An Earnings Shock
The author is an analyst of KB Securities. He can be reached at drlee@kbfg.com. -- Ed.
Maintain BUY; Revise down TP to KRW1,100,000
We maintain BUY and revise down our TP by 4.5% to KRW1,100,000 for NCsoft. We have revised down 2021E revenue and OP by 8.8% and 15.8%, respectively, to reflect sluggish results for mobile games in 1Q21, as well as delays in the rollouts of key game titles (e.g., Blade & Soul 2, Aion 2). We have also revised our valuation method from P/E to DCF model in order to better reflect the company’s long-term growth potential. Our revised TP implies 12m fwd P/E of 24.1x.
Earnings shock attributable to sluggish mobile game revenue and increase in labor expenses
NCsoft reported 1Q21 revenue of KRW512.5bn (-8.7% QoQ, -29.9% YoY) and OP of KRW56.7bn (-63.8% QoQ, -76.5% YoY), with OP missing the market consensus (KRW125.8bn) by 54.9%. We attribute the QoQ decline in revenue to lower revenues for Lineage M and Lineage 2M (-18.4% and -8.7% QoQ, respectively). The shock to OP came on the back of: (1) an increase in labor expenses upon wage hikes and one-off incentive payments (+25.8% QoQ to KRW232.5bn); and (2) higher marketing expenses due to new game rollouts (+22.6% QoQ to KRW55.0bn).
Delays in new title launches disappointing, but revenue forecast for Blade & Soul 2 revised up
New game rollouts will begin, starting with the release of Trickster M on May 20, but schedules for other key titles have been pushed back. We believe it highly likely that the release of Blade & Soul 2 will be pushed back from June to 3Q21, and both Project TL (The Lineage) and Aion 2 from 4Q21 to 2022. However, we expect Blade & Soul 2 to generate higher revenue than previously expected, given that pre-registrations indicate a wider range of age groups among users, as well as a higher number of characters compared to Lineage 2M during the same time period. As such, we have revised up our daily average revenue forecast (for the initial phase of launch) for the title from KRW2.5bn to KRW3.0bn.
Share price to gain ground ahead of Blade & Soul 2 rollout
While share price performance has been sluggish upon concerns over 1Q21 results, delays in new game rollouts, as well as the resumption of short selling, we believe it should gain ground ahead of new title releases (Trickster M, Blade & Soul 2). We also expect OP to normalize in 2Q21 (KRW167.2bn, +194.7% QoQ).