Company Report Feb 12, 2016

NCsoft (036570 KS)

Power of role-playing games

4Q15 review SW/SI  Sales came to W237.0bn (+1% YoY), operating profit W74.9bn (-14% YoY), and net profit BUY (M) W42.2bn (-32% YoY). By game, sales of “” came to W83.2bn (-14% YoY), “Lineage 2” TP: W280,000 (U) W220.0bn (+3% YoY), “Aion” W18.6bn (-11% YoY), “Blade & Soul” W32.4bn (+32% YoY), and “ 2” W37.3bn (+94% YoY), with overseas royalty income of W29.2bn (-10% YoY).

Sales of Lineage, Lineage 2, Aion, and Blade & Soul were strong thanks to updates and new Share price (won, Feb 11) 240,000 item launches. It is particularly encouraging that sales of old games Lineage 2 and Blade & Paid-in capital (Wbn) 11 Soul have grown for the past three years and that Lineage’s sales broke records. This is Market cap (Wbn) 5,263 thanks to the nature of role-playing games, in which the company excels. ’s sales BPS (won) 80,707 increased thanks to a feature pack launch, but missed expectations. In terms of expenses, Net debt to equity (%) -54.0 Shares outstanding 21,929,022 marketing and baseball club expenses rose, but earnings of existing games climbed, and Avg daily T/O (2M, Wbn) 31 thus, total earnings were in line with market estimates. In non-operating terms, the company Avg daily vol (2M, shrs) 138,946 booked W18.4bn in impairment of Ntreev Soft goodwill. 52-week high (won) 244,000 52-week low (won) 169,000 1Q16 forecast

Foreign ownership (%) 32.6  Earnings are likely to fall given the disappearing effects of game updates and events seen in Major shareholders (%) 4Q15, but the decline is unlikely to be huge, given solid earnings growth of old games. In NPS 13.6 addition, as cumulative users of Blade & Soul, launched on Jan 19 in North America and Europe, have exceeded 2mn, its 1Q16 and 2016 full-year earnings may beat estimates. Stock performance (%) 1M 3M 12M Maintain BUY; revise up target price to W280,000 Absolute 9.1 14.8 14.6 Relative 11.0 23.2 19.7  We believe old games will maintain robust earnings in 2016 thanks to launches in other Abs (US$) 10.2 10.8 5.0 regions (eg, Blade & Soul in Taiwan, North America, and Europe) and higher item sales

(Lineage, Lineage 2, Aion, Blade & Soul in Korea, and Guild Wars 2). Moreover, a mobile (won) (%) 300,000 140 game, developed in-house over the about four years, and a new online game “Master X 250,000 120 Master” (MXM), are set to be launched in 2016, and “Lineage Eternal” may also be released. 100 200,000 We believe new game momentum is stronger in 2016 than any other year. In particular, for 80 150,000 60 “Blade & Soul Mobile,” set to be launched in China in Mar 2016, local publisher Tencent is 100,000 40 likely to adopt a marketing blitz to recover mobile RPG market share from rival NetEase. Thus, 50,000 20 0 0 the mobile version may become as popular as its online version. Moreover, demand for online Feb-14 Feb-15 Feb-16 games has stagnated, but launches of new games have also declined (new online game NCsoft(LHS) Rel. to KOSPI(RHS) launches down from 48 in 2011 to 22 in 2014). We cannot rule out the possibility that online games will be more popular than expected. We revise up our target price to W280,000, given Source: Datastream the likely stellar earnings of old games and new mobile and online games in 2016.

Quarterly earnings Forecasts and valuations (K-IFRS, consolidate) (Wbn)

(Wbn) 4Q15E % YoY % QoQ Consens vs consens (%) FY ends Dec 2013A 2014A 2015E 2016E Sales 237 0.8 21.1 236 0.3 Sales 757 839 838 933 Operating profit 205 278 237 274 Operating profit 75 -14.3 48.1 73 2.7 Pre-tax profit 62 -33.6 19.9 82 -24.0 Net profit, CI 159 230 165 212 Net profit 42 -33.0 38.8 60 -29.9 % YoY 1.9 44.9 -28.2 28.4 24.0 16.9 31.9 24.8 Op margin (%) 31.6 -5.6 %pt +5.7 %pt 30.9 +0.7 %pt P/E (x) P/B (x) 3.0 2.6 3.0 2.7 Net margin (%) 17.8 -8.9 %pt +2.3 %pt 25.4 -7.6 %pt EV/EBITDA (x) 13.1 9.6 16.0 13.9 Source: Yuanta Securities ROE (%) 14.8 18.4 10.5 11.5 Note: OP = gross profit - SG&A Source: Yuanta Securities

NCsoft (036570 KS)

NCsoft: 4Q15 review and forecast (Wbn)

4Q14 1Q15 2Q15 3Q15 4Q15 1Q16E 2014 2015 2016E 2017E

Sales 235.1 188.1 217.5 195.7 237.0 213.3 838.7 838.3 933.0 1,082.3 Lineage 1 96.7 66.0 85.5 78.2 83.2 78.7 263.1 312.9 296.9 276.3

% YoY 29 61 50 14 -14 19 -9 19 -5 -7

Domestic sales 93.2 64.3 83.6 75.6 80.0 75.9 253.2 303.5 287.2 267.2

Overseas sales 3.5 1.8 1.9 2.6 3.2 2.8 9.9 9.4 9.7 9.1

Lineage 2 19.5 11.0 16.3 15.6 20.1 17.3 59.5 63.0 62.6 57.4 % YoY 25 -5 20 5 3 58 4 6 -1 -8

Domestic sales 11.2 5.9 8.1 6.7 10.0 7.7 30.9 30.7 30.6 26.9

Overseas sales 8.3 5.2 8.1 8.9 10.1 9.7 28.5 32.2 32.0 30.5

Aion 20.9 18.3 20.1 16.8 18.6 17.4 94.4 73.7 75.2 69.1 % YoY 17.5 15.0 17.0 14.1 16.0 14.8 79.2 62.1 62.5 57.5

Domestic sales 3.4 3.3 3.1 2.6 2.6 2.6 15.2 11.6 12.7 11.6

Blade & Soul 24.6 26.8 29.8 24.9 32.4 39.9 82.7 113.9 132.1 111.1 % YoY 18.7 17.0 16.7 15.9 22.0 18.7 71.6 71.6 68.6 60.3

Domestic sales 5.9 9.8 13.1 9.0 10.4 21.2 5.9 42.3 63.5 50.8

Guild Wars 2 19.3 20.0 22.5 20.7 37.3 21.3 85.6 100.5 79.7 70.5

Royalty income 32.4 25.6 21.0 22.9 29.2 22.4 136.8 98.7 95.6 89.7

WildStar 5.5 2.6 2.1 1.7 2.7 2.2 49.5 9.1 5.7 4.3

Mobile games ------100.0 200.0

MXM, lineage Eternal ------18.0 136.0

Expenses 147.8 143.2 150.4 145.1 162.1 145.9 560.5 600.8 658.7 740.1 Wages 81.7 85.9 81.4 80.9 76.7 80.5 308.8 324.9 341.3 366.7

Royalties paid 3.0 2.7 2.5 2.0 1.9 2.1 13.2 9.1 12.6 13.5

Payment commission 6.4 8.1 9.3 9.2 9.4 8.1 23.9 36.1 61.5 97.0

Box production 0.4 0.2 0.4 0.2 1.4 0.4 2.3 2.2 2.0 2.1

Freight, BDE, other 3.5 1.6 2.6 1.3 1.8 1.6 8.1 7.3 8.0 7.8

Marketing 8.6 4.3 8.4 8.0 13.5 7.3 32.7 34.2 40.9 48.4

Depreciation/amortization 8.5 8.9 8.3 9.2 7.9 8.9 37.0 34.2 34.2 33.9

Other 35.7 31.5 37.5 34.3 49.6 36.9 134.5 152.9 158.2 170.7

Operating profit 87.4 44.9 67.1 50.6 74.9 67.5 278.2 237.5 274.3 342.2 Operating margin (%) 37 24 31 26 32 32 33 28 29 32

Source: Company data, Yuanta Securities

2 Company Report

Target price calculation (won)

Net cash and cash equivalents (B) 1,153,758,985,702 Real estate (book value) 240,081,769,977 Real estate (fair value)(C) 329,940,247,977

Acquisition price of Netmarble Games equity on Feb 16, 2015 380,264,907,420

Netmarble Games value as of Feb 16, 2015 3,500,001,735,170

2016E net profit 211,800,000,000 Target P/E (x) 20.2

Value of operations (A) 4,278,360,000,000

EV (A + B + C + D) 6,142,324,141,099

Shares out 21,929,022 Value per share 280,100

Source: Yuanta Securities

3 NCsoft (036570 KS)

NCsoft (036570 KS) pro forma financial statements (K-IFRS, consolidated)

Statement of comprehensive income Statement of financial position FY ends Dec (Wbn) 2013A 2014A 2015E 2016E 2017E FY ends Dec (Wbn) 2013A 2014A 2015E 2016E 2017E Sales 757 839 838 933 1,082 Current assets 786 1,020 1,083 1,222 1,376 Cost of sales 220 220 203 243 287 Cash & cash equiv 123 203 514 598 687 Gross profit 536 618 636 690 795 Accts rec & other 90 98 92 103 120 SG&A 331 340 398 416 453 Inventory 1 1 1 1 1 Operating profit 205 278 237 274 342 Non-current assets 694 679 1,136 1,191 1,251 EBITDA 241 315 271 302 368 Tangible assets 248 241 233 221 212 Non-op profit/loss 11 11 2 10 20 Investment in affiliate 23 29 36 43 51 Forex gain/loss -2 5 11 11 13 Other non-current 22 27 502 558 614 Net interest inc 16 17 20 23 26 Total assets 1,480 1,699 2,219 2,414 2,627 Equity-meth gain/loss 4 -2 -2 -1 -1 Current liabilities 252 245 338 387 411 Other -8 -9 -28 -23 -18 Accts payable & other 98 97 99 135 147 Net prof before income tax 216 289 239 285 362 ST financial liabilities 3 0 0 0 0 Income tax 58 61 73 71 87 Liquid LT liabilities 0 0 0 0 0 Net profit from cont op 159 228 166 214 275 Non-current liabilities 69 78 92 100 109 Net profit from discont op 0 0 0 0 0 LT financial liabilities 0 0 0 -1 -1 Net profit 159 228 166 214 275 Debentures 0 0 0 0 0 NP for controlling int 159 230 165 212 273 Total liabilities 321 323 430 487 520 Total comprehensive inc 148 224 169 218 280 Equity, controlling int 1,141 1,361 1,769 1,906 2,084 TCI for controlling int 151 228 166 214 276 Paid-in capital 11 11 11 11 11 Note: Operating profit calculation same as K-GAAP (sales - COGS - SG&A). Capital surplus 221 222 442 442 442 Retained earnings 1,017 1,234 1,328 1,465 1,642 Equity, non-control int 18 15 19 21 23 Total equity 1,159 1,376 1,789 1,927 2,107 Net debt -669 -897 -955 -1,081 -1,214 Total debt 9 1 1 -1 -2

Cash flow statement Valuation FY ends Dec (Wbn) 2013A 2014A 2015E 2016E 2017E FY ends Dec 2013A 2014A 2015E 2016E 2017E Operating cash flow 236 264 227 300 328 EPS (won) 7,245 10,487 7,525 9,659 12,460 Net profit 159 228 166 214 275 BPS (won) 57,222 68,130 81,038 87,309 95,440 Depreciation & amort 29 30 28 26 25 EBITDA/shr (won) 10,983 14,362 12,361 13,769 16,794 Forex gain/loss 0 -5 -11 -11 -13 SPS (won) 34,533 38,249 38,228 42,549 49,355 Affiliate invest gain/loss 0 0 0 1 1 DPS (won) 600 3,430 3,430 4,384 5,630 Inc(dec) net working cap -16 -21 23 36 5 P/E (x) 24.0 16.9 31.9 24.8 19.3 Other 64 32 20 35 34 P/B (x) 3.0 2.6 3.0 2.7 2.5 Investing cash flow -214 -176 -247 -196 -202 EV/EBITDA (x) 13.1 9.6 16.0 13.9 11.1 Investment -49 -28 -498 -64 -64 PSR (x) 5.0 4.6 6.3 5.6 4.9 Inc in tangible assets -102 -19 -16 -18 -19 Dec in tangible assets 0 1 4 4 4 Key financial data Other -63 -129 264 -119 -123 FY ends Dec 2013A 2014A 2015E 2016E 2017E Financing cash flow -17 -12 322 -75 -96 Sales (% YoY) 0.4 10.8 -0.1 11.3 16.0 Inc(dec) in ST fin liab -6 -3 0 0 0 Operating profit (%YoY) 35.7 35.5 -14.6 15.5 24.7 Inc(dec) in LT fin liab 0 0 0 0 0 NP, CI (%YoY) 1.9 44.9 -28.2 28.4 29.0 Inc(dec) in equity 0 0 0 0 0 Gross margin (%) 70.9 73.7 75.8 74.0 73.5 Cash dividend -12 -12 -69 -75 -96 Operating margin (%) 27.1 33.2 28.3 29.4 31.6 Other 1 3 391 0 0 NP, CI margin (%) 21.0 27.4 19.7 22.7 25.2 Other cash flow -5 4 8 56 58 EBITDA margin (%) 31.8 37.5 32.3 32.4 34.0 Inc (dec) in cash & eq 0 79 311 85 88 ROIC (%) 45.2 101.6 110.8 327.7 793.4 Beginning cash & equiv 123 123 203 514 598 ROA (%) 11.4 14.5 8.4 9.1 10.8 Ending cash & equiv 123 203 514 598 687 ROE (%) 14.8 18.4 10.5 11.5 13.7 NOPLAT 205 278 237 274 342 Debt-to-equity (%) 27.7 23.5 24.1 25.2 24.7 FCF 69 215 206 252 272 Net debt-to-equity (%) -58.7 -65.9 -54.0 -56.7 -58.3 OP/financing cost (x) 636.0 9,729.2 20,732.1 11,975.7 9,958.5 Note: EPS, BPS, P/E and P/B are based on controlling interest For valuation metrics such as P/E, historical figures are based on annual averages, estimates on current price For ROA or ROE, assets and equity are averages of end-of-year figures for given year and year prior Data to 2010 based on K-GAAP and from 2011, K-IFRS Source: Yuanta Securities

4 Company Report

P/E band P/B band

(W'000) (W'000) 700 Price (adj) 900 Price (adj) 4.4 x 1.5 x 600 800 16.6 x 3.2 x 28.7 x 700 500 5.0 x 40.9 x 600 6.7 x 53.0 x 400 500 8.4 x

300 400 300 200 200 100 100 0 0 Jan-08 Jan-11 Jan-14 Jan-17 Jan-08 Jan-11 Jan-14 Jan-17

NCsoft (036570 KS) ratings and target price history

(won) Date Rating TP (won) 350,000 Current Price 2016-02-12 BUY 280,000 Target Price 300,000 2016-01-27 BUY 260,000 250,000 2016-01-04 BUY 260,000 200,000 2015-11-05 BUY 260,000 2015-11-02 BUY 260,000 150,000 2015-10-05 BUY 260,000 100,000 2015-08-31 BUY 260,000 50,000 2015-08-03 BUY 260,000 0 2015-07-29 BUY 260,000 Feb-14 Aug-14 Feb-15 Aug-15 Feb-16 2015-06-29 BUY 250,000

Source: Yuanta Securities

Current distribution of Yuanta Securities Korea ratings Rating Share (%) STRONG BUY 1.7 BUY 80.9 HOLD 17.3 SELL 0.0 Total 100.0 Note: As of Feb 9, 2016 ※ Excluding reports written or published by overseas affiliates

5 NCsoft (036570 KS)

Disclosures & disclaimers This research report has been prepared for informational purposes only; it does not constitute an offer or a solicitation of an offer to buy or sell any securities or other financial instruments. The information and data contained in this report have been obtained from sources we consider reliable; however, we make no representation that the information provided in this report is accurate or complete, and it should not be relied on as such. The recipient of this report should use his/her independent judgment regarding the sale or purchase of any securities or financial instruments mentioned herein. We disclaim any liability whatsoever for any direct or consequential loss arising from any use of this report or its contents. This report is for our clients only. It is copyrighted material and may not be reproduced, transmitted, quoted, or distributed in any manner without the prior written consent of Yuanta Securities Korea Co., Ltd.

As of the publication date of this report, Yuanta Securities Korea Co., Ltd. does not own a stake in excess of 1%, nor does it have any interest whatsoever, in the subject company (ies). The material contained herein was not disclosed by Yuanta Securities Korea Co., Ltd. to any institutional investors or third parties prior to its publication. The analyst (s) of this report or the analyst (s)’ spouse does not have any financial interest in the securities of the subject company (ies) mentioned herein, nor financial interest of any nature related to the subject company (ies) (including without limitation, whether it consists of any option, right, warrant, future, long or short position), as of the publication date of this report. Analyst certification I/We, as the research analyst/analysts who prepared this research report, do hereby certify that the views expressed in this report accurately reflect my/our personal views about the subject securities discussed in this report. Stock and sector ratings  Stock ratings include an Investment Rating (Strong Buy, Buy, Hold, Sell) based on the expected absolute return of a stock over the next 6 -12 months.  - Strong Buy: Expected to return 30% or more - Buy: Expected to return between 10% and 30% - Hold: Expected to return between -10 and +10% - Sell: Expected to return -10% or less  Sector ratings suggest 6 to 12 - month forward investment weighting of a given sector compared to its market capitalization weighting. - Overweight: Investment weighting is higher than the market capitalization weighting - Neutral: Investment weighting is equal to the market capitalization weighting - Underweight: Investment weighting is lower than the market capitalization weighting

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