Success of Mir M to Drive Full-fledged Earnings Growth
The authors are analysts of Shinhan Investment Corp. They can be reached at sokang@shinhan.com and kimaram@shinhan.com, respectively. -- Ed.
Success of Mir M to drive full-fledged earnings growth
Mir M, released on 23 June, currently ranks fourth on Google Play in terms of gross sales. Daily average sales started off at KRW1bn levels and should average around KRW0.7bn as earnings are booked for the full quarter from 3Q22. The introduction of an intricate and diverse in-game economic system will likely allow in-game items to maintain value over time, fueling longer-term success of the new mobile game. As the game offers more ways for users to earn real income, we expect to see even stronger market response for the global version of Mir M, which is slated for launch in 2H22 with the adoption of a token economy.
Labor costs sharply increased in 1Q22 from the large-scale recruitment carried out from 2H21 for expansion of the blockchain businesses, as well as the acquisition of SundayToz. With relevant expenses mostly booked in the previous quarter, labor costs likely increased at a slower pace in 2Q22. Instead of earnings in the first two quarters during the lull in new game releases, we urge investors to focus on sales and profit growth from 3Q22 with Mir M to start contributing to quarterly earnings in full. Wemade should be able to minimize its marketing spend for the global version of Mir M given the sharp increase in monthly active users (MAU) of its Wemix platform.
Initiate coverage with BUY for a target price of KRW110,000
Wemade shares, after trading at a PER around 10x in 1H21, enjoyed a sharp re-rating in 2H21 backed by the growing popularity of blockchain games and the company's agile response to changes in market trends. Although recent correction in cryptocurrency prices has dampened expectations for the blockchain game market, we believe now is the time to look beyond simple play-to-earn (P2E) features to the overall quality of the new game, conversion of in-game goods to real-life assets, and creation of an inter-game (interoperability of in-game goods/items and accounts between different games) economy. In our view, Wemade shares deserve to trade at a premium given the large lineup of high-quality games from listed companies on board the Wemix platform as well as significant savings on marketing spend expected from the launch of new games on the platform.
We initiate our coverage on Wemade with a BUY rating for a target price of KRW110,000, based on 2023F EPS of KRW4,352 and a target PER of 25x. With 1H22 earnings weighed down by workforce expansion costs and subsidiary acquisition expenses, investors should focus on earnings forecasts for 2023. Game developers will then be able to directly upload their new games on the Wemix platform using the software development kit provided by Wemade without going through other processes. In addition, the introduction of accounting standards for the WEMIX cryptocurrency and in-game tokens (price of WEMIX currently booked at conservative levels and other tokens have yet to be reflected in the company's books) will likely lead to explosive growth in overall earnings from 2023.