NCsoft (036570 KS) A combination of growth and dividends Game 1Q15 review: OP disappoints due to bonus payout For 1Q15, NCsoft posted revenue of W188.1bn (+5.6% YoY) and operating profit of Results Comment W44.9bn (+0.8% YoY). Revenue was consistent with expectations, but operating profit May 14, 2015 fell behind, primarily due to a bonus payout. After spending W6bn on employee bonuses in 4Q14, the company handed out another W9bn in 1Q15. Royalties (including those from Blade & Soul China ) shrank to W25.6bn (from W44.6bn (Maintain) Buy in 1Q14), but Lineage I revenue grew robustly to W66bn (+61% YoY). Revenue from Blade & Soul also expanded to W26.8bn (+39.2% YoY), boosted by the game’s Target Price (12M, W) 270,000 popularity in Taiwan after its release in November 2014. Share Price (05/13/15, W) 217,000 Margins to pick up in 2Q; Earnings to gain momentum in 2H The biggest factor impacting quarterly earnings right now is revenue from Lineage I . We Expected Return 24% forecast the title’s quarterly revenue to continue to grow throughout the year. In 2Q, margins should pick up on the removal of one-off expenses (bonuses, etc.). We forecast OP (15F, Wbn) 312 2Q revenue and operating profit at W184.9bn and W53.3bn, respectively. Consensus OP (15F, Wbn) 303 The first beta testing for the upcoming blockbuster Lineage Eternal (official release in EPS Growth (15F, %) 17.0 2016) is set to take place in June. In 2H, the Guild Wars 2 expansion pack is scheduled to Market EPS Growth (15F, %) 39.5 go on sale in the US and Europe , though presales could begin months before its official P/E (15F, x) 17.7 release. Market P/E (15F, x) 10.7 On the mobile front, Pangya Mobile (a golf game) and Aion Legions are scheduled to KOSPI 2,114.16 come out in 3Q, and the mobile versions of Lineage and Blade & Soul China are set to hit Market Cap (Wbn) 4,759 the market in 4Q. Shares Outstanding (mn) 22 Free Float (%) 84.9 Raise TP by 12.5% to W270,000; Rising expectations on Lineage Eternal Foreign Ownership (%) 42.1 We maintain Bu y on NCsoft and raise our target price to W270,000 (from W240,000). We Beta (12M) 0.37 expect anticipation on new releases to build up following the June beta testing for Li neage 52-Week Low 123,500 Eternal . Meanwhile, uncertainties over the rollout of the Guild Wars 2 expansion pack in 52-Week High 218,500 the US and Europe have been dissipating. The expansion pack’s commercialization is likely (%)(%)(%) 1M1M1M 6M6M6M 12M12M12M to be the company’s largest earnings determinant in 2015, and the timeline for its game Absolute 15.7 31.1 9.3 show debut and beta testing is becoming clearer. Relative 14.9 21.6 2.5 NCsoft’s P/E has historically ranged from the mid-teens to 40x, contracting when 130 NCsoft KOSPI anticipated games failed to take off and expanding when expectations heightened on new releases. 110 90 Expectations on Lineage Eternal , the Guild Wars 2 expansion pack, and mobile games are rising. We revised upward our P/E multiple by 10% to 22x (previously 20x). The stock 70 currently has a dividend yield of 1.6% based on 2014 DPS of W3,430. 50 5.14 9.14 1.15 5.15 Daewoo Securities CCo.,o., Ltd.Ltd.Ltd. FY (Dec.) 12/12 12/13 12/14 12/15F 12/16F 12/17F Revenue (Wbn) 754 757 839 931 1,067 1,183 [Internet/Game/Entertainment] OP (Wbn) 151 205 278 312 355 401 Chang-kwean Kim OP margin (%) 20.0 27.1 33.1 33.5 33.3 33.9 +822-768-4321 NP (Wbn) 156 159 230 269 294 342 [email protected] EPS (W) 7,120 7,245 10,487 12,270 13,395 15,599 ROE (%) 16.8 14.8 18.4 18.4 17.6 18.0 Jeong-yeob Park +822-768-4124 P/E (x) 21.1 34.3 17.4 17.7 16.2 13.9 [email protected] P/B (x) 3.0 4.4 2.7 2.9 2.5 2.2 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 APPENDIX 1 AT THE END OF REPORT. May 14, 2015 NCsoft Earnings and forecasts Table 111.1. Quarterly and annual earnings (Wbn, %) 1Q141Q141Q14 2Q142Q142Q14 3Q143Q143Q14 4Q144Q144Q14 1Q151Q151Q15P1Q15 PPP 2Q15F 3Q15F 4Q15F 201320132013 201420142014 2015F2015F2015F Revenue 178 214 212 235 188 185 256 303 757 839 931 Lineage 41 57 69 97 66 65 69 55 288 263 256 Lineage II 12 14 15 19 11 13 15 17 57 59 56 Aion 22 18 33 21 18 18 25 23 96 94 85 Blade & Soul 19 19 20 25 27 22 22 19 69 83 89 Guild Wars 2 25 22 20 19 20 17 57 95 123 86 189 WildStar 0 28 16 5 3 3 3 3 0 50 11 MXM 0 0 0 0 0 0 20 32 0 0 52 Royalties 45 38 22 32 26 27 25 33 66 137 110 Other 14 18 18 16 18 20 20 25 58 67 83 Revenue portion Lineage 23.0 26.6 32.4 41.1 35.1 35.2 27.0 18.3 38.0 31.4 27.4 Lineage II 6.5 6.3 7.0 8.3 5.9 7.1 5.9 5.6 7.6 7.1 6.1 Aion 12.5 8.6 15.6 8.9 9.7 9.9 9.9 7.7 12.7 11.3 9.1 Blade & Soul 10.8 8.9 9.3 10.5 14.2 11.8 8.5 6.3 9.1 9.9 9.6 Guild Wars 2 14.1 10.4 9.3 8.2 10.6 9.2 22.3 31.3 16.3 10.2 20.3 WildStar 0.0 13.1 7.6 2.3 1.4 1.4 1.0 1.0 0.0 5.9 1.1 MXM 0.0 0.0 0.0 0.0 0.0 0.0 7.8 10.7 0.0 0.0 5.6 Royalties 25.0 17.6 10.5 13.8 13.6 14.5 9.6 10.8 8.7 16.3 11.8 Other 8.1 8.4 8.3 6.9 9.5 11.0 7.9 8.3 7.6 8.0 9.0 Operating expenses 134 149 130 148 143 132 164 180 551 561 619 Operating profit 45 65 81 87 45 53 91 123 205 278 312 OP margin (%) 25.0 30.4 38.4 37.2 23.9 28.8 35.7 40.5 27.1 33.2 33.5 Net profit 37 53 76 62 36 45 76 110 159 227 266 Net margin (%) 20.5 24.8 35.8 26.5 18.9 24.3 29.6 36.3 21.0 27.1 28.6 YoY growth Revenue -3.6 11.4 24.7 12.0 5.6 -13.5 20.8 28.8 0.4 10.8 11.1 Lineage -37.9 -32.9 10.0 29.4 61.0 14.3 0.7 -42.7 40.3 -8.6 -2.9 Lineage II -18.5 -5.1 13.7 25.1 -5.0 -2.7 2.5 -12.6 -12.2 4.1 -5.1 Aion -21.4 -21.1 45.7 -3.2 -17.8 -0.5 -23.3 11.5 -32.2 -1.4 -9.9 Blade & Soul 16.5 35.2 -2.7 37.4 39.2 13.8 10.2 -22.1 10.8 20.1 8.2 Guild Wars 2 -30.9 -23.1 -19.6 -42.6 -20.3 -23.4 189.7 391.2 -25.2 -30.6 120.4 WildStar - - - - - -90.8 -83.9 -46.7 - - -78.4 Royalties 314.9 188.4 125.9 0.3 -42.5 -28.8 10.2 0.7 2.9 107.5 -19.9 Other 13.1 32.8 2.8 13.4 23.9 12.5 15.3 54.3 13.8 15.9 24.7 Operating profit -19.8 4.3 164.7 54.0 0.8 -18.0 12.2 40.4 35.7 35.5 12.2 Net profit -30.1 54.8 187.9 36.4 -2.7 -15.1 0.0 76.5 3.2 43.4 17.0 Notes: 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 % chg. 2015F2015F2015F 2016F2016F2016F 2015F2015F2015F 2016F2016F2016F 2015F2015F2015F 2016F2016F2016F Revenue 921 1,067 931 1,067 1.1 0.0 Operating profit 311 353 312 355 0.3 0.6 Pretax profit 344 389 329 374 -4.4 -3.9 Net profit 279 303 269 294 -3.6 -3.0 EPS 12,710 13,806 12,270 13,395 -3.5 -3.0 OP margin 33.8 33.1 33.5 33.3 -0.3 0.2 Net margin 30.3 28.4 28.9 27.6 -1.4 -0.8 Notes: All figures are based on consolidated K-IFRS Source: Company data, KDB Daewoo Securities Research estimates KDB Daewoo Securities Research 2 May 14, 2015 NCsoft Table 333.3.