[Overseas Stocks Spotlight] "Nexon’s Growth to Slow Due to Uncertainty in Chinese Market"

[Asia Economy Reporter Eunmo Koo] KB Securities forecasted that NEXON's growth will slow down due to uncertainties in the Chinese market.

NEXON recorded sales of 79.41 billion yen, operating profit of 27.61 billion yen, and net profit of 16.33 billion yen in the third quarter of this year. Sales exceeded the consensus by 7%, but operating profit fell short by 11%. Net profit decreased by 59% compared to the same period last year due to an exchange loss of 8.6 billion yen and goodwill impairment of 3 billion yen related to Big Huge Games, acquired in 2016.

NEXON announced its annual operating profit and net profit guidance at 108.2 to 111.9 billion yen and 94.74 to 97.63 billion yen, respectively. These figures are 13-16% and 16-19% below consensus, respectively. On the other hand, the annual sales guidance is 287.34 to 292.12 billion yen, which is similar to the consensus level.

There is an increased uncertainty regarding sales growth in the Chinese market (accounting for 20% of Q3 sales). NEXON's sales in the Chinese market in Q3 decreased by 11% year-on-year, and the company's Q4 sales growth guidance was lowered by 15-24%. The specific release date for Dungeon & Fighter Mobile (D&F), which was postponed, has not been announced and is not included in the annual performance guidance.

On the 14th, KB Securities researcher Asim Hussain stated in a report, “D&F, scheduled to be released in China through local partner Tencent, exceeded 60 million pre-registrations last August but its release was delayed due to regulations,” and “Following a recent controversy over the history of hanbok, the release of D&F is expected to be postponed until April next year.”

On the other hand, sales in the Korean market (accounting for 64% of Q3 sales) are rapidly growing. Q3 sales in the Korean market increased by 114% year-on-year. PC game sales rose by 20%, and mobile game sales increased by 140%. Researcher Hussain predicted, “Sales in the Korean market will further increase,” adding, “Popular games this year (D&F, MapleStory, Sudden Attack, Kingdom of the Winds: Yeon, Kart Rider Rush+) will be re-released on mobile, and with the increased risk of COVID-19 resurgence this winter, in-game paid item purchases are expected to rise.”

There is also an assessment that additional mergers and acquisitions (M&A), share buybacks, and dividends may be pursued. Researcher Hussain explained, “To offset concerns about the delay in D&F’s release in Q3, NEXON plans to conduct a share buyback worth 100 billion yen, equivalent to 4.5% of its market capitalization, by November 2023.” Currently, NEXON holds 633.1 billion yen in cash, which corresponds to 28% of its market capitalization and is about three times the industry average of 10%.