The author is an analyst of Shinhan Investment Corp. He can be reached at email@example.com. -- Ed.
NCsoft shares have corrected by 20.6% from peak levels recorded at the start of the year. Major games including Lineage M and Lineage II M continue to post solid performance, but shares have corrected nonetheless, due mainly to market liquidity issues. From December 2019 through early-March 2020, foreign investors had remained net buyers for 54 out of 63 trading days. However, the COVID-19 outbreak prompted an outflow of funds from the domestic market, turning foreign investors into net sellers for 12 consecutive trading days from March 5 to 20. Foreign investors once again became net buyers of NCsoft shares on March 23, and a turnaround in fund flows into the domestic market could help shares rally past the previous peak once foreigners resume their buying spree. Compared with the period of the previous buying spree, we see no changes in company fundamentals.
1Q20 OP forecast at KRW279.2bn (+97.8% QoQ)
NCsoft is expected to post sales of KRW695bn (+30.2% QoQ) and operating profit of KRW279.2bn (+97.8% QoQ) for 1Q20. Daily average sales of Lineage M and Lineage II M are remaining solid at KRW2.4bn and KRW3.5bn, respectively. Lineage II M has seen a decline in daily average sales since its release, but faster content updates should help to stabilize the downtrend to similar levels as Lineage M.
Retain BUY for a revised-down target price of KRW720,000
We retain our BUY rating on NCsoft but lower our target price to KRW720,000 on downward-adjustment of the target PER (23x à 21x) in light of share price correction of global peers. While fundamentals remain unchanged, shares have corrected due to market liquidity issues. NCsoft shares are now trading near the lower end of the valuation band at a 12-month forward PER of 16.5x. We find valuations undemanding, considering the solid performance of existing games and momentum expected from the 2H20 launch of Lineage II M in Taiwan/Japan and release of Blade & Soul 2. We recommend accumulating shares on further correction to levels seen during the absence of momentum in the past, with delays in new game releases seen as the only risk posed by the COVID-19 pandemic on NCsoft.