The authors are analysts from Shinhan Investment Corp. They can be contacted at sokang@shinhan.com and kimaram@shinhan.com respectively. — Ed.
1Q22 preview
Pearl Abyss is expected to have recorded sales of KRW 88.8 billion (-12.0% YoY, -24.7% QoQ) and an operating loss of KRW 1 billion (negative swing YoY and quarterly operating margin of -1.1%) for 1Q22. The company should have recorded a loss due to lower sales and higher labor costs for new hires, despite lower marketing and other expenses. Sales likely fell QoQ due to the high base effect created by Pearl Abyss Capital’s one-time investment gains booked in 4Q21.
Strong growth hopes driven by Crimson Desert and Black Desert Mobile China
Crimson Desert, an open-world action adventure game, is slated for PC and console release in late 2022. Other open-world titles launching earlier this year, such as Dying Light 2 and Elden Ring, are recording a high volume of sales. It is obvious that there is still a strong demand for this genre. Crimson Desert, if it launches as planned, should be in the limelight in the absence of rival games.
Crimson Desert is built on Pearl Abyss’ proprietary game engine to deliver high-fidelity graphics and gameplay features. The stunning trailer released at The Game Awards (TGA) has already caught the attention of users around the world. The global success of an open-world game relies on its own original worldview, immersive storytelling, and graphical optimization. Amid the absence of new IP titles, existing IP games are seeing declining Metacritic scores. We are clearly seeing pent-up demand for new IP titles, as in the case of Cyberpunk 2077. The risks associated with a new IP game have diminished compared to the past. Crimson Desert will be evaluated on quality alone.
Black Desert Mobile launched in China on April 26 is expected to generate stable royalty revenue, contributing to company-wide profit growth.
Initiate hedging with BUY for a target price of 120,000 KRW
We initiate our Pearl Abyss hedge with BUY for a target price of 120,000 KRW, based on a 12-month forward EPS of 4,899 KRW and a target PER of 25x. We see three bright spots for valuations: 1) focus on game genres that are in line with the global trend; 2) AAA game development capabilities; and 3) strong growth potential in markets outside Asia.