[Into the Stocks] Pearl Abyss's 2Q Slump... Everything Depends on Performance in China

Sales Plunge 32% Year-on-Year... Operating Profit of 50 Billion KRW Turns to Loss
Release of Anticipated Title 'Bulgeun Samak' Also Delayed
"Must Bet on 'Geomeun Samak Mobile' Performance in China"

[Asia Economy Reporter Minwoo Lee] Pearl Abyss recorded earnings in the second quarter of this year that fell significantly short of expectations. Even considering one-time costs related to employee performance bonuses, the results were disappointing. It is evaluated that the decline in sales of the flagship title 'Black Desert' both domestically and internationally had a major impact. Since the release of the new title 'Red Desert,' originally scheduled for this year, has been postponed to next year, the performance of Black Desert Mobile in China is seen as a key factor.

Second Quarter Falls Short of Expectations... Sales Down 43 Billion KRW, Operating Profit Down 56 Billion KRW Year-on-Year

Pearl Abyss posted consolidated sales of 88.5 billion KRW and an operating loss of 6 billion KRW in the second quarter of this year. Compared to the same period last year, sales decreased by 32.79%, and operating profit turned into a loss. Considering that operating profit in the second quarter of last year reached 50.6 billion KRW, operating profit decreased by about 56 billion KRW. The sales of 'Black Desert Mobile' decreased by 41.5% compared to the previous quarter, which had a significant impact. Although it was a natural decline trend, the decrease accelerated across all regions this quarter. However, PC sales increased by about 7.6% compared to the previous quarter to 57.5 billion KRW, due to the effect of directly servicing the North American and European regions previously handled by Kakao Games. As a result, the share of PC sales in total company sales increased to 65%.

Labor costs also had an impact. One-time costs related to performance bonuses amounting to 10 billion KRW were reflected, resulting in a 26.1% increase compared to the previous quarter. Marketing expenses decreased by 2 billion KRW compared to the previous quarter due to no new releases, and although one-time costs were already anticipated, the scale of the sales decline was larger than expected, ultimately leading to an operating loss.

Release of Highly Anticipated New Title 'Red Desert' Also Delayed

In this situation, the delay in the release of the trusted new title 'Red Desert' was officially announced. Regarding this, Pearl Abyss CEO Kyung-in Jung said during the Q2 earnings conference call yesterday, "Due to the difficult development environment caused by the spread of COVID-19, we had no choice but to postpone the release schedule to ensure everyone's safety and to enhance the content. However, contrary to many concerns, this is not a long-term delay caused by development setbacks, and we are currently accelerating development according to the internally set schedule."

Regarding this, researcher Hoyoon Jung from Korea Investment & Securities explained, "New titles such as Red Desert, Dokkaebi, and Plan 8 are expected to be released sequentially starting next year. However, there is uncertainty regarding the schedule, and the stock price has already reflected expectations for Red Desert, which will be released first."

Success of Black Desert Mobile in China is Key

Ultimately, the performance of 'Black Desert Mobile,' which is about to be released in China, is analyzed as the key to a future earnings rebound. Earlier, Pearl Abyss received a foreign-invested game license (game service permit) from the Chinese National Press and Publication Administration on June 28 for 'Black Desert Mobile.' It is reported that Pearl Abyss applied for the license with a local partner in China in 2019. Since the game license was blocked in 2017, only a few games have received licenses over the past four years, including Com2uS's 'Summoners War: Sky Arena' in December last year and Handmade Games' 'Rooms' PS4 version in February this year. This has raised expectations for the Chinese market.

However, the fact that Chinese authorities have publicly expressed a negative stance on games is a burden. The 'Economic Information Daily,' published by the state-run Xinhua News Agency, criticized games as "spiritual opium." It urged authorities to implement stronger regulations to address youth online game addiction.

Meanwhile, Black Desert Mobile is scheduled to be released in China in the fourth quarter of this year after localization work with local partners. Researcher Jung said, "The investment attractiveness of Pearl Abyss depends on the performance of Black Desert Mobile in China. Considering the market size in China, the potential for success is high, but since Black Desert is not a highly recognized IP in China, caution against excessive optimism is necessary."

Reflecting such concerns, many securities firms have lowered their target prices. On the same day, Hanwha Investment & Securities lowered the target price by about 5.3% to 90,000 KRW. On the same day, Shinhan Financial Investment set a target price of 89,000 KRW, down 11%. Korea Investment & Securities gave a 'neutral' investment opinion and did not provide a target price. Sohee Kim, a researcher at Hanwha Investment & Securities, analyzed, "Pearl Abyss's valuation is based on a price-earnings ratio (PER) of 29 times on expected earnings for next year, reflecting the momentum of entering the Chinese market within this year. Considering the high sales dependence on a single intellectual property (IP) until the release of 'Red Desert' next year, the stock price rebound depends on the success of Black Desert Mobile in China."

This content was produced with the assistance of AI translation services.