2Q16 review: Earnings well above expectations

For 2Q16, NCSOFT reported earnings well above our estimates and the market consensus. The latest results once again confirmed the stable earnings potential of the company’s existing titles, including Lineage I and Blade & Soul. 2Q16 revenue and operating profit expanded 10.6% and 28.4% YoY to W240.5bn and W86.1bn, respectively.

By title, revenue from Lineage I grew to W94.4bn (+10.5% YoY, 19.8% QoQ) thanks to a microtransaction event. Despite concerns, Blade & Soul, which began monetization in North America and Europe in 1Q16, saw only a marginal sequential decline, generating solid revenue of W48.9bn (-9% QoQ).



For Guild Wars 2 and Aion, revenues declined QoQ and YoY. However, overall revenue of existing titles showed stable earnings as WildStar revenue in the US and Europe rebounded. Lineage I, which was launched in 1997, generated record-high annual revenue of W313bn in 2015. We forecast that it will once again break records with annual revenue of W344bn in 2016.

Momentum from mobile games to continue from September to December

The momentum for new mobile titles is becoming increasingly visible. We think the most positive scenario at this point is the launch of one or two new titles every month from September to December.

We see the highest visibility in Lineage II: Blood Alliance (developed by China Snail Games). On July 28th, its iOS version was successfully launched on China’s Apple App store and became the seventh-highest grossing game a week later.

It is particularly notable since meaningful marketing activities have not been executed yet. Marketing activities for Lineage II: Blood Alliance will begin after the Android version obtains regulatory approval sometime between mid-August and mid-September.

Netmarble is set to officially roll out Lineage II: Revolution in October (after beta testing). Around that time, NCSOFT’s in-house developed Lineage RK will be commercially released after beta testing. In November, we anticipate the beta test for the PC game Lineage Eternal will be implemented. Lastly, Lineage M is expected to begin its official service after beta testing in December.

Buy in August; Maintain Buy and TP of W420,000

Due to the delay in launches of mobile titles, the company’s stock price has remained stuck in the low- to mid-W200,000 range. We recommend buying NCSOFT in August for the following reasons: 1) 2Q16 results confirmed strong cash generation through existing titles, such as Lineage, 2) a series of new titles is set to be launched from September to December, and 3) foreign investors’ interest in NCSOFT is rising as similar large-cap game companies with strong intellectual property, such as Blizzard, EA and Nintendo, are gaining traction in the global stock market. Thus, we maintain our Buy rating on NCSOFT with a target price of W420,000.


Source: Mirae Asset Daewoo