Friday, February 21, 2020
NHN: Stronger momentum needed
Lacking New Hit Mobile Games
NHN: Stronger momentum needed
  • By Ahn Jae-min
  • February 12, 2020, 17:44
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The author is a stock analyst at NH Investment & Securities. He can be contacted at jaemin.ahn@nhqv.com. -- Ed.

While PAYCO is delivering steady sales growth, and while web-board game deregulation is welcome news, NHN’s earnings growth is to be slowed by both a lack of new hit mobile games and sliding sales for its existing games.

▶ Expect earnings growth in 2020

We downgrade our investment rating on NHN from Buy to Hold. But, we keep our TP unchanged at W75,000, noting that estimated EV remains similar to our previous projection, even though the firm’s 4Q19 earnings came in lackluster, and even though we have cut our earnings forecasts for 2020 onwards.

However, NHN’s tepid 4Q19 results and the cuts to our earnings forecasts for 2020 onwards have prompted the downgrade in our investment rating. NHN’s game business, the firm’s cash cow, has not fared well since 2017, displaying a steady decline in sales.

That said, NHN’s web-board game sales should rise from 2Q20 following deregulation, in turn positively impacting upon the firm’s 2H20 earnings.

With PAYCO’s 2019 GMV upping to W6tn (+30% y-y), NHN’s PAYCO-related losses narrowed to W4bn in response to higher sales. Of note, PAYCO’s off-line sales portion is widening gradually in response to both a partnership with Samsung Pay and a higher number of participating merchants. As PAYCO is faring well, it is expected to attract additional investment, a likelihood which bodes well for NHN’s EV. Of note, Hanwha Life Insurance made a W75bn investment in PAYCO in Jul 2019.

▶ 4Q19 review: Earnings prove sluggish

NHN posted consolidated 4Q19 sales of W400.6bn (+8.8% y-y, +13.9% q-q), OP of W17.7bn (+7.1% y-y, -19.4% q-q), and net losses of W30bn (TTL). OP missed both our estimate of W26bn and consensus of W25.4bn. Despite healthy merchandise sales on peak seasonality, overall earnings were drained by both slowing sales of mobile games and the booking of W8bn in incentive payments.

Six years following its debut in Jan 2014, Disney Tsum Tsum (NHN’s flagship mobile game) is seeing a decline in sales. With the new mobile games released by NHN last year failing to achieve success, we estimate that 2020 sales at its game business will decline to W386.1bn (-7.4% y-y), noting that its upcoming new lineup is not garnering as much attention as its offerings for last year.