Netmarble Games Corporation(251270 KS) Watch for overseas publishing and new domestic releases Game 2Q17: First official earnings report; Expectations should be lowered For 2Q17, Netmarble Games reported that its revenue, operating profit, and net Results Comment profit grew 53%, 99%, and 140% YoY, respectively. The latest results showed a August 14, 2017 deceleration in revenue from Lineage II: Revolution, which was released in late 2016. Positives: Overseas revenue was up YoY and QoQ, boosted by the consolidation of (Downgrade) Trading Buy Kabam (acquired in February). Kabam is a well-recognized game developer, with its game Transformers: Forged to Fight winning the Best Game Award at the 2017 Target Price (12M, W) 150,000 Google Play Awards in May. Negatives: Domestic revenue slumped 45% QoQ, affected by softening traffic for Share Price (08/11/17, W) 127,500 key titles like Lineage II: Revolution and Seven Knights. Meanwhile, labor and advertising expenses increased 44% and 9% YoY, pushing up operating expenses. Expected Return 18% 2H17: Lineage II: Revolution overseas publishing and domestic MMORPG releases OP (17F, Wbn) 518 In 2H17, we believe Netmarble Games could potentially make up for its recent Consensus OP (17F, Wbn) 792 earnings weakness through new title releases. EPS Growth (17F, %) 59.4 Lineage II: Revolution: We believe domestic user metrics have been stabilizing Market EPS Growth (17F, %) 42.1 since June. As for overseas markets, the mobile title was launched in Southeast Asia P/E (17F, x) 31.2 on June 14th and is set for release in Japan on August 23rd and in North America, Market P/E (17F, x) 9.7 Europe, and China in 4Q17. KOSPI 2,319.71 Domestic MMORPG releases: Following its success with Lineage II: Revolution, Market Cap (Wbn) 10,839 Netmarble Games is planning to roll out a number of new mobile MMORPG titles, Shares Outstanding (mn) 85 including Tera M, Blade & Soul Mobile, and Seven Knights MMORPG. For Tera M, Free Float (%) 27.9 the company has already launched a teaser website and will reveal more details on Foreign Ownership (%) 24.8 the timeline of the game’s release at a September 8th showcase. The company also Beta (12M) 0.39 has several new releases lined up in other genres, including Phantom Gate, Knights 52-Week Low 127,500 Chronicle, and Teria Saga. All of the aforementioned new titles are likely to 52-Week High 162,000 contribute to revenue from 4Q17 rather than 3Q17. (%) 1M 6M 12M Downgrade to Trading Buy and Cut TP to W150,000 Absolute -14.1 0.0 0.0 Relative -11.3 0.0 0.0 We downgrade our rating on Netmarble Games from Buy to Trading Buy. We believe the decline in Lineage II: Revolution user metrics following the game’s 110 Netmarble Games Corporation initial success has been largely priced in. However, with upcoming titles likely to KOSPI 100 contribute to earnings from 4Q17 (rather than 3Q17), we think it is too early to reflect expectations for new releases. 90 We lower our target price from W200,000 to W150,000. We revised down our 2017 80 EPS estimate by 36%, after 1) cutting our 2H17 daily average revenue assumption 70 for Lineage II: Revolution from W1.5bn to W1.4bn and 2) raising labor and 8.16 12.16 4.17 8.17 marketing expense estimates. FY (12) 12/14 12/15 12/16 12/17F 12/18F 12/19F Mirae Asset Daewoo Co., Ltd. Revenue (Wbn) 362 1,073 1,500 2,286 2,214 2,235 [Internet/Game/Advertising] OP (Wbn) 89 225 295 518 477 473 OP Margin (%) 24.6 21.0 19.7 22.7 21.5 21.2 Jee-hyun Moon NP (Wbn) 25 121 174 348 324 320 +822-3774-1640 [email protected] EPS (W) 457 2,024 2,567 4,092 3,811 3,764 ROE (%) 7.8 14.8 15.3 12.9 7.5 6.9 P/E (x) - - - 31.2 33.5 33.9 P/B (x) - - - 2.6 2.4 2.3 Dividend Yield (%) - - - 0.0 0.0 0.0 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 Analysts who prepared this report are registered as research analysts in Korea but not in any other jurisdiction, including the U.S. PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES & DISCLAIMERS IN APPENDIX 1 AT THE END OF REPORT. August 14, 2017 Netmarble Games Corporation Earnings forecasts and valuation Table 1. Annual and quarterly earnings trends (Wbn, %) 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17P 3Q17F 4Q17F 2015 2016 2017F Revenue 326 352 359 463 687 540 496 563 1,073 1,500 2,286 Domestic 168 149 159 268 477 261 205 207 886 744 1,150 Overseas 158 203 200 195 211 279 291 356 187 756 1,137 Mobile games 665 519 475 542 970 1,406 2,200 MMORPG 389 211 155 195 17 150 950 RPG 156 173 176 184 544 638 689 Casual 112 124 130 138 350 561 505 Other 9 11 13 25 59 58 58 Online games 14 13 13 12 82 61 52 Other revenue 8 8 8 8 21 33 34 Operating profit 59 53 65 118 200 105 81 132 225 295 518 OP margin 18.2 15.0 18.0 25.5 29.1 19.5 16.4 23.4 21.0 19.6 22.7 Net profit 55 32 41 81 146 78 63 101 169 209 388 Net margin 16.7 9.2 11.5 17.5 21.3 14.5 12.7 18.0 15.7 13.9 17.0 YoY growth Revenue 110.7 53.5 38.2 21.5 196.1 39.8 52.4 Domestic 183.2 75.3 29.1 -22.7 196.1 -16.0 54.6 Overseas 33.4 37.6 45.4 82.1 195.9 303.6 50.3 Mobile games 252.9 45.0 56.5 MMORPG 39.5 768.8 531.9 RPG 276.8 17.1 8.0 Casual 340.7 60.4 -10.0 Other 51.6 -1.8 0.0 Online games 27.7 -25.3 -15.0 Other revenue -9.1 54.8 3.0 Operating profit 236.9 99.7 26.0 11.4 153.8 30.8 75.9 Net profit 167.5 140.5 52.3 25.3 299.9 24.1 85.6 Note: All figures are based on consolidated K-IFRS; mobile game revenue by genre is based on estimates; other revenue includes rental income; Lineage II: Revolution is included in MMORPGs; 2016 data for revenue by genre is unavailable; net profit refers to net profit attributable to controlling and non-controlling interests Source: Company data, Mirae Asset Daewoo Research estimates Table 2. Earnings forecast revisions (Wbn, W, %) Previous Revised % chg. Note 17F 18F 17F 18F 17F 18F Revenue 2,374 2,601 2,286 2,214 -3.7 -14.9 - Raised MMORPG estimates, lowered RPG/casual estimates Operating profit 678 740 518 477 -23.6 -35.6 - Raised labor and marketing expenses Net profit 514 568 388 360 -24.5 -36.6 - Lowered non-operating estimates EPS 6,448 7,119 4,092 3,811 -36.5 -46.5 Notes: All figures are based on consolidated K-IFRS; EPS is based on net profit attributable to controlling interests Source: Mirae Asset Daewoo Research estimates Table 3. 12-month target price calculation (Wbn, x, W) Valuation Notes Operating value (1) 9,648 12MF NP attributable to Multiple controlling interests Consolidated 336 28.7 9,648 Based on average 12-month forward P/E of peers Investment asset value (2) 800 Available-for-sale financial assets 794 As of end-2Q17 (preliminary) Investments in affiliates 6 As of end-2016 Total asset value (1+2=3) 10,448 Net debt (4) -2,460 As of end-2Q17 (estimate) Net asset value (3-4) 12,908 No. of shares (‘000 shares) 85,018 Total shares outstanding as of August 7th Target price 150,000 Note: Peer group includes NetEase, Tencent, and Zynga Source: Mirae Asset Daewoo Research estimates Mirae Asset Daewoo Research 2 August 14, 2017 Netmarble Games Corporation Key factors Figure 1. Rankings of existing mobile games on Korean Android game charts: Lineage II: Revolution ranks second 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15 1Q16 3Q16 1Q17 3Q17 0 10 20 Lineage II: Revolution 30 Modoo Marble for Kakao Seven Knights for Kakao 40 Marvel Future Fight Monster Taming for Kakao 50 Raven: Awaken Penta Storm for Kakao 60 (rank) Note: 3Q17 data is based on 2017 August 13th Source: App Annie, Mirae Asset Daewoo Research Figure 2. Lineage II: Revolution to be released in Japan on August 23rd Note: Picture of the August 6th Showcase in Japan Source: App.famitsu.com, Mirae Asset Daewoo Research Figure 3. Tera M to be unveiled in Korea at a September 8th showcase Source: Company materials, Mirae Asset Daewoo Research Mirae Asset Daewoo Research 3 August 14, 2017 Netmarble Games Corporation Netmarble Games Corporation (251270 KS/Trading Buy/TP: W150,000) Comprehensive Income Statement (Summarized) Statement of Financial Condition (Summarized) (Wbn) 12/16 12/17F 12/18F 12/19F (Wbn) 12/16 12/17F 12/18F 12/19F Revenue 1,500 2,286 2,214 2,235 Current Assets 721 3,618 4,018 4,401 Cost of Sales 751 1,145 1,109 1,120 Cash and Cash Equivalents 273 2,934 3,356 3,733 Gross Profit 749 1,141 1,105 1,115 AR & Other Receivables 247 376 365 368 SG&A Expenses 454 623 628 642 Inventories 2 3 3 3 Operating Profit (Adj) 295 518 477 473 Other Current Assets 199 305 294 297 Operating Profit 295 518 477 473 Non-Current Assets 1,236 1,490 1,434 1,411 Non-Operating Profit -19 1 1 1 Investments in Associates 6 10 9 10 Net Financial Income 2 0 0 0 Property, Plant and Equipment 123 115 107 98 Net Gain from Inv in Associates -3 0 0 0 Intangible Assets 540 518 495 473 Pretax Profit 276 519 478 474 Total Assets 1,957 5,108 5,452 5,812 Income Tax 66 131 118 119 Current Liabilities 421 585 570 574 Profit from Continuing Operations 209 388 360 356 AP & Other Payables 152 231 224 226 Profit from Discontinued Operations 0 0 0 0 Short-Term Financial Liabilities 109 109 0 0 Net Profit 209 388 360 356 Other Current Liabilities 160 245 346 348 Controlling Interests 174 348 324 320 Non-Current Liabilities 226 219 218 218 Non-Controlling Interests 35 40 36 36 Long-Term Financial Liabilities 200 180 0 0 Total Comprehensive Profit 275 388 360 356 Other Non-Current Liabilities 26 39 218 218 Controlling Interests 239 337 312 308 Total Liabilities 647 804 788 793 Non-Controlling Interests 36 51 48 47 Controlling Interests 1,216 4,170 4,494 4,813 EBITDA 325 549 508 504 Capital Stock 7 7