Faster Profit Growth vs. Peers
The author is an analyst of Shinhan Investment Corp. He can be reached at mj1224@shinhan.com. -- Ed.
1Q20 sales hit an all-time high at KRW731.1bn (+37.0% QoQ)
NCSoft reported sales of KRW731.1bn (+37.0% QoQ) and operating profit of KRW241.4bn (+71.0% QoQ) for 1Q20. Sales boost from Lineage II M (daily average sales of KRW3.7bn) was felt for the full quarter, while Lineage M’s daily average sales remained flat QoQ at KRW2.3bn. Operating profit missed the consensus estimate (KRW275.1bn), with labor costs increasing KRW41.9bn QoQ due to special bonuses for the success of Lineage II M and regular incentive payments.
Expected releases of Lineage II M (overseas) and Blade & Soul II (domestic) within 2020 raise hopes for 2021
NCSoft aims to release Lineage II M overseas and Blade & Soul II in the domestic market before the end of 2020. The timeframe of their release should be 4Q when Lineage II M’s domestic sales stabilize downward. Our earnings projection reflect daily average sales of Lineage II M (overseas) at KRW2bn and Blade & Soul II (domestic) at KRW1.5bn for the first 45 days of their release. Lineage II M’s domestic daily average sales will likely stabilize downward to KRW1.9bn by then.
In view of the strong domestic performance of Lineage II M, expectations have increased for the game’s overseas release and Blade & Soul II. The rollout of two blockbuster MMORPG games in 4Q also raises prospects for 2021. We project NCSoft’s 2021 net profit to grow 20.9% YoY on full-year sales contributions from Lineage II M (overseas) and Blade & Soul II. The pace of growth far surpasses the average growth consensus of 10% YoY for global peers (Activision Blizzard, Electronic Arts, NetEase). There is room for upward earnings forecast revision given the possibility of Project TL and Aion mobile game releases in 2021.
Maintain BUY and raise target price by 19.4% to KRW860,000
We raise our target price for NCSoft by 19.4% to KRW860,000. Amid the rise in global game stocks, NCSoft is seeing faster profit growth vs. peers. The upcoming release of new games and potential of IP expansion offer high visibility of profit growth. Our target price is based on an upward-adjusted PER of 24.7x (global peer average), vs. previous 21.0x.