Brief TMT & Internet: NCsoft: Major Highlights of 4Q18 Earnings Conference Call and more

In this briefing:

1. NCsoft: Major Highlights of 4Q18 Earnings Conference Call
2. Puregold Price Club: Steady Grower with Provincial Expansion Story
3. Chunghwa Telecom’s 2019 Guidance Looks Optimistic After Missing 2018 Guidance.

1. NCsoft: Major Highlights of 4Q18 Earnings Conference Call

• NCsoft Corp (036570 KS)‘s 4Q18 earnings fell short of the consensus earnings estimates. In 4Q18, NCsoft reported sales of 399.7 billion won (down 25.1% YoY and 1.1% lower than consensus), operating profit of 112.6 billion won (down 40.5% YoY and 13.3% lower than the consensus), and net profit of 67.6 billion won (down 44% YoY and 32.9% lower than the consensus). 
• Three different analysts raised questions about why the company changed the timing of the launch of the Lineage2M game. In the 3Q18 earnings conference call, the company previously mentioned that it will most likely launch the Lineage2M mobile MMORPG game in 2Q19. In the most recent 4Q18 earnings conference call, the company mentioned that it will launch Lineage2M by the end of 2019. 
• We expect little change to the consensus earnings estimates of NCsoft in 2019 and 2020. Although Tencent consortium acquiring Nexon could pose greater competitive threats to NCsoft in Korea, it could also lead to a consolidation of the gaming sector in Asia, which would be a positive for the company. NCsoft is currently trading at P/E multiples of 15x in 2019 and 12x in 2020, based on the consensus earnings estimates, which are attractive. We maintain our positive view of the company following its 4Q18 earnings. 

2. Puregold Price Club: Steady Grower with Provincial Expansion Story

• Conference call with the IR of Puregold Price Club (PGOLD PM) reveals that SSSG grew healthily at 6.5% YoY in 9M18, thanks to personal income tax cut.
• The bigger growth driver is provincial expansion (outside Metro Manila), which would allow PGOLD to achieve mid-teen sales growth.
• There has been little to no sales impact from e-commerce as e-commerce penetration in Philippines is lagging even in the ASEAN context. 
• PGOLD trades at 18.3x 2019E PE, a 15% discount to peers average of 21.6x

3. Chunghwa Telecom’s 2019 Guidance Looks Optimistic After Missing 2018 Guidance.

Chunghwa Telecom (2412 TT) recently announced very ambitious FY19 guidance targets. While the market may view management’s optimism poistively, we expect this to be very short-lived for two reasons (i) Chunghwa’s 2018 guidance proved to be hopelessly optimistic, eventually missing revenue and EBITDA by a wide margin, and (ii) Chunghwa starts 2019 with a -6% revenue growth. It will be tough to get to the guided 2.4-3.5% growth in 2019.  Management seem to be assuming the competitive environment will ease, but the comparables will be very tough in 1H19, and we will not see a repeat of the one-off cancellation fees received in May 2018. The dividend looks to be at risk, and if that is a key concern, we would prefer to own Far Eastone (4904 TT) or Taiwan Mobile (3045 TT) which should keep  dividends stable. We to reiterate our Reduce recommendation and slightly lower the target price to NT$86.