Crimson Desert Launch Pushed Back to 2Q23
The author is an analyst of NH Investment & Securities. He can be reached at jaemin.ahn@nhqv.com. -- Ed.
Pearl Abyss’s short-term earnings momentum is being sapped by disappointment over a delay in its release of Crimson Desert. However, moving ahead this year, the company’s share price should recover gradually once additional information related to the new title becomes available.
Crimson Desert launch pushed back to 2Q23
Lowering our TP from W70,000 to W60,000, we downgrade our investment rating on Pearl Abyss from Buy to Hold. With the release of Crimson Desert having been delayed until next year, the cut in our TP stems from a lack of short-term growth drivers and downward adjustments to our top-line forecasts.
Now expecting Crimson Desert to be rolled out in 2Q23 (previous assumption: 4Q22), we trim down our related sales projections. With short-term earnings deterioration looking inevitable, we see 2022 sales of W376.2bn (-6.8% y-y) and OP of W7.1bn (-83.5% y-y). However, annual OP should recover to W195.1bn in line with the launch of new games in 2023.
Additional information on the Crimson Desert is to be released within this year. Expectations for global success are high, but share price momentum is to be tepid in 2H22 given the lengthy time left before the game’s launch.
2Q22 review: Earnings arrive sluggish
Pearl Abyss announced consolidated 2Q22 sales of W94.0bn (+6.2% y-y, +2.8% q-q) and operating losses of W4.2bn (RR y-y, TTL q-q), with operating income missing both estimate of W6.7bn and consensus of W8.0bn. Following last year, one-time labor costs (incentive payments) were booked in the company’s 2Q22 figures, dragging it down into the red.
The company’s sales grew in 2Q22 in line with direct service conversion in the South American market. However, its mobile game sales continued on a decline, dropping to W19.7bn (-10.0% q-q). Looking ahead, sales growth should restore upon the release of new games.
Labor costs upped to W50.6bn (+10.4% y-y, +15.9% q-q) in 2Q22, with the firm booking W8.0bn in one-off expenses for employees. Advertising costs expanded to W10.8bn (-17.1% y-y, +31.8% q-q) on higher offline marketing expenditure.