New Game Releases Concentrated in 4Q20
The author is an analyst of Shinhan Investment Corp. He can be reached at mj1224@shinhan.com. -- Ed.
1Q20 OP falls short of consensus at KRW20.4bn (-59.3% QoQ)
Netmarble posted operating profit of KRW20.4bn (-59.3% QoQ) on sales of KRW532.9bn (-3.4% QoQ) for 1Q20, falling short of the consensus estimate of KRW49.3bn. Marketing expenses rose 28.9% QoQ on the launch of highly-anticipated games such as The Seven Deadly Sins: Grand Cross (global release) and A3: Still Alive in March. Despite the success of newly released games, earnings came in short of market expectations on the continued QoQ decline in sales from existing games (Marvel Contest of Champions, Seven Knights, Lineage II: Revolution).
OP to normalize in 2Q20; new game releases concentrated in 4Q20
We expect earnings to improve in 2Q20 compared with the sluggish results of 1Q20, with new hit games (The Seven Deadly Sins: Grand Cross global launch, A3: Still Alive) contributing toward quarterly earnings in full. However, the natural decline in sales from existing games could become a slight burden. Upcoming releases of highly-anticipated games are mostly concentrated in 4Q20. Marvel Realm of Champions, one of the most talked-about games of the year, was initially planned for a summer release. However, with Marvel pushing back the release of new movies, the launch of the new game based on the company's IP assets has been put off to 4Q20. Other new game titles based on popular IP assets such as Seven Knights II (mobile, domestic launch), Seven Knights: Time Wanderer (Nintendo Switch) and Cross Worlds are also slated for launch in 4Q20. Meanwhile, concerns remain that new game releases could be delayed further, depending on various factors at home and abroad.
Retain HOLD rating
We retain our HOLD rating for Netmarble. Investors could focus on domestic/global release schedules to find trading opportunities, but we remain concerned over the lack of structural growth in profit despite the success of new games as well as relatively high share valuations (2020F PER of 32.6x) vs. global peers.