Eyes on the global gaming market beyond Korea
Korea-listed NCSoft Corp is known as a leading online games company, creating popular franchises such as the Lineage, Aion and Guild Wars series. In addition, it has significant business in publishing web-based editing software and software for designs and databases, Intranet, and commercial Internet access systems.
NCSoft has an integrated development and publishing network, with online and mobile game development studios in Korea and North America and well-organised publishing arms in significant markets such as the US, Taiwan, Japan and Europe. Mobile games are the most significant contributing segment, with 70% of the total sales deriving from it, with the remaining from online games.
As typical of high-margin software companies, NCSoft’s business is lucrative, as it has many successful IPs, with multiple flagship IPs diversified across various product lines and platforms. Many of these IPs have grossed trillions of Korean won over the years, and the company’s R&D is focused on actively developing new titles and IPs. Further, the company’s business model has sustainable longevity, with continuous growth bolstered by a diverse game portfolio and the extension of this growth cycle through IP utilisation across various platforms.
NCSoft is known within the online gaming space for prioritising users’ experience. Among the various innovations created by the company, it was the first game developer to adopt a paid item system which sells in-game items, effectively monetising this channel further. It is the first game company to develop and support PC/mobile cross-play platforms for MMORPG (massively multiplayer online role-playing games). This is possible due to its technological capabilities and development. NCSoft is a global leader in AI R&D, focused on enhancing AI capabilities in gaming, culture and society and setting cultural standards for AI use. The company’s visual and audio production also utilises state-of-the-art equipment and technology, which aids in creating new IPs and titles.
The company’s current strategy is to focus on overseas expansion, as the global games market has grown tremendously over the past few years. The company plans to expand its presence in the global market through global IPs and new games designed for the global market. Further, the company’s IP enhancement strategy involves developing new IPs and gaming titles and utilising existing IPs, such as its Lineage IP, where various franchises can be generated in the future based on legacy IPs, for example, Lineage II and Lineage W.
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NCSoft is in a rapidly growing industry and is set to capitalise on this, given its mobile gaming position as a leader in South Korea. Market research indicates that the global video game software industry is expected to hit over US$200 billion ($265 billion) by 2025, driven mainly by the growth of mobile games in China, the US and South Asia. With new titles such as Lineage W, NCSoft’s expansion into overseas markets is expected to be profitable, apart from potential ventures into non-fungible token (NFT)-based games. The company has also announced a few more title releases over the next year, which will provide earnings visibility. In the latest 3QFY2022 ended Sept 30, 2022, NCSoft performed well y-o-y as sales were up 21%, operating profit was up 50%, and net income was up 83%.
The company’s one-year total return was –18.3%, although their results were good. NCSoft has had over five years of positive income, operating cash flow and free cash flow, as shown in the chart. The company’s operating and net margins have been double-digit for the past 10 years, indicating its strong competitive advantage. In terms of financial safety, NCSoft has excellent liquidity with a current ratio of 3.7 times, and solvency is not a concern as the company is net cash. In terms of yield, the company’s earnings and free cash flow yields are 6.2% and 5.4%, respectively, which is more attractive than the risk-free rate of 3.4%.
Sentiments-wise, the company has 25 “buy” calls, seven “hold” calls, and two “sell” calls, with a consensus target price of 15% above its current trading price of KRW476,500 ($506.64). Based on our in-house valuations of the company, we believe that the intrinsic value of the company is at least 20% above its current trading price. NCSoft is a great company because it is undervalued and has bright prospects and sound fundamentals.
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Photo Credit: Bloomberg
Data for Charts & Tables were sourced from Bloomberg; Stock returns include capital adjustments and dividends, and excludes currency exchange fluctuations.
