Lineage II M Performing Weaker than Expected Overseas
The author is an analyst of Shinhan Investment Corp. He can be reached at mj1224@shinhan.com. -- Ed.
Short lull ahead of the launch of highly-anticipated Blade & Soul 2
is in a short lull ahead of the launch of the most-anticipated game of the year, Blade & Soul 2. Negatives further weighing on the stock include: 1) lukewarm response to Lineage II M in Taiwan and Japan; 2) delays in the launch of Trickster M; and 3) issues related to the rollback of pattern (stats boost) updates for Lineage M. We expect new game momentum to resume from end-April or early May as the launch of Blade & Soul 2 approaches.
Lineage II M is performing weaker than expected in overseas markets. In Japan, we had projected the game to follow the successful path of previously-launched Korean RPGs and assumed it to make the top five on gross sales charts in March and rank around 10th in 2Q21. However, the game currently ranks 36th in the country (iOS; as of March 28). In Taiwan, Lineage II M has also failed to meet our expectations for an unrivaled lead from the launch backed by strong IP power, and is now competing closely with other games for the first place on sales charts. Even with the release of TV ads featuring Takeshi Kaneshiro scheduled from this week, a sharp rebound in sales is unlikely given the typical life cycle of MMORPGs.
Meanwhile, the release of Trickster M has been postponed from March 26 to 2Q21. We do not see the delay as a total negative as it is aimed at enhancing game quality in line with greater-than-anticipated user interest in the game. Pattern update rollbacks for Lineage M caused some users to launch a boycott campaign, but the actual user churn has been limited.
1Q21OP estimated at KRW103.7bn (-33.8% QoQ)
We now expect NCsoft to post operating profit of KRW103.7bn (-33.8% QoQ) for 1Q21, missing the consensus estimate of KRW175.5bn by a wide margin. Results should disappoint on: 1) special bonuses paid out to the entire workforce (roughly KRW40bn; KRW8mn per employee); and 2) partial reflection of annual wage increases (KRW13mn for development staff; KRW10mn for non-development staff). Daily average sales of Lineage M are estimated at KRW2.1bn for 1Q21, down by KRW150mn QoQ, with compensation for pattern update rollbacks causing a dent in payments. Lineage II M should also see daily average sales decline by KRW210mn QoQ from the high base of 4Q20, created from the first anniversary event.
Target price lowered by 12.5% to KRW1,050,000
Our target price for NCsoft is lowered by 12.5% to KRW1,050,000. We recommend lowering expectations for a short while, given weaker-than-expected overseas performance of Lineage II M. However, we retain our BUY rating on remaining positives such as the launch of Blade & Soul 2 slated for 2Q21 and new projects to be unveiled within this year.