Webzen Guidance: "Challenging Target" (WZEN, NCTY)

Includes: NCTY, WZEN
by: SA Editors

South Korea-based Lehman Brothers analyst Stanley Yang released a report earlier today on online game developer Webzen (ticker: WZEN). Webzen partners with The9 (ticker: NCTY) to distribute games in China. Key extract from Yang's note to clients:

Maintain 3-Underweight

As expected, Webzen posted disappointing 4Q05 results with operating loss sequentially increasing 25% to W6.2bn on decelerating revenue of Mu. We also regard the management’s 2006 guidance (W62bn in revenue, W3bn in operating, and W5bn in net profit) as challenging target given the increasing uncertainty relating to its commercialization of SUN, the single dominant 2006 revenue contributor. Commercialization of SUN was delayed from 1Q06 to 2Q06E. Our domestic revenue forecast for SUN of W22bn is lower than company guidance of W27bn as we believe the game will face fierce competition from Granado Espada (published by Hanbitsoft, 047080 KS, Not Rated), which will also be commercialized in 2Q06.

We believe the real catalyst for the stock will be launch of Huxley, its next MMO shooting title, which has been ranked as the 14 th most anticipated game title in 2006 according to GameSpy. Huxley is expected to start closed/open beta in 4Q06 and be commercialized in 1Q07.

We maintain 3-Underweight recommendation, but raised target price from W13,500 to W18,000 based on 15x 2007 EPS estimate of W1,210.

Aggressive Outlook on SUN and 2006

At the 4Q05 earnings conference call, Webzen provided its business outlook for 2006. The company said it expects W62bn in revenue with W34bn (W27bn in domestic and W7bn in overseas market) coming from its new MMORPG SUN. The company also targeted W3bn in operating profit and W5bn in net profit.

We believe Webzen’s business outlook for 2006 is quite aggressive assuming success of its new game SUN. Our forecast is more on the conservative side with revenue forecast of W50.9bn, and operating profit and net profit forecasts of -W6.1bn and -1.6bn, respectively.

As for other major games in the pipeline, Webzen mentioned that it plans to start closed beta and open beta for Huxley in 4Q06 and commercialize the game in 2007. Webzen also said that APB will likely be commercialized in early 2008.

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