The author is an analyst of NH Investment & Securities. He can be reached at email@example.com. -- Ed.
We expect sales of game companies to increase in line with a likely decrease in outdoor activities amid the Covid-19 outbreak. With new lineups resting, sales of existing games should continue to increase. And, web-board games will likely enjoy additional momentum in response to deregulation effects.
Reduced outdoor activities to benefit game company plays; sales growth of existing games to outpace that for new titles
Although the Covid-19 outbreak is stoking concerns of a downturn in the domestic economic index, the games sector should benefit from increasing hours of game play as a result of reduced outdoor activities. Thus, while the virus outbreak is a tragic event for Korea, game stocks warrant overweighting by investors as they will serve as defensive plays. Against this backdrop, we maintain a Positive investment rating for the game industry.
In 1H20, sales growth numbers should remain strong for existing games, as planned new game launches are still lying dormant. In detail, a previous large-scale new line-ups cycle (including for NCSOFT’s Lineage 2M as well as blockbusters V4 and Moonlight Sculptor) came to an end in 2H19. While 1H20 is to usher in Netmarble’s A3: Still Alive, Webzen’s Mu: Ignition 2 (web-board game), Krafton’s Tera Hero, and Joycity’s Bless Mobile, the number of major new releases this quarter is to be comparatively fewer than usual. Accordingly, we believe that the games currently occupying the top ranks in sales charts will remain at there for now. In particular, likely continued brisk sales of Lineage 2M should keep it in the number-one spot in terms of sales.
The sales environment for web-board games looks favorable in light of the relatively older age of the user pool for such games. In addition, related deregulation is expected to be implemented within 1Q20, a development that should translate into a 20% expansion in the web-board game market in 2020. The impact on the earnings of web-board game companies will likely be boosted even further by the fact that the web-board genre carries high OPMs.
▶ Focus on solid sales growth momentum plays: NCSOFT, Neowiz
We believe that it is time to focus on firms with outstanding earnings growth.
With user feedback for Lineage 2M improving gradually and sales of the game remaining at the top of the charts, NCSOFT is equipped to deliver unparalleled earnings growth momentum versus its rivals.
Meanwhile, given its popular web-board game titles, Neowiz should see sales growth in line with deregulation.