Game Business Continues to Slump
The author is an analyst of NH Investment & Securities. They can be reached at jaemin.ahn@nhqv.com. -- Ed.
We favorably view ongoing sales expansion at NHN’s payment services & ad business. However, overall earnings should be restrained by lackluster sales of new games and deteriorating sales for existing titles.
Game business continues to slump
Maintaining a Hold rating on NHN, we lower our TP from W90,000 to W84,000. Despite ongoing sales growth at NHN’s payment services & ad business, positive earnings growth momentum is likely to remain absent for the time being due to both unsuccessful launches of new games and diminishing effects from loosened regulations on web-board games.
In 4Q20, NHN launched Critical OPS (in twelve countries), Yongbi the Invincible M (in Korea), A.I.M.$ (in Japan), and sports betting game Hangame Match Prediction (in Korea), but these titles likely failed to contribute notably to overall sales. Seeing a dampening in overall revenue on deteriorating sales of existing games (including Line Disney Tsum Tsum and Compass), we expect NHN’s earnings momentum to slow in 2021 on diminishing effects from loosened regulations on web-board games, and an accompanying flattening in top-line growth for such. Of note, NHN is to release five new games in 2021.
However, sales growth at NHN’s payment services & ad business should sustain this year on strong growth at subsidiary NHN KCP’s payment gateway (PG) business. Moreover, having acquired a preliminary license, NHN plans to aggressively expand its MyData business. PAYCO witnessed its transaction volume growth stagnate q-q in 2H20, but we expect growth to resume this year, estimating that its annual GMV will climb from W6.8tn (+14.9% y-y) in 2020 to W7.3tn (+7% y-y) in 2021.
4Q20 preview: To show earnings slump
On a consolidated basis, we expect NHN to record 4Q20 sales of W451.1bn (+12.8% y-y, +7.6% q-q) and OP of W25.7bn (+46.9% y-y, -6.3% q-q), with OP missing consensus of W32bn. Contributions to overall sales by new games were likely lackluster, and expenses for launching the new titles likely pushed up marketing expenses. And, we believe that both layoffs at the company’s Dr. Tour business and the paying out of annual incentives translated into higher operating costs. Looking at the non-operating profit side, goodwill impairment losses related to its subsidiaries are likely to be reflected.