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NCsoft: Item Trading System To Lead To Long-Term Success

Summary

Game Rating and Administration Committee assigned an “adult only” rating to the new Lineage M which allows item trading involving cash exchange within the game

The item trading system that has been newly introduced is expected to play a key role in the development/maintenance of the game’s free economic ecosystem.

Since the June 21 launch, Lineage M has attracted some 7mn registered users on a cumulative basis.

1) Investment highlights

  • -  Finalizing its rating decision on Lineage M yesterday, the Game Rating and Administration Committee assigned an “adult only” rating to the new Lineage M which allows item trading involving cash exchange within the game. Following the decision, the current Lineage M will continue to be serviced to the age-12-and-older group in Google Play under a new name Lineage M (12), whereas the other Lineage M with the item exchange system will become available to users aged 18 and older. On iTunes where only Lineage M (12) is available for now, the company is working to find ways to introduce the adult version of the game.

  • -  The item trading system that has been newly introduced is expected to play a key role in the development/maintenance of the game’s free economic ecosystem. It will also encourage users’ long- term involvement in the game, eventually leading to the game’s long, steady success.

  • -  Since the June 21 launch, Lineage M has attracted some 7mn registered users on a cumulative basis. Average daily revenue is about KRW9bn and the number reached KRW13bn on July 1, signaling the game’s massive early success. Considering that the game’s major user base is made up of adults aged 30 or older who have better ability to pay, the game is likely to become a steady source of earnings for the company even after the initial buzz wears off.

    2) Major issues and earnings outlook

  • -  For 2Q, we expect the company to report revenue of KRW301.8bn (+25.5% YoY) and operating profit of KRW78.2bn (-9.2% YoY), similar to the levels seen in the past. The pedestrian results have to do with the incomplete recognition of Lineage M revenue (worth only 10 days) and marketing/labor cost hikes associated with the game’s release.

  • -  The revenue from the PC version of Lineage 1 is likely to remain flat QoQ. We expect there to be some cannibalization effects between Lineage 1 and Lineage M but believe soaring Lineage M revenue will help offset negative impacts.

  • -  We estimate 3Q operating profit will skyrocket 200.6% YoY to KRW195.7bn on the full recognition of Lineage M revenue, although the result will fluctuate depending on the game’s daily revenue.

    3) Share price outlook and valuation

    - In light of robust earnings momentum coming from Lineage M’s success, we still see ample upside for the stock. We maintain BUY and our target price of KRW510,000. 

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.