Three Positives for Valuations
The authors are analysts of Shinhan Investment Corp. They can be reached at sokang@shinhan.com and kimaram@shinhan.com, respectively. -- Ed.
1Q22 preview
Pearl Abyss is expected to have posted sales of KRW88.8bn (-12.0% YoY,-24.7% QoQ) and operating loss of KRW1bn (negative swing YoY and QoQ, operating margin of -1.1%) for 1Q22. The company should have swung to a loss owing to sales drop and labor cost hikes from new hires, despite declines in marketing spend and other expenses. Sales likely fell QoQ due to high base effect created by Pearl Abyss Capital’s one-off investment gains booked in 4Q21.
Hopes for strong growth driven by Crimson Desert and Black Desert Mobile China
Crimson Desert, an open-world action adventure game, is set to be released in both PC and console versions at end-2022. Other open-world titles rolled out early this year, such as Dying Light 2 and Elden Ring, are recording strong sales volume. It is evident that there is still robust demand for this genre. Crimson Desert, if launched as scheduled, should enjoy the limelight in the absence of rival games.
Crimson Desert is built on Pearl Abyss’s proprietary game engine to deliver high fidelity graphics and game features. The stunning reveal trailer released at The Game Awards (TGA) has already captured the attention of global users. The global success of an open-world game hinges on its own original world view, immersive narrative, and graphics optimization. Amid the absence of new IP titles, games of existing IPs are suffering a decline in Metacritic scores. We clearly see a pent-up demand for new IP titles, as in the case of Cyberpunk 2077. Risks associated with a new IP game have decreased compared to the past. Crimson Desert will be evaluated based purely on its quality.
Black Desert Mobile released in China on April 26 is forecast to generate steady royalty revenue, contributing to company-wide profit growth.
Initiate coverage with BUY for a target price of KRW120,000
We initiate our coverage on Pearl Abyss with BUY for a target price of KRW120,000, based on a 12-month forward EPS of KRW4,899 and a target PER of 25x. We see three positives for valuations: 1) focus on game genres that are in line with the global trend; 2) capabilities to develop AAA games; and 3) strong growth potential in markets outside Asia.