0. Executive Summary

Pearl Abyss is in the midst of a historic turnaround — from three consecutive years of operating losses to a projected single-quarter operating profit of KRW 200B+ — driven by the global commercial success of Crimson Desert, a single-player open-world AAA title developed over seven years. The market has yet to fully price in the magnitude of these earnings.

Core Variant Perception: The market views Pearl Abyss as “a game stock that sold 4 million copies and is fully priced in.” However: (1) Q1 results are likely to exceed consensus by nearly 2x, (2) 5 million copies have effectively been reached with a path to 6 million open, and (3) the current price of KRW 57,400 reflects an excessive discount from macro factors (Middle East tensions, investment warning designation) relative to fundamentals.

1. Investment Thesis — Five Core Arguments

Argument 1: Q1 Results Are Already Locked In, and the Market Has Not Accurately Reflected Them

Structure: Crimson Desert launched on 3/19. Approximately 3.9-4.0 million copies are recognized for revenue by the Q1 close on 3/31. Pearl Abyss’s revenue recognition structure approximates the gross method (Principal), with platform commissions recorded separately as operating expenses.

P x Q x C Decomposition:

Premise Verification:

• Gross Method Basis [Inference]: Q4 2025 Commissions of KRW 19.2B and Q1 2025 of KRW 17.3B are recorded as independent line items within operating expenses. Cost of Revenue = 0 structure. Historical quarterly commission rates of 20-22% have been consistently maintained.
• ASP KRW 83,500 Cross-verification: Samsung Securities ~KRW 80,000, Meritz ~KRW 84,000, Alinea Analytics $50 (approx. KRW 73,000, Gross/Net unclear). Converges at midpoint.
• Dev Cost Expensing [Inference]: Three consecutive years of operating losses (2023-2025) = development costs reflected in P&L annually. Minimal development cost balance in intangible assets. No significant amortization burden post-launch, so revenue converts almost directly to OP.

Consensus Gap:

The NH estimate is most widely cited but is based on 3/25 data (3 million copies) and already outdated. At the 5/7 earnings release, revenue will be ~2x and OP ~3x versus NH estimates, forcing a consensus reset.

Argument 2: 5 Million Copies Achieved or Imminent; Path to 6 Million Is Open

Sales Trajectory:

Evidence for 5M Achievement:

• CEO stated at 3/27 AGM: “We will quickly announce 5 million copies sales achievement”
• KitGuru (overseas media) reported 5M milestone breached (approx. 4/1)
• 4/6 weekend Steam peak CCU of 236,253 — maintaining 85% of ATH
• PS5 download charts: US/Canada #2, Asia #1 (March)

6 Million Scenario (Within April):

Current estimated daily sales of 70-100K x remaining ~22 days = 1.54-2.2M additional copies. From the 5M base, 6.2-7.2M copies achievable by end of April.

Additional catalysts:

• Post-conversion from China’s Qingming Festival (4/4-6) viral effect
• China accounts for less than 10% of total — the Chinese market is effectively untapped
• Steam global reviews settling at “Very Positive” (~85%) reduces friction for new buyers

Q2 Implications at 6M:

Q2 new sales ~2M copies x ASP KRW 83,500 = Crimson Desert Q2 revenue ~KRW 167B. Adding legacy business ~KRW 95B yields Q2 revenue ~KRW 260B, OP ~KRW 110B [Speculation].

Argument 3: KRW 57,400 Represents an Excessive Discount to Fundamentals

Share Price Path:

The 4/1 to 4/8 correction of -26% breaks down as:

• Macro: KOSPI -3% crash (4/3), Middle East tensions, oil price surge — gaming stocks overreact
• Technicals: Investment caution designation (4/1), investment warning anticipated after 60%+ rise in 5 days
• Fundamental change: None. Crimson Desert sales and CCU both remain robust

Therefore, KRW 57,400 represents a temporary discount driven by macro + technical factors, not fundamentals. The convergence price once Q1 earnings (a fundamental anchor) are confirmed is Base KRW 65,000-72,000.

Valuation Matrix:

At KRW 57,400, the stock trades at PER 11.2x on OP KRW 420B — a discount to the Korean gaming sector average of 12-15x.

Argument 4: Beyond 6M Copies, the IP Expansion Roadmap Becomes Visible, Creating Preconditions for Multiple Re-rating

Strategic Interpretation of CEO’s 3/27 AGM Remarks:

The CEO stated a preference for driving additional base game sales through content expansion rather than pursuing expansion pack sales immediately. This references Capcom’s Monster Hunter model (free major updates leading to a second curve in base game sales). Short-term paid DLC revenue is delayed, but the strategy maximizes cumulative sales to expand the IP’s installed base.

Re-rating Path:

Important Constraint: The CEO explicitly stated that paid DLC is on hold for now. Stage 3 entry is at minimum 2027 or later. Pricing in multiple re-rating at this point is premature — 6M+ copies is a “precondition formed,” not a “multiple transition confirmed.”

Argument 5: Switch 2 Port + Console Expansion Exists as Option Value

The CEO confirmed at the 3/27 AGM that Switch 2 port R&D has commenced. Given the Switch 2’s projected global installed base (tens of millions by end of 2026), a successful port opens potential for an additional 2-3 million copies.

This remains [Speculation] at this stage and is not reflected in our valuation, but an official announcement would provide grounds for PER +1-2x upside.

2. Sales Data & Earnings Analysis

2-1. Crimson Desert Sales Data [Fact-Based]

2-2. Steam Review Trends [Fact]

2-3. CCU Retention — Exceptional for Single-Player

For comparison: most single-player AAA titles see peak CCU drop to 30-50% within two weeks. Crimson Desert’s 85% retention rate is exceptional, largely attributable to the game’s volume requiring 70+ hours for average completion.

2-4. Platform Revenue Mix [Inference]

The PS5 share of ~38% is notably higher than expected. No Korean game company has achieved this level of console performance, suggesting brokerage models may be systematically underestimating console revenue.

2-5. Q1 2026 P&L Estimate — Operating Expense Detail

Commission Rate cross-check: Q1 2025 20.7%, Q2 2025 22.8%, Q4 2025 20.1% => Q1 2026E 20.5% (console share increase offset by Steam tier discounts).

2-6. FX Effect

2-7. 2026E Full-Year Scenario

Base Case (Annual Sales 7.8M Copies):

Bull Case (Annual Sales 9.0M Copies, Switch 2 Not Included):

3. Valuation

3-1. Global Peer Comparison

Pearl Abyss trades at the lowest multiple among peers. Reasons: (1) KOSDAQ listing discount, (2) foreign ownership at 5.6% — extremely low, (3) discount for one-time package game revenue structure.

3-2. Fair PER Derivation

Based on EPS KRW 5,130 x target PER. Base is set at 13x rather than 14x because governance issues (no audit committee, oversight score 14/45, foreign ownership 5.6%) remain unresolved, making 14x+ difficult to justify.

3-3. EV/EBITDA Cross-Check

• 2026E EBITDA: KRW 420B (OP) + KRW 26B (D&A) = KRW 446B
• Estimated net cash: ~KRW 500B (end-2025 ~KRW 300B + Q1 operating CF ~KRW 200B) [Speculation]

3-4. Convergence Range

vs. Current Price KRW 57,400: Base +19%, Bear -6%, Bull +51%

3-5. Key Variable Sensitivity

4. Governance & Structural Factors

4-1. Ownership Structure

4-2. Treasury Shares & Commercial Code Amendment Impact

• Holdings: 2.828M shares (4.4%), ~KRW 162.4B at current price
• 3rd Commercial Code Amendment (effective 2026.3.6): Mandatory cancellation of existing treasury shares within 18 months
• Cancellation deadline: September 6, 2027 (exception if AGM approves retention)
• Cancellation effect: +4.6% per-share value

4-3. Governance Impact on Valuation

Foreign ownership of 5.6% is the lowest among gaming peers. This is not merely “lack of interest” — the absence of an audit committee and lowest-tier oversight ratings fail to meet MSCI and global passive fund inclusion criteria.

Prerequisites for justifying PER 14x+:

1. Establishment of audit committee
2. Increased outside director ratio
3. Treasury share cancellation resolution (2027 AGM)
4. Or KOSPI transfer listing initiative

Fulfilling any one of these opens PER +2-3x upside.

5. Catalyst & Risk Timeline

5-1. Upside Catalysts

5-2. Downside Risks

6. Trading Strategy

6-1. Position Structure: Staged Entry

6-2. Entry Rationale

At KRW 57,400 = PER 11x on Q1 OP of KRW 200B. This is near Bear case (PER 10x, KRW 51,300), leaving meaningful re-rating room upon earnings surprise confirmation. The macro-overlaid discount at the current price is excessive relative to fundamentals.

6-3. Invalidation (Thesis Kill Conditions)

1. Q1 Crimson Desert Reported Revenue below KRW 250B — net method or excessive refunds
2. Q1 OPM below 40% — cost structure misjudged
3. End-April Steam 24hr peak CCU below 100K — long tail thesis collapse
4. Company announces major unrelated M&A — governance risk materialized
5. CEO announces capital raise (rights offering/CB) — financial structure concerns

6-4. Monitoring Metrics

7. Key Uncertainties & Blocked Items

The following items are critical to thesis conviction but currently unverifiable. Expected resolution at the 5/7 Q1 earnings release.

8. Portfolio Manager’s Final Comment

The essence of this investment is a bet on information asymmetry. Q1 results are already locked in, and their magnitude is likely to exceed most analysts’ estimates by nearly 2x. The market perceives Pearl Abyss as a “4 million copy game stock,” but in reality, the company is likely recording a single-quarter operating profit exceeding KRW 200B — a historic result for Korean gaming.

KRW 57,400 is a temporary price where macro discount (Middle East tensions, investment warning) has compounded, trading at PER 11x near Bear case levels. However, two structural constraints must be soberly acknowledged.

First, this is a package game. The CEO has declared prioritizing free patches over paid DLC, so multiple re-rating (one-time to recurring revenue) is at least a year away. Justifying PER 16x+ at this point requires more evidence.

Second, governance is a structural discount factor. Foreign ownership of 5.6%, absence of an audit committee, and the lowest-tier oversight rating are structural barriers to global capital inflow. Unless resolved, Krafton/Capcom-level multiples cannot be expected.

Conclusion: The current price is attractive and suitable for an initial entry. However, a staged entry — adding half the position after the 5/7 earnings confirmation — is appropriate. If Q1 OP exceeds KRW 200B, expect convergence to the KRW 65,000-72,000 range. If 6M copies + a content roadmap materialize, aim higher.

9. Evidence Classification (Appendix)

[Fact]

1. Global 4M copies sold (4/1 official announcement)
2. Revenue ~$200M, PS5 $75M (Alinea Analytics estimate)
3. Steam ATH CCU 276,261 (3/29)
4. 4/6 weekend peak CCU 236,253 (85% of ATH)
5. 4/8 price KRW 57,400, market cap KRW 3.61T, 52-week range KRW 29,000-77,400
6. Q4 2025: Revenue KRW 95.5B, OP -KRW 8.4B, Labor KRW 50.7B, Commissions KRW 19.2B, Advertising KRW 12.3B
7. Q1 2025: Revenue KRW 83.7B, OP -KRW 5.2B, overseas share 80%
8. CEO 3/27 AGM: “will quickly announce 5M,” free patches over DLC, Switch 2 R&D commenced
9. PS5 download chart March: US/Canada #2, Asia #1
10. Steam global reviews Very Positive (~85%), Simplified Chinese ~70%
11. Treasury shares 2.828M (4.4%), Commercial Code amendment cancellation deadline 2027.9.6
12. China market share below 10% of total (brokerage estimates)
13. Meritz TP KRW 100,000, NH TP KRW 51,000
14. Q1 average FX ~KRW 1,464.8/USD, period-end KRW 1,513.4/USD

[Inference]

1. Q1 recognized volume ~3.9-4.0M copies, Reported Revenue ~KRW 400-430B
2. Q1 OP ~KRW 195-250B (assuming gross method + dev cost expensing)
3. 5M copies achieved around 4/1-2 (KitGuru report + CEO statement consistent)
4. Current daily sales of 70-100K (CCU retention + console chart ranking extrapolation)
5. 60%+ probability of reaching 6M within April
6. Commission rate ~20-22% (cross-verified from historical quarterly data)
7. PS5 share ~38% — exceptional console performance for a Korean developer
8. Development costs expensed (3-year loss pattern, minimal intangible dev cost balance)

[Speculation]

1. 2026E annual OP KRW 420B, EPS KRW 5,130
2. Fair value Base KRW 68,500 (PER 13x / EV/EBITDA 9x convergence)
3. China Douyin viral as structural Q2 sales driver
4. Switch 2 port adding 2-3M copies potential
5. 2027 treasury share cancellation yielding +4.6% per-share value
6. Net cash ~KRW 500B (post-Q1 operating CF inflow)
7. Q2 OP KRW 105B (based on 6M scenario)

[Blocked]

1. Principal/Agent audit report notes (final gross/net determination)
2. Q1 refund rate and net sales adjustment
3. Platform sales mix (Steam vs PS5 vs Xbox)
4. Exact accounting recognized volume as of 3/31
5. Q1 marketing spend actual execution
6. Development cost capitalized balance (annual report notes)
7. Exact timing and date of official 5M announcement

Disclaimer: This analysis is for informational purposes only and does not constitute investment advice. Past performance does not guarantee future results. Always conduct your own due diligence before making investment decisions.