Ncsoft (036570)

NCsoft (036570)

2H21 Performance to Determine Future Earnings

Danny Lee Internet & Games / Media +82-2-6114-2960 August 11, 2021 [email protected]

Maintain BUY; lower target price 8.6% We maintain BUY on NCsoft but lower our TP by 8.6% to KRW960,000. Our DCF-derived to KRW960,000 TP represents 20.2x 2022E P/E. We revised down 2021E NP (attributable to controlling interests) by 14.7% given the downtrend in revenue from key IPs (e.g., Lineage M, Lineage 2M) and an expected increase in marketing expense in 2H21 related to new game releases. However, we revised up 2022E NP (attributable to controlling interests) by 3.9% to reflect the rollout of Lineage W.

2Q21 OP misses consensus by 34.8% NCsoft reported 2Q21 revenue of KRW538.5bn (+5.1% QoQ, flat YoY) and OP of on sluggish performance of key IPs KRW112.8bn (+98.8% QoQ, -46.0% YoY). Revenue/OP missed our estimate by (i.e., Lineage M, Lineage 2M) 3.6%/17.6%. Drops in revenue from Lineage M (daily avg. of KRW1.5bn; -22.3% QoQ) and domestic revenue from Lineage 2M (daily avg. of KRW1.4bn; -12.3% QoQ) were the major contributors to tepid revenue growth. Revenue from the company’s five notable PC games dropped 17.8% QoQ. On a positive note, however, combined Lineage 2M revenue from Japan and Taiwan remained robust at KRW90.0bn (daily avg. of KRW1.0bn).

Results of Blade & Soul 2 and Lineage The newly released Lineage W, along with Blade & Soul 2, should dictate earnings over M to dictate earnings over next the next several years. As revenue from Lineage M and Lineage 2M is showing signs of several years deteriorating because of the recent success of rival Odin: Valhalla Rising, NCsoft needs successful results from Blade & Soul 2. The game has already received pre-registrations from 7.46mn users. As such, it requires a business model accommodating a wide range of users. Currently, Odin: Valhalla Rising is recording daily avg. revenue of ~KRW4bn. When

Buy Maintain Trading Data Risk & Total Return (annualized over three years) Free float 81.9% Target Price (Lowered) KRW960,000

Avg. T/O val. (3m, KRWbn) 68.4 Return 1 2 3 4 High5 Risk Dividend yield* 1.0% Foreign ownership 51.5% 1 FALSE FALSE FALSE TRUE FALSE Total return 22.5% Major shareholders Taek-Jin Kim and 8 others 12.0% 2 FALSE FALSE FALSE FALSE FALSE Current price (Aug 11) KRW790,000 3 FALSE FALSE FALSE FALSE FALSE Consensus target price KRW1,113,125 National Pension Service 9.9%

4High FALSE FALSE FALSE FALSE FALSE Market capitalization USD15.0bn Stock Price Performance 5 FALSE FALSE FALSE FALSE FALSE * 12-month forward (%) 1M 3M 6M 12M

Absolute -1.3 -7.1 -23.1 -6.0

Relative -1.3 -7.4 -25.9 -29.4

Earnings Forecast & Valuation Stock Price & Relative Performance

Fiscal year-end 2020A 2021E 2022E 2023E Relative performance (LHS) Revenue (KRWbn) 2,416 2,536 3,606 3,714 Stock price (RHS) % KRW OP (KRWbn) 825 637 1,313 1,353 10 1,220,000 NP to control. int. (KRWbn) 587 547 1,043 1,078 0 EPS (KRW) 26,756 24,911 47,504 49,092 EPS growth (%) 63.9 -6.9 90.7 3.3 -10 P/E (x) 34.8 31.7 16.6 16.1 960,000 -20 EV/EBITDA (x) 21.0 20.9 10.3 9.4 P/B (x) 6.5 4.9 4.0 3.3 -30 ROE (%) 20.8 16.5 26.5 22.2 -40 700,000 Div. yield (%) 0.9 1.0 0.9 1.8 Aug '20 Nov '20 Feb '21 May '21 Aug '21

Source(s): Company data, KB Securities

released, Blade & Soul 2 is expected to become the second-largest grossing game for the company. Meanwhile, if Lineage W, NCsoft’s first global mobile project achieves meaningful results, it should ease the company’s heavy dependence on the domestic market and enhance visibility on the global potential of future projects. Of note, we project daily avg. revenue of Blade & Soul 2 and Lineage W in the first quarter of their releases to be KRW3.0bn and KRW2.0bn, respectively.

Investment Opinion & Risks

Base-case scenario: Catalysts 1) Lineage W 2021E avg. daily revenue at

KRW2.0bn

Bull-case scenario KRW1,150,000 (24.0x 2022E P/E) 2) Blade & Soul 2 2021E avg. daily revenue at

KRW2.8bn

Bull-case scenario: Upside risks Base-case scenario (target price) KRW960,000 (20.0x 2022E P/E) 1) Lineage W 2021E avg. daily revenue at

KRW3.0bn

Bear-case scenario KRW790,000 2) Blade & Soul 2 2021E avg. daily revenue at

KRW4.0bn

Current price KRW770,000 (16.0x 2022E P/E) Bear-case scenario: Downside risks 1) Lineage W 2021E avg. daily revenue at KRW1.0bn

2) Blade & Soul 2 2021E avg. daily revenue at KRW2.0bn

Revised Earnings Estimates Valuation & Target Price Calculation

(KRWbn, %) Previous Revised Change 1) Valuation method: 2021E 2022E 2021E 2022E 2021E 2022E Discounted cash flow model Revenue 2,557.5 3,260.4 2,536.0 3,605.8 -0.8 10.6

OP 752.2 1,233.9 636.9 1,313.4 -15.3 6.4 2) Target price calculation: NP (to control. int.) 641.2 1,003.9 546.9 1,042.9 -14.7 3.9 Target market cap of KRW21tn Source(s): KB Securities estimates

3) Target price range: KB Estimates vs. Consensus KRW770,000 – KRW1,150,000 (KRWbn, %) KB Estimates Consensus Difference 2021E 2022E 2021E 2022E 2021E 2022E 4) ) Valuation at target price: Revenue 2,536.0 3,605.8 2,676.5 3,604.7 -5.2 0.0 20.2x 12m fwd P/E

OP 636.9 1,313.4 802.5 1,363.3 -20.6 -3.7 NP (to control. int.) 546.9 1,042.9 644.2 1,045.7 -15.1 -0.3

Source(s): Quantiwise, KB Securities estimates

Revenue Composition (2021E) Earnings Sensitivity Analysis (%) EPS Change 2021E 2022E +1% in FX rate +0.1 +0.1 7% +1pp in interest rate +1.0 +1.0

Games

Royalties

93%

Source(s): KB Securities estimates

Peer Group Comparison

(KRWbn, x, %) Market Cap. 12m fwd P/E 5y EPS CAGR 12m fwd P/B 12m fwd EV/EBITDA 5y EBITDA CAGR NCsoft 17,343.7 19.2 27.59 4.1 10.6 26.69 Activision Blizzard 74,770.0 20.1 19.61 3.4 13.2 12.42 NetEase 71,007.4 20.0 12.03 3.7 13.9 19.28 Nexon 19,916.8 16.8 0.26 2.2 8.7 9.76

Source(s): Bloomberg consensus, KB Securities

Table 1. 2Q21 Earnings Review

(KRWbn, %, pp) 2Q21P 1Q21 QoQ 2Q20 YoY KB Estimates Diff. Cons. Diff.

Revenue 538.5 512.5 5.1 538.6 (0.0) 558.9 (3.6) 590.4 (8.8)

OP 112.8 56.7 98.8 209.0 (46.0) 136.8 (17.6) 173.0 (34.8)

OPM 20.9 11.1 9.9 38.8 (17.9) 24.5 (3.5) 29.3 (8.4)

NP (to control. int.) 94.4 80.9 16.7 158.2 (40.3) 116.2 (18.7) 117.1 (19.4)

NPM (to control. int.) 17.5 15.8 1.7 29.4 (11.8) 20.8 (3.3) 19.8 (2.3)

Source(s): Company data, Quantiwise, KB Securities estimates

Table 2. Earnings Forecast (consolidated)

(KRWbn) 1Q20 2Q20 3Q20 4Q20 1Q21 2Q21 3Q21E 4Q21E 2019 2020 2021E 2022E

Revenue 731.1 538.6 585.2 561.3 512.5 538.5 613.6 871.4 1,701.2 2,416.2 2,536.0 3,605.8

(% QoQ) 37.0 (26.3) 8.7 (4.1) (8.7) 5.1 13.9 42.0

(% YoY) 103.8 31.1 47.1 5.2 (29.9) (0.0) 4.9 55.2 (0.8) 42.0 5.0 42.2

Games 678.3 476.3 526.3 517.3 467.0 495.7 571.7 830.5 1,503.7 2,198.1 2,364.9 3,453.3

Lineage 1 44.8 34.3 49.9 46.8 48.9 36.4 48.0 45.1 174.1 175.7 178.5 172.2

Lineage 2 26.4 25.8 26.3 26.0 26.2 24.2 25.7 25.3 93.6 104.5 101.4 98.8

Aion 10.1 8.194 8.5 18.8 23.4 19.5 20.4 22.8 46.0 45.6 86.2 82.9

Blade & Soul 19.6 19.8 17.2 15.6 14.1 9.8 14.1 14.2 83.9 72.2 52.2 51.4

Guild Wars 2 12.5 15.6 18.8 14.2 16.3 16.0 15.9 15.7 58.7 61.2 63.9 61.6

Lineage M 212.0 159.9 245.2 211.7 172.6 134.2 146.5 161.1 834.7 828.7 614.4 531.6

Lineage 2M 341.1 197.3 144.5 166.7 152.2 218.0 170.6 214.1 143.9 849.6 754.9 684.4

Other 11.6 15.5 16.0 17.5 13.2 37.6 130.6 332.1 68.9 60.6 513.4 1,770.4

Royalties 52.8 62.3 58.8 44.1 45.5 42.8 41.9 40.8 197.5 218.0 171.1 152.5

OPEX 489.7 329.6 367.5 404.6 455.8 425.8 434.1 583.5 1,222.2 1,591.4 1,899.1 2,292.4

(% QoQ) 24.7 (32.7) 11.5 10.1 12.6 (6.6) 2.0 34.4 (% YoY) 75.4 17.1 36.7 3.0 (6.9) 29.2 18.1 44.2 11.1 30.2 19.3 20.7 Labor 211.8 162.3 159.1 184.9 232.5 186.0 185.8 215.3 555.1 718.2 819.5 930.4 Variable 223.5 138.7 162.2 158.2 147.3 160.7 171.8 248.3 507.9 682.6 728.2 1,009.6 Marketing 39.6 12.9 29.7 44.8 55.0 55.6 52.8 95.8 107.3 127.0 259.2 253.8 D&A 14.8 15.6 16.5 16.7 20.9 23.5 23.8 24.0 52.0 63.7 92.3 98.5 OP 241.4 209.0 217.7 156.7 56.7 112.8 179.5 287.9 479.0 824.8 636.9 1,313.4 (% QoQ) 71.0 (13.4) 4.2 (28.0) (63.8) 98.8 59.2 60.4 - - - - (% YoY) 203.6 61.5 68.9 11.0 (76.5) (46.0) (17.5) 83.7 (22.1) 72.2 (22.8) 106.2 OPM (%) 33.0 38.8 37.2 27.9 11.1 20.9 29.3 33.0 28.2 34.1 25.1 36.4 NP (to control. int.) 195.5 158.2 153.2 80.6 80.9 94.4 143.6 228.1 358.2 587.4 546.9 1,042.9 (% QoQ) 260.5 (19.1) (3.2) (47.4) 0.4 16.7 52.1 58.9 - - - - (% YoY) 163.5 35.9 35.1 48.6 (58.6) (40.3) (6.3) 183.0 (14.4) 64.0 (6.9) 90.7 NPM (%) 26.7 29.4 26.2 14.4 15.8 17.5 23.4 26.2 21.1 24.3 21.6 28.9

Source(s): Company data, KB Securities estimates

Table 3. Earnings Estimates Revisions

2021E 2022E (KRWbn, %, pp) Revised Previous Change Cons. Diff. Revised Previous Change Cons. Diff. Revenue 2,536.0 2,557.5 (0.8) 2,676.5 (5.2) 3,605.8 3,260.4 10.6 3,604.7 0.0 OP 636.9 752.2 (15.3) 802.5 (20.6) 1,313.4 1,233.9 6.4 1,363.3 (3.7) OP margin 25.1 29.4 (4.3) 30.0 (4.9) 36.4 37.8 (1.4) 37.8 (1.4) NP (to control. int.) 546.9 641.2 (14.7) 644.2 (15.1) 1,042.9 1,003.9 3.9 1,045.7 (0.3) NP margin (to control. int.) 21.6 25.1 (3.5) 24.1 (2.5) 28.9 30.8 (1.9) 29.0 (0.1)

Source(s): Quantiwise, KB Securities estimates

Note: Previous estimates based on data as of Jun 9, 2021

TTable 4. TP Calculation: DCF Model

(KRWbn, %, ’000 shares, KRW) 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E 2029E 2030E 2031E

Cash flow projection

Adj. FCF 642.4 767.3 926.6 947.2 1,019.9 1,072.9 1,102.3 1,121.6 1,138.7 1,154.8 FCFF 444.4 767.3 926.6 947.2 1,019.9 1,072.9 1,102.3 1,121.6 1,138.7 1,154.8 1,168.0 NOPLAT 474.1 955.6 991.6 1,064.3 1,138.9 1,181.9 1,203.7 1,221.3 1,238.4 1,254.4 1,266.6 (+) Depreciation & amortization 98.5 108.3 110.5 112.7 115.0 117.3 119.7 122.1 124.5 127.0 129.6

(+/-) Changes in working capital -2.2 -154.2 -52.7 -104.6 -106.4 -96.1 -88.3 -86.4 -86.1 -85.8 -84.6 (-) Capital expenditure -117.0 -138.0 -120.0 -122.4 -124.8 -127.3 -129.9 -132.5 -135.1 -137.8 -140.6 (-) Others -9.0 -4.4 -2.9 -2.8 -2.8 -2.9 -2.9 -2.9 -2.9 -2.9 -3.0

PV of cash flow

WACC 7.33 Discount 1.00 0.93 0.87 0.81 0.75 0.70 0.65 0.61 0.57 0.53 PV of cash flow 642.4 714.9 804.3 766.1 768.5 753.2 720.9 683.4 646.5 610.8 Terminal growth 2.1 Average 30y KTB yield Terminal value 22,531.1 2031E FCFF / (WACC – TGR) PV of terminal value 11,917.5 7.10% WACC (0.69% risk-free rate; 7.37% market risk premium)

Valuation

EV 19,028.5 (-) Net debt (1,982.0) 2021E (+) Investments in associates 64.2 2Q21 (-) Non-controlling interests (2.6) 2Q21 Fair EV 21,077 No. of shares 21,954 Target price 960,000 Current price 790,000 Aug 11, 2021

Upside 21.5

Source(s): KB Securities estimates

Table 5. P/E Valuation

Line Item Value Notes

2022E NP (to control. int.) 1,042.9

No. of shares (’000) 21,954 Fully diluted

EPS (KRW) 47,504

Target P/E (x) 20.2 Average of ATVI, EA, NetEase

Target price (KRW) 960,000

Current price (KRW) 790,000 Jul 8, 2021

Upside (%) 21.5

Source(s): KB Securities estimates

Table 6. TP Sensitivity to WACC & TGR

(KRW) TGR (%) 1.3 1.5 1.7 1.9 2.1 2.3 2.5 2.7 2.9

6.73 970,943 992,914 1,016,631 1,042,311 1,070,208 1,100,623 1,133,911 1,170,501 1,210,910

6.93 940,038 960,145 981,789 1,005,154 1,030,452 1,057,935 1,087,897 1,120,690 1,156,737

7.13 911,257 929,708 949,517 970,840 993,858 1,018,781 1,045,855 1,075,373 1,107,680

WACC (%) 7.33 884,391 901,363 919,540 939,056 960,063 982,740 1,007,294 1,033,968 1,063,048

7.53 859,254 874,902 891,623 909,532 928,759 949,456 971,797 995,988 1,022,267

7.73 835,685 850,144 865,561 882,035 899,680 918,623 939,014 961,026 984,860

7.93 813,542 826,929 841,174 856,365 872,596 889,981 908,645 928,736 950,424

Source(s): Quantiwise, KB Securities estimates

Table 7. WACC Revision

Previous Revised (KRWbn, %) Notes (July 9) (Aug 11)

COE (A) = a + b x c 7.10 7.33 Risk-free rate (a) 0.69 0.85 Avg. 1y MSB yield (last 3 months) Adj. beta (b) 0.87 0.88 Adj. beta Risk premium (c = d - e) 7.37 7.37

Market (d) 10.97 10.97 2001-20 annual avg. WMI500 total return Risk-free rate (e) 3.61 3.61 2001-20 avg. 1y MSB yield COD (B) 1.45 2.00

Value of equity 21,077 Fair value based on target price Value of debt -1,982 Net debt Weight of equity (f) 100.00 100.00 Weight of debt (g) 0.00 0.00

WACC (C) = (A x f) + (B x g) 7.10 7.33

Source(s): KB Securities estimates

Table 8. Key Assumptions for Mobile Games

(KRWbn) 1Q20 2Q20 3Q20 4Q20 1Q21 2Q21E 3Q21E 4Q21E 2019 2020 2021E 2022E

Lineage M 212.0 159.9 245.2 211.7 172.6 134.2 146.5 161.1 834.7 828.7 614.4 531.6 Avg. daily revenue 2.3 1.8 2.7 2.3 1.9 1.5 1.6 1.8 2.3 2.3 1.7 1.5 No. of days serviced 91 91 92 92 90 91 92 92 365 366 365 365

Lineage 2M 341.1 197.3 144.5 166.7 152.2 218.0 170.6 214.1 143.9 849.6 754.9 684.4 Avg. daily revenue 3.7 2.1 1.6 1.8 1.7 2.4 1.9 2.4 4.1 2.3 2.1 1.9 No. of days serviced 91 92 92 91 90 92 92 91 35 366 365 365 Blade & Soul 2 108.0 248.9 356.9 476.7

Avg. daily revenue 3.0 2.7 2.8 1.3 No. of days serviced 36 91 127 365 Lineage W 60.0 60.0 521.0 Avg. daily revenue 2.0 2.0 1.4 No. of days serviced 30 30 365 Aion 2 272.4

Avg. daily revenue 2.3

No. of days serviced 121 Project TL 68.6

Avg. daily revenue 0.4 No. of days serviced 182

Source(s): Company data, KB Securities estimates Note: Revenue data includes overseas revenue

Table 9. NCsoft Game Lineup

Game Release Date Genre Country/Region Platform Developer/Publisher Notes

Lineage 2: Blood 07/28/16 MMORPG China Mobile Snail Games/NCsoft - Pledge Collective Lineage RK 12/08/16 Global Mobile NCsoft/NCsoft - RPG

Blade & Soul 08/08/17 Web game China Mobile Tencent/Tencent

Final Blade 02/14/17 RPG Korea Mobile Sky People/NCsoft -

Professional 03/30/17 Sports Korea Mobile Ntreev/NCsoft - Baseball H2

Lineage M 06/21/17 MMORPG Korea Mobile NCsoft/NCsoft -

Lineage M 12/11/17 MMORPG Taiwan Mobile NCsoft/Gamania -

Arami Puzzventure 08/17/17 Puzzle Global Mobile NCsoft/NCsoft -

Pangya M 02/08/18 Sports Southeast Asia Mobile NCsoft/NCsoft -

AION: Legions of North America 01/24/19 RPG Mobile NCsoft/NCsoft - War / Europe

Lineage M 05/29/19 MMORPG Japan Mobile NCsoft/NCsoft -

Lineage 2M 12/27/19 MMORPG Korea Mobile NCsoft/NCsoft -

FUSER 11/10/20 Rhythm U.S./Europe PC/Console Harmonix/NCsoft -

Lineage 2M 03/24/21 MMORPG Taiwan, Japan Mobile NCsoft/NCsoft -

Trickster M 05/20/21 MMORPG Korea Mobile NCsoft/NCsoft -

7.46mn pre- Blade&Soul 2 08/26/21 MMORPG Korea Mobile NCsoft/NCsoft registrations

Lineage 2M 2H21 MMORPG U.S./Europe Mobile NCsoft/NCsoft -

Lineage W 2Q21 MMORPG Global Mobile NCsoft/NCsoft -

Aion 2 2022 MMORPG Global Mobile NCsoft/NCsoft -

Project TL 2022 MMORPG Global PC/Console NCsoft/NCsoft -

Source(s): Company data, KB Securities estimates

Fig 1. 12m Fwd OP Consensus & Share Price Trend

12 month fwd. OP Consensus(R) Modified stock price(L) KRW KRWbn 1,200,000 1,600,000

1,400,000 1,000,000 1,200,000 800,000 1,000,000

600,000 800,000

600,000 400,000 400,000 200,000 200,000

0 0 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21

X 12m fwd P/E 30 Lineage2M Lineage2 Revolution Korea release TricksterM 25 Korea release (2019.11) Korea release (2016.12) (2021.05) 20

15 Lineage2M Japna/Taiwan 10 Lineage2 LineageM Blade&Soul Blade&Soul Korea release Xion release China Korea release Lineage2 Korea release LineageM (2021.03) 5 (2003.10) Korea release (2017.06) Global release release Taiwan release (2008.11) (2012.06) (2004.11~) (2013.11) (2017.12) 0 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21

Source(s): Quantiwise consensus, KB Securities

Fig 2. Lineage M: Revenue Estimate Revisions

Revenue (Reveised) (L) Daily Revenue (Revised) (R) (KRWbn) Daily Revenue (Previous) (R) (KRWbn) 400 5.0 4.1 350 3.7 4.0 300 250 2.4 3.0 2.1 200 2.0 2.0 1.8 1.7 2.0 150 2.4 100 1.9 1.0 50 143.9 341.1 197.3 144.5 166.7 152.2 218.0 170.6 214.1 0 0.0 4Q19 1Q20 2Q20 3Q20 4Q20 1Q21 2Q21P 3Q21E 4Q21E

Source(s): Company data, KB Securities estimates

Fig 3. Lineage 2M: Revenue Estimate Revisions

Revenue (Reveised) (L) Daily Revenue (Revised) (R) (KRWbn) Daily Revenue (Previous) (R) (KRWbn) 300 5.0 245.2 250 212.0 211.7 4.0

200 172.6 159.9 161.1 146.5 3.0 134.2 150 2.7 2.3 2.3 2.4 2.4 1.9 2.0 100 1.8 1.8 1.5 1.6 1.0 50

0 0.0 1Q20 2Q20 3Q20 4Q20 1Q21 2Q21P 3Q21E 4Q21E

Source(s): Company data, KB Securities estimates

Fig 4. Lineage M: Monthly Revenue Fig 5. Lineage 2M: Monthly Revenue

(KRWbn) (KRWbn) 100 100 90 90 80 80 70 70 60 60 50 50 40 30 40 20 30 10 20 0 10 07/17 01/18 07/18 01/19 07/19 01/20 07/20 01/21 07/21 0 11/19 05/20 11/20 05/21

Source(s): Mobileindex, KB Securities Source(s): Mobileindex, KB Securities

Fig 6. Trickster M: Daily Revenue Fig 7. Lineage 2M, Lineage M, Odin: DAU

(KRWbn) 1.8 (People) Lineage2M LineageM Odin 1.6 700,000 1.4 600,000 1.2 500,000 1.0 400,000 0.8 300,000 0.6

0.4 200,000

0.2 100,000

0.0 0 05/20/21 06/09/21 06/29/21 07/19/21 01/21 03/21 05/21 07/21

Source(s): Mobileindex, KB Securities Source(s): Mobileindex, KB Securities

Fig 8. Lineage 2M, Lineage M, Odin: Usage Time Fig 9. Lineage 2M: Japan Google Play Revenue Ranking

Lineage2M LineageM Odin 03/27/21 04/27/21 05/27/21 06/27/21 07/27/21 (Hours) 0 2,500,000 10

2,000,000 20

1,500,000 30

1,000,000 40

500,000 50

0 (Ranking) 21.01 21.03 21.05 21.07 60

Source(s): Mobileindex, KB Securities Source(s): Mobileindex, KB Securities

Fig 10. Lineage 2M: Taiwan Google Play Revenue Ranking Fig 11. Lineage M: Taiwan Google Play Revenue Ranking

03/21 04/21 05/21 06/21 07/21 01/20 04/20 07/20 10/20 01/21 04/21 07/21 0 0 1 2 1 3 4 2 5 6 3 7 8 4 9 (Ranking) 10 5 (Ranking)

Source(s): Mobileindex, KB Securities Source(s): Mobileindex, KB Securities

Income Statement Statement of Financial Position (KRWbn) 2019A 2020A 2021E 2022E 2023E (KRWbn) 2019A 2020A 2021E 2022E 2023E (Reporting standard) (IFRS-C) (IFRS-C) (IFRS-C) (IFRS-C) (IFRS-C) (Reporting standard) (IFRS-C) (IFRS-C) (IFRS-C) (IFRS-C) (IFRS-C)

Revenue 1,701 2,416 2,536 3,606 3,714 Total assets 3,346 4,081 4,752 5,641 6,575 Cost of revenue 0 0 0 0 0 Current assets 2,088 2,444 2,887 3,730 4,614 Gross profit 1,701 2,416 2,536 3,606 3,714 Cash and cash equivalents 303 157 528 1,293 2,191

SG&A expenses 1,222 1,591 1,899 2,292 2,361 Current financial assets 1,469 1,962 1,985 1,985 1,997 Operating profit 479 825 637 1,313 1,353 Trade receivables 254 243 308 383 356 EBITDA 531 891 735 1,422 1,463 Inventory 2 1 2 2 2

Non-operating accounts 17 -22 101 114 116 Other current assets 59 81 65 67 69 Interest income 34 33 26 26 26 Non-current assets 1,259 1,637 1,865 1,911 1,960 Interest expenses 8 9 10 10 10 Investment assets 838 1,186 1,210 1,222 1,258

Profit on equity method -19 -6 17 -1 -1 Property, plant and equipment 350 368 566 597 608 Net other non-operating income 11 -40 68 99 101 Intangible assets 50 50 46 50 51 Profit before tax 496 803 738 1,428 1,469 Other non-current assets 21 33 43 43 43

Income tax expense 137 217 192 386 392 Total liabilities 834 937 1,246 1,257 1,266 Net profit 359 587 546 1,042 1,077 Current liabilities 450 509 780 789 795 NP attributable to controlling interests 358 587 547 1,043 1,078 Trade payables 5 0 1 2 2

Adj. net profit 358 587 547 1,043 1,078 Short-term financial liabilities 43 42 207 216 222

Other current liabilities 402 467 572 572 572 Operating Statistics & Ratios Non-current liabilities 384 427 466 467 471

(%) 2019A 2020A 2021E 2022E 2023E Non-current financial liabilities 315 295 315 317 317

Revenue growth -0.8 42.0 5.0 42.2 3.0 Other non-current liabilities 69 132 150 150 153 OP growth -22.1 72.2 -22.8 106.2 3.0 Total equity 2,512 3,145 3,506 4,385 5,309

EBITDA growth -17.3 67.6 -17.4 93.3 2.9 Issued capital 11 11 11 11 11 NP growth of parent -14.4 64.0 -6.9 90.7 3.3 Share premium 436 433 433 433 433 GP margin 100.0 100.0 100.0 100.0 100.0 Other equity interest -438 -438 -438 -438 -438

OP margin 28.2 34.1 25.1 36.4 36.4 Accumulated other comprehensive income 108 278 267 267 267 EBITDA margin 31.2 36.9 29.0 39.4 39.4 Retained earnings 2,382 2,857 3,230 4,109 5,034 EBT margin 29.2 33.3 29.1 39.6 39.6 Controlling interests 2,499 3,142 3,504 4,383 5,308

NP margin of parent 21.1 24.3 21.6 28.9 29.0 Non-controlling interests 13 3 2 2 1

Statement of Cash Flows Key Ratios (KRWbn) 2019A 2020A 2021E 2022E 2023E (x, %, KRW) 2019A 2020A 2021E 2022E 2023E

Cash flow from operating activities 392 708 562 997 1,138 Multiples

Net profit 359 587 546 1,042 1,077 P/E 33.1 34.8 31.7 16.6 16.1 Depreciation & amortization 52 66 98 108 111 P/B 4.8 6.5 4.9 4.0 3.3

Other non-cash adjustments 148 251 149 387 393 P/S 7.0 8.5 6.8 4.8 4.7 Investments in working capital -71 -46 -2 -154 -53 EV/EBITDA 19.7 21.0 20.9 10.3 9.4 Decrease(Increase) in receivables -106 11 -69 -75 27 EV/EBIT 21.9 22.6 24.1 11.1 10.1 Decrease(Increase) in inventory -1 0 -1 0 0 Dividend yield, ordinary (%) 1.0 0.9 1.0 0.9 1.8

Increase(Decrease) in payables 3 3 1 1 0 EPS 16,320 26,756 24,911 47,504 49,092 Investments in other working capital 34 -60 66 -80 -80 BVPS 113,836 143,098 159,607 199,639 241,775 Other operating cash flow -97 -150 -229 -386 -389 SPS 77,514 110,057 115,514 164,243 169,170

Cash flow from investing activities -234 -696 -142 -154 -171 DPS (annual, ordinary) 5,220 8,550 7,960 7,411 14,133 Capital expenditure -50 -62 -117 -138 -120 Cash dividends payout ratio (%) 30.0 30.0 30.0 14.6 27.0 Investments in intangibles -3 0 -1 -4 -3 Operating performance

Changes in investment assets 253 -667 -82 -12 -37 ROE 14.7 20.8 16.5 26.5 22.2 Other investment cash flow -434 34 57 0 -12 ROA 11.4 15.8 12.4 20.1 17.6 Cash flow from financing activities -46 -159 -52 -77 -69 ROIC 142.5 216.8 141.6 207.9 194.4

Proceeds from (repayment of) debt 86 -40 0 10 6 Financial structure (%) Changes in equity 2 0 0 0 0 Total liab./equity 33.2 29.8 35.5 28.7 23.8 Dividends paid -125 -108 -176 -164 -153 Net debt/equity Net Cash Net Cash Net Cash Net Cash Net Cash

Other financing cash flow -9 -12 124 77 77 Current ratio 4.6 4.8 3.7 4.7 5.8 Other cash flow 6 1 2 0 0 Interest coverage (x) 56.9 91.9 62.4 128.7 132.6 Increase/decrease in cash 118 -146 370 766 898 Activity ratios

Cash and cash equivalents at FYE 303 157 528 1,293 2,191 Asset turnover (x) 0.5 0.7 0.6 0.7 0.6 Free cash flow 342 645 445 859 1,018 Receivables turnover (x) 8.4 9.7 9.2 10.4 10.1 Net cash flow 199 367 208 756 903 Payables turnover (x) 543.8 0.0 0.0 2,403.9 2,095.3

Net cash (net debt) 1,414 1,782 1,990 2,746 3,649 Inventory turnover (x) 1,105.6 1,733.4 2,259.3 2,099.5 2,022.1

Source(s): Company data, KB Securities estimates

Disclosures Rating and Target Price Changes (Share price ━, Target Price ━)

NCsoft (036570) KRW NCsoft Date R ating Analyst TP Differential (%) 1,360,000 (KRW) Av g. Max / Min

Aug-02-2019 Buy Danny Lee 630,000 -14.64 1,040,000 Jan-22-2020 Buy Danny Lee 750,000 -13.14 -10.40 Feb-12-2020 Buy Danny Lee 790,000 -18.04 -8.86 Mar-26-2020 Buy Danny Lee 780,000 -16.50 -10.38 720,000 May-12-2020 Buy Danny Lee 870,000 -2.12 14.37 Jul-21-2020 Buy Danny Lee 1,000,000 -18.74 -10.30 400,000 Nov-16-2020 Buy Danny Lee 1,050,000 -17.56 -6.19 Aug '19 Dec '19 Apr '20 Aug '20 Dec '20 Apr '21 Aug '21 Jan-06-2021 Buy Danny Lee 1,150,000 -19.41 -9.74 May-10-2021 Buy Danny Lee 1,100,000 -23.74 -20.73 Jul-09-2021 Buy Danny Lee 1,050,000 -22.70 -19.90 Aug-11-2021 Buy Danny Lee 960,000

KB Securities is a liquidity provider for stocks issued by NCsoft as of the date of this Proportion of investment rating (as of June 30, 2021) report. KB Securities is an issuer and liquidity provider of equity-linked warrants (ELW) that Buy Hold Sell have stock of NCsoft underlying as of the date of this report. 81.1 18.9 - KB Securities has not provided any material in this research report to institutional investors or third parties in advance of publication of this research report. The research analyst responsible for the preparation of this research report does not have any * Note: Based on reports presented with investment ratings over the past one year beneficial interest in any security or issuer covered and certifies that the analysis was made in good faith and that the views presented accurately reflect personal opinion without any undue influence or intervention.

Classification and Standards for Investment Rating All research reports are available through electronic publication on Bloomberg, Thomson Reuters and FactSet. Please contact your KB Securities sales representative for access. Investment Rating for Company (based on estimation of 12-month absolute returns) This report is provided for information only and is not an offer or solicitation to trade in Buy: +15% or beyond Hold: Between 15% and -15% Sell: -15% or beyond any security. Opinions in this report reflect the professional judgment of the research analyst(s) as of the date hereof and are based on information and data obtained from

Note: KB Securities’ classification of investment ratings has shifted from four stages sources that KB Securities considers reliable. KB Securities makes no representation that (Strong BUY, BUY, Marketperform, Underperform) to three stages (Buy, Hold, Sell) the information and data are accurate or complete and the views presented in this report based on Korean reports since February 23, 2017. are subject to change without prior notification. Clients should independently consider KB Securities’ standards for stock rating shifted starting on Feb 10, 2020 from an their own particular circumstances and objectives and are solely responsible for their estimation of six-month absolute returns to an estimation of 12-month absolute returns. investment decisions and we shall not have liability for investments or results thereof. These materials are the copyright of KB Securities and may not be reproduced, Investment Rating for Industry redistributed or modified without the prior consent of KB Securities. Comments and (based on estimation of 12-month absolute returns) views in this report are of a general nature and intended for reference only and not Positive: Neutral: Negative: authorized for use for any other purpose. To outperform market To match market performance To underperform market

Notes: The industry rating system of KB Securities has shifted from (Overweight, Neutral, Underweight) to (Positive, Neutral, Negative) as of Jun 28, 2017. KB Securities’ standards for industry rating shifted starting on Feb 10, 2020 from an estimation of six-month absolute returns to an estimation of 12-month absolute returns.