Ncsoft (036570 KS) Game

September 3, 2012 Company Report NCsoft (036570 KS) Game Expecting huge success for Guild Wars 2 Daewoo Securities Co., Ltd. Chang-kwean Kim +822-768-4321 Guild Wars 2 to be more successful than previously anticipated [email protected] On August 28th, NCsoft commercially launched Guild Wars 2 in the US and Europe. The gameÊs sales volume (offline CD sales and downloads) had already exceeded 1mn copies before „early access‰ began on August 25th. And the number of concurrent users exceeded the 400,000 level during the „early access‰ period. Since mid-August, Guild Wars 2 has topped the list of most popular PC games at AmazonÊs US, British, French, and German websites. Furthermore, high-margin download sales are strong. Most importantly, feedback for Guild Wars 2 has been favorable. In our view, Buy (Maintain) feedback will be the most important factor affecting the gameÊs success. In Target Price (12M, W) 420,000 particular, with the proliferation of social network sites like Facebook, the influence Share Price (08/31/12, W) 252,500 of online reviews on the fortunes of online games is increasing. It should be noted Expected Return (%) 66.3 that some editions of Guild Wars 2 were listed as "sold out" on the gameÊs official EPS Growth (12F, %) 47.8 Market EPS Growth (12F, %) 12.7 website due to capacity limitations. P/E (12F, x) 30.9 Still, investors are concerned that revenue models for Guild Wars 2 could be weak. Market P/E (12F, x) 10.2 During 2005~2007, four episodes of Guild Wars 1 were released. And CD sales KOSPI 1,905.12 volume of each episode reached 1.1mn~1.6mn copies during the first six months Market Cap (Wbn) 5,528 of release. Net revenues per CD were only around US$30, and the proportion of Shares Outstanding (mn) 22 Avg Trading Volume (60D, '000) 305 low-margin offline sales (out of overall sales volume) was high. As such, a CD sales Avg Trading Value (60D, Wbn) 73 volume of 1mn led to revenues of just W30bn and an operating profit of W12bn Dividend Yield (12F, %) 0.4 (OP margin of 40%). Free Float (%) 76.3 However, we anticipate Guild Wars 2 to exceed the results of its predecessor and 52-Week Low (W) 203,000 52-Week High (W) 386,000 market expectations. Factoring in strong presales volume and current robust sales, Beta (12M, Daily Rate of Return) 0.69 we project the gameÊs cumulative CD sales volume to exceed 3~4mn copies in 3Q Price Return Volatility (12M Daily, %, SD) 2.9 (including presales) and reach 5~6mn in 2012. Given these sales volume Foreign Ownership (%) 43.3 assumptions, major earnings variables (e.g., game item purchases, average Major Shareholder(s) revenues per user) should be favorable. NEXON Co., Ltd. (14.7%) T.J. Kim et al. (10.41%) Currently, our 2012 and 2013 earnings estimates for NCsoft are based on the NPS (9.19%) following assumptions: 1) 2012 Guild Wars 2 CD sales volume of 3.12mn, 2) 2013 Price Performance CD sales volume of 1.54mn, and 3) 400,000 gamers (10% of CD buyers and (%) 1M 6M 12M downloaders) will spend US$15 on item purchases per month. Under these Absolute 12.7 -8.8 -27.8 assumptions, we estimate the game to generate revenues of W164.3bn in 2012 Relative 11.5 -2.7 -29.1 and W162.9bn in 2013. Given the recent strong performance of the game, we Key Business could raise our Guild Wars 2-related earnings estimates by 1.5~2 times. A computer game company focusing on MMORPG. § Earnings & Valuation Metrics Share price FY Revenues OP OP Margin NP EPS EBITDAFCF ROE P/E P/B EV/EBITDA 130 KOSPI (Wbn) (Wbn) (%) (Wbn) (Won) (Wbn) (Wbn) (%) (x) (x) (x) 120 110 12/10 660 174 26.3 144 6,602 243 187 20.8 31.6 6.3 16.3 100 12/11 609 135 22.2 121 5,529 161 -120 15.1 55.6 8.1 38.7 90 80 12/12F 837 222 26.5 179 8,174 225 -245 18.9 30.9 5.5 23.5 70 12/13F 1,106 469 42.5 369 16,852 474 355 30.5 15.0 4.1 10.4 60 50 12/14F 1,229 563 45.8 449 20,537 568 426 28.3 12.3 3.1 8.0 8/11 12/11 4/12 8/12 Note: All figures are based on consolidated K-IFRS; NP refers to net profit attributable to controlling interests Source: Company data, KDB Daewoo Securities Research estimates Analysts who prepared this report are registered as research analysts in Korea but not in any other jurisdiction, including the U.S. September 3, 2012 NCsoft Figure 1. Guild Wars 2 Âs sales rank at Amazon in each country (Rank) 7 US UK Canada Germany France 6 5 4 3 2 1 0 7/25 7/28 7/31 8/3 8/6 8/9 8/12 8/15 8/18 8/21 8/24 8/27 Source: Amazon (in the US, UK, Germany, Canada and France), KDB Daewoo Securities Research Figure 2. Sales volume for Guild Wars 1 expansion packs (mn units) 8 Guild Wars: Eye of the North 7.1 Guild Wars Nightfall 6 Guild Wars Factions 5.7 2.9 Guild Wars Prophecies 1.5 4 1.5 1.5 2.7 2 1.6 1.1 1.1 1.1 1.6 1.6 1.6 1.6 0 2006년 4월 2006년 10월 2007년 8월 2012년 8월 Note: Prophecies (released in Apr. 2005), Factions (released in Apr. 2006), Nightfall (released in Oct. 2006), Eye of the North (released in Aug. 2007) Source: Company data, KDB Daewoo Securities Research Figure 3. Guild Wars 2Ês sales rank at Gamestop.com Guild Wars 2 ranked No. 1, 2, 5 at PC games Best Selling list Download versions (higher margin) are ranked top 2 Source: KDB Daewoo Securities Research KDB Daewoo Securities Research 2 September 3, 2012 NCsoft Figure 4. Guild Wars 2ÊÊs item sales Source: Company data, KDB Daewoo Securities Research Figure 5. Guild Wars 2ÊÊs item sales Source: Company data, KDB Daewoo Securities Research Figure 6. Guild Wars 2ÊÊs item sales Source: Company data, KDB Daewoo Securities Research KDB Daewoo Securities Research 3 September 3, 2012 NCsoft NCsoft (036570 KS/Buy/TP: W420,000) Comprehensive Income Statement (Summarized) Statement of Financial Condition (Summarized) (Wbn) 12/11 12/12F 12/13F 12/14F (Wbn) 12/11 12/12F 12/13F 12/14F Revenues 609 837 1,106 1,229 Current Assets 639 678 1,053 1,464 Cost of Sales 139 191 195 204 Cash and Cash Equivalents 59 59 388 778 Gross Profit 470 646 911 1,026 AR & Other Receivables 76 104 138 153 SG&A Expenses 334 424 441 463 Inventories 1 2 2 3 Operating Profit (Adj) 136 222 469 563 Other Current Assets 27 37 49 55 Operating Profit 135 222 469 563 Non-Current Assets 475 972 1,043 1,089 Non-Operating Profit 22 14 17 30 Investments in Associates 14 14 14 14 Net Financial Income -22 -20 2 -12 Property, Plant and Equipment 366 716 716 716 Net Gain from Inv in Associates 6 0 0 0 Intangible Assets 30 33 35 36 Pretax Profit 157 236 486 593 Total Assets 1,113 1,650 2,096 2,553 Income Tax 40 57 118 144 Current Liabilities 199 269 351 389 Profit from Continuing Operations 118 179 369 449 AP & Other Payables 27 37 49 54 Profit from Discontinued Operations 0 0 0 0 Short-Term Financial Liabilities 12 12 12 12 Net Profit 118 179 369 449 Other Current Liabilities 160 219 290 322 Controlling Interests 121 179 369 449 Non-Current Liabilities 46 334 349 359 Non-Controlling Interests -3 0 0 0 Long-Term Financial Liabilities 0 228 228 228 Total Comprehensive Profit 111 179 369 449 Other Non-Current Liabilities 12 72 87 97 Controlling Interests 113 179 369 449 Total Liabilities 245 603 700 748 Non-Controlling Interests -2 0 0 0 Controlling Interests 856 1,034 1,383 1,793 EBITDA 161 225 474 568 Capital Stock 11 11 11 11 FCF (Free Cash Flow) -120 -245 355 426 Capital Surplus 221 221 221 221 EBITDA Margin (%) 26.5 26.9 42.9 46.2 Retained Earnings 725 904 1,253 1,663 Operating Profit Margin (%) 22.2 26.5 42.5 45.8 Non-Controlling Interests 13 13 13 13 Net Profit Margin (%) 19.8 21.4 33.3 36.6 Stockholders' Equity 869 1,047 1,396 1,806 Cash Flows (Summarized) Forecasts/Valuations (Summarized) (Wbn) 12/11 12/12F 12/13F 12/14F 12/11 12/12F 12/13F 12/14F Cash Flows from Op Activities 117 108 357 425 P/E (x) 55.6 30.9 15.0 12.3 Net Profit 118 179 369 449 P/CF (x) 45.9 30.3 14.8 12.2 Non-Cash Income and Expense 46 46 106 118 P/B (x) 8.1 5.5 4.1 3.1 Depreciation 22 0 0 0 EV/EBITDA (x) 38.7 23.5 10.4 8.0 Amortization 4 3 5 5 EPS (W) 5,529 8,174 16,852 20,537 Others -10 -5 19 19 CFPS (W) 6,697 8,326 17,072 20,768 Chg in Working Capital 13 -60 1 0 BPS (W) 37,844 45,796 61,654 80,294 Chg in AR & Other Receivables 32 -28 -33 -15 DPS (W) 600 1,000 2,000 2,000 Chg in Inventories 0 -1 -1 0 Payout ratio (%) 9.9 11.1 10.8 8.9 Chg in AP & Other Payables 0 10 12 5 Dividend Yield (%) 0.2 0.4 0.8 0.8 Income Tax Paid -61 -57 -118 -144 Revenue Growth (%) -7.7 37.5 32.1 11.2 Cash Flows from Inv Activities -105 -335 15 28 EBITDA Growth (%) -33.8 39.7 110.6 19.7 Chg in PP&E -190 -350 0 0 Operating Profit Growth (%) -22.2 64.2 111.6 19.9 Chg in Intangible Assets -6 -6 -6 -6 EPS Growth (%) -16.3 47.8 106.2 21.9 Chg in Financial Assets 84 0 0 0 Accounts Receivable Turnover (x) 8.5 9.7 9.5 8.8 Others 8 21 21 34 Inventory Turnover (x) 473.4 557.8 548.3 507.2 Cash Flows from Fin Activities -12 227 -43 -63 Accounts Payable Turnover (x) 346.4 6,066.9 5,962.9 5,516.6 Chg in Financial Liabilities -7 0 0 0 ROA (%) 11.0 12.9 19.7 19.3 Chg in Equity 7 0 0 0 ROE (%) 15.1 18.9 30.5 28.3 Dividends Paid -12 -12 -20 -40 ROIC (%) 46.4 31.1 47.6 57.0 Others -1 -1 -23 -23 Liability to Equity Ratio (%) 28.2 57.6 50.2 41.4 Increase (Decrease) in Cash 0 0 329 390 Current Ratio (%) 321.6 252.4 300.3 376.8 Beginning Balance 60 59 59 388 Net Debt to Equity Ratio (%) -60.2 -28.1 -44.7 -56.1 Ending Balance 59 59 388 778 Interest Coverage Ratio (x) 178.1 189.6 20.6 24.8 Source: Company data, KDB Daewoo Securities Research estimates KDB Daewoo Securities Research 4 September 3, 2012 NCsoft Important Disclosures & Disclaimers Disclosures As of the publication date, Daewoo Securities Co., Ltd.

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