NCSOFT (036570 KS) Blade & Soul gaining renewed momentum Game 4Q15 review: In-line results NCSOFT reported 4Q15 revenue and operating profit that were broadly in line with our Results Comment expectations. Revenue expanded 21% QoQ to W236.9bn, with balanced growth across February 12, 2016 existing titles, while operating profit increased 48% QoQ to W74.9bn, backed by strong top-line growth. Existing titles, including Lineage I, Lineage II , Aion, and Blade & Soul, recorded strong (Maintain) Buy revenue growth QoQ. In particular, revenue from Blade & Soul jumped 30% QoQ to W32.4bn thanks to rollouts of new classes and items, which were positively received. Target Price (12M, W) 400,000 4Q15 net profit, however, fell below our estimate to W42.2bn, hurt by a goodwill impairment charge (W18.4bn) related to Ntreev Soft Share Price (2/11/16, W) 240,000 1Q16 catalysts: Blade & Soul US revenue recognition and China mobile launch Expected Return 67% Blade & Soul US , the company’s first new release in 2016, is doing much better than th initially expected. Launched on January 19 , the title has attracted more than 2mn players and currently has a total of 34 servers, after originally starting with 22. We are OP (15P, Wbn) 237 conservatively modeling quarterly revenue of W10bn for Blade & Soul US (beginning Consensus OP (15F, Wbn) 238 1Q16). Since the title is free to play, user metrics are critical in predicting revenue . With EPS Growth (15P, %) -26.9 the title still in its very early stages, we could see changes in user metric trends, which Market EPS Growth (15F, %) 19.9 would prompt revisions to our estimates. P/E (15P, x) 27.8 Lineage Eternal testing is planned for 1H16, while Master X Master (MXM) closed and Market P/E (15F, x) 11.3 open best testing are scheduled for 1H16 and 2H16, respectively. ANP Project , a newly KOSPI 1,861.54 unveiled online game, is also set to go into testing in 1H16. Blade & Soul Mobile is slated Market Cap (Wbn) 5,263 for commercial release in China in 1Q16 and Korea and Japan in 2Q-3Q. Aion Legions ’ Shares Outstanding (mn) 22 soft launch is planned for 4Q16. Mobile titles based on Lineage I are set for testing in Free Float (%) 84.4 1H16 and commercial release in 2H16. The company is also pr eparing to publish two Foreign Ownership (%) 32.6 games developed by outside companies—one of which will be launched domestically in Beta (12M) 0.95 1H16 and the other in Korea and Japan in 3Q16. 52-Week Low 169,000 Maintain Buy and TP of W400,000 52-Week High 244,000 Following the successful launch of Blade & Soul US in January, the mobile version of (%)(%)(%) 1M1M1M 6M6M6M 12M12M12M Blade & Soul China is scheduled to come out in late February or in March. In addition, Absolute 9.1 13.7 14.6 the launches of MXM and four mobiles titles based on Lineage I and Lineage II , as well as Relative 11.0 21.4 19.7 a series of beta tests for Lineage Eternal and AMP Project , are lined up for 2016. Meanwhile, details regarding Netmarble’s release of Lineage II mobile are likely to be 120 NCSOFT KOSPI unveiled during the Netmarble Together with Press (NTP) event on February 18 th . 110 100 We think the market is gradually pricing in expectations for earnings improvements in 90 2017. We look for a strong quarter in 1Q16, driven by new revenue from Blade & Soul US , and believe new title events planned in the coming quarters will provide positive 80 share momentum. We reiterate our Buy rating on NCSOFT with a target price of 70 2.15 6.15 10.15 2.16 W400,000. Daewoo Securities CCo.,o., Ltd. FY (Dec.) 12/12 12/13 12/14 12/15P 12/16F 12/17F Revenue (Wbn) 754 757 839 838 950 1,074 [Internet/Game/Entertainment] OP (Wbn) 151 205 278 237 329 395 Chang-kwean Kim OP margin (%) 20.0 27.1 33.1 28.3 34.6 36.8 +822-768-4321 NP (Wbn) 156 159 230 168 266 320 [email protected] EPS (W) 7,120 7,245 10,487 7,669 12,123 14,596 ROE (%) 16.8 14.8 18.4 11.9 17.0 17.9 Jeong-yeob Park +822-768-4124 P/E (x) 21.1 34.3 17.4 27.8 19.8 16.4 [email protected] P/B (x) 3.0 4.4 2.7 3.0 3.0 2.6 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 APPENDAPPENDIXIX 1 AT THE END OF REPORT. February 12, 2016 NCSOFT Earnings and forecasts Table 111.1. Quarterly and annual earnings (Wbn, %) 1Q11Q11Q151Q1 555 2Q12Q12Q152Q1 555 3Q13Q13Q153Q1 555 4Q14Q14Q154Q1 555PPPP 1Q11Q11Q16F1Q1 6F6F6F 2Q12Q12Q16F2Q1 6F6F6F 3Q13Q13Q16F3Q1 6F6F6F 4Q14Q14Q164Q1 666FFFF 2012012014201 444 2012012015201 555PPPP 2012012016201 666FFFF Revenue 188 218 196 237 224 225 239 262 839 838 950 Lineage I 66 85 78 83 80 85 77 81 263 313 324 Lineage II 11 16 16 20 19 18 19 22 59 63 78 Aion 18 20 17 19 17 19 18 20 94 74 74 Blade & Soul 27 30 25 32 42 37 38 36 83 114 154 Guild Wars 2 20 22 21 37 23 20 22 20 86 101 85 WildStar 3 2 2 3 2 2 1 1 50 9 6 MXM 0 0 0 0 0 0 14 21 0 0 35 Royalties 26 21 23 29 27 25 25 29 137 99 106 Other 18 20 15 14 15 19 24 32 67 67 89 Revenue proproproportionpro portion Lineage I 35.1 39.3 40.0 35.1 35.7 38.0 32.4 31.0 31.4 37.3 34.1 Lineage II 5.9 7.5 8.0 8.5 8.5 8.0 8.0 8.4 7.1 7.5 8.2 Aion 9.7 9.2 8.6 7.8 7.6 8.5 7.5 7.6 11.3 8.8 7.8 Blade & Soul 14.2 13.7 12.7 13.7 18.7 16.4 16.1 13.8 9.9 13.6 16.2 Guild Wars 2 10.6 10.3 10.6 15.8 10.0 9.0 9.3 7.6 10.2 12.0 8.9 WildStar 1.4 1.0 0.9 1.1 0.8 0.7 0.6 0.3 5.9 1.1 0.6 MXM 0.0 0.0 0.0 0.0 0.0 0.0 5.9 8.0 0.0 0.0 3.7 Royalties 13.6 9.6 11.7 12.3 12.0 11.1 10.4 11.1 16.3 11.8 11.2 Other 9.5 9.4 7.6 5.7 6.5 8.3 9.9 12.2 8.0 7.9 9.3 Operating expenses 143 150 145 162 143 152 151 174 561 601 621 Operating profit 45 67 51 75 81 73 88 88 278 237 329 OP margin (%) 23.9 30.8 25.9 31.6 36.1 32.4 36.7 33.6 33.2 28.3 34.7 Net profit 36 58 31 42 67 60 68 68 227 166 263 Net margin (%) 18.9 26.6 15.7 17.8 29.7 26.8 28.5 25.9 27.1 19.8 27.7 YoY growth Revenue 5.6 1.7 -7.5 0.8 19.1 3.4 22.1 10.6 10.8 -0.1 13.3 Lineage I 61.0 50.3 14.2 -14.0 21.3 -0.1 -1.1 -2.3 -8.6 18.9 3.6 Lineage II -5.0 19.9 5.2 3.0 73.0 10.9 22.0 9.5 4.1 5.8 24.1 Aion -17.8 9.5 -49.1 -11.2 -6.4 -5.0 6.7 7.6 -1.4 -21.9 0.5 Blade & Soul 39.2 55.6 26.1 31.9 56.6 24.0 54.2 11.9 20.1 37.7 34.8 Guild Wars 2 -20.3 1.2 5.1 93.7 12.4 -9.7 7.3 -46.5 -30.6 17.4 -15.5 WildStar - -92.6 -89.3 -51.4 -28.0 -24.4 -15.0 -75.2 - -81.7 -38.6 Royalties -42.5 -44.2 3.1 -10.1 5.2 19.0 8.8 -0.5 107.5 -27.9 7.3 Other 23.9 13.1 -16.1 -16.4 -18.0 -8.9 59.6 135.4 15.9 -0.6 33.3 Operating profit 0.8 3.3 -37.8 -14.3 80.2 8.7 73.2 17.4 35.5 -14.6 38.7 Net profit -2.7 9.3 -59.5 -32.2 86.9 4.2 122.5 60.9 43.4 -26.9 58.1 Note: 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 % ch% chg.ch g.g.g. 2015F2015F2015F 2016F2016F2016F 2015P2015P2015P 2016F2016F2016F 2015P2015P2015P 2016F2016F2016F Revenue 837 933 838 950 0.1 1.8 Operating profit 237 321 237 329 0.0 2.5 Net profit 187 269 168 266 -10.2 -1.1 EPS 8,549 12,254 7,669 12,123 -10.3 -1.1 OP margin 28.3 34.4 28.3 34.6 0.0 0.2 Net margin 22.3 28.8 20.0 28.0 -2.3 -0.8 Note: All figures are based on consolidated K-IFRS Source: Company data, KDB Daewoo Securities Research estimates KDB Daewoo Securities Research 2 February 12, 2016 NCSOFT NCSOFT (036570 KS/Buy/TP: W400,000) Comprehensive Income Statement (Summarized) Statement of Financial Condition (Summarized) (Wbn) 12/14 12/15F 12/16F 12/17F (Wbn) 12/14 12/15F 12/16F 12/17F Revenue 883399839 883388838 995500950 11,,0077441,074 Current Assets 11,,0022001,020 11,,1144991,149 11,,4411551,415 11,,7711771,717 Cost of Sales 222200220 221199219 222200220 224499249 Cash and Cash Equivalents 203 332 489 670 Gross Profit 661199619 661199619 773300730 882255825 AR & Other Receivables 90 91 103 116 SG&A Expenses 334400340 338822382 440000400 443300430 Inventories 1 1 1 1 Operating Profit (Adj) 227788278 223377237 332299329 339955395 Other Current Assets 726 725 822 930 Operating Profit 227788278 223377237 332299329 339955395 NNoonnNon-Non ---CurrentCurrent Assets 667799679 664488648 662288628 661133613 NNoonnNon-Non ---OperatingOperating Profit 111111 222 555 223323 Investments in Associates 29 29 33 38 Net Financial Income 17 21 25 31 Property, Plant and Equipment 241 215 192 172 Net Gain from Inv in Associates -2 -1 -1 -1 Intangible Assets 95 89 85 81 Pretax Profit 289 239 334 418 Total Assets 11,,6699991,699 11,,7799771,797 22,,0044222,042 22,,3333002,330 Income Tax 61 73 71 102 Current Liabilities 224455245 224455245 227788278 331144314 Profit from Continuing Operations 228 166 263 317 AP & Other Payables 25 25 29 33 Profit from Discontinued Operations 0 0 0 0 Short-Term Financial Liabilities 0 0 0 0 Net Profit 228 166 263 317 Other Current Liabilities 220 220 249 281 Controlling Interests 230 168 266 320 NNoonnNon-Non ---CurrentCurrent Liabilities 778878 778878 888888 999999 Non-Controlling Interests -2 -2 -3 -3 Long-Term Financial Liabilities 1 1 1 1 Total Comprehensive Profit 222244224 116666166 226633263 331177317 Other Non-Current Liabilities 77 77 87 98 Controlling Interests 228 169 267 322 Total Liabilities 332233323 332233323 336666366 441144414 Non-Controlling Interests -4 -3 -4 -5 Controlling Interests 11,,3366111,361 11,,4466001,460 11,,6666771,667 11,,9900991,909 EBITDA 315 269 357 419 Capital Stock 11 11 11 11 FCF (Free Cash Flow)