[Korea] Games January 19, 2021 NCsoft Buy (036570 KS) (Maintain) Watch for earnings/new title momentum and new TP: W1,260,000 businesses in 2021 Upside: 34.3% Mirae Asset Daewoo Co., Ltd. Chang-kwean Kim [email protected] HeeSeok Lim [email protected] Revenue from existing titles 4Q20 preview: Revenue of W552bn and OP of W187bn remains robust In 1Q21, we believe the combined daily average revenue of Lineage M and Lineage 2M has remained at around W4bn (similar to the 4Q20 level), supported by the continued effects of updates made in July (Lineage M) and November (Lineage 2M). For 4Q20, we expect NCsoft to post revenue of W552bn (+3.3% YoY) and operating profit of W187bn (+32.5% YoY). The consensus is currently looking for revenue of W554.9bn and operating profit of W169.3bn. We believe 4Q20 margins contracted on: 1) company-wide incentive payouts; and 2) bonus payouts to the company’s professional baseball team following its Korean Series win. Launch of new businesses, 1Q20 new releases coming into view, with Lineage 2M beginning pre-registrations in including UNIVERSE, in 1Q21 Taiwan/Japan New releases due in 1Q20 are coming into view, with Lineage 2M beginning pre-registrations simultaneously in Taiwan and Japan on Jan. 8. The domestic rollout of Blade & Soul 2 also looks set to take place in 1Q21, as planned. Trickster M, which we have not reflected in our revenue assumption, has reached over 3mn pre- registrations. The K-pop entertainment platform UNIVERSE also surpassed 3mn pre-registrations on Jan. 14. In 2020, NCsoft established an AI-based brokerage firm (W90bn in capital) jointly with KB Securities. Earnings/new title momentum Maintain Buy and TP of W1,260,000 expected every quarter in 2021 After bottoming in 4Q20, we expect earnings to gather momentum every quarter in 2021, driven by: 1) partial recognition of new title revenue in 1Q21; 2) full recognition of new title revenue in 2Q21; and 3) additional new releases and overseas expansion in 2H21. We expect to see platform diversification beyond mobile (i.e., consoles and cloud gaming). We also look for positive developments in new businesses in 2021 (e.g., entertainment, finance, and AI). Based on 2021F earnings, NCsoft is trading at a P/E of 23.9x. We think the stock’s multiple could expand to the mid-30x level, the upper end of its P/E band. We could revisit our EPS estimate once the company’s new release schedule is confirmed. Key data Current price (1/18/21, W) 938,000 Market cap (Wbn) 20,593 170 NCsoft KOSP I 150 OP (20F, Wbn) 855 Shares outstanding (mn) 22 130 Consensus OP (20F, Wbn) 837 Free float (%) 81.8 110 EPS growth (20F, %) 81.5 Foreign ownership (%) 49.3 90 P/E (20F, x) 31.4 Beta (12M) 0.63 70 50 Market P/E (20F, x) 20.9 52-week low (W) 530,000 1.20 5.20 9.20 1.21 KOSPI 3,013.93 52-week high (W) 995,000 Share performance Earnings and valuation metrics (%) 1M 6M 12M (Dec.) 2017 2018 2019 2020F 2021F 2022F Absolute 8.7 6.6 48.7 Revenue (Wbn) 1,759 1,715 1,701 2,407 3,135 3,534 Relative 0.0 -22.2 11.0 OP (Wbn) 585 615 479 855 1,141 1,402 OP margin (%) 33.3 35.9 28.2 35.5 36.4 39.7 NP (Wbn) 441 418 358 650 862 1,053 EPS (W) 20,104 19,061 16,320 29,613 39,247 47,954 ROE (%) 19.1 16.4 14.7 23.5 25.3 24.9 P/E (x) 22.3 24.5 33.1 31.4 23.9 19.6 P/B (x) 3.4 3.7 4.1 5.9 4.9 4.0 Div. yield (%) 1.6 1.3 1.0 0.7 0.8 0.9 Notes: Under consolidated K-IFRS; NP is attributable to owners of the parent 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 US. PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES AND DISCLAIMERS IN APPENDIX 1 AT THE END OF REPORT. January 19, 2021 NCsoft Table 1. Quarterly and annual earnings (Wbn, %) 1Q19 2Q19 3Q19 4Q19 1Q20 2Q20 3Q20 4Q20F 2019 2020F 2021F Revenue 359 411 398 534 731 539 585 552 1,701 2,407 3,135 Lineage 21 50 52 51 45 34 50 42 174 171 177 Lineage II 22 21 23 28 26 26 26 25 94 103 108 Aion 12 12 13 8 10 8 8 13 46 40 39 Blade & Soul 23 21 21 18 20 20 17 20 84 77 61 Guild Wars 2 16 16 15 11 13 16 19 16 59 63 59 Mobile games 199 224 213 363 553 357 390 363 999 1,663 2,342 Other 8 15 16 10 12 15 16 14 49 58 60 Royalties 57 52 44 44 53 62 59 58 198 232 290 OP 80 129 129 141 241 209 218 187 479 855 1,141 OP margin 22.2 31.5 32.4 26.4 33.0 38.8 37.2 33.9 28.2 35.5 36.4 NP 75 117 114 54 195 158 153 146 359 652 864 Net margin 20.8 28.4 28.6 10.1 26.7 29.4 26.1 26.4 21.1 27.1 27.6 YoY growth Revenue -24.5 -5.9 -1.5 33.4 103.8 31.1 47.1 3.3 -0.8 41.5 30.3 Lineage -26.7 19.1 28.6 31.7 116.0 -31.6 -3.8 -18.7 16.3 -2.0 3.8 Lineage II 51.5 59.0 47.3 34.4 22.7 21.5 14.3 -11.2 46.5 10.3 4.5 Aion -34.3 -20.7 -19.2 -36.3 -17.7 -33.9 -36.1 60.1 -27.5 -13.7 -2.0 Blade & Soul -31.3 -31.1 -28.6 -28.0 -15.7 -6.2 -19.9 12.8 -29.9 -8.3 -21.3 Guild Wars 2 -30.9 -20.0 -27.8 -27.8 -23.3 -1.5 24.3 45.4 -26.8 8.1 -7.3 Mobile games -24.7 6.6 -1.5 62.9 178.3 59.6 82.6 0.2 9.4 66.5 40.8 Other 4.6 16.9 25.2 -8.4 39.2 5.3 2.9 43.7 10.7 18.3 4.3 Royalties -31.8 -44.2 -14.2 -17.0 -8.0 20.8 33.1 30.0 -29.9 17.2 25.0 OP -61.0 -18.9 -7.3 24.7 203.6 61.5 68.9 32.5 -22.1 78.5 33.4 NP -37.3 -16.7 20.3 -19.9 161.6 35.5 34.3 168.7 -14.8 81.4 32.6 Source: Company data, Mirae Asset Daewoo Research estimates Mirae Asset Daewoo Research 2 January 19, 2021 NCsoft Figure 1. Lineage M: Daily revenue (Wbn) Jul. 8 6 Three-year anniversary update Apr. 22 "Archmage: Encounter Awakening" update 4 2 0 1/20 2/20 3/20 4/20 5/20 6/20 7/20 8/20 9/20 10/20 11/20 12/20 1/21 Source: Sensor Tower, Mirae Asset Daewoo Research estimates Figure 2. Lineage 2M: Daily revenue (Wbn) 6 Nov. 25 First-year anniversary update 4 2 0 1/20 2/20 3/20 4/20 5/20 6/20 7/20 8/20 9/20 10/20 11/20 12/20 1/21 Source: Sensor Tower, Mirae Asset Daewoo Research estimates Figure 3. Lineage M + Lineage 2M: Daily revenue (Wbn) 10 8 6 4 2 0 1/20 2/20 3/20 4/20 5/20 6/20 7/20 8/20 9/20 10/20 11/20 12/20 1/21 Source: Sensor Tower, Mirae Asset Daewoo Research estimates Mirae Asset Daewoo Research 3 January 19, 2021 NCsoft NCsoft (036570 KS) Income statement (summarized) Balance sheet (summarized) (Wbn) 2019 2020F 2021F 2022F (Wbn) 2019 2020F 2021F 2022F Revenue 1,701 2,407 3,135 3,534 Current assets 2,088 2,612 3,261 3,885 Cost of revenue 0 0 0 0 Cash & equivalents 303 416 615 530 Gross profit 1,701 2,407 3,135 3,534 AR & other receivables 257 364 475 535 SG&A expenses 1,222 1,551 1,994 2,132 Inventory 2 3 4 4 OP (adj.) 479 855 1,141 1,402 Other current assets 1,526 1,829 2,167 2,816 OP 479 855 1,141 1,402 Non-current assets 1,259 1,485 1,786 2,186 Non-operating profit 17 30 54 48 Investments in associates 44 62 80 91 Net financial income 25 30 39 45 PP&E 350 408 536 749 Net income from associates -19 0 0 0 Intangible assets 50 48 47 46 Pretax profit 496 885 1,195 1,450 Total assets 3,346 4,098 5,047 6,071 Income tax 137 233 331 395 Current liabilities 450 632 819 922 Profit from continuing operations 359 652 864 1,056 AP & other payables 50 70 92 103 Profit from discontinued operations 0 0 0 0 Short-term financial liabilities 43 56 69 77 NP 359 652 8641,056 Other current liabilities 357 506 658 742 Attributable to owners 358 650 862 1,053 Non-current liabilities 384 410 436 450 Attributable to minority interests 1 2 2 3 Long-term financial liabilities 324 324 324 324 Total comprehensive income 264 652 864 1,056 Other non-current liabilities 60 86 112 126 Attributable to owners 263 648 858 1,049 Total liabilities 834 1,041 1,255 1,372 Attributable to minority interests 2 4 6 7 Equity attributable to owners 2,499 3,041 3,775 4,679 EBITDA 531 917 1,224 1,520 Capital stock 11 11 11 11 FCF 341 658 778 403 Capital surplus 436 436 436 436 EBITDA margin (%) 31.2 38.1 39.0 43.0 Retained earnings 2,382 2,925 3,658 4,562 OP margin (%) 28.2 35.5 36.4 39.7 Minority interests 13 15 17 20 Net margin (%) 21.0 27.0 27.5 29.8 Shareholders' equity 2,512 3,056 3,792 4,699 Cash flow statement (summarized) Key valuation metrics/ratios (Wbn) 2019 2020F 2021F 2022F 2019 2020F 2021F 2022F Operating cash flow 392 776 988 733 P/E (x) 33.1 31.4 23.9 19.6 NP 359 652 864 1,056 P/CF (x) 21.2 22.4 16.7 13.5 Non-cash income/expenses 200 261 371 464 P/B (x) 4.1 5.9 4.9 4.0 Depreciation 51 61 82 117 EV/EBITDA (x) 21.2 20.4 15.0 12.0 Amortization 1 1 1 1 EPS (W) 16,320 29,613 39,247 47,954 Other 148 199 288 346 CFPS (W) 25,497 41,582 56,263 69,227 Chg.