Hoping to start from a clean slate
Event
- We paid a company visit to NCsoft.
Impact
- Short-term focus will be on Tabula Rasa. NCsoft plans to launch Tabula Rasa on 17 October in the US and Europe. So far, reviews were mixed. Positive reviews were focused on the differentiated experience the game offers, while the main negative indicated was the game was less addictive. The level of success of this highly-anticipated MMORPG will likely determine the strength of NCsoft shares ahead of 3Q07 results in early November.
- Korean operations recovering. Lineage I is recovering from piracy server issues and Lineage II remains stable with a new update. However, our checks indicate that the financial impact may be limited as Lineage I user metrics remain below previous highs and Lineage II promotional activity was high.
- Overseas operations mixed. The success of Guild Wars and the stable City of Heroes/City of Villans (CoH/CoV) franchise suggest that operations in the US and Europe are in line with expectations. However, operations in Taiwan and China remain disappointing due to extreme competition.
- Downside risk to 3Q07 estimates. We expect 3Q07 results to be better QoQ, due to seasonality and the launch of the Guild Wars expansion pack in August. However, we believe the improvements may not be as significant as the market expects, as the piracy server issue still seems to be weighing down on results, while the free-trial promotion event of Lineage II following the recent update is not expected to have a huge benefit to the top line.
Earnings revision
- No change.
Price catalyst
- 12-month price target: Won80,000 based on a PER methodology.
- Catalyst: Shares may stay range-bound for the time being until more concrete data points from new titles emerge.
Action and recommendation
- NCsoft shares have gone up 51% year to date, outperforming the KOSPI by 15%. The shares have also rebounded from a recent correction ahead of Tabula Rasa’s launch on 17 October and the short-term direction of shares will likely be determined by the launch’s level of success. Therefore even though the longer-term growth outlook remains in question (2009E adjusted EPS may decline 4% YoY), and 3Q07 results are at risk of falling below expectations, taking profit at this time may be premature, in our view.
