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Home , Gamania, Guild Wars, Lineage (series), Lineage II, NCSoft

NCSOFT (036570 KS/Buy)

Lineage M’s launch on December 11th confirmed  Taiwanese game publisher Gamania confirmed its release of M on December 11th Issue Comment  With time spent on Lineage M remaining stable in Korea, NCsoft is scheduled to begin November 21, 2017 Castle Siege update on November 5th and add new character class and server for the game on November 29th

 NCsoft to launch three new mobile titles in 2018; maintain Buy and target price of W640,000 Mirae Asset Daewoo Co., Ltd.

[Internet/Game/Advertising] 1. Lineage M set for release in Taiwan on December 11th Jee-hyun Moon +822-3774-1640 Gamania, NCsoft’s Taiwanese publishing partner for the Lineage series, confirmed its local th [email protected] release of Lineage M on December 11 . The game has so far recorded pre-registrations of 2.51mn in Taiwan.

Gamania has been publishing the original Lineage game since 2000, which currently boasts

up to 9mn cumulative subscribers. The publisher has been carrying out targeted marketing, based on the information of existing Lineage players, as well as a mass marketing campaign (including a commercial featuring famed baseball player Chin-Feng Chen). On November

20th, shares of Gamania advanced 4.79%, rallying by over 300% YTD.

NCsoft is expected to recognize its Lineage M revenue from Taiwan as royalty income, which we think should translate into its margin pickup going forward. The game is also set for release in Hong Kong and Macau, on December 11th, with details regarding the game’s upcoming release in other countries to be announced later on. We believe that improving margins, backed by higher royalty revenue, and revenue contribution from overseas release of new mobile titles should provide a boost to shares of NCsoft going forward. We maintain our Buy rating and target price of W640,000 on NCsoft.

Figure 1. Gamania, Taiwanese partner of NCsoft: Lineage M set for release on December 11th, share price has tripled since year-start

Note: Assuming share price of NCsoft and Gamania at year-start as 100 Source: Gamania, Thomson Reuters, Mirae Asset Daewoo Research

FY (12) 12/14 12/15 12/16 12/17F 12/18F 12/19F Revenue (Wbn) 839 838 984 1,832 2,616 2,631 OP (Wbn) 278 237 329 629 957 972 OP margin (%) 33.1 28.3 33.4 34.3 36.6 36.9 NP (Wbn) 230 165 272 504 723 735 EPS (W) 10,486 7,542 12,416 22,968 32,975 33,482 ROE (%) 18.4 10.6 14.9 22.5 25.2 21.4 P/E (x) 17.4 28.2 19.9 19.2 13.4 13.2 P/B (x) 2.7 2.6 2.7 3.5 2.9 2.5 Dividend yield (%) 1.9 1.3 1.5 1.6 2.0 2.0 Note: All figures are based on consolidated K-IFRS; NP refers to net profit attributable to controlling interests Source: Company data, Mirae Asset Daewoo Research estimates

November 21, 2017 NCSOFT

2. Playing time for Lineage M stabilized in 4Q; major content update expected in November

Following the release of Lineage M in Korea on June 21st, total time spent on the mobile title continued to decline in 3Q. However, in 4Q, it has shown no signs of further decline; moreover, a major content update is slated for November.

Starting on November 5th, NCsoft has held the Castle Siege event at 8 p.m. every Sunday. The event engages high-skilled users (level 55 or over) in multiplayer battles to win over a clan’s castle, and is believed to facilitate users’ participation, as evidenced by the increase in item purchases and game duration. On November 29th, NCsoft is scheduled to add a new character class (Dark Elf) and server (BlueDica) for Lineage M. Dark Elves specialize in attacks with strong magical powers to fight humans. The scheduled addition of the new server will increase the number of total servers for Lineage M from 130 to 140. NCsoft will receive pre-registrations for the new character class and server until November 28th.

Figure 2. Weekly playing time of Lineage M in Android Figure 3. Castle Sieges held every Sunday at 8 pm, as of Nov. platform stabilizing from 4Q17 5th

Source: Nielsen Korea Click, Mirae Asset Daewoo Research Source: Lineage M of NCsoft, Mirae Asset Daewoo Research

Figure 4. New class, Dark Elf, and new server, BlueDica, added Figure 5. Pre-registration for Dark Elf class and BlueDica on November 29th server

Source: Lineage M of NCsoft, Mirae Asset Daewoo Research Source: Lineage M of NCsoft, Mirae Asset Daewoo Research

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3. At least three new mobile titles to be released in 2018

In 2018, NCsoft is scheduled to release at least three new mobile titles, including Blade & Soul 2, Lineage II M, and Aion Tempest/Legions. We believe the company will increasingly move toward an “Avengers-style” development model. Many Hollywood studios, such as Disney, are producing a stream of projects based on popular intellectual properties, such as the “Avengers” franchise, in order to: 1) limit potential losses by tapping into a well-established fan base; and 2) reduce uncertainty by leaning on a more predictable lineup. We think NCsoft is taking a similar approach, introducing remakes or spin-offs of existing popular titles.

Another big change expected is a shortened cycle for new mobile releases, with three new titles set to come out next year. In the past, it took about four years for NCsoft to release new titles, with the company launching LineageⅠ in 1998, Lineage II in 2013, Aion in 2008, and Blade & Soul/ 2 in 2012. However, with the rise of mobile , the company has introduced new games with shorter time lags, launching Lineage II Red Knights (mobile) in December 2016 and Lineage M in June 2017. In 2018, NCsoft is expected to introduce new titles every six months in 2018.

NCsoft’s share performance is expected to follow the pattern of a China-based game company, NetEase Games. The company has released new mobile games based on the intellectual properties of PC or online games every six months since 2015. The success of a series of games, including Westward Journey, New Westward Journey Online II, and Onmyoji, has boosted valuations, leading to growth in market capitalization.

Figure 7. Mobile games Aion Tempest (MMORPG) and Aion Figure 6. Blade & Soul 2, based on B&S IP, to be Legions (RPG) are based on Aion IP, scheduled for release in first release of 2018 2018

Source: NCsoft, Mirae Asset Daewoo Research Source: Mirae Asset Daewoo Research

Figure 8. Lineage II M: Based on Lineage 2 IP, set for 2018 Figure 9. NCsoft expected to follow in footsteps of NetEase release

Source: NCsoft, Mirae Asset Daewoo Research Note: Fantasy Westward Journey, Westward Journey, and Onmyoji are NetEase mobile titles Source: Mirae Asset Daewoo Research

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4. Earnings forecast: New mobile titles and royalty revenue are key

Table 1. Quarterly and annual earnings and forecast (Wbn, %) 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17F 2016 2017F 2018F Revenue 241 241 218 285 240 259 727 606 984 1,832 2,616 Lineage 79 94 84 118 51 34 35 37 375 158 156 Lineage II 17 19 21 20 18 17 16 17 77 68 67 Aion 20 18 16 18 13 11 10 11 72 45 43 Blade & Soul 54 49 40 39 45 39 38 39 182 160 144 Guild War 2 31 16 15 15 14 14 20 33 77 80 76 Mobile 0 0 0 19 23 94 551 410 20 1,078 1,872 Other 11 18 17 13 11 15 13 12 58 51 49 Royalties 29 27 24 42 64 36 44 48 122 192 209 Operating profit 76 86 65 102 30 38 328 233 329 629 957 Operating 31.5 35.8 29.9 35.7 12.7 14.5 45.1 38.4 33.4 34.3 36.6 margin Net profit 66 90 48 67 17 31 275 180 271 504 723 Operating 27.5 37.6 22.0 23.5 7.3 11.9 37.8 29.8 27.6 27.5 27.6 margin YoY Revenue 28.0 10.6 11.2 20.1 -0.6 7.5 234.3 113.1 17.3 86.2 42.8 Lineage 19.5 10.5 7.1 42.4 -34.8 -64.2 -57.8 -68.7 20.0 -58.0 -1.0 Lineage II 55.1 17.1 31.8 1.7 7.7 -12.6 -24.1 -15.8 22.5 -12.0 -2.0 Aion 10.2 -12.4 -4.2 -3.6 -33.9 -38.5 -36.8 -39.2 -2.7 -37.0 -5.0 Blade & Soul 101.8 64.1 60.8 21.5 -17.5 -20.2 -5.2 -1.3 60.1 -12.0 -10.0 Guild War 2 52.6 -29.3 -26.0 -60.2 -53.4 -14.7 31.5 118.9 -23.8 5.0 -5.0 Mobile 51,113.1 110,771.6 2,045.4 5,351.8 73.7 Other -47.0 -22.1 3.3 -20.0 -1.5 -14.9 -22.2 -8.2 -22.8 -13.1 -4.0 Royalties 14.7 28.7 5.5 42.5 116.1 33.8 80.2 16.6 23.7 57.0 9.1 Operating profit 68.9 28.4 28.7 35.8 -59.8 -56.4 403.4 129.1 38.5 91.3 52.2 Net profit 86.1 56.3 56.3 58.1 -73.7 -65.9 474.3 170.2 63.1 85.6 43.5 Notes: All figures are based on consolidated K-IFRS; revenue from Lineage M, which was released on June 21, 2017, is included in mobile game revenue; Lineage M’s daily average revenue is estimated at W4.5bn for 4Q17 and W3bn for 2018; royalties from external developers’ games based on NCsoft’s IP, including Games’ L2R, are included in royalty revenue; net profit is attributable to controlling and non-controlling interests Source: Company data, Mirae Asset Daewoo Research estimates

Figure 10. High correlation between royalty revenue and operating margin: Lineage M overseas revenue and Netmarble Games’ Blade & Soul Revolution are key

(Wbn) (%) 240 Royalty revenue (L) Portion of royalties within total revenue (R) Operating margin (R) 40

180 30

120 20

60 10

0 0 2009 2010 2011 2012 2013 2014 2015 2016 2017F 2018F

Source: NCsoft, Mirae Asset Daewoo Research

APPENDIX 1

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Important Disclosures & Disclaimers 2-Year Rating and Target Price History

Company (Code) Date Rating Target Price (W) NCSOFT NCsoft (036570) 09/26/2017 Buy 640,000 800,000 07/09/2017 Buy 600,000 05/01/2017 Buy 500,000 600,000 01/02/2017 No Coverage 400,000 03/11/2016 Buy 420,000 02/05/2016 Buy 400,000 200,000 05/13/2015 Buy 270,000

0 Nov 15 Nov 16 Nov 17

Stock Ratings Industry Ratings Buy : Relative performance of 20% or greater Overweight : Fundamentals are favorable or improving Trading Buy : Relative performance of 10% or greater, but with volatility Neutral : Fundamentals are steady without any material changes Hold : Relative performance of -10% and 10% Underweight : Fundamentals are unfavorable or worsening Sell : Relative performance of -10% Ratings and Target Price History (Share price (─), Target price (▬), Not covered (■), Buy (▲), Trading Buy (■), Hold (●), Sell (◆)) * Our investment rating is a guide to the relative return of the stock versus the market over the next 12 months. * Although it is not part of the official ratings at Mirae Asset Daewoo Co., Ltd., we may call a trading opportunity in case there is a technical or short-term material development. * The target price was determined by the research analyst through valuation methods discussed in this report, in part based on the analyst’s estimate of future earnings. * The achievement of the target price may be impeded by risks related to the subject securities and companies, as well as general market and economic conditions.

Equity Ratings Distribution & Investment Banking Services Buy Trading Buy Hold Sell Equity Ratings Distribution 74.52% 12.50% 12.98% 0.00% Investment Banking Services 70.73% 19.51% 9.76% 0.00% * Based on recommendations in the last 12-months (as of September 30, 2017)

Disclosures As of the publication date, Mirae Asset Daewoo Co., Ltd. and/or its affiliates do not have any special interest with the subject company and do not own 1% or more of the subject company's shares outstanding.

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