 66 93 197 286 340 ROE 0% 34% 36% 37% 31% ROCE 141% 41% 46% 47% 40% Tax -14 -21 -45 -63 -75 ROIC 0% 138% 96% 85% 67% Net earnings 51 72 153 223 265 EBITDA margin 49% 44% 47% 47% 48% EBIT margin 31% 31% 33% 34% 34% Balance 2015 2016 2017E 2018E 2019E Net margin 24% 24% 25% 26% 26% Assets Current assets Data per share 2015 2016 2017E 2018E 2019E Cash in banks 26 167 161 216 279 EPS 0.00 1.00 2.12 3.09 3.68 Receivables 31 47 91 128 151 EPS adj 0.00 1.00 2.12 3.09 3.68 Inventories 13 18 36 51 61 Dividend 0.00 0.00 0.00 0.00 0.00 Other current assets 0 0 0 0 0 Net debt 0.00 -1.93 -2.23 -3.00 -3.87 Current assets 69 232 288 395 491 Total shares 0.00 72.03 72.03 72.03 72.03 Fixed assets

Tangible assets 2 4 6 8 10 Valuation 2015 2016 2017E 2018E 2019E Associated comp. 0 0 0 0 0 EV -15.6 2,238.4 5,133.9 5,078.2 5,015.4 Investments 0 0 0 0 0 P/E 0.0 33.0 34.7 23.8 20.0 Goodwill 0 0 0 0 0 P/E diluted 0.0 33.0 34.7 23.8 20.0 Cap. exp. for dev. 0 0 0 0 0 P/Sales 0.0 7.9 8.7 6.2 5.2 O intangible rights 105 229 385 568 779 EV/Sales -0.1 7.4 8.5 6.0 5.0 O non-current assets 0 0 0 0 0 EV/EBITDA -0.1 16.9 18.0 12.7 10.4 Total fixed assets 106 232 391 575 789 EV/EBIT -0.2 23.6 25.9 17.8 14.7 Deferred tax assets 0 0 0 0 0 P/BV 0.0 6.9 10.6 7.3 5.4

Total (assets) 175 465 679 970 1,280 Share performance Growth/year 15/17e

Liabilities Current liabilities Short -term debt 10 29 0 0 0 Accounts payable 72 80 170 238 283 O current liabilities 0 0 0 0 0 Current liabilities 82 108 170 238 283 Shareholder structure % Capital Votes Long-term debt 0 0 0 0 0 Lars Wingefors 50.0 % 61.8 % O long-term liabilities 1 0 0 0 0 Xagonus AB 10.8 % 13.4 % Convertibles 0 0 0 0 0 Swedbank Robur Fonder 5.5 % 2.6 % Total Liabilities 84 108 170 238 283 Handelsbanken Fonder 4.7 % 2.2 % Deferred tax liab 8 11 11 11 11 Cmb Holding AB 3.7 % 4.6 % Provisions 0 0 0 0 0 Didner & Gerge Fonder 3.1 % 1.5 % Shareholders' equity 84 345 498 720 986 Lumarisimo AB 2.2 % 2.8 % Minority interest (BS) 0 0 0 0 0 RAM Fonder 1.9 % 0.9 % Minority & equity 84 345 498 720 986 Avanza Pension 1.8 % 0.8 % Rolf Lundström 1.7 % 0.8 % Total liab & SE 175 465 679 970 1,280 Share information Free cash flow 2015 2016 2017E 2018E 2019E Reuters code THQNO.ST Net sales 213 302 607 851 1,010 List Total operating costs -108 -170 -322 -450 -528 Share price 73.5 Depreciations total -38 -37 -86 -116 -142 Total shares, million 72.0 EBIT 67 95 198 286 340 Market Cap, MSEK 5294.4 Taxes on EBIT 0 0 0 0 0 NOPLAT 67 95 198 286 340 Management & board Depreciation 38 37 86 116 142 CEO Lars Wingefors Gross cash flow 105 132 285 401 482 CFO Erik Stenberg Change in WC 29 -14 28 17 11 IR Gross CAPEX -145 -163 -245 -300 -355 Chairman Kicki Wallje-Lund

Free cash flow -11 -45 68 118 138 Financial information

Capital structure 2015 2016 2017E 2018E 2019E Equity ratio 48% 74% 73% 74% 77% Debt/equity ratio 12% 8% 0% 0% 0% Net debt -16 -139 -161 -216 -279 Analysts Redeye AB Capital employed 69 206 337 504 707 Kristoffer Lindstrom Mäster Samuelsgatan 42, 10tr Capital turnover rate 1.2 0.6 0.9 0.9 0.8 [email protected] 111 57 Stockholm

Growth 2015 2016 2017E 2018E 2019E Tomas Otterbeck Sales growth 0% 42% 101% 40% 19% [email protected] EPS growth (adj) 0% 0% 112% 46% 19%

Company analysis 19 THQ Nordic

Revenue & Growth (%) EBIT (adjusted) & Margin (%)

1200 120.0% 400 40.0% 350 35.0% 1000 100.0% 80.0% 300 30.0% 800 250 25.0% 60.0% 600 200 20.0% 40.0% 150 15.0% 400 20.0% 100 10.0% 200 0.0% 50 5.0% 0 -20.0% 0 0.0% 2014 2015 2016 2017E 2018E 2019E 2014 2015 2016 2017E 2018E 2019E

Net sales Net sales growth EBIT adj EBIT margin

Earnings per share Equity & debt-equity ratio (%)

4 4 0.9 14.0% 3.5 3.5 0.8 12.0% 3 3 0.7 10.0% 0.6 2.5 2.5 8.0% 0.5 2 2 6.0% 0.4 1.5 1.5 4.0% 0.3 1 1 0.2 2.0% 0.5 0.5 0.1 0.0% 0 0 0 -2.0% -0.5 2014 2015 2016 2017E 2018E 2019E -0.5 2014 2015 2016 2017E 2018E 2019E

EPS, unadjusted EPS, adjusted Equity ratio Debt-equity ratio

Sales division Geographical areas

Conflict of interests Company description Kristoffer. Lindström owns shares in the company THQ Nordic: Founded in 2011, THQ Nordic is a global video game publisher and Yes developer. Based in Vienna, Austria and Karlstad, Sweden with Tomas Otterbeck owns shares in the company THQ Nordic: Yes subsidiaries in Germany and the USA, THQ Nordic brands include Darksiders, MX vs. ATV, Red Faction, Titan Quest and many more. THQ Redeye performs/have performed services for the Company and Nordic is meant to represent a core approach of doing much more than receives/have received compensation from the Company in connection “owning” a highly competitive portfolio of IPs. It revolves around with this. cherishing them, and aligning them with the very best development resources to expand upon them with the level of experience that communities and established fan bases expect and deserve. The company’s internal development studios are Grimlore Games based in Munich, Germany; Rainbow Studios based in Phoenix, Arizona; Mirage Game Studios AB based in Karlstad, Sweden and Foxglove Studios AB based in Stockholm, Sweden.

Company analysis 20 THQ Nordic

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Redeye Rating (2017-08-31)

Rating Management Ownership Profit Profitability Financial outlook Strength 7,5p - 10,0p 44 42 17 11 22 3,5p - 7,0p 71 65 99 35 45 0,0p - 3,0p 12 20 11 81 60 Company N 127 127 127 127 127

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Company analysis 21