Sector Top Pick
The authors are analysts of Shinhan Investment Corp. They can be reached at sokang@shinhan.com and kimaram@shinhan.com, respectively. -- Ed.
3Q22 preview: Deregulation of web board games and upturn in sales of existing games
Neowiz is expected to earn operating profit of KRW8.2bn (positive swing YoY, +39% QoQ, operating margin of 11%) on sales of KRW74.8bn (+21.2% YoY, +6.4% QoQ) for 3Q22, meeting the consensus estimate of KRW8.6bn. Sales from web board games should increase by about 15% QoQ with the monthly spending cap raised on July 1. Daily average sales of Cats & Soup, which fell slightly in 2Q22 in the absence of any update, will likely rebound to 1Q22 levels with the resumption of updates.
Expectations for stable earnings and new game releases
Demand for web board games has picked up following a period of weak seasonality in 2Q22. We project sales from web board games to grow steadily through 1Q23 thanks to deregulation. Sales generated from a wide range of mobile games, including casual and RPG, add stability to earnings. The company plans to expand its portfolio with the launch of independent games on the PC/console platform as well as new puzzle games in 2H22.
Neowiz’s Lies of P is slated to hit the market in 1H23. The game took home three awards at Gamescom 2022 and raised expectations for its release. Our projection for its first year post-launch sales is 2.5mn copies, which is still rather conservative. The success of the new title on the PC/console platform, which has greater IP influence than the mobile platform, will help to boost sales of follow-up games based on a global fandom and justify valuation premiums. The growing number of users playing console games on a PC via Steam, Epic Games, and the likes has raised expectations for sales growth going forward.
Retain BUY for a target price of KRW61,000
We retain our BUY rating on Neowiz for a target price of KRW61,000, based on a 12-month forward EPS of KRW4,089 and a target PER of 15x. We expect a re-rating of shares given: 1) global console game market continuing on the growth trajectory; 2) M&A demand rising for AAA game developers; and 3) global platforms like Microsoft, Sony, Netflix, and Amazon competing to secure IPs for their game subscription services. APER of15-20x is attainable if the company proves its capability as a PC/console game developer with a new IP and global fandom through the success of Lies of P. We keep Neowiz as our sector top pick.