Gamevil:Established-game sales decline in 1Q

WHAT’S THE STORY?

    1Q review: Gamevil’s sales fell 30% y-y and 25.7% q-q to KRW28.6b in 1Q, missingconsensus by 24.5% amid: 1) a lack of new titles; and 2) game aging. Sales of strategicRPGs fell 22.6% q-q, while sports-game sales tumbled 38.5% q-q. Operating expenses (ie,commission paid and marketing costs) fell overall amid weaker sales and an absence ofnew releases, but the firm suffered a KRW3b operating loss (vs a KRW2.7b loss in 4Q16),missing consensus (of a KRW0.2b loss).

    New releases to trigger sales rebound in 2Q: We expect sales of establishedgames to rebound q-q in 2Q thanks to: 1) April updates—one for Become a Star for Kakao(Season 5) and a character update for Kritika; and 2) the release of a new version of MLBPerfect Inning. Meanwhile, the firm also launched War of Crown in April. Although thistitle has underperformed expectations, it is one of Gamevil’s better selling games thanksto decent performances in markets worldwide.

    To remain unprofitable amid rise in marketing costs: Though sales shouldrebound in 2Q, Gamevil is likely to spend more marketing War of Crown, keeping thefirm in the red in 2Q. Meanwhile, the hiring of more development personnel has raisedfixed costs, and most of the firm’s upcoming titles are being developed by externalcompanies and thus offer low margins. Thus, to swing back to profitability, Gamevil needssome new hits that can more than cover fixed cost. As the firm plans to launch majorRPGs (eg, ArcheAge and Royal Blood) in 2H, it will likely remain in the red unless anduntil these titles prove successful.

    Maintaining HOLD: We maintain our HOLD rating on the stock but raise our targetprice 12.3% from KRW47,000 to KRW53,000 to reflect a higher peer-average valuationmultiple. Investors should wait for new titles to prove successful before buying shares, asGamevil’s successful games are aging and its recent releases have failed to perform.