Ncsoft (036570 KS ) 2Q19 Earnings to Surprise to the Upside

NCsoft (036570 KS ) 2Q19 earnings to surprise to the upside

Game Lineage M user and daily revenue growth to be long-lasting Company Report Lineage M exhibited an increase in users and daily revenue after undergoing several April 10, 2019 updates in June, September, and December 2018. Daily revenue subsequently plateaued in January-February 2019, but following the “Eclipse” update on March 6 th , the number of users has returned to levels seen in 4Q17 (when the game was initially released), and daily revenue (W2.4bn in 3Q18 and W2.5bn in 4Q18) has increased. (Maintain) Buy Lineage M unveiled a new update called “World Dungeon: Falling Island” on April 3 rd . In our view, the latest update—a “battle royale” that lets 1,000 players fight in the same Target Price (12M, W) 700,000 space until only one survivor remains—represents a significant improvement in the technology and playability of mobile MMORPGs. Share Price (04/09/19, W) 496,000 Following the sale of “Dragon Stone,” a W55,000 monthl y subscription item launched on March 6 th , Lineage M ’s conversion rate has been rising. As such, we expect the Expected Return 41% recent increase in daily revenue to continue throughout 2019. Lineage M had a 10% conversion rate and monthly ARPU of around W430,000 (our estimate) in 2018. Its player base was previously divided into free players and heavy-paying players, who OP (19F, Wbn) 852 tend to spend millions of won per month. Consensus OP (19F, Wbn) 707 We believe a large portion of the game’s free players (who account for 90% of all EPS Growth (19F, %) 49.9 Lineage M players) are converting to paying players through the purchase of "Dragon Market EPS Growth (19F, %) -13.8 Stone, which is essentially a monthly subscription item. We thus believe the March P/E (19F, x) 17.4 increase in daily average revenue is more structural than temporary. Market P/E (19F, x) 11.7 KOSPI 2,213.56 1Q19 preview: Earnings to be in line with consensus; 2Q18 to surprise to the upside

Market Cap (Wbn) 10,882 For 1Q19, we forecast NCsoft to report revenue of W388bn and operating profit of Shares Outstanding (mn) 22 W115bn, in line with consensus expectations (W392.3bn and W121.4bn, respectively), Free Float (%) 81.9 as event effects were limited in the quarter. Foreign Ownership (%) 49.5 Looking to 2Q19, we forecast revenue of W459bn and operating profit of W158bn, Beta (12M) 0.65 which are far above the current consensus (W402.9bn and W125.2bn, respectively). 52-Week Low 332,500 Earnings should be boosted by: 1) effects of the Lineage M March/April updates and 52-Week High 512,000 sale of Dragon Stone; 2) effects of the Lineage Remastered (PC) update on March 27 th ; (%) 1M 6M 12M and 3) revenue from the launch of Lineage M in Japan, expected in May-June. Absolute 15.2 18.0 23.1 Foreign buying continues; maintain Buy and TP of W700,000 Relative 11.3 20.1 35.9 We project earnings to improve much more sharply than market expectations, driven

130 NCsoft KOSPI by existing titles alone. Meanwhile, upcoming title Lineage II M , which is expected to 120 be a full-3D mobile MMORPG, is believed to be in the final stages of development, with 110 the company currently working on improving the game’s graphics. A r ecent inflow of 100 foreign investo rs has raised the foreign ownership in the company to a record 49.46%. 90 In addition to BlackRock, the National Pension Service (NPS) also announced on April 80 8th that it had acquired additional shares in the company. As the cloud gaming market 70 3.18 7.18 11.18 3.19 gains increasing attention, game companies with intellectual properties have seen their values grow, with Nexon (3659 JP/CP: JPY1,729) reportedly valu ed at US$15bn (W17tr) in the M&A market. We maintain our Buy rating and target price of W700,000 Mirae Asset Daewoo Co., Ltd. on NCsoft. [ Internet ] FY (12) 12/16 12/17 12/18 12/19F 12/20F 12/21F Revenue (Wbn) 984 1,759 1,715 2,116 2,353 2,882 Chang -kwean Kim +822 -3774 -1614 OP (Wbn) 329 585 615 852 1,066 1,497 [email protected] OP margin (%) 33.4 33.3 35.9 40.3 45.3 51.9

NP (Wbn) 272 441 422 632 747 1,041 EPS (W) 12,416 20,104 19,061 28,577 33,796 47,429 ROE (%) 14.9 19.1 16.4 23.9 23.3 26.4

P/E (x) 19.9 22.3 24.5 17.4 14.7 10.5 P/B (x) 2.7 3.4 3.7 3.3 2.8 2.3 Dividend yield (%) 1.5 1.6 1.3 1.2 1.2 1.2 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

April 10, 2019 NCsoft

Table 1. Quarterly and annual earnings (Wbn, %) 1Q18 2Q18 3Q18 4Q18 1Q19F 2Q19F 3Q19F 4Q19F 2018 2019F 2020F Sales 475 436 404 400 388 459 602 667 1,715 2,116 2,353 Lineage 28 42 40 39 31 49 45 44 150 168 155 Lineage 2 14 13 16 21 16 15 15 17 64 63 59 Aion 19 16 16 13 15 14 14 15 63 57 54 Blade & Soul 34 31 30 25 28 26 27 28 120 108 89 Guild Wars 2 24 20 21 16 14 15 15 13 80 57 55 Mobile games 264 210 216 223 210 270 420 484 913 1,383 1,245 Others 8 13 12 11 12 11 12 12 44 47 45 Royalties 84 92 52 53 63 58 56 54 282 232 257 OP 204 160 139 113 115 158 260 319 615 852 1,066 OPM 42.9 36.5 34.4 28.3 29.7 34.4 43.2 47.8 35.9 40.3 45.3 NI 119 140 94 68 77 113 196 246 422 632 747 Net margin 25.1 32.1 23.4 16.9 19.9 24.6 32.5 36.9 24.6 29.8 31.8 YoY growth Sales 98.3 68.8 -44.5 -24.9 -18.3 5.1 49.2 66.6 -2.5 23.4 11.2 Lineage -45.1 24.5 14.0 15.7 8.5 16.1 11.1 12.4 -3.0 12.3 -7.7 Lineage 2 -22.7 -19.9 0.0 37.0 13.5 15.6 -5.4 -18.3 -2.9 -1.0 -6.8 Aion 41.1 44.3 61.1 0.4 -22.6 -13.0 -14.1 18.3 35.2 -9.9 -5.0 Blade & Soul -23.9 -21.4 -20.8 -36.8 -18.7 -14.3 -10.6 10.5 -25.8 -9.4 -17.8 Guild Wars 2 66.2 46.6 4.0 -55.0 -39.4 -24.4 -30.0 -16.5 -3.2 -28.7 -3.8 Mobile games 1028.2 124.0 -60.7 -31.8 -20.6 28.5 93.9 117.2 -8.2 51.4 -10.0 Others -24.8 -15.6 -6.5 2.2 46.2 -9.8 -7.2 11.2 -11.3 6.4 -3.0 Royalties 32.5 155.8 18.3 -10.3 -24.6 -36.8 8.5 1.7 38.9 -17.5 10.6 OP 569.1 324.8 -57.6 -40.1 -43.3 -1.1 87.0 181.3 5.1 38.6 25.2 NI 584.9 355.0 -65.7 -44.0 -35.2 -19.7 107.4 263.6 -5.0 49.8 18.3 Source: Company data, Mirae Asset Daewoo Research estimates

Table 2. Earnings forecast revisions (Wbn, %) Previous Revised %chg. Notes 2019F 2020F 2019F 2020F 2019F 2020F Revenue 2,091 2,339 2,116 2,353 1.2 0.6

Operating profit 847 1,070 0.6 -0.3 852 1,066 Revised Lineage Net profit 629 750 632 747 0.4 -0.4 M revenue forecasts upward OP margin 40.5 45.7 40.3 45.3 - - Net profit 30.1 32 29.8 31.8 - - Source: Company data, Mirae Asset Daewoo Research estimates

Mirae Asset Daewoo Research 2 April 10, 2019 NCsoft

Figure 1. Lineage M ’s monthly unique visitor trend (08/18-03/19)

('000 persons) 50% increase over 200 January and February

150

100

50 08/18 09/18 10/18 11/18 12/18 01/19 02/19 03/19

Note: Based on Koreanclick’s estimates Source: KoreanClick, Mirae Asset Daewoo Research

Figure 2. Quarterly Lineage M revenue trend and forecast

(Wbn) 350 327 March 'Eclipse' and April 'World Dungeon' update effects 300

264 258 250 241 223 217 210 200

150 4Q17 1Q18 2Q18 3Q18 4Q18 1Q19(F) 2Q19(F)

Note 1: 1Q19F and 2Q19F revenues are based on Sensor Tower’s estimates, which differ from our estimates Note 2: 2Q19 revenue estimates are based on the assumption that revenue will remain the same as the levels in March Source: Sensor Tower, Mirae Asset Daewoo Research

Figure 3. Ranking of Lineage Remastered

3/22 3/25 3/28 3/31 4/3 4/6 5

15 'Lineage Remastered' released (March 27th) 17

Source: Gametrics, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 3 April 10, 2019 NCsoft

Figure 4. Lineage M Japan: Reservations to play before launch have exceeded the 500,000 mark

Source: Lineage M Japan homepage and twitter, Mirae Asset Daewoo Research

Figure 5. ARPU by major game (as of October 2018)

(W'000) 600

430 400

200 140 110

14 0 Lineage M Lineage 2: Revolution Black Desert M Modoo Marble

Source: SensorTower, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 4 April 10, 2019 NCsoft

Table 3. Estimates for ARPU and revenue per time spent Lineage Lineage2 Aion Blade & Soul Quarterly revenue (Wmn) 78,211 15,619 16,775 24,919 Based on domestic revenue in 1Q15 Monthly average revenue (Wmn) 26,070 5,206 5,592 8,306

% of PC café revenue is estimated based on past data in % of PC café revenue 10% 15% 20% 30% consideration of the characteristics of each game Monthly average revenue excluding 23,463 4,425 4,473 5,814 PC café revenue (Wmn) Monthly average active users Different from the company’s user data, due to the limited number of 102 29 26 60 (‘000 persons) samples Based on the company’s data for Lineage and our estimates for the Peak concurrent users 220 62 55 129 other games Number of Lineage’s monthly average active users: Number of peak (‘000 persons) 2.2 concurrent users provided by the company = 1:2.2 Based on this multiple, we estimated the number of peak concurrent

users for the other games The ratio of the number of peak concurrent users to total number of Mirae Asset Daewoo coefficient estimate 2 2 2 2 users Total users ( ‘000 persons) 440 125 110 258

Monthly ARPU (W’000) 53.3 35.5 40.5 22.6

Monthly average time spent 408,309 52,982 166,239 91,245 (‘000 minutes) Monthly average time spent (‘000 hours) 6,805 883 2,771 1,521

Monthly average time spent per user 15.5 7.1 25.1 5.9 (hours) ARPU per time spent (W) 3,448 5,011 1,615 3,823 Note: Due to small sample size and resulting low level of confidence, we used our estimates (based on the above statistics) for comparison purposes only Source: Company data, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 5 April 10, 2019 NCsoft

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

Comprehensive Income Statement (Summarized) Statement of Financial Condition (Summarized) (Wbn) 12/18 12/19F 12/20F 12/21F (Wbn) 12/18 12/19F 12/20F 12/21F Revenue 1,715 2,116 2,353 2,882 Current Assets 1,576 2,934 3,626 4,678 Cost of Sales 0 0 0 0 Cash and Cash Equivalents 186 1,217 1,718 2,340 Gross Profit 1,715 2,116 2,353 2,882 AR & Other Receivables 152 188 209 257 SG&A Expenses 1,100 1,264 1,286 1,385 Inventories 1 1 1 2 Operating Profit (Adj) 615 852 1,066 1,497 Other Current Assets 1,237 1,528 1,698 2,079 Operating Profit 615 852 1,066 1,497 Non-Current Assets 1,365 460 446 445 Non-Operating Profit 22 97 61 83 Investments in Associates 56 70 77 95 Net Financial Income 26 27 53 71 Property, Plant and Equipment 234 211 191 174 Net Gain from Inv in Associates -2 0 0 0 Intangible Assets 54 52 50 48 Pretax Profit 637 949 1,127 1,580 Total Assets 2,941 3,394 4,073 5,122 Income Tax 216 317 379 532 Current Liabilities 473 397 441 539 Profit from Continuing Operations 421 632 748 1,049 AP & Other Payables 27 33 37 45 Profit from Discontinued Operations 0 0 -1 0 Short-Term Financial Liabilities 155 5 5 5 Net Profit 421 632 747 1,049 Other Current Liabilities 291 359 399 489 Controlling Interests 418 627 741 1,041 Non-Current Liabilities 89 110 122 150 Non-Controlling Interests 3 5 6 8 Long-Term Financial Liabilities 0 0 0 0 Total Comprehensive Profit 80 632 747 1,049 Other Non-Current Liabilities 89 110 122 150 Controlling Interests 77 606 717 1,007 Total Liabilities 562 508 564 689 Non-Controlling Interests 3 25 30 42 Controlling Interests 2,368 2,870 3,487 4,403 EBITDA 643 877 1,088 1,516 Capital Stock 11 11 11 11 FCF (Free Cash Flow) 326 481 666 837 Capital Surplus 433 433 433 433 EBITDA Margin (%) 37.5 41.4 46.2 52.6 Retained Earnings 2,164 2,666 3,283 4,199 Operating Profit Margin (%) 35.9 40.3 45.3 51.9 Non-Controlling Interests 11 16 22 30 Net Profit Margin (%) 24.4 29.6 31.5 36.1 Stockholders' Equity 2,379 2,886 3,509 4,433

Cash Flows (Summarized) Forecasts/Valuations (Summarized) (Wbn) 12/18 12/19F 12/20F 12/21F 12/18 12/19F 12/20F 12/21F Cash Flows from Op Activities 353 481 666 837 P/E (x) 24.5 17.4 14.7 10.5 Net Profit 421 632 747 1,049 P/CF (x) 15.6 11.6 10.1 7.2 Non-Cash Income and Expense 233 303 335 468 P/B (x) 3.7 3.3 2.8 2.3 Depreciation 26 23 20 18 EV/EBITDA (x) 15.5 10.7 8.1 5.4 Amortization 2 2 2 2 EPS (W) 19,061 28,577 33,796 47,429 Others 205 278 313 448 CFPS (W) 29,813 42,600 49,352 69,119 Chg in Working Capital -56 -175 -103 -231 BPS (W) 127,548 150,446 178,563 220,314 Chg in AR & Other Receivables 45 -35 -20 -46 DPS (W) 6,050 6,050 6,050 6,050 Chg in Inventories 0 0 0 0 Payout ratio (%) 29.6 19.7 16.7 11.9 Chg in AP & Other Payables -1 0 0 1 Dividend Yield (%) 1.3 1.2 1.2 1.2 Income Tax Paid -281 -317 -379 -532 Revenue Growth (%) -2.5 23.4 11.2 22.5 Cash Flows from Inv Activities 68 -56 -33 -73 EBITDA Growth (%) 4.6 36.4 24.1 39.3 Chg in PP&E -26 0 0 0 Operating Profit Growth (%) 5.1 38.5 25.1 40.4 Chg in Intangible Assets -4 0 0 0 EPS Growth (%) -5.2 49.9 18.3 40.3 Chg in Financial Assets 2,422 -56 -33 -73 Accounts Receivable Turnover (x) 10.0 12.8 12.2 12.7 Others -2,324 0 0 0 Inventory Turnover (x) - - - - Cash Flows from Fin Activities -424 -275 -125 -125 Accounts Payable Turnover (x) 0.0 0.0 0.0 0.0 Chg in Financial Liabilities 5 -150 0 0 ROA (%) 13.0 19.9 20.0 22.8 Chg in Equity 0 0 0 0 ROE (%) 16.4 23.9 23.3 26.4 Dividends Paid -155 -125 -125 -125 ROIC (%) 65.6 47.1 52.4 66.0 Others -274 0 0 0 Liability to Equity Ratio (%) 23.6 17.6 16.1 15.6 Increase (Decrease) in Cash -2 1,031 501 622 Current Ratio (%) 333.2 738.1 821.7 867.1 Beginning Balance 187 186 1,217 1,718 Net Debt to Equity Ratio (%) -11.2 -52.1 -58.1 -61.6 Ending Balance 186 1,217 1,718 2,340 Interest Coverage Ratio (x) 184.7 487.1 9,635.6 13,527.3 Source: Company data, Mirae Asset Daewoo Research estimates

Mirae Asset Daewoo Research 6 April 10, 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 Apr 17 Apr 18 Apr 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 83.52% 8.24% 8.24% 0.00% Investment Banking Services 82.61% 4.35% 13.04% 0.00% * Based on recommendations in the last 12-months (as of March 31, 2019)

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. As of the publication date, Mirae Asset Daewoo Co., Ltd. and/or its affiliates own 1% or more of NCsoft`s shares outstanding.

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

Mirae Asset Daewoo Research 7 April 10, 2019 NCsoft

client of Mirae Asset Daewoo by virtue of receiving this report. This report does not take into account the particular investment objectives, financial 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 8 April 10, 2019 NCsoft

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