Diversification to lay path for valuation upgrade

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

We look forward to change of NCSOFT. Preparations are underway to reduce its sales portion for MMORPG titles (which has served as a disadvantage) and its domestic-centered business structure. If these goals are successfully achieved, valuation re-rating should be in the cards.

Focus on global expansion and genre diversification initiatives

Although reiterating a Buy rating, we lower our TP on NCSOFT from W620,000 to W530,000. As the launch schedule for Throne and Liberty (TL) has been delayed from June to 3Q23, we relocate our related earnings estimates by about one quarter and reduce our overall earnings forecasts for 2023.

However, we point out that TL remains the most anticipated PC title for the firm in a long time. To be published with Amazon (which succeeded with Lost Ark in North America) the new game is expected to achieve solid results in global markets and create a strong path for the company into the console market. Thus, despite the delay in the release schedule for TL to 3Q23, our expectations are still upbeat towards the game’s market prospects.

Project G, Blade & Soul S, and Battle Crush, all of which are to be released in 2H23, will also be at the forefront of NCSOFT’s strategy of diversifying its game genres beyond MMORPG. With NCSOFT now preparing to lower both its sales portion for MMORPG titles (which has served as a disadvantage) and its domestic-centered business structure, the chances of valuation re-rating are strong once these efforts start to bear fruit.

In addition, it is also highly likely that several of NCSOFT’s titles will receive Chinese publishing rights. In Sep 2021, NCSOFT announced the signing of a global publishing contract for five mobile games. MMORPG preferences in the Chinese market are still high, and the play appeal of Lineage Series and Blade & Soul 2 has already been verified in both Korea and Taiwan.

1Q23 preview: OP to arrive sluggish, but remember it is darkest just before sunrise

We expect NCSOFT to post consolidated 1Q23 sales of W473.2bn (-40.1% y-y, -13.6% q-q) and OP of W41.2bn (-83.1% y-y, -13.1% q-q), with OP missing both our previous estimate of W60.6bn and consensus of W62.8bn. We attribute a likely slippage (q-q) in the company’s PC game sales to off-season effects and a lack of special events. Also, we believe that downward stabilization of sales of Lineage W was inevitable.

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