Kakao Games
The author is an analyst for NH Investment & Securities. He can be reached at jaemin.ahn@nhqv.com -- Ed.
Backed by Eversoul, ArcheAge War, and Ares, Kakao Games is continuing to produce new-lineup successes in 2023. Earnings at the firm are believed to have bottomed out, and the share price has fallen significantly in recent days. We expect a recovery in both earnings and share price in 2H23.
Earnings to recover in 2H23
We maintain a Buy rating on Kakao Games. Released on Jul 27, Ares: Rise of Guardians is displaying a robust sales performance, ranking second in the Google Play Store in terms of Korean sales as of Aug 2. With sales for Ares to be reflected from 3Q23, we expect a sales recovery from 3Q23. Ares is a futuristic SF-themed MMORPG boasting strengths that should differentiate it from other recently released MMORPGs, including ArcheAge War. Therefore, cannibalization effects should be minimal.
With Odin having launched in the Japanese market in June, sales decline is stabilizing for the game. In addition, Eversoul is also entering the Japanese market, and Goddess Order is set to be rolled out in 4Q23. In line, we expect an earnings recovery from 2H23. However, we lower our TP from W44,000 to W42,000 (calculated by applying a target P/E of 22x to 12-month forward EPS).
2Q23 review: OP misses consensus
On a consolidated basis, Kakao Games posted 2Q22 sales of W271.1bn (-20.0% y-y, +8.8% q-q) and OP of W26.5bn (-67.3% y-y, +133.4% q-q), with OP exceeding our estimate (W20.4bn) but missing the elevated consensus (W34.3bn). Despite the full reflection of sales for ArcheAge War (released in March; hovering around the number-10 spot on the Google Play Store), sales decline for Odin sapped overall sales on a y-y basis.
In 2Q23, labor costs increased to W53.7bn (+6.6% y-y, +8.7% q-q) due to developer recruitment at subsidiaries. However, marketing costs (W20.6bn, +1.1% y-y, +1.6% q-q) were controlled effectively despite the launch of Ares.