NCsoft (036570 KS) Earnings momentum and new title expectations to materialize in 3Q Game New title momentum concentrated in 3Q NCsoft plans to conduct open technical beta testing for its new multiplayer online Company Update battle arena (MOBA) game Master X Master (MXM) from May 1 st to May 10 th . PC and April 27, 2015 mobile versions of the game, which will be published in China by Tencent, are being developed simultaneously. Beta testing for another major new title, Lineage Eternal , is set to take place sometime (Maintain) Buy in 2Q. The Guild Wars 2 expansion pack is scheduled to go on sale in the US and Europe in 3Q, in time for the summer vacation season. In the US and Europe, the company Target Price (12M, W) 240,000 typically launches promotional presale events for new game CDs three to four months ahead of official release. Share Price (4/24/15, W) 206,000 In 3Q, we also expect major developments regarding the commercialization of mobile Expected Return 17% RPGs based on existing intellectual property (e.g., characters and storylines). In 3Q, the mobile versions of Aion and Lineage are anticipated to hit the domestic market, while the mobile version of Blade & Soul China is expected to be launched by Tencent. OP (15F, Wbn) 311 Consensus OP (15F, Wbn) 304 Watch for record-breaking earnings in 3Q-4Q We expect NCsoft to deliver record-high earnings in 3Q-4Q, driven by 1) an increase in EPS Growth (15F, %) 22.5 Lineage I microtransaction events (which somewhat stalled in 1Q-2Q), and 2) the Market EPS Growth (15F, %) 38.3 P/E (15F, x) 16.2 revenue contribution of MXM and internally-developed mobile games ( Aion and Market P/E (15F, x) 11.1 Lineage ). KOSPI 2,159.80 In 2H, the biggest highlight will be the release of the Guild Wars 2 expansion pack. We Market Cap (Wbn) 4,517 estimate that 2-4mn copies will be sold in 2H, with roughly US$60/copy recognized as Shares Outstanding (mn) 22 revenue. Our assumptions are based on initial and cumulative sales data (4.6mn copies) Free Float (%) 84.9 for the original Guild Wars 2 following its August 2012 debut. The company has already Foreign Ownership (%) 41.5 reflected the game’s development costs in its labor expenses, and we believe any Beta (12M) 0.25 additional expenses (marketing and disc manufacturing) will be modest at around 52-Week Low 123,500 W30bn. 52-Week High 218,500 Maintain Buy and TP of W240,000; Expectations to materialize in 3Q (%)(%)(%) 1M1M1M 6M6M6M 12M12M12M NCsoft’s current dividend yield is 1.7% based on the company’s 2014 DPS of W3,430 . Absolute 17.7 57.3 -0.2 We believe management could raise dividends in 2015, given the continued power Relative 11.3 40.2 -7.7 struggle with Nexon. Meanwhile, the company has around W800bn in cash and W1tr in 130 NCsoft KOSPI real estate and investment securities. 110 NCsoft has recently been seeing foreign net inflows and has also become popular among 90 dividend-focused funds. As we head into 3Q, expectations on earnings and new titles should begin to materialize, pushing up the stock’s valuation premium. 70 We maintain our Buy rating on NCsoft with a target price of W240,000. 50 4.14 8.14 12.14 4.15 Daewoo Securities CCo.,o., Ltd. FY (Dec.) 12/11 12/12 12/13 12/14 12/15F 12/16F Revenue (Wbn) 609 754 757 839 921 1,067 [Internet/Game/Entertainment] OP (Wbn) 136 151 205 278 311 353 Chang-kwean Kim OP Margin (%) 22.3 20.0 27.1 33.1 33.8 33.1 +822-768-4321 NP (Wbn) 121 156 159 228 279 303 [email protected] EPS (W) 5,529 7,120 7,245 10,378 12,710 13,806 ROE (%) 14.6 16.8 14.8 18.2 19.1 18.1 Jeong-yeob Park +822-768-4124 P/E (x) 55.6 21.1 34.3 17.5 16.2 14.9 [email protected] P/B (x) 7.0 3.0 4.4 2.7 2.7 2.4 Note: 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 DISCLOSURESDISCLOSURES & DISCLAIMERS IN APPENDIX 1 AATT THE END OF REPORT. April 27, 2015 NCsoft Figure 111.1. Game release schedule Source: KDB Daewoo Securities Research Figure 222.2. Fund flowflowssss:: Net buying of NCsoft shares (Wbn) (W) 1,000 Price (R) 300,000 Foreign investors (L) 800 Domestic institutions (L) 250,000 600 400 200,000 200 150,000 0 -200 100,000 -400 50,000 -600 -800 0 1/13 7/13 1/14 7/14 1/15 Source: QuantiWise, KDB Daewoo Securities Research Figure 333.3. PC/PC/PC/cPC/ ccconsoleonsole gggamegame developer stock price trends (-1Y=100) 250 NCsoft Neowiz Games Activision Blizzard Electronic Arts Nintendo Sega Sammy Tencent 200 150 100 50 4/14 6/14 8/14 10/14 12/14 2/15 4/15 Source: Thomson Reuters, KDB Daewoo Securities Research KDB Daewoo Securities Research 2 April 27, 2015 NCsoft ARPU and earnings trends Figure 444.4. ARPU trends by game Figure 555.5. Relative ARPU performance by game (W) (p) 140,000 Lineage Lineage II 800 Lineage Aion Blade & Soul Lineage II 120,000 700 Aion Blade & Soul 600 100,000 500 80,000 400 60,000 300 40,000 200 20,000 100 0 0 1/11 7/11 1/12 7/12 1/13 7/13 1/14 7/14 1/15 1/11 7/11 1/12 7/12 1/13 7/13 1/14 7/14 1/15 Notes: Monthly revenue (quarterly revenue divided by three) divided by the sum Note: As of January 2011 of daily average concurrent users for each month; this calculation provides a Source: Gametrics, company data, KDB Daewoo Securities Research good measure of changes in per-user revenue Source: Gametrics, company data, KDB Daewoo Securities Research Figure 666.6. Lineage : Revenue and concurrent users Figure 777.7. Lineage II : Revenue and concurrent users ('000 persons) Monthly sum of daily avg. concurrent users (L) (Wbn) ('000 persons) Monthly sum of daily avg. concurrent users (L) (Wbn) 400 Quarterly revenue (R) 120 400 Quarterly revenue (R) 35 350 350 100 30 300 300 25 80 250 250 20 200 60 200 15 150 150 40 10 100 100 20 50 50 5 Release of Leagueof Legends Release of Leagueof Legends 0 0 0 0 1/11 7/11 1/12 7/12 1/13 7/13 1/14 7/14 1/15 1/11 7/11 1/12 7/12 1/13 7/13 1/14 7/14 1/15 Source: Gametrics, Company data, KDB Daewoo Securities Research Source: Gametrics, Company data, KDB Daewoo Securities Research Figure 888.8. AionAionAion : Revenue and concurrent useruserssss Figure 999.9. Blade & Soul : Revenue and concurrent users ('000 persons) Monthly sum of daily avg. concurrent users (L) (Wbn) ('000 persons) Monthly sum of daily avg. concurrent users (L) (Wbn) 1,800 Quarterly revenue (R) 70 2,000 Quarterly revenue (R) 35 1,500 60 30 1,600 50 25 1,200 1,200 40 20 900 15 30 800 600 20 10 400 Release of Leagueof Legends 300 10 5 Release of Leagueof Legends 0 0 0 0 1/11 7/11 1/12 7/12 1/13 7/13 1/14 7/14 1/15 1/11 7/11 1/12 7/12 1/13 7/13 1/14 7/14 1/15 Source: Gametrics, Company data, KDB Daewoo Securities Research Source: Gametrics, Company data, KDB Daewoo Securities Research KDB Daewoo Securities Research 3 April 27, 2015 NCsoft Earnings and forecasts Table 111.1. 1Q15F preview (Wbn, %) 1Q15F Growth 1Q141Q141Q14 4Q144Q144Q14 KDB Daewoo Consensus YoYYoYYoY QoQQoQQoQ Revenue 178 235 179 194 0.4 -23.9 Operating profit 45 87 52 59 15.9 -41.0 OP margin 25.0 37.2 28.8 30.3 3.8 -8.3 Pretax profit 44 94 54 62 22.4 -41.9 Net profit 37 63 45 49 21.6 -28.7 Source: WISEfn, KDB Daewoo Securities Research estimates TableTableTable 2. Quarterly and annual earnings (Wbn, %) 1Q141Q141Q14 2Q142Q142Q14 3Q143Q143Q14 4Q144Q144Q14 1Q15F 2Q15F 3Q15F 4Q15F 201320132013 201420142014 2015F2015F2015F Revenue 178 214 212 235 179 181 279 283 757 839 921 Lineage 41 57 69 97 62 63 67 64 288 263 256 Lineage II 12 14 15 19 13 13 13 16 57 59 56 Aion 22 18 33 21 19 19 26 21 96 94 85 Blade & Soul 19 19 20 25 20 20 20 21 69 83 79 Guild Wars 2 25 22 20 19 17 14 84 74 123 86 189 WildStar - 28 16 5 2 2 2 3 - 50 11 MXM - - - - - - 20 32 - - 52 Royalties 45 38 22 32 27 29 26 27 66 137 110 Other 14 18 18 16 18 21 21 24 58 67 83 Revenue breakdown Lineage 23.0 26.6 32.4 41.1 34.5 34.7 23.9 22.8 38.0 31.4 27.7 Lineage II 6.5 6.3 7.0 8.3 7.5 7.5 4.8 5.7 7.6 7.1 6.1 Aion 12.5 8.6 15.6 8.9 10.6 10.5 9.3 7.5 12.7 11.3 9.2 Blade & Soul 10.8 8.9 9.3 10.5 10.9 10.8 7.0 7.3 9.1 9.9 8.6 Guild Wars 2 14.1 10.4 9.3 8.2 9.5 7.8 30.1 26.0 16.3 10.2 20.5 WildStar - 13.1 7.6 2.3 1.4 1.4 0.9 1.1 - 5.9 1.2 MXM - - - - - - 7.2 11.5 - - 5.7 Royalties 25.0 17.6 10.5 13.8 15.3 15.8 9.4 9.6 8.7 16.3 11.9 Other 8.1 8.4 8.3 6.9 10.2 11.5 7.4 8.4 7.6 8.0 9.1 Operating expenses 134 149 130 148 127 133 171 179 551 561 610 Operating profit 45 65 81 87 52 47 108 104 205 278 311 OP margin 25.0 30.4 38.4 37.2 28.8 26.1 38.8 36.8 27.1 33.2 33.8 Net profit 37 53 76 62 45 42 93 99 159 227 279 Net margin 20.5 24.8 35.8 26.5 25.0 23.1 33.3 35.1 21.0 27.1 30.2 YoY growth Revenue -3.6 11.4 24.7 12.0 0.4 -15.6 32.0 20.2 0.4 10.8 9.9 Lineage -37.9 -32.9 10.0 29.4 50.4 10.2 -2.6 -33.4 40.3 -8.6 -2.9 Lineage II -18.5 -5.1 13.7 25.1 16.2 -0.7 -9.2 -17.6 -12.2 4.1 -5.1 Aion -21.4 -21.1 45.7 -3.2 -14.8 3.2 -21.3 1.8 -32.2 -1.4 -9.9 Blade & Soul 16.5 35.2 -2.7 37.4 1.8 2.3 -0.9 -15.6 10.8 20.1 -3.9 Guild Wars 2 -30.9 -23.1 -19.6 -42.6 -32.1 -36.7 327.1 281.6 -25.2 -30.6 120.4 WildStar - - - - - -91.1 -84.5 -41.2 - - -78.4 Royalties 314.9 188.4 125.9 0.3 -38.5 -24.1 18.3 -15.9 2.9 107.5 -19.9 Other 13.1 32.8 2.8 13.4 27.1 15.1 17.9 45.8 13.8 15.9 24.7 Operating profit -19.8 4.3 164.7 54.0 15.9 -27.5 33.3 19.0 35.7 35.5 11.8 Net profit -30.1 54.8 187.9 36.4 22.3 -21.3 22.8 59.2 3.2 43.4 22.5 Note: All figures are based on consolidated K-IFRS Source: Company data, KDB Daewoo Securities Research estimates KDB Daewoo Securities Research 4 April 27, 2015 NCsoft Table 333.3.