Expectations to Begin Climbing for The Callisto Protocol

The author is an analyst of NH Investment & Securities. He can be reached at jaemin.ahn@nhqv.com. -- Ed. 

 

Given the influences of off-seasonality and declining sales of existing games, Krafton’s 2Q22 earnings are likely to arrive sluggish. Nevertheless, Krafton’s recent share price decline looks excessive. Moving ahead, expectations for The Callisto Protocol are to continue rising.

Expectations to begin climbing for The Callisto Protocol

- Although maintaining a Buy rating, we lower our TP on Krafton from W400,000 to W350,000. In 2Q22, sales of Game for Peace and PUBG Mobile likely slid q-q due to off-seasonality. However, expectations for The Callisto Protocol, which has been confirmed for release on Dec 2, should be reflected in earnest in 2H22.

- Of note, The Callisto Protocol proved to be one of the most anticipated console games of 2H22 at Sony’s State of Play global presentation (Jun 2), despite showing alongside major IP titles such as Resident Evil 4 and Biohazard Village. Additional pre-release video for The Callisto Protocol is expected to emerge at Gamescom (August) and the Tokyo Game Show (September), with expectations to rise as the release date approaches.

- Affected by concerns over its 2Q22 earnings, Krafton has seen its share price fall sharply as of late. However, with its 2022E P/E having dropped to 14.3x, we view such concerns as being excessive, given the likelihood of increasing expectations for the launch of new games at yearend.

2Q22 preview: Off-season impacts inevitable

- Krafton is forecast to report 2Q22 sales of W469.0bn (+2.1% y-y, -10.3% q-q) and OP of W170.2bn (-2.3% y-y, -45.4% q-q), with OP to fall short of both our previous estimate of W183.6bn and the consensus of W192.9bn. Mobile sales decline was likely inevitable in 2Q22 due to off-seasonality for the Chinese game market.

- For 2Q22, mobile sales are estimated at W338.8bn (-4.3% y-y, -14.4% q-q), with sales of Game for Peace likely sliding on off-seasonality in the Chinese game market. However, PUBG Mobile has been maintaining healthy user traffic and logging a solid performance in the Indian market. PUBG: New State is enjoying greater user engagement on the addition of new play modes (Extreme BR, Round Deathmatch). Additional map updates are set to arrive in 3Q22.
 

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