NCsoft (036570 KS ) A compelling buy

Game 4Q18 review: Earnings come in slightly below our expectation Results Comment For 4Q18, NCsoft reported revenue of W399.7bn (-1% QoQ, -25% YoY). Operating profit February 13, 2019 fell to W112.6bn (-19% QoQ, -41% YoY), due to the recognition of bonus payouts and a one-off payment for the signing of new players for the NC Dinos baseball team.

Both revenue and operating profit fell slightly short of our estimates (W407bn and W131bn, respectively). However, revenue from M continued to grow (+3% (Maintain) Buy QoQ), confirming a longer lifecycle for mobile titles.

Target Price (12M, W) 700,000 New title release schedule has yet to be confirmed Investors were looking forward to more clarity on the new-title release schedule, as the Share Price (02/12/19, W) 433,500 company has several times mentioned that it has up to five new mobile titles set for release in 2019. However, it did not offer a timeline for the first mobile title re lease Expected Return 61% during the earnings call.

Nevertheless, the company stressed that its plan to globally release blockbuster mobile titles such as Lineage II M , Aion II , and Blade & Soul II in 2019 remains unchanged. In OP (18P, Wbn) 615 addition, a beta test for the upcoming PC/console game The Lineage will be carried out Consensus OP (18F, Wbn) 632 as scheduled in mid-2019. EPS Growth (18P, %) -5.1 No changes to the big picture; recommend Buy from a medium-term perspective Market EPS Growth (18F, %) 5.1 P/E (18P, x) 24.4 We made marginal changes to our 2019 earnings forecast, reflecting the 4Q18 Market P/E (18F, x) 9.1 earnings release (see Table 1). Although we think the release of Lineage II M is likely to KOSPI 2,190.47 be delayed from 2Q19 to 3Q19, our assumption regarding the 2019 release of blockbuster mobile titles is intact. Market Cap (Wbn) 9,511 Shares Outstanding (mn) 22 Despite the absence of new title releases, the outlook for 1Q-2Q19 is solid in ligh t of nd Free Float (%) 81.9 large-scale updates to Lineage M (scheduled to be unveiled on February 22 ) and Foreign Ownership (%) 49.0 Lineage Remastered (for which a second test is underway). Beta (12M) 0.78 NCsoft’s shares typically see a boost in the quarter prior to when new title releases 52-Week Low 332,500 translate into earnings. Accordingly, we expect the stock to gain momentum from 52-Week High 512,000 either 1Q19 (if new title releases begin in 2Q19) or 2Q19 (if releases are delayed to (%) 1M 6M 12M 3Q19). Absolute -11.4 20.1 10.4 Although the absence of a clear timeline for new titles is disappointing, we maintain Relative -16.1 25.1 20.3 our Buy rating in light of the company’s upcoming new blockbuster titles, aggressive foray into global markets, and platform expansion (consoles), as well as the rise of the 120 NCsoft KOSPI 110 cloud gaming market. Our target price of W700,000 is based on the upper end of the 100 stock's P/E band (24.1x) and our 2019F EPS. 90

80 70 60 1.18 5.18 9.18 1.19

Mirae Asset Daewoo Co., Ltd.

[ Internet ] FY (Dec.) 12/15 12/16 12/17 12/18P 12/19F 12/20F Revenue (Wbn) 838 984 1,759 1,715 2,091 2,339 Chang -kwean Kim +822 -3774 -1614 OP (Wbn) 237 329 585 615 847 1,070 [email protected] OP margin (%) 28.3 33.4 33.3 35.9 40.5 45.7

NP (Wbn) 165 272 441 421 624 745 EPS (W) 7,542 12,416 20,104 19,084 28,464 33,953 ROE (%) 10.6 14.9 19.1 14.7 19.4 19.8

P/E (x) 28.2 19.9 22.3 24.4 15.2 12.8 P/B (x) 2.6 2.7 3.4 3.3 2.6 2.3 Dividend yield (%) 1.3 1.5 1.6 1.6 1.7 1.7 Note: All figures are based on consolidated K-IFRS; NP refers to net profit attributable to controlling interests Source: Company data, Mirae Asset Daewoo Research estimates

February 13, 2019 NCsoft

Table 1. Earnings forecast revisions (Wbn, %)

Previous Revised % chg. Notes 2019F 2020F 2019F 2020F 2019F 2020F Revenue 2,099 2,337 2,091 2,339 -0.4 0.1 Operating profit 884 1,070 847 1,070 -4.2 0.0 Net profit 640 757 629 750 -1.7 -0.9 Reflects 4Q18 earnings OP margin 42.1 45.8 40.5 45.7 - - Net margin 30.5 32.4 30.1 32.0 - - Source: Company data, Mirae Asset Daewoo Research estimates

Table 2. Quarterly and annual earnings (Wbn, % ) 1Q18 2Q18 3Q18 4Q18P 1Q19F 2Q19F 3Q19F 4Q19F 2017 2018P 2019F 2020F

Revenue 475 436 404 400 399 406 607 679 1,759 1,715 2,091 2,339 Lineage 28 42 40 39 37 41 39 42 154 150 158 146 Lineage II 14 13 16 21 18 14 15 15 66 64 63 59 Aion 19 16 16 13 15 14 14 15 47 63 57 54 Blade & Soul 34 31 30 25 28 26 27 28 161 120 108 89 2 24 20 21 16 18 17 18 19 83 80 72 69 Mobile games 264 210 216 223 220 230 430 494 995 913 1,373 1,236 Other 8 13 12 11 12 11 12 12 50 44 47 45 Royalties 84 92 52 53 52 53 53 54 203 282 212 247 Operating profit 204 160 139 113 123 122 264 337 585 615 847 1,070 OP margin 42.9 36.5 34.4 28.3 30.9 30.1 43.5 49.6 33.3 35.9 40.5 45.7 Net profit 119 140 94 68 83 89 199 258 444 421 629 750 Net margin 25.1 32.1 23.4 16.9 20.7 22.0 32.7 38.0 25.2 24.6 30.1 32.0 YoY growth Revenue 98.3 68.8 -44.5 -24.9 -16.0 -6.9 50.2 69.7 78.8 -2.5 22.0 11.9 Lineage -45.1 24.5 14.0 15.7 29.8 -2.9 -3.8 7.3 -58.9 -3.0 5.7 -7.7 Lineage II -22.7 -19.9 0.0 37.0 27.6 8.1 -2.2 -25.5 -14.7 -2.9 -1.0 -6.8 Aion 41.1 44.3 61.1 0.4 -22.6 -13.0 -14.1 18.3 -34.6 35.2 -9.9 -5.0 Blade & Soul -23.9 -21.4 -20.8 -36.8 -18.7 -14.3 -10.6 10.5 -11.6 -25.8 -9.4 -17.8 66.2 46.6 4.0 -55.0 -22.5 -14.3 -15.7 21.7 8.1 -3.2 -10.0 -3.8 Mobile games 1028.2 124.0 -60.7 -31.8 -16.8 9.4 98.5 121.7 4935.0 -8.2 50.4 -10.0 Other -24.8 -15.6 -6.5 2.2 46.2 -9.8 -7.2 11.2 -15.1 -11.3 6.4 -3.0 Royalties 32.5 155.8 18.3 -10.3 -37.6 -42.7 2.2 1.2 66.0 38.9 -24.7 16.4 Operating profit 569.1 324.8 -57.6 -40.1 -39.4 -23.3 89.9 197.6 77.8 5.1 37.8 26.3 Net profit 584.9 355.0 -65.7 -44.0 -30.7 -36.3 110.2 281.7 63.6 -5.0 49.1 19.2 Source: Company data, Mirae Asset Daewoo Research estimates

Mirae Asset Daewoo Research 2 February 13, 2019 NCsoft

Table 3. Valuation table (Wbn, x, %) Revenue Operating profit Net profit EV/EBITDA P/E P/B ROE Company Market cap 19F 20F 19F 20F 19F 20F 19F 20F 19F 20F 19F 20F 19F 20F NCsoft (KOR) 9,511 2,052 2,477 796 1,020 602 766 10.0 7.9 15.8 12.4 2.9 2.4 19.9 20.9 Netmarble 10,061 2,066 2,605 265 498 224 373 23.3 13.7 45.2 27.1 2.2 2.0 5.1 8.1 Com2Us 1,530 578 651 187 214 155 180 4.3 3.7 9.9 8.5 1.5 1.3 16.4 16.5 NHN Entertainment 1,223 1,258 1,480 77 99 120 78 8.8 7.3 11.1 15.9 0.7 0.7 7.9 4.9 Pearl Abyss 2,550 414 616 184 280 161 226 11.9 7.7 15.3 11.1 5.9 3.8 46.4 43.3 Webzen 678 206 225 64 74 53 61 8.3 7.3 12.9 11.2 1.7 1.5 15.1 14.9 DoubleU Games 1,031 544 598 172 196 116 137 7.1 6.4 9.2 7.4 1.6 1.3 21.3 20.8 WeMade 581 122 139 1 6 11 10 73.0 45.8 52.9 57.4 1.9 1.9 3.8 3.5 Activision Blizzard (US) 34,486 8,381 8,190 2,824 2,731 2,254 2,211 11.2 11.2 15.5 15.9 2.7 2.4 17.2 15.2 Electronic Arts 32,826 5,372 5,647 1,554 1,699 1,339 1,441 16.3 15.2 24.9 22.9 5.6 5.1 23.0 21.5 Take-Two Interactive 11,914 3,296 3,108 727 797 625 647 12.9 12.0 19.8 18.9 4.9 4.0 33.6 18.6 Zynga 5,048 1,322 1,644 233 306 221 272 16.7 12.4 23.5 18.6 2.6 2.3 9.0 13.5 Glu Mobile 1,501 505 575 64 99 64 92 21.7 15.0 26.3 18.8 6.5 5.6 26.0 28.4 Ubisoft (FR) 9,746 2,654 2,900 555 659 468 535 7.5 6.8 22.7 20.4 6.4 4.7 28.3 25.0 Nintendo (JP) 42,249 12,679 14,034 2,704 3,668 2,019 2,666 11.5 8.3 17.9 13.6 2.4 2.2 14.1 17.1 Nexon 15,234 2,813 2,997 1,153 1,254 933 975 9.4 8.7 16.0 15.4 2.3 2.0 15.5 13.7 Square Enix 4,181 2,603 2,815 297 406 213 275 7.8 5.8 18.9 14.4 1.9 1.8 10.2 13.0 DeNA 2,591 1,381 1,425 176 202 133 148 5.1 4.6 18.8 16.9 0.9 0.9 5.3 5.5 GungHo Online 2,846 903 882 235 211 152 136 8.4 8.8 15.1 16.7 2.5 2.2 20.8 15.8 GREE 1,109 773 813 80 92 59 65 2.8 2.6 17.9 16.7 0.9 0.9 5.1 5.4 Tencent (CH) 481,975 52,279 67,554 16,870 19,126 12,837 15,627 25.1 21.4 36.2 30.5 8.6 6.8 26.7 24.3 NetEase 35,537 11,209 13,992 1,284 1,550 1,407 1,680 20.7 16.6 24.8 20.7 4.1 3.5 13.8 15.2 Kingsoft 3,118 948 1,305 -58 74 37 137 40.8 10.9 70.2 21.0 1.5 1.4 3.2 5.7 Youzu Interactive 2,727 618 773 149 190 156 191 17.0 14.0 17.7 14.4 3.3 2.8 19.0 19.2 Changyou 1,120 519 495 112 128 120 118 5.0 5.0 10.2 10.4 1.2 1.1 12.4 11.5 Average 15.5 11.2 22.7 18.3 3.1 2.6 16.8 16.1 Note: Market cap, revenue, operating profit, and net profit are based on Bloomberg figures (exchange rates as of Feb. 12) Source: Bloomberg, Mirae Asset Daewoo Resear ch

Mirae Asset Daewoo Research 3 February 13, 2019 NCsoft

NCsoft (036570 KS/Buy/TP: W700,000)

Comprehensive Income Statement (Summarized) Statement of Financial Condition (Summarized) (Wbn) 12/17 12/18F 12/19F 12/20F (Wbn) 12/17 12/18F 12/19F 12/20F Revenue 1,759 1,715 2,091 2,339 Current Assets 1,773 2,083 2,438 2,961 Cost of Sales 212 206 251 281 Cash and Cash Equivalents 187 539 554 854 Gross Profit 1,547 1,509 1,840 2,058 AR & Other Receivables 198 191 234 261 SG&A Expenses 962 894 993 988 Inventories 1 1 1 1 Operating Profit (Adj) 585 615 847 1,070 Other Current Assets 1,387 1,352 1,649 1,845 Operating Profit 585 615 847 1,070 Non-Current Assets 1,754 1,694 1,957 2,125 Non-Operating Profit 25 22 97 60 Investments in Associates 34 33 40 45 Net Financial Income 16 22 27 33 Property, Plant and Equipment 229 205 185 167 Net Gain from Inv in Associates -2 0 0 0 Intangible Assets 52 50 47 45 Pretax Profit 610 637 944 1,130 Total Assets 3,527 3,777 4,395 5,086 Income Tax 166 216 315 380 Current Liabilities 456 444 542 606 Profit from Continuing Operations 444 422 629 750 AP & Other Payables 43 42 51 57 Profit from Discontinued Operations 0 0 0 0 Short-Term Financial Liabilities 0 0 0 0 Net Profit 444 422 629 750 Other Current Liabilities 413 402 491 549 Controlling Interests 441 419 624 745 Non-Current Liabilities 342 337 378 405 Non-Controlling Interests 3 3 4 5 Long-Term Financial Liabilities 150 150 150 150 Total Comprehensive Profit 919 422 629 750 Other Non-Current Liabilities 192 187 228 255 Controlling Interests 916 420 627 748 Total Liabilities 797 781 920 1,011 Non-Controlling Interests 3 1 2 2 Controlling Interests 2,721 2,985 3,460 4,055 EBITDA 615 641 870 1,090 Capital Stock 11 11 11 11 FCF (Free Cash Flow) 566 439 742 830 Capital Surplus 433 433 433 433 EBITDA Margin (%) 35.0 37.4 41.6 46.6 Retained Earnings 1,906 2,170 2,644 3,239 Operating Profit Margin (%) 33.3 35.9 40.5 45.7 Non-Controlling Interests 8 11 15 20 Net Profit Margin (%) 25.1 24.4 29.8 31.9 Stockholders' Equity 2,729 2,996 3,475 4,075

Cash Flows (Summarized) Forecasts/Valuations (Summarized) (Wbn) 12/17 12/18F 12/19F 12/20F 12/17 12/18F 12/19F 12/20F Cash Flows from Op Activities 595 439 742 830 P/E (x) 22.3 24.4 15.2 12.8 Net Profit 444 422 629 750 P/CF (x) 15.6 16.0 10.1 8.5 Non-Cash Income and Expense 185 217 309 365 P/B (x) 3.4 3.3 2.6 2.3 Depreciation 27 24 21 18 EV/EBITDA (x) 13.7 13.3 8.6 6.4 Amortization 3 3 2 2 EPS (W) 20,104 19,084 28,464 33,953 Others 155 190 286 345 CFPS (W) 28,692 29,128 42,752 50,819 Chg in Working Capital 11 -9 90 59 BPS (W) 131,144 143,177 164,808 191,929 Chg in AR & Other Receivables -42 5 -41 -27 DPS (W) 7,280 6,050 7,280 7,280 Chg in Inventories 0 0 0 0 Payout ratio (%) 34.8 35.6 23.8 20.0 Chg in AP & Other Payables -4 0 0 0 Dividend Yield (%) 1.6 1.6 1.7 1.7 Income Tax Paid -63 -216 -315 -380 Revenue Growth (%) 78.8 -2.5 21.9 11.9 Cash Flows from Inv Activities -460 67 -569 -375 EBITDA Growth (%) 70.4 4.2 35.7 25.3 Chg in PP&E -28 0 0 0 Operating Profit Growth (%) 77.8 5.1 37.7 26.3 Chg in Intangible Assets -4 0 0 0 EPS Growth (%) 61.9 -5.1 49.2 19.3 Chg in Financial Assets -1,263 67 -569 -375 Accounts Receivable Turnover (x) 10.0 9.0 10.0 9.6 Others 835 0 0 0 Inventory Turnover (x) - - - - Cash Flows from Fin Activities -80 -155 -150 -150 Accounts Payable Turnover (x) 48.4 100.2 111.5 107.1 Chg in Financial Liabilities 0 0 0 0 ROA (%) 15.1 11.5 15.4 15.8 Chg in Equity 1 0 0 0 ROE (%) 19.1 14.7 19.4 19.8 Dividends Paid -81 -155 -150 -150 ROIC (%) - - - - Others 0 0 0 0 Liability to Equity Ratio (%) 29.2 26.1 26.5 24.8 Increase (Decrease) in Cash 42 351 15 300 Current Ratio (%) 388.9 468.8 449.8 488.5 Beginning Balance 145 187 539 554 Net Debt to Equity Ratio (%) -51.1 -57.1 -58.1 -61.6 Ending Balance 187 539 554 854 Interest Coverage Ratio (x) 179.6 188.6 259.9 328.2 Source: Company data, Mirae Asset Daewoo Research estimates

Mirae Asset Daewoo Research 4 February 13, 2019 NCsoft

APPENDIX 1

Important Disclosures & Disclaimers 2-Year Rating and Target Price History

Company (Code) Date Rating Target Price (W) NCsoft NCsoft (036570) 11/26/2018 Buy 700,000 800,000 08/27/2018 No Coverage 05/10/2018 Buy 500,000 600,000 04/16/2018 Buy 600,000 09/26/2017 Buy 640,000 400,000 07/09/2017 Buy 600,000 200,000 05/01/2017 Buy 500,000

01/02/2017 No Coverage 0 Feb 17 Feb 18 Feb 19

Stock Ratings Industry Ratings Buy : Relative performance of 20% or greater Overweight : Fundamentals are favorable or improving Trading Buy : Relative performance of 10% or greater, but with volatility Neutral : Fundamentals are steady without any material changes Hold : Relative performance of -10% and 10% Underweight : Fundamentals are unfavorable or worsening Sell : Relative performance of -10% Ratings and Target Price History (Share price (─), Target price (▬), Not covered ( ■), Buy (▲), Trading Buy (■), Hold (●), Sell ( ◆)) * Our investment rating is a guide to the relative return of the stock versus the market over the next 12 months. * Although it is not part of the official ratings at Mirae Asset Daewoo Co., Ltd., we may call a trading opportunity in case there is a technical or short-term material development. * The target price was determined by the research analyst through valuation methods discussed in this report, in part based on the analyst’s estimate of future earnings. * The achievement of the target price may be impeded by risks related to the subject securities and companies, as well as general market and economic conditions.

Equity Ratings Distribution & Investment Banking Services Buy Trading Buy Hold Sell Equity Ratings Distribution 81.28% 9.63% 9.09% 0.00% Investment Banking Services 84.61% 3.85% 11.54% 0.00% * Based on recommendations in the last 12-months (as of December 31, 2018)

Disclosures As of the publication date, Mirae Asset Daewoo Co., Ltd. has acted as a liquidity provider for equity-linked warrants backed by shares of NCsoft as an underlying asset; other than this, Mirae Asset Daewoo has no other special interests in the covered companies.

Analyst Certification The research analysts who prepared this report (the “Analysts”) are registered with the Korea Financial Investment Association and are subject to Korean securities regulations. They are neither registered as research analysts in any other jurisdiction nor subject to the laws or regulations thereof. Each Analyst responsible for the preparation of this report certifies that (i) all views expressed in this report accurately reflect the personal views of the Analyst about any and all of the issuers and securities named in this report and (ii) no part of the compensation of the Analyst was, is, or will be directly or indirectly related to the specific recommendations or views contained in this report. Mirae Asset Daewoo Co., Ltd. (“Mirae Asset Daewoo”) policy prohibits its Analysts and members of their households from owning securities of any company in the Analyst’s area of coverage, and the Analysts do not serve as an officer, director or advisory board member of the subject companies. Except as otherwise specified herein, the Analysts have not received any compensation or any other benefits from the subject companies in the past 12 months and have not been promised the same in connection with this report. Like all employees of Mirae Asset Daewoo, the Analysts receive compensation that is determined by overall firm profitability, which includes revenues from, among other business units, the institutional equities, investment banking, proprietary trading and private client division. At the time of publication of this report, the Analysts do not know or have reason to know of any actual, material conflict of interest of the Analyst or Mirae Asset Daewoo except as otherwise stated herein.

Disclaimers This report was prepared by Mirae Asset Daewoo, a broker-dealer registered in the Republic of Korea and a member of the Korea Exchange. Information and opinions contained herein have been compiled in good faith and from sources believed to be reliable, but such information has not been independently verified and Mirae Asset Daewoo makes no guarantee, representation or warranty, express or implied, as to the fairness, accuracy, completeness or correctness of the information and opinions contained herein or of any translation into English from the Korean language. In case of an English translation of a report prepared in the Korean language, the original Korean language report may have been made available to investors in advance of this report. The intended recipients of this report are sophisticated institutional investors who have substantial knowledge of the local business environment, its common practices, laws and accounting principles and no person whose receipt or use of this report would violate any laws or regulations or subject Mirae Asset Daewoo or any of its affiliates to registration or licensing requirements in any jurisdiction shall receive or make any use hereof. This report is for general information purposes only and it is not and shall not be construed as an offer or a solicitation of an offer to effect transactions in any securities or other financial instruments. The report does not constitute investment advice to any person and such person shall not be treated as a client of Mirae Asset Daewoo by virtue of receiving this report. This report does not take into account the particular investment objectives, financial

Mirae Asset Daewoo Research 5 February 13, 2019 NCsoft

situations, or needs of individual clients. The report is not to be relied upon in substitution for the exercise of independent judgment. Information and opinions contained herein are as of the date hereof and are subject to change without notice. The price and value of the investments referred to in this report and the income from them may depreciate or appreciate, and investors may incur losses on investments. Past performance is not a guide to future performance. Future returns are not guaranteed, and a loss of original capital may occur. Mirae Asset Daewoo, its affiliates and their directors, officers, employees and agents do not accept any liability for any loss arising out of the use hereof. Mirae Asset Daewoo may have issued other reports that are inconsistent with, and reach different conclusions from, the opinions presented in this report. The reports may reflect different assumptions, views and analytical methods of the analysts who prepared them. Mirae Asset Daewoo may make investment decisions that are inconsistent with the opinions and views expressed in this research report. Mirae Asset Daewoo, its affiliates and their directors, officers, employees and agents may have long or short positions in any of the subject securities at any time and may make a purchase or sale, or offer to make a purchase or sale, of any such securities or other financial instruments from time to time in the open market or otherwise, in each case either as principals or agents. Mirae Asset Daewoo and its affiliates may have had, or may be expecting to enter into, business relationships with the subject companies to provide investment banking, market-making or other financial services as are permitted under applicable laws and regulations. No part of this document may be copied or reproduced in any manner or form or redistributed or published, in whole or in part, without the prior written consent of Mirae Asset Daewoo.

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Mirae Asset Daewoo Research 6 February 13, 2019 NCsoft

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Mirae Asset Daewoo Research 7