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NHN-1Q14 results sluggish on web-board regulations

May 19, 2014 15:20|May 19, 2014 15:21
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Due to the introduction of web-board game regulations, NHN Entertainment recorded worse-than-expected 1Q14 results. Against this background, we expect investor sentiment towards the firm to weaken over the near term. However, we anticipate that earnings contributions from the company’s mid- to long-term growth drivers will become increasingly visible from 3Q14.

1Q14 results: Operating profit falls largely short of consensus

- NHN Entertainment posted 1Q14 consolidated sales of W152.1bn (down 8.4% y-y, down 7.1% q-q) and operating profit of W22.3bn (down 64.3% y-y, down 16.8% q-q), with both figures falling significantly short of our estimates and consensus.

- In detail, PC game sales slid 13.9% q-q due to declining web-board game sales. Of note, following the implementation of new web-board game regulations on Feb 24, poker game sales dropped by more than 60% in March (compared to January), with the number of users and paid users falling by 40~50% over the same period.

- Meanwhile, mobile game sales climbed 18.6% q-q thanks to newly released games such as ‘LINE Disney TSUM TSUM’ and ‘Wara Store’.

Amid negative short-term investment sentiment, lower TP to W90,000

- We anticipate that web-board game sales will deteriorate further in 2Q14, weighing on the firm’s short-term investment sentiment. Specifically, we expect the firm to post 2Q14 sales of W139.4bn (down 8.4% q-q) and operating profit of W13.1bn (down 41.1% q-q).

- However, led by improving earnings visibility at the mobile game business, we expect NHN Entertainment’s earnings to rebound in 2H14. In detail, the company plans to launch 36 new games (including ‘LINE POP’ and the next version of ‘Wooparoo Mountain’) in 2Q14, and a further 23 new titles in 2H14. Of note, the firm also plans to release its first social casino game in 2H14.

- Reflecting the worse-than-expected 1Q14 results, we revise down 2014 sales and operating profit estimates by 20.1% and 27.5%, respectively. Accordingly, we lower our target price from W110,000 to W90,000. However, believing that the mobile game business boasts sound growth potential, we maintain our Buy rating.
*Source: Woori Investment & Securities Co.