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NCSOFT (036570.KS) Earnings to enter recovery phase from November

With the launch of B&S2 having been pushed back to 1Q21 (vs the previous Company Note │ Oct 19, 2020 expectation of an end-2020 release), NCSOFT’s share price has been adjusting as of late. However, noting both that the specifics of the B&S2 Refer to page 2 for ESG index/event tables launch are to be announced in November and that subsidiaries are slated to roll out new titles by the end of this year, we expect to see an accompanying resurgence in NCSOFT’s earnings momentum. Buy (maintain) TP W1,220,000 (lower) CP (’20/10/16) W767,000 Set to release B&S2; subsidiaries rolling out new offerings as well Sector Game Kospi/Kosdaq 2,341.53 / 833.84 We reiterate a Buy rating on NCSOFT, continuing to suggest it as our sector top Market cap (common) US$14,732.02mn pick. The company’s share price has recently been undergoing adjustment due Outstanding shares (common) 22.0mn 52W high (’20/07/06) W995,000 to both concerns over the delayed release of Blade & Soul 2 (B&S2) and low (’19/12/03) W485,000 slowing sales of Lineage 2M. However, we point out that the pushing back of Average trading value (60D) US$90.03mn the B&S2 launch stems from merely a scheduling issue, not a development Dividend yield (2020E) 0.79% issue. The new title appears safely on track to be released in 1Q21, with specific Foreign ownership 48.8% information regarding the launch to be released next month. Also drawing Major shareholders attention to planned rollouts of new games (including TricksterM and Fuser) at TJ Kim & 9 others 12.0% subsidiaries by yearend, we see NCSOFT as being well-situated to see a sharp NPS 11.0% rebound in earnings momentum in the not-too-distant future. Share perf 3M 6M 12M Absolute (%) -12.7 17.1 51.6 Relative (%p) -18.6 -7.1 34.8 NCSOFT’s share price has now slipped around 20% compared to its Jul 2020 peak. Considering its lower valuation versus its competitors’ average, the 2019 2020E 2021F 2022F company’s share price looks well-primed to rebound. But, in reflection of a Sales 1,701 2,426 3,362 3,747 deferring in new game sales from 4Q20E to 2021F due to delayed global Chg -0.8 42.6 38.6 11.5 expansions/rollouts of B&S2 and Lineage 2M, we trim down our earnings OP 479.0 843.0 1,401 1,560 Chg -22.1 76.0 66.2 11.3 estimates, in turn lowering our TP from W1,270,000 to W1,220,000. OPM 28.2 34.7 41.7 41.6 NP 358.2 669.0 1,097 1,231 G-Star to kick off peak seasonality from November EPS 16,320 30,471 49,981 56,089 Chg -14.4 86.7 64.0 12.2 The upcoming G-Star convention in November is to kick off peak seasonality P/E 33.1 25.2 15.3 13.7 for the game industry. As NCSOFT usually holds a press conference around P/B 4.8 5.5 4.2 3.3 November of each year in order to unveil titles and share its business plans, we EV/EBITDA 21.0 17.4 10.2 8.7 assume that a similar event will run this year, anticipating that B&S2 details will ROE 14.7 24.1 31.2 27.2 be in the spotlight. Debt/equity 33.2 26.7 21.4 18.3 Net debt -719.7 -1,104 -1,917 -2,606 Unit: Wbn, %, won, x 3Q20 preview: Earnings to come in slightly weak Note 1: NP excludes minority interests Note 2: EPS, P/E, P/B, ROE based on NP (excl minority interests) We size NCSOFT’s 3Q20 revenue at W574.2bn (+44.3% y-y, 6.6% q-q) and Source: NH I&S Research Center estimates OP at W197.2bn (+53.0% y-y, -5.6% q-q), with OP missing the consensus of W207.8bn due to a drop in sales of Lineage 2M despite a third-anniversary update-spurred rise in a Lineage M sales.

3Q20 preview (Unit: Wbn, %) 3Q20E 3Q19 4Q19 1Q20 2Q20 4Q20F Revised y-y q-q Previous Consen Sales 397.8 533.8 731.1 538.6 574.2 44.3 6.6 579.3 565.3 581.9 OP 128.9 141.2 241.4 209.0 197.2 53.0 -5.6 200.3 207.8 195.4 OPM 32.4 26.4 33.0 38.8 34.3 - - 34.6 36.8 33.6 Pre-tax profit 153.2 97.6 255.6 216.4 207.6 35.5 -4.0 210.9 211.5 207.9 Jaemin Ahn, Analyst NP (excl minority 113.3 54.2 195.5 158.2 157.5 38.9 -0.5 160.0 166.2 157.8 822)768-7647, [email protected] interests) Note: K-IFRS consolidated basis; Source: WISEfn, NH I&S Research Center estimates NCSOFT www.nhqv.com

Summary

Founded in Mar 1997, NCSOFT was listed in May 2003. As a leading domestic mobile and online game developer, the firm booked 2019 sales of W1,705.7bn (-0.8% y-y), with game sales representing about 94% (mobile: 81.1%, PC: 18.9%) of its total revenue. Thanks to the Nov 2019 launch of Lineage 2M (sequel to 2017’s Lineage M) and the planned release of B&S2 in 2021, the firm’s top line should enjoy strong growth. We present a Buy rating and a TP of W1,220,000.

Share price drivers/earnings momentum Downside risks

Launches of new game lineups in 2021 High dependency on domestic market due to lack of global hit games Globally competitive game development capabilities sufficient to roll out cloud-based games

Cross valuations (Unit: x, %) Historical valuations (Unit: x, %)

P/E P/B ROE Company Valuations 2018 2019 2020E 2021F 2022F 2020E 2021F 2020E 2021F 2020E 2021F Activision Blizzard 29.1 27.7 4.2 3.7 16.3 15.3 P/E 24.5 33.1 25.2 15.3 13.7 Electronic Arts 9.6 36.3 3.9 4.7 48.0 18.5 P/B 4.3 4.8 5.5 4.2 3.3 Tencent 38.9 32.8 8.2 6.5 22.8 22.4 P/S 6.0 7.0 6.9 5.0 4.5 Nexon 19.4 16.3 3.1 2.6 16.8 17.2 ROE 16.4 14.7 24.1 31.2 27.2 Netease 28.0 22.9 4.5 4.0 19.0 19.0 ROIC 47.7 27.0 53.1 78.8 77.0 Source: Bloomberg, NH I&S Research Center Source: Bloomberg, NH I&S Research Center

ESG index (Unit: %, yrs, hours, ‘000TJ, mntCO2e, mn tons)

BOD composition Human resources 2017 2018 2019 Kim Taek-jin President, CEO, BOD chair Inside Portion of female employees 30.7 31.6 31.9 Park Byeong-mu Compensation Committee chair Inside Portion of contract workers 5.0 4.3 3.1 Audit Committee chair, Outside Director Candidate Hwang Chan-hyeon Outside Average service period per employee 4.8 5.2 5.4 Recommendation Committee chair Average training hours per employee N/A N/A N/A Hyeon Dong-hun - Outside Cho Guk-hyeon - Outside Environment 2017 2018 2019 Baek Sang-hun - Outside Energy consumption N/A N/A N/A Greenhouse gas emissions N/A N/A N/A Recycled water consumption N/A N/A N/A Recycled waste N/A N/A N/A Source: NCSOFT, NH I&S Research Center

ESG events

E - - N/A - Outsourced tasks related to graphics development and character goods production to 30 outside contractors without properly 2017.2 S signing contract sheets 2015.3 - Reaped unjust gains in process of selecting vendor companies - Nexon expanded its stake in NCSOFT to 15.08%, a development that highlighted the possibility of a hostile takeover; to protect G 2014.10 its management rights, NCSOFT decided to conduct a stake exchange with Netmarble (which has since come to own an 8.9% stake in NCSOFT) Source: NCSOFT, NH I&S Research Center

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Share price declines With the launch of B&S2 having been pushed back to 1Q21 (vs the previous expectation on delay in new of an end-2020 release), NCSOFT’s share price has fallen 20% versus the July peak. game title However, given that the delay: 1) is attributable to schedule adjustments due to Covid- 19, rather than technical issues; and 2) will likely last only a couple of months (less than a year), we view additional downside as limited.

Resurgence in Noting both that the specifics of the B&S2 launch are to be announced in November and NCSOFT’s earnings that subsidiaries are slated to roll out new titles (such as Fuser and Trickster M) by end- momentum 2020, we expect to see an accompanying resurgence in NCSOFT’s earnings momentum. anticipated in November on likely pre-orders for B&S2 and new title The upcoming G-Star convention in November is to kick off peak seasonality for the launches at game industry. Of note, NCSOFT has usually held a press conference around November subsidiaries of each year in order to unveil titles and share its business plans, regardless of its participation in the G-Star convention. Given such, we assume that a similar event will run this year, anticipating that B&S2 details will be in the spotlight.

We note that pre-orders, which game companies often use as an opportunity to promote their products, generally begin two~three months ahead of the official launch of a new title. Assuming that B&S2 will be officially released over Feb~Mar 2021, related pre- orders are likely to start over November~December. For reference, looking at the case of Lineage 2M, the title was launched on Nov 27, 2019, and pre-orders started on Sep 5.

We also draw investor attention towards new title launches at NCSOFT’s subsidiaries. On Nov 10, NC West plans to roll out Fuser, which is a console-based music game developed by Harmonix. In addition, NTREEV is scheduled to release Trickster M by the end of this year, with related teasers unveiled on Oct 7.

Of note, Nexon’s latest MMORPG titled Kingdom of the Winds: Yeon has been showing robust performances, backed by the strong IP power for the Kingdom of the Winds series and rising consumer interest in MMORPGs. We believe that Trickster M can be as successful as Kingdom of the Winds: Yeon, given that Trickster M has also been developed based on a famous IP, and represents a casual MMORPG with cute characters.

NCSOFT usually holds press conference around November of each year Date Remarks 2013.11.27 Press conference in celebration of Lineage 2’s15th anniversary 2014.11.18 Premiere at G-Star convention 2015.11.12 Press conference at G-Star convention 2016.10.27 Showcase for Lineage Red Knights 2017.11.07 2017 NC Media Day Directors' Cut 2018.11.08 2018 NC Media Day Directors' Cut 2019.09.05 Lineage 2M media showcase: 2nd Impact 2019.11.20 Release of game platform Purple Source: NCSOFT, media reports, NH I&S Research Center

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Fuser: Published by subsidiary NC West Trickster M: Developed by subsidiary NTREEV

Source: NCSOFT, NH I&S Research Center Source: NCSOFT, NH I&S Research Center

Pangya M: Developed by subsidiary NTREEV Pro baseball H3: Developed by subsidiary NTREEV

Source: NCSOFT, NH I&S Research Center Source: NCSOFT, NH I&S Research Center

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3Q20 earnings to We expect NCSOFT to post 3Q20 sales of W574.2bn (+44.3% y-y, +6.6% q-q) and OP miss consensus of 197.2bn (+53.0% y-y, -5.6% q-q), with OP arriving below our previous forecast of W200.3bn and the consensus of W207.8bn.

Lineage M sales likely jumped to W228.6bn (daily average sales of W2.48bn; +10.0% y-y, +43.0% q-q), backed by effects from a third-anniversary update. We anticipate that Lineage M sales will remain robust over the mid/long term.

However, sales for Lineage 2M likely dropped to W167.7bn (daily average sales of W1.82bn; -15.0% q-q), despite the opening of a new server (Baium) and the introduction of the Spear weapon class as well as a new dungeon (Oman’s Tower). But, noting that the sharp decline in daily average sales for the title witnessed in 1H20 began to ease in July, we view that Lineage 2M sales may rebound on the offering of updates.

Quarterly earnings forecasts (Unit: Wbn, %) 1Q19 2Q19 3Q19 4Q19 1Q20 2Q20 3Q20E 4Q20F 2019 2020E 2021F Sales 358.8 410.8 397.8 533.8 731.1 538.6 574.2 581.9 1,701.2 2,425.7 3,361.7 Game 301.3 359.2 353.6 489.5 678.3 476.3 517.6 526.7 1,503.7 2,198.8 3,128.3 PC 102.6 135.4 140.3 126.7 125.1 119.1 120.2 118.2 504.9 482.7 551.5 Lineage 1 20.7 50.1 51.8 51.4 44.8 34.3 40.7 40.3 174.1 160.0 156.7 Lineage 2 21.6 21.2 23.0 27.8 26.4 25.8 26.7 27.2 93.6 106.1 111.5 Aion 12.3 12.4 13.2 8.1 10.1 8.2 8.6 8.3 46.0 35.3 31.8 B&S 23.3 21.1 21.5 18.0 19.6 19.8 19.2 18.4 83.9 77.0 69.8 Guild Wars 2 16.3 15.9 15.1 11.3 12.5 15.6 11.5 10.8 58.7 50.4 38.6 Mobile 198.8 223.8 213.3 362.9 553.2 357.1 397.4 408.4 998.8 1,716.1 2,576.8 Lineage M 191.6 215.1 207.9 214.7 212.0 159.9 228.6 234.3 829.3 834.8 782.4 Lineage 2M - - - 143.9 341.1 197.3 167.7 171.9 143.9 878.0 524.2 L2M Global ------333.9 B&S 2 ------705.4 Royalties 57.4 51.6 44.2 44.3 52.8 62.3 56.6 55.2 197.5 226.9 233.4 Lineage 2: R 7.2 7.4 8.7 7.2 5.9 5.5 5.1 4.7 30.4 21.1 16.7 Lineage M Taiwan 13.4 12.1 10.9 9.8 8.8 7.9 7.1 6.4 46.1 30.2 22.6 Operating expenses 279.2 281.4 268.9 392.7 489.7 329.6 377.0 386.5 1,222.2 1,582.7 1,960.2 Labor costs 143.2 125.8 116.1 169.9 211.8 162.3 148.8 157.9 555.1 680.9 686.4 Marketing costs 19.0 24.2 22.8 41.3 39.6 12.9 19.5 20.4 107.3 92.4 108.3 OP 79.5 129.4 128.9 141.2 241.4 209.0 197.2 195.4 479.0 843.0 1,401.5 OPM 22.2 31.5 32.4 26.4 33.0 38.8 34.3 33.6 28.2 34.8 41.7 Pre-tax profit 98.2 147.1 153.2 97.8 255.6 216.4 207.6 207.9 496.3 887.5 1,457.8 NP (excl minority interests) 74.2 116.4 113.3 54.4 195.5 158.2 157.5 157.8 358.3 669.0 1,097.3 Source: NCSOFT, NH I&S Research Center estimates

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Lineage 2M’s gross sales ranking (Korea) Lineage 2M’s estimated daily sales on Google

(Ranking) (Wmn) '19.11 '20.1 '20.3 '20.5 '20.7 '20.9 8,000 Lineage 2M (Google) 0 7,000 5 6,000 5,000 10 4,000 3,000 15 2,000

20 1,000 Lineage 2M(18)(Korea, Google) 0 '19.11 '20.1 '20.3 '20.5 '20.7 '20.9 25 Lineage 2M(12)(Korea, Apple)

Source: AppAnnie, Google, Apple, NH I&S Research Center Source: WiseApp, NH I&S Research Center

Lineage M’s gross sales ranking (Korea) Lineage M’s estimated daily sales on Google

(Ranking) (Wmn) '17.6 '17.12 '18.6 '18.12 '19.6 '19.12 '20.6 8,000 0 Lineage M (Google) 7,000 1 6,000 2 5,000 3 4 4,000 5 3,000 6 2,000 Lineage M(18)(Apple) 7 1,000 8 Lineage M(18)(Google) 0 9 '18.1 '18.5 '18.9 '19.1 '19.5 '19.9 '20.1 '20.5 '20.9

Source: AppAnnie, Google, Apple, NH I&S Research Center Source: WiseApp, NH I&S Research Center

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Adhere to Buy We reiterate a Buy rating on NCSOFT, continuing to suggest it as our sector top pick. rating but lower TP The company’s share price has recently been undergoing adjustment due to both to W1,220,000 concerns over the delayed release of B&S2 and slowing sales of Lineage 2M. However, as noted above, we point out that the pushing back of the B&S2 launch stems from nothing more than a scheduling issue, not a development issue. The new title appears safely on track to be released in 1Q21, with specific information regarding the launch to be released next month. Also drawing attention to planned rollouts of new games (including TricksterM and Fuser) at subsidiaries by yearend, we see NCSOFT as being well-situated to see a sharp rebound in earnings momentum in the not-too-distant future.

Still, we revise down our TP from W1,270,000 to W1,220,000, in reflection of deferred new game sales from 4Q20E to 2021E due to delayed global expansions of B&S2 and Lineage 2M. Our TP (assumptions: risk free rate of 1.5%, market risk premium of 5.2%, and beta of 0.9) offers 59.1% upside, and is equivalent to a 2021F P/E of 24.4x.

RIM valuation (Unit: Wbn, won) 2020E 2021F 2022F 2023F 2024F 2025F 2026F 2027F 2028F 2029F 2030F 2031F Net profit 669 1,097 1,231 1,170 1,155 1,218 1,392 1,591 1,818 2,078 2,375 2,714 Shareholder’s equity 3,043 3,995 5,061 6,045 6,993 7,983 9,087 10,317 11,687 13,210 14,904 16,784

Forecast ROE (FROE) 24.1% 31.2% 27.2% 21.1% 17.7% 16.3% 16.3% 16.4% 16.5% 16.7% 16.9% 17.1% Spread (FROE-COE) 18.0% 25.0% 21.0% 14.9% 11.5% 10.1% 10.1% 10.2% 10.3% 10.5% 10.7% 10.9%

Residual income 498 880 952 827 752 755 865 992 1,139 1,309 1,506 1,735

Cost of equity (COE) 6.2% Beta 0.9 Market risk premium (Rm-Rf) 5.2% Risk-free rate (Rf) 1.5%

Beginning shareholder’s equity 2,499 PV of forecast period RI 8,358 PV of continuing value 14,340 Equity value (C+P) 25,198 No of shares (common, mn) 21,954 12M TP Fair price (C) 1,218,695 Current price (C) 767,000 Upside (-downside) 58.9% Implied P/B (x) 9.1 Implied P/E (x) 26.1 Note: The residual income model (RIM) is a cash flow approach that yields a fair shareholder value (value of equity) by adding shareholders’ equity and present value of residual income (meaning income excluding cost of equity). Value of equity = shareholders’ equity + sum of present value of future residual income * Residual income (RIt) = NP (t) – shareholders’ equity (t-1) * cost of equity (t) = shareholders’ equity (t-1) * (ROEt - COEt) NH I&S uses RIM as our primary valuation model, as RIM is an objective model that minimizes the subjectivity of valuation indicators while producing the same results as the dividend discount model (DDM) and DCF.

Market risk premium assessment guidelines Mega cap Large cap Mid cap Small cap Market cap of W10tn or higher Market cap of W1~10tn Market cap of W200bn-1tn Market cap of less than W200bn Criteria + credit rating of 'AAA' or higher + credit rating of 'A0' or higher + credit rating of 'BBB+' or higher + credit rating of 'BBB-' or higher Risk premium 5.2% 6.0% 7.0% 8.0% * Risk free rate = 1.05% (standardized)

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Earnings forecasts (IFRS consolidated) (Unit: Wbn, won, x, %) 2019 2020E 2021F 2022F Sales - Revised 1,701 2,426 3,362 3,747 - Previous - 2,616 3,427 3,797 - Change - -7.3 -1.9 -1.3 OP - Revised 479.0 843.0 1,401 1,560 - Previous - 952.2 1,428 1,590 - Change - -11.5 -1.9 -1.9 OPM - Revised 28.2 34.8 41.7 41.6 EBITDA 531.5 903.8 1,468 1,634 NP (excl minority interests) 358.2 669.0 1,097 1,231 EPS - Revised 16,320 30,471 49,981 56,089 - Previous - 34,278 50,943 57,188 - Change - -11.1 -1.9 -1.9 P/E 33.1 25.2 15.3 13.7 P/B 4.8 5.5 4.2 3.3 EV/EBITDA 21.0 17.4 10.2 8.7 ROE 14.7 24.1 31.2 27.2 Note: EPS, P/E, P/B, and ROE based on NP (excluding minority interests) Source: NH I&S Research Center estimates

NCSOFT’s game lineup Game Genre Developer Date of Launch Lineage 2: Blood Alliance MMORPG Snail Games Jul 28, 2016 Lineage RK RPG NCSOFT Dec 8, 2016 Side-scrolling Final Blade Sky People Feb 14, 2017 RPG Pro Baseball H2 Sports Ntreev Mar 30, 2017 Lineage M MMORPG NCSOFT Jun 21, 2017 B&S Mobile IP-based game Web game Tencent Aug 8, 2017 (B&S: Hongmoon Rising, China) Arami Puzzventure Puzzle NCSOFT Aug 17, 2017 PangYa Mobile (Southeast Asia) Sports Ntreev Feb 8, 2018 Aion: Legions of War MMORPG NCSOFT Jan 25, 2019 Lineage M (Japan) MMORPG NCSOFT May 29, 2019 Lineage 2M MMORPG NCSOFT Nov 27, 2019 Fuser Music Harmonix Nov 10, 2020 Trickster M MMORPG Ntreev 2020 Pro Baseball H3 Sports Ntreev 2020 B&S 2 MMORPG NCSOFT 1H21 Lineage 2M (Taiwan/Japan) MMORPG NCSOFT 1H21 PangYa M Sports Ntreev 2021 Aion2 MMORPG NCSOFT 2021 Project TL (PC / Console / Mobile) PC MMORPG NCSOFT 2021 B&S S MMORPG NCSOFT 2022 B&S M MMORPG NCSOFT 2022 Note: RPG = role-playing game; MMORPG = massively multiplayer online role-playing game Source: NCSOFT, media reports, NH I&S Research Center

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STATEMENT OF COMPREHENSIVE INCOME Valuation / Profitability / Stability (Wbn) 2019/12A 2020/12E 2021/12F 2022/12F 2019/12A 2020/12E 2021/12F 2022/12F Sales 1,701 2,426 3,362 3,747 Price/ Earnings (X) 33.1 25.2 15.3 13.7 Growth (%) -0.8 42.6 38.6 11.5 Price/ Book Value (X) 4.8 5.5 4.2 3.3 COGS 0.0 0.0 0.0 0.0 Price/ Gross Cash Flow (X) 21.2 18.4 11.4 10.2 Gross Profit 1,701 2,426 3,362 3,747 Price/ Sales (X) 7.0 6.9 5.0 4.5 Gross margin (%) 100.0 100.0 100.0 100.0 EV/ EBITDA (X) 21.0 17.4 10.2 8.7 SG&A 1,222 1,583 1,960 2,187 EV/ EBIT (X) 23.3 18.7 10.7 9.1 Operating Income 479.0 843.0 1,402 1,560 Fully diluted EPS (W) 16,320 30,471 49,981 56,089 Growth (%) -22.1 76.0 66.3 11.3 BVPS (W) 113,836 138,628 181,992 230,525 Operating margin (%) 28.2 34.7 41.7 41.6 Sales PS (W) 77,514 110,491 153,125 170,678 EBITDA 531.5 903.8 1,468 1,634 ROE (%) 14.7 24.1 31.2 27.2 Non-Operating Profit 17.2 44.5 56.3 74.9 ROA (%) 11.4 18.5 25.1 22.7 Financial Income(Costs) 38.2 25.2 38.7 57.3 ROIC (%) 27.0 53.1 78.8 77.0 Other Non-Operating Profit -1.7 21.6 20.5 20.5 Dividend Yield (%) 1.0 0.8 0.9 1.0 Gains(Losses) in Associates, Subsidiaries and -19.3 -2.3 -2.9 -2.9 Payout Ratio (%) 30.0 18.6 13.2 13.5 JVs Pre-tax Profit from Cont. Op. 496.2 887.5 1,458 1,635 Total Cash Dividend (Wbn) 107.6 124.7 145.3 165.9 Income Taxes 137.0 218.6 360.7 404.0 Cash DPS (W) 5,220 6,050 7,050 8,050 Profit from Continuing Op. 359.2 669.0 1,097 1,231 Net debt(cash)/ equity (%) -28.6 -36.1 -47.8 -51.4 Net Profit 359.2 669.0 1,097 1,231 Debt/ equity (%) 33.2 26.7 21.4 18.3 Growth (%) -14.8 86.2 64.0 12.2 Interest-Bearing Debts (Wbn) 260.7 249.4 249.4 249.4 Net margin (%) 21.1 27.6 32.6 32.9 Current Ratio (%) 464.2 591.8 576.6 667.5 Net Profit of Parent 358.2 669.0 1,097 1,231 Total shares (mn) 22 22 22 22 Net Profit to Non-Controlling 1.0 0.0 -0.2 -0.2 Par value (W) 500 500 500 500 Other Comprehensive Income -94.7 0.0 0.0 0.0 Share price (W) 541,000 767,000 767,000 767,000 Total Comprehensive Income 264.5 669.0 1,097 1,231 Market Cap (Wbn) 11,877 16,839 16,839 16,839

STATEMENT OF FINANCIAL POSITION CASH FLOW STATEMENT (Wbn) 2019/12A 2020/12E 2021/12F 2022/12F (Wbn) 2019/12A 2020/12E 2021/12F 2022/12F Cash and Cash Equivalents 303.4 678.0 1,433 1,981 Operating Cash Flow 392.2 585.0 1,067 1,081 Accounts Receivables 254.4 253.9 275.6 328.7 Net Profit 359.2 669.0 1,097 1,231 Total Current Assets 2,088 2,588 3,506 4,454 Depreciation&Amortization 52.5 60.8 66.7 73.2 Tangible Assets 350.4 380.9 414.5 451.6 + Loss(Gains) from Subs 19.3 0.0 0.0 0.0 Investment Assets 746.9 741.2 781.4 932.2 + FC translation loss(profit) -5.6 0.8 1.1 1.2 Non-Current Assets 1,259 1,285 1,360 1,549 Gross Cash Flow 559.6 916.4 1,479 1,644 Assets 3,346 3,874 4,866 6,004 - Incr. (Decr.) in WC -70.8 -145.6 -98.4 -224.4 Short-Term Debt 42.7 31.1 184.5 201.6 Investing Cash Flow -234.2 -87.1 -200.1 -404.7 Account Payables 4.6 4.6 4.8 6.6 + Decr. In Tangible Assets 0.8 0.0 0.0 0.0 Current Liabilities 449.8 437.3 608.0 667.4 - Incr. In Tangible Assets(CAPEX) -51.0 -90.0 -99.0 -108.9 Long-Term Debt 323.6 319.4 179.3 179.3 + Disp.(Acq.) of Inv. Assets 206.5 5.8 -40.3 -150.8 Long-Term Allowance 20.1 20.0 19.8 19.6 Free Cash Flow 341.2 495.0 967.6 972.2 Non-Current Liabilities 384.4 379.7 249.7 262.6 Net Cash Flow 158.0 497.9 866.5 676.4 Liabilities 834.2 817.1 857.7 930.0 Financing Cash Flow -45.7 -123.4 -111.4 -128.2 Capital Stock 11.0 11.0 11.0 11.0 Equity Financing 2.9 0.0 0.0 0.0 Capital Surplus 435.5 435.5 435.5 435.5 Debt Financing -48.6 -123.4 -111.4 -128.2 Retained Earnings 2,382 2,926 3,878 4,944 Incr.(Decr.) in Cash 117.9 374.5 755.1 548.3 Non-Controlling Interests Equity 13.0 13.0 12.8 12.6 Ending Cash and Cash Equivalents 303.4 678.0 1,433 1,981 Shareholders' Equity 2,512 3,056 4,008 5,074 Net Debt (Cash) -719.7 -1,104 -1,917 -2,606

9 NCSOFT www.nhqv.com

Rating and TP update NCSOFT (036570.KS) Disparity ratio (%) Date Rating TP Avg Max/Min 2020.10.19 Buy W1,220,000(12M) - - (won) Closing Price Target Price(12M) 2020.07.06 Buy W1,270,000(12M) -34.3% -21.7% 1,400,000 2020.06.07 Buy W1,000,000(12M) -13.1% -3.6% 1,200,000 2020.05.13 Buy W900,000(12M) -13.1% -9.3% 1,000,000 2020.02.28 Buy W850,000(12M) -23.8% -12.1% 800,000 2020.02.12 Buy W800,000(12M) -17.2% -14.1% 600,000 2019.05.20 Buy W750,000(12M) -29.4% -10.4% 400,000 2019.02.13 Buy W620,000(12M) -22.9% -15.2% 200,000 2018.12.04 Buy W650,000(12M) -26.6% -21.7% 0 '18.10 '19.2 '19.6 '19.10 '20.2 '20.6 '20.10 2018.11.02 Buy W600,000(12M) -21.5% -14.7%

NH Investment & Securities stock ratings 1. Rating based on a stock’s forecasted absolute return over a period of 12 months from the date of publication.

l Buy: Greater than +15% l Hold: -15% to +15% l Sell: Less than -15% 2. Regarding listed companies under NH I&S’ coverage, our stock ratings break down as follows (as of Oct 16, 2020).

l NH I&S’ stock rating distribution Buy Hold Sell 70.3% 29.2% 0.5% - The stock rating on an individual company can change at irregular intervals. Our stock rating distribution is calculated on a weekly basis.

Compliance notice

l NH I&S does not have a stake greater than or equal to 1% in NCSOFT as of the preparation date. l NH I&S has not provided this material to any institutional investor or other third party in advance. l The analyst and his/her spouse do not own any securities of NCSOFT as of the preparation date. l NH I&S is an issuer and liquidity provider of ELWs taking NCSOFT as an underlying asset. l This report correctly reflects the analyst’s opinion and was written without any external influence or intervention.

Disclosures The research is based on current public information that NH I&S considers reliable, but NH I&S does not represent it as accurate or complete and it should not be relied on as such. Furthermore, the research does not take into account particular investment objectives, financial situations or individual client needs, and NH I&S is in no way legally responsible for future returns or loss of original capital. All materials in this report are the intellectual property of NH I&S. Copying, distributing, transmitting, transforming or lending of this material without NH I&S' consent is prohibited.