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Conference Highlights: All Eyes on Mobile and Core Games

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Conference Highlights: All Eyes on Mobile and Core Games Information Technology / Korea 8 June 2015 NCsoft 1 Buy (unchanged) 036570 KS 2 Outperform 3 Hold 4 Underperform Target (KRW): 245,000 245,000 Upside: 27.3% 5 Jun price (KRW): 192,500 5 Sell growth to accelerate into 2H15, ■ What we recommend Conference supported by revenue from new We reaffirm our Buy (1) rating and 12- online and mobile games, and month TP of KRW245,000, based on highlights: effective cost controls. a 2015E PER of 17.3x, the average of its global peers, based on our and all eyes on See the potential to capture the Bloomberg-consensus forecasts. mobile opportunities. At investor We advise investors to buy in before mobile and meetings during the event, NCsoft’s big-game launches from management said NCsoft has 2Q15 and strong likely earnings core games established game intellectual property growth in 2015-17E. Key risk to our (IP) and strong game-development call: a sharp fall in gamer traffic. Thomas Y. Kwon capabilities, which should enable it to (82) 2 787 9181 cater to thriving demand for mid-to- ■ How we differ [email protected] hard core games for smart devices. We are more positive than the market NCsoft plans to roll out mobile games on the future earnings contribution that take advantage of its popular from NCsoft’s lucrative in-game item • NCsoft met investors at online- game IP, loyal user base, and sales and overseas royalties. Daiwa’s investment conference powerful in-game communities. Forecast revisions (%) in London Year to 31 Dec 15E 16E 17E In 2H15, NCsoft will launch Blade & Revenue change - - - • Net profit change - - - New games for multiple Soul Mobile, Aion Legion, and Pangya platforms likely to drive solid Core EPS (FD) change - - - Mobile. It also aims to commence the Source: Daiwa forecasts earnings growth over 2015-17 commercial service of Lineage Eternal • Reaffirming Buy (1) rating in 2016, which will serve all of its Share price performance global gamers on cloud platform. For (KRW) (%) What's new mobile games, we believe 220,000 140 On 1-4 June, NCsoft attended Daiwa’s management has become more 195,000 123 Investment Conference (DIC) in confident in NCsoft’s strong capability 170,000 105 London and went on a separate non- and powerful assets, which should 145,000 88 120,000 70 deal road show in Switzerland and allow it to capitalize on the improved Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Germany. The company presented its business environment, with gamers vision and growth strategy for 2015- preferring more immersive content NCSoft (LHS) Relative to KOSPI (RHS) 17. Investor questions focused on and multiple battle modes. recent trends in core game titles, 12-month range 123,500-218,500 mobile-game strategies, and Market cap (USDbn) 3.80 Earnings outlook and 3m avg daily turnover (USDm) 33.69 enhancing shareholder value. shareholder-value enhanced. For Shares outstanding (m) 22 2Q15, we forecast NCsoft’s Major shareholder Nexon (15.1%) ■ What's the impact profitability to improve on lower Good momentum for core game labour costs and more lucrative in- Financial summary (KRW) titles. NCsoft said its core online game item sales from Lineage and Year to 31 Dec 15E 16E 17E games in Korea saw solid gamer traffic other core games (vs. 1Q15). Revenue (bn) 972 1,042 1,135 and in-game item sales in April-May Management said NCsoft will enhance Operating profit (bn) 376 403 456 2015, on the back of the addition of its shareholder value through a higher Net profit (bn) 310 335 381 Core EPS (fully-diluted) 14,143 15,294 17,382 new game storylines, less competition cash dividend than in the past, as its EPS change (%) 34.8 8.1 13.7 from newcomers, and effective FCF continues to increase. NCsoft Daiwa vs Cons. EPS (%) 18.6 11.2 10.3 promotional events. Management said recorded a 2014 DPS of KRW3,430. PER (x) 13.6 12.6 11.1 that Lineage and other franchise We forecast NCsoft’s revenue to rise Dividend yield (%) 1.8 1.8 1.8 DPS 3,430 3,430 3,430 games have been capitalising on stable by 29% YoY to KRW578bn, with the PBR (x) 2.5 2.2 1.9 gamer traffic and vast in-game operating margin of 44.6% for 2H15, EV/EBITDA (x) 7.6 6.3 5.0 communities since 2H14. It expects on the back of new game launches and ROE (%) 20.3 18.3 18.0 the company’s quarterly earnings strong operating leverage. Source: FactSet, Daiwa forecasts See important disclosures, including any required research certifications, beginning on page 5 Information Technology / Korea 036570 KS 8 June 2015 Financial summary Key assumptions Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E PC café market share (%) 25.4 21.6 19.8 16.0 15.0 17.6 19.2 20.3 Number of servicing games 5.0 5.0 7.0 7.0 8.0 11.0 12.0 12.0 Revenue contribution from B&S and 0.0 0.0 30.1 28.0 31.1 31.1 27.4 24.4 GW2 (%) Profit and loss (KRWbn) Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E Lineage I&II Revenues 306 296 270 345 323 363 354 346 Aion Revenues 262 223 141 96 94 90 96 100 Other Revenue 82 89 342 316 422 519 591 689 Total Revenue 650 609 754 757 839 972 1,042 1,135 Other income 017000000 COGS (140) 0 0 0 0 0 0 0 SG&A (267) (473) (602) (551) (561) (596) (638) (679) Other op.expenses 0 (17) 0 0 0 0 0 0 Operating profit 243 135 151 205 278 376 403 456 Net-interest inc./(exp.) 22 22 25 16 17 17 20 24 Assoc/forex/extraord./others (49) (1) 6 (6) (7) 5 7 9 Pre-tax profit 215 157 183 216 289 398 431 489 Tax (53) (40) (29) (58) (61) (90) (98) (111) Min. int./pref. div./others (1) 3 2 0 2 2 2 3 Net profit (reported) 162 120 156 159 230 310 335 381 Net profit (adjusted) 162 120 156 159 230 310 335 381 EPS (reported)(KRW) 7,439 5,502 7,129 7,253 10,490 14,143 15,294 17,382 EPS (adjusted)(KRW) 7,439 5,502 7,129 7,253 10,490 14,143 15,294 17,382 EPS (adjusted fully-diluted)(KRW) 7,439 5,502 7,129 7,253 10,490 14,143 15,294 17,382 DPS (KRW) 600 600 600 600 3,430 3,430 3,430 3,430 EBIT 243 135 151 205 278 376 403 456 EBITDA 269 161 190 241 315 410 452 506 Cash flow (KRWbn) Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E Profit before tax 215 157 183 216 289 398 431 489 Depreciation and amortisation 27 25 38 35 37 33 49 50 Tax paid (53) (32) (30) (24) (67) (90) (97) (111) Change in working capital 5 (4) 32 (6) (12) 13 7 10 Other operational CF items 23 (23) (1) (241) 12 (16) (6) (6) Cash flow from operations 217 124 222 (20) 259 339 383 432 Capex (49) (191) (90) (102) (19) (13) (14) (16) Net (acquisitions)/disposals 3 89 33 (109) (155) (60) (8) (8) Other investing CF items (201) (3) (8) 244 (30) (14) (14) (14) Cash flow from investing (246) (105) (65) 33 (204) (87) (36) (37) Change in debt (1) 9 11 (15) (8) (1) 0 0 Net share issues/(repurchases) 9 0 3 0 0 0 0 0 Dividends paid (10) (12) (12) (12) (12) (68) (75) (75) Other financing CF items 0 0 0 0 0 0 0 0 Cash flow from financing (1) (3) 3 (27) (20) (70) (75) (75) Forex effect/others (3) 0 0 0 0 0 0 0 Change in cash (34) 16 160 (14) 36 183 272 320 Free cash flow 169 (67) 133 (121) 240 326 369 417 Source: FactSet, Daiwa forecasts - 2 - Information Technology / Korea 036570 KS 8 June 2015 Financial summary continued … Balance sheet (KRWbn) As at 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E Cash & short-term investment 612 535 563 678 898 1,081 1,353 1,673 Inventory 21211111 Accounts receivable 68 73 77 81 90 104 111 121 Other current assets 82 30 32 25 31 36 39 42 Total current assets 763 639 674 786 1,020 1,222 1,504 1,837 Fixed assets 189 366 426 248 241 232 215 199 Goodwill & intangibles 0 30 133 112 95 93 89 84 Other non-current assets 95 78 83 334 344 518 532 546 Total assets 1,046 1,113 1,317 1,480 1,699 2,065 2,340 2,666 Short-term debt 0 12 12 3 0 0 0 0 Accounts payable 4 0 7 8 8 8 9 10 Other current liabilities 164 186 217 241 237 269 286 308 Total current liabilities 168 199 236 252 245 278 295 318 Long-term debt 3 0 12 5 1 0 0 0 Other non-current liabilities 64 46 49 64 77 73 74 74 Total liabilities 235 245 296 321 323 351 368 392 Share capital 11 11 11 11 11 11 11 11 Reserves/R.E./others 787 845 990 1,130 1,350 1,690 1,950 2,256 Shareholders' equity 798 856 1,001 1,141 1,361 1,701 1,961 2,267 Minority interests 141320181513118 Total equity & liabilities 1,046 1,113 1,317 1,480 1,699 2,065 2,340 2,667 EV 3,615 3,698 3,681 3,547 3,310 3,124 2,849 2,527 Net debt/(cash) (609) (523) (539) (669) (897) (1,081) (1,353) (1,673) BVPS (KRW) 36,601 39,157 45,769 52,076 62,045 77,563 89,427 103,379 Key ratios (%) Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E Sales (YoY) 2.4 (6.3) 23.7 0.4 10.8 15.9 7.1 8.9 EBITDA (YoY) 5.0 (40.3) 18.0 26.9 31.0 30.1 10.3 11.9 Operating profit (YoY) 3.6 (44.3) 11.9 35.7 35.5 35.3 7.2 13.0 Net profit (YoY) (12.1) (25.8) 29.7 1.9 44.9 34.9 8.1 13.7 Core EPS (fully-diluted) (YoY) (14.8) (26.0) 29.6 1.7 44.6 34.8 8.1 13.7 Gross-profit margin 78.4 100.0 100.0 100.0 100.0 100.0 100.0 100.0 EBITDA margin 41.4 26.4 25.2 31.8 37.6 42.2 43.4 44.6 Operating-profit margin 37.3 22.2 20.1 27.1 33.2 38.7 38.7 40.2 Net profit margin 24.9 19.7 20.7 21.0 27.4 31.9 32.2 33.6 ROAE 22.6 14.5 16.8 14.8 18.4 20.3 18.3 18.0 ROAA 17.1 11.1 12.8 11.4 14.5 16.5 15.2 15.2 ROCE 33.2 15.9 15.7 18.6 21.9 24.4 21.9 21.5 ROIC 103.1 36.8 30.7 31.0 45.2 52.4 49.8 57.7 Net debt to equity n.a.
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