NCsoft (036570 KS) OP to double in 1Q20 and 2020

Game 4Q19 review: Underlying OP much better than expected Company Report For 4Q19, NCsoft announced revenue of W533.8bn (+34% YoY) and operating profit of February 13, 2020 W141.1bn (+25% YoY). Operating profit missed the consensus (W185bn), but this was primarily because of changes to the revenue recognition method for mobile titles (from a gross to a partial basis). Due to the changes, 20% of Lineage 2M revenue and less than 10% of Lineage M revenue in the quarter was deferred to 1Q20. (Maintain) Buy Labor expenses were also much higher than anticipated, due to the front-loading of employee incentives related to the successful release of Lineage 2M. In 4Q19, Lineage Target Price (12M, W) 910,000 2M’s daily average revenue was slightly above W5bn, higher than our aggressive forecast of W4.9bn. We believe Lineage M’s 4Q19 daily average revenue was W2.3- Share Price (02/12/20, W) 650,000 2.4bn, also higher than our expectation. 1Q20 and 2020 OP to double QoQ and YoY, respectively Expected Return 40% Lineage 2M’s traffic has been increasing sharply ever since its release. Daily active users (DAU) and peak concurrent users (PCU; a measure of an MMORPG’s popularity) OP (19, Wbn) 479 have both continued to grow in February. Data show that Lineage 2M’s daily average Consensus OP (19F, Wbn) 519 revenue in January fell only 6.8% MoM.

EPS Growth (19, %) -14.8 For 1Q20, we expect revenue of W719bn (+100% YoY) and operating profit of W312bn Market EPS Growth (19F, %) -34.9 (+292% YoY). For 2020 as a whole, we forecast revenue and operating profit to grow to P/E (19, x) 33.3 W2.69tr (+59% YoY) and W1.12tr (+134% YoY), respectively, driven by robust traffic and Market P/E (19F, x) 15.6 revenue trends for Lineage M and Lineage 2M. We assume 2020 daily average revenue KOSPI 2,238.38 of W2bn for Lineage M and W3bn for Lineage 2M.

Market Cap (Wbn) 14,270 Focus on big picture more than momentum; Maintain Buy and TP of Shares Outstanding (mn) 22 W910,000 Free Float (%) 81.9 The 4Q19 results have increased visibility on 2020 earnings. Despite its recent rally, Foreign Ownership (%) 51.8 NCsoft is still trading at a P/E of 15.9x based on our 2020F EPS, the low end of its P/E Beta (12M) 0.31 band over the past two decades. The company’s earnings forecasts and valuation are 52-Week Low 430,500 also more compelling compared to those of other major gaming companies in the US, 52-Week High 672,000 Japan, and China.

(%) 1M 6M 12M A number of new releases are expected in 2020, including the new titles Aion 2 and Absolute 6.9 24.0 49.9 Blade & Soul 2 and the overseas launch of Lineage 2M in Japan and Taiwan. Given the Relative 5.4 7.6 46.7 young age profile of Lineage 2M gamers and the rising appeal of Korean MMORPGs globally amid the advancement of the mobile content industry, we believe the big 150 NCsoft KOSPI picture is very positive for NCsoft. 130 Due to continued foreign buying since Lineage 2M’s release, foreign ownership in 110 NCsoft is now at a record 51.7%. If the 1Q20 earnings picture becomes clearer or new

90 release schedules are revealed, we expect the stock to gain further momentum. We maintain our Buy rating and target price of W910,000. 70 2.19 6.19 10.19 2.20

Mirae Asset Daewoo Co., Ltd.

[Internet] FY (Dec.) 12/16 12/17 12/18 12/19 12/20F 12/21F Revenue (Wbn) 984 1,759 1,715 1,701 2,696 2,882 Chang-kwean Kim +822-3774-1614 OP (Wbn) 329 585 615 479 1,122 1,397 [email protected] OP Margin (%) 33.4 33.3 35.9 28.2 41.6 48.5 NP (Wbn) 272 441 418 356 900 1,014 EPS (W) 12,416 20,104 19,061 16,235 40,994 46,203 ROE (%) 14.9 19.1 16.4 14.3 30.1 26.6 P/E (x) 19.9 22.3 24.5 33.3 15.9 14.1 P/B (x) 2.7 3.4 3.7 3.9 3.8 3.0 Dividend Yield (%) 1.5 1.6 1.3 1.1 0.9 0.9 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

Analysts who prepared this report are registered as research analysts in Korea but not in any other jurisdiction, including the U.S. PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES & DISCLAIMERS IN APPENDIX 1 AT THE END OF REPORT.

February 13, 2020 NCsoft

Table 1. Quarterly and annual earnings (Wbn, %) 1Q18 2Q18 3Q18 4Q18 1Q19 2Q19 3Q19 4Q19 1Q20F 2Q20F 3Q20F 4Q20F 2018 2019 2020F Revenue 475 436 404 400 359 411 398 534 719 611 582 784 1,715 1,701 2,696 Lineage 28 42 40 39 21 50 52 51 48 45 41 47 150 174 181 Lineage II 14 13 16 21 22 21 23 28 23 22 23 20 64 94 87 Aion 19 16 16 13 12 12 13 8 11 9 10 10 63 46 40 Blade & Soul 34 31 30 25 23 21 21 18 17 15 15 18 120 84 65 Guild Wars 2 24 20 21 16 16 16 15 11 11 11 11 18 80 59 51 Mobile games 264 210 216 223 199 224 213 363 553 453 426 613 913 999 2,046 Other 8 13 12 11 8 15 16 10 11 10 11 14 44 49 46 Royalties 84 92 52 53 57 52 44 44 45 45 45 44 282 198 180 OP 204 160 139 113 80 129 129 141 312 242 227 341 615 479 1,122 OP margin 42.9 36.5 34.4 28.3 22.2 31.5 32.4 26.4 43.4 39.7 39.0 43.4 35.9 28.2 41.6 Net profit 119 140 94 68 75 117 114 54 250 194 196 267 422 359 907 Net margin 25.1 32.1 23.4 16.9 20.8 28.4 28.6 10.1 34.8 31.8 33.7 34.0 24.6 21.1 33.6 YoY growth Revenue 98.3 68.8 -44.5 -25.0 -24.5 -5.9 -1.5 33.4 100.4 48.7 46.2 46.9 -2.5 -0.8 58.5 Lineage -45.1 24.5 14.0 15.7 -26.7 19.1 28.6 31.7 129.8 -11.2 -20.8 -7.7 -3.0 16.3 3.8 Lineage II -22.7 -19.9 0.0 37.0 51.5 59.0 47.3 34.4 8.6 1.8 -2.3 -29.0 -2.9 46.5 -6.8 Aion 41.1 44.3 61.1 0.4 -34.3 -20.7 -19.2 -36.3 -13.6 -24.5 -24.4 20.3 35.2 -27.5 -13.7 Blade & Soul -23.9 -21.4 -20.8 -36.8 -31.3 -31.1 -28.6 -28.0 -28.0 -27.2 -29.9 -1.3 -25.8 -29.9 -22.6 Guild Wars 2 66.2 46.6 4.0 -55.0 -30.9 -20.0 -27.8 -27.8 -31.2 -29.0 -25.6 56.0 -3.2 -26.8 -12.3 Mobile games 1028.2 124.0 -60.7 -31.9 -24.7 6.6 -1.5 62.9 178.4 102.6 99.7 69.0 -8.2 9.4 104.8 Other -24.8 -15.6 -6.5 2.2 4.6 16.9 25.2 -8.4 29.2 -29.0 -31.7 43.7 -11.3 10.7 -4.8 Royalties 32.5 155.8 18.3 -10.3 -31.8 -44.2 -14.2 -17.0 -21.1 -13.1 1.8 0.3 38.9 -29.9 -9.1 OP 569.1 324.8 -57.6 -40.2 -61.0 -18.9 -7.3 24.7 292.3 87.2 76.0 141.4 5.1 -22.1 134.2 Net profit 584.9 355.0 -65.7 -44.0 -37.3 -16.7 20.3 -19.9 235.2 66.1 72.4 392.7 -5.0 -14.8 152.5 Source: Company data, Mirae Asset Daewoo Research estimates

Table 2. Earnings forecast revisions (Wbn, %) Previous Revised % chg. Note 2019F 2020F 2019 2020F 2019 2020F

Revenue 1,737 2,666 1,701 2,696 -2.1 1.1 Reflected Operating profit 525 1,143 479 1,122 -8.8 -1.9 change to revenue Net profit 466 930 359 907 -22.8 -2.5 recognition OP margin 30.2 42.9 28.2 41.6 - - method for Net margin 26.8 34.9 21.1 33.6 - - mobile titles Source: Mirae Asset Daewoo Research estimates

Mirae Asset Daewoo Research 2 February 13, 2020 NCsoft

Figure 1. Lineage M: Domestic quarterly revenue

(Wbn) 240

218 220 213 210 203 199 200

180

160

140 1Q19 2Q19 3Q19 4Q19 1Q20F

Source: Sensor Tower, Mirae Asset Daewoo Research estimates

Figure 2. Lineage 2M: Daily revenue

(Wbn) 16

12 January daily avg. revenue: -6.8% MoM

8

4

0 11/27 12/7 12/17 12/27 1/6 1/16 1/26 2/5

Source: Sensor Tower, Mirae Asset Daewoo Research estimates

Mirae Asset Daewoo Research 3 February 13, 2020 NCsoft

NCsoft (036570 KS/Buy/TP: W910,000)

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 1,701 2,696 2,882 Current Assets 1,576 1,683 2,690 3,645 Cost of Sales 0 0 0 0 Cash and Cash Equivalents 186 295 1,045 1,952 Gross Profit 1,715 1,701 2,696 2,882 AR & Other Receivables 152 151 240 257 SG&A Expenses 1,100 1,222 1,574 1,485 Inventories 1 1 2 2 Operating Profit (Adj) 615 479 1,122 1,397 Other Current Assets 1,237 1,236 1,403 1,434 Operating Profit 615 479 1,122 1,397 Non-Current Assets 1,365 1,340 1,351 1,338 Non-Operating Profit 22 17 63 29 Investments in Associates 56 56 89 95 Net Financial Income 26 27 39 57 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 637 496 1,185 1,426 Total Assets 2,941 3,023 4,041 4,983 Income Tax 216 137 278 404 Current Liabilities 473 321 505 539 Profit from Continuing Operations 421 359 907 1,022 AP & Other Payables 27 27 42 45 Profit from Discontinued Operations 0 0 0 0 Short-Term Financial Liabilities 155 5 5 5 Net Profit 421 359 907 1,022 Other Current Liabilities 291 289 458 489 Controlling Interests 418 356 900 1,014 Non-Current Liabilities 89 89 140 150 Non-Controlling Interests 3 3 7 8 Long-Term Financial Liabilities 0 0 0 0 Total Comprehensive Profit 80 359 907 1,022 Other Non-Current Liabilities 89 89 140 150 Controlling Interests 77 345 871 981 Total Liabilities 562 409 645 689 Non-Controlling Interests 3 14 36 41 Controlling Interests 2,368 2,599 3,375 4,264 EBITDA 643 504 1,144 1,416 Capital Stock 11 11 11 11 FCF (Free Cash Flow) 326 382 1,045 1,063 Capital Surplus 433 433 433 433 EBITDA Margin (%) 37.5 29.6 42.4 49.1 Retained Earnings 2,164 2,396 3,171 4,061 Operating Profit Margin (%) 35.9 28.2 41.6 48.5 Non-Controlling Interests 11 14 21 29 Net Profit Margin (%) 24.4 20.9 33.4 35.2 Stockholders' Equity 2,379 2,613 3,396 4,293

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 353 382 1,045 1,063 P/E (x) 24.5 33.3 15.9 14.1 Net Profit 421 359 907 1,022 P/CF (x) 15.6 24.6 12.3 10.4 Non-Cash Income and Expense 233 123 249 354 P/B (x) 3.7 3.9 3.8 3.0 Depreciation 26 23 20 18 EV/EBITDA (x) 14.0 20.7 10.4 7.8 Amortization 2 2 2 2 EPS (W) 19,061 16,235 40,994 46,203 Others 205 98 227 334 CFPS (W) 29,813 21,949 52,665 62,695 Chg in Working Capital -56 -2 116 22 BPS (W) 127,548 138,016 173,331 213,855 Chg in AR & Other Receivables 45 1 -86 -16 DPS (W) 6,050 6,050 6,050 6,050 Chg in Inventories 0 0 -1 0 Payout ratio (%) 29.6 34.7 13.7 12.2 Chg in AP & Other Payables -1 0 1 0 Dividend Yield (%) 1.3 1.1 0.9 0.9 Income Tax Paid -281 -137 -278 -404 Revenue Growth (%) -2.5 -0.8 58.5 6.9 Cash Flows from Inv Activities 68 2 -138 -26 EBITDA Growth (%) 4.6 -21.6 127.0 23.8 Chg in PP&E -26 0 0 0 Operating Profit Growth (%) 5.1 -22.1 134.2 24.5 Chg in Intangible Assets -4 0 0 0 EPS Growth (%) -5.2 -14.8 152.5 12.7 Chg in Financial Assets 2,422 2 -138 -26 Accounts Receivable Turnover (x) 10.0 11.5 14.2 11.9 Others -2,324 0 00 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 12.0 25.7 22.7 Chg in Equity 0 0 0 0 ROE (%) 16.4 14.3 30.1 26.6 Dividends Paid -155 -125 -125 -125 ROIC (%) - - - - Others -274 0 00 Liability to Equity Ratio (%) 23.6 15.7 19.0 16.1 Increase (Decrease) in Cash -2 109 750 907 Current Ratio (%) 333.2 525.1 532.7 675.6 Beginning Balance 187 186 295 1,045 Net Debt to Equity Ratio (%) -51.1 -56.4 -69.5 -76.7 Ending Balance 186 295 1,045 1,952 Interest Coverage Ratio (x) - - - - Source: Company data, Mirae Asset Daewoo Research estimates

Mirae Asset Daewoo Research 4 February 13, 2020 NCsoft

APPENDIX 1

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

Company (Code) Date Rating Target Price (W) NCsoft NCsoft (036570) 01/07/2020 Buy 910,000 1,000,000 11/26/2019 After 1yr 800,000 11/26/2018 Buy 700,000 08/27/2018 No Coverage 600,000 05/10/2018 Buy 500,000 400,000 04/16/2018 Buy 600,000 09/26/2017 Buy 640,000 200,000

0 Feb 18 Feb 19 Feb 20

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 84.05% 9.82% 6.13% 0.00% Investment Banking Services 76.67% 13.33% 10.00% 0.00% * Based on recommendations in the last 12-months (as of December 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.

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, 2020 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, 2020 NCsoft

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