Internet/Game/Advertising Market Changes Spurring Shifts in Business Strategy

Home , Cheil Worldwide, Gamania, Glu Mobile, Grand Chase, Interpark, Kakao

2018 Outlook

Internet/Game/Advertising Market changes spurring shifts in business strategy

Jee-hyun Moon +822-3774-1640 [email protected]

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. Contents

[Summary] 3

I. 2017 review 4

II. 2018 outlook 7

III. [Internet] Commerce, voice interface, cloud 12 - NAVER, Kakao, NHN Entertainment, Interpark

IV. [Game] Overseas revenue growth, new titles 101 - NCsoft, Netmarble Games, Com2uS, Pearl Abyss, Webzen

V. [Advertising] Inorganic growth, stable affiliate billings 144 - Cheil Worldwide, INNOCEAN Worldwide, Nasmedia

[Conclusion] 162 [Summary] Shifts in business strategy coming into focus

Market changes call for strategic shifts; Only those that are able to adapt and create new markets will survive Shifts in strategy

[Internet] Online commerce [Game] New titles based on existing intellectual [Advertising] Strengthening ties property (IP), global expansion with affiliates, M&As

Source: Mirae Asset Daewoo Research

3 | 2018 Outlook [Internet/Game/Advertising] Mirae Asset Daewoo Research I. 2017 review

In 2017, game stocks and • In 2017, game stocks and Kakao delivered robust share performances among internet/game/advertising plays. Kakao delivered robust • Kakao: Recovery in ad revenue and expectations for expansion in the value of subsidiaries share performances • Game: Expectations for new titles (NCsoft), solid earnings and valuation merits (Com2uS), IPO (Netmarble Games)

2017 share performance: Kakao and NCsoft outperformed peers

Expectations reflected in 2017 (1/17=100) - Game: Expectations for new 220 NAVER Kakao titles, IPO of Netmarble Games, NCsoft Com2uS potential regulatory easing 200 Cheil Worldwide INNOCEAN Worldwide - Kakao: Spin-offs; expectations for advertising recovery 180

160

140

120

100

80 1/17 3/17 5/17 7/17 9/17 11/17

Source: Thomson Reuters, Mirae Asset Daewoo Research

4 | 2018 Outlook [Internet/Game/Advertising] Mirae Asset Daewoo Research I. 2017 review

Key shifts in Kakao’s • For Kakao, ad revenue fell around 10% YoY in 2016. drivers • In 2017, however, ad revenue resumed growth, boosting the stock. • In November, the company rolled out new ad products, including Shopping Plus and Moment Circle, a performance-based ad platform boasting superior targeting capabilities. • In December, Kakao announced a plan to issue US$1bn worth of new shares/global depositary receipts (GDRs) in 2018.

In 2017, shares of Kakao rebounded on an upturn in ad revenue

The advertising business (%, YoY) (Wtr) represents a key revenue model 24 Ad revenue growth (L) 10 for internet firms. Market cap (R) - Advertising is a core revenue model for internet firms. 16 9 - Tencent has seen performance- based ad revenue exceed traditional display ad revenue since 3Q16. 8 8

0 6

-8 5

-16 4 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17F

Source: Company data, Thomson Reuters, Mirae Asset Daewoo Research

5 | 2018 Outlook [Internet/Game/Advertising] Mirae Asset Daewoo Research I. 2017 review

Game stocks displayed • Biggest event of 1H17: Netmarble Games IPO (KOSPI) strong rallies • Netmarble Games’ market cap stands at around W16tr. Globally, there are around 10 game stocks with market caps of more than W10tr (e.g., Tencent, Activision Blizzard, Nintendo, NetEase, Electronic Arts, Take-Two Interactive, NCsoft, Netmarble Games, Nexon). • For most game companies, earnings remain solid amid increased new game momentum; valuation re-ratings are well underway.

Major game stocks have advanced since the beginning of the year

Impact of the Netmarble Games (1/17=100) IPO on game stocks: 220 NCsoft Com2uS NHN Entertainement - Game stocks enjoyed a boost DoubleU Games Webzen Gamevil following confirmation of the 200 Netmarble Games Pearl Abyss upper bound of Netmarble’s price range. 180 - Marketing for new titles drew attention to the game sector. 160 - M&A possibilities shined a spotlight on small/medium- 140 sized game stocks.

120

100

60 1/17 2/17 3/17 4/17 5/17 6/17 7/17 8/17 9/17 10/17 11/17 12/17

Note: For Netmarble Games and Pearl Abyss, 100 represents the IPO price. Source: Thomson Reuters, Mirae Asset Daewoo Research

6 | 2018 Outlook [Internet/Game/Advertising] Mirae Asset Daewoo Research II. 2018 outlook

Shifts in business • In 2018, shifts in business strategy (aimed at achieving growth) and new revenue sources to enter the spotlight strategy to drive growth • Internet: Details (e.g., monetization) regarding AI and global businesses to come to light; existing businesses (e.g., commerce) to deliver additional growth • Game: New title launches and overseas publishing to continue; expectations for M&As to pick up • Advertising: Ad firms to enhance their stability via stronger links with affiliates, as well as experience growth potential boosts

Major variables and notable stocks for 2018

Top picks and 2018 other notable stocks

• In the internet platform segment, commerce/payment services should garner greater attention than ads. • Top pick: NAVER • In the global space, content platforms and cloud businesses should • Notable stocks: Kakao, Internet come into focus. NHN Entertainment, Interpark • AI services have entered the actual implementation phase, with launches of relevant devices underway.

• New mobile title launches (focused on mobile MMORPGs) are likely to continue. • Top pick: NCsoft • Overseas publishing (e.g., Taiwan, China, North America) should • Notable stocks: Netmarble Games, Game increase. Com2uS, Pearl Abyss, Webzen • M&A expectations and the possibility of regulatory easing (e.g., web board games) in Korea are likely to take shape.

• Ad agencies: Affiliate billings should increase further. • Notable stocks: Cheil Worldwide, • Global M&As (backed by ample cash holdings) are imminent. Advertising INNOCEAN Worldwide, Nasmedia • Digital marketing capabilities are now essential.

Source: Mirae Asset Daewoo Research

7 | 2018 Outlook [Internet/Game/Advertising] Mirae Asset Daewoo Research II. 2018 outlook

Internet/Game/Advertising: Maintain Overweight

Top picks and other notable stocks (Wbn, W, %)

Market Sector Company Ticker Rating TP CP Upside cap

NAVER 035420 KS 28,348 Buy: Top pick (Maintain) 1,200,000 (Maintain) 860,000 40

NHN Entertainment 181710 KS 1,356 Buy (Maintain) 83,000 (Maintain) 69,300 20 Internet Kakao 035720 KS 9,132 Trading Buy (Maintain) 170,000 (Maintain) 134,500 26

Interpark 108790 KQ 313 Trading Buy (Downgrade) 11,000 (Maintain) 9,460 16

NCsoft 036570 KS 10,366 Buy: Top pick (Maintain) 640,000 (Maintain) 472,500 35

Netmarble Games 251270 KS 16,197 Buy (Maintain) 230,000 (Maintain) 190,500 21

Game Com2uS 078340 KQ 1,696 Buy (Maintain) 160,000 (Raise) 131,800 21

Pearl Abyss 263750 KQ 2,611 Not Rated - 216,400 -

Webzen 069080 KQ 1,356 Not Rated - 38,400 -

Cheil Worldwide 030000 KS 2,404 Buy (Maintain) 25,000 (Raise) 20,900 20 INNOCEAN Advertising 214320 KS 1,520 Buy (Maintain) 96,000 (Maintain) 76,000 26 Worldwide Nasmedia 089600 KQ 604 Buy (Maintain) 83,000 (Raise) 69,000 20

Source: Mirae Asset Daewoo Research

8 | 2018 Outlook [Internet/Game/Advertising] Mirae Asset Daewoo Research II. 2018 outlook

Internet: Change in business focus: Ads  Commerce

Slower growth of internet ads  Ample upside to commerce market; In 2017, Amazon grabbed headlines starting in January, with Shopify and PayPal (PYPL US/CP: US$75.3) displaying even greater share performances

(%) (1/17=100) 300 Amazon 40 Online penetration of retail market Shopify Online penetration of ad market PayPal 260 Alphabet

Facebook 30

220

20 180

140

100

0 60 07 08 09 10 11 12 13 14 15 16 17F 18F 1/17 3/17 5/17 7/17 9/17 11/17

Note: Online penetration data are based on the domestic market; Shopify is a North American online shopping solutions provider Source: KOSTAT, Thomson Reuters, Mirae Asset Daewoo Research

9 | 2018 Outlook [Internet/Game/Advertising] Mirae Asset Daewoo Research II. 2018 outlook

Games: Change in business focus: Domestic  Overseas

Korea ranks third (in ARPU terms) among global markets; Korean firms need to advance further into China, NA, and Japan

Online game revenue Online population ARPU Online game spending as % of (US$mn) (mn) (US$) per-capita GDP

China 27,547.0 801.6 34.36 0.42%

US 25,059.9 261.2 95.95 0.17%

Japan 12,545.7 119.8 104.70 0.27%

Germany 4,378.1 73.1 59.89 0.14%

UK 4,217.7 61.6 68.45 0.17%

Korea 4,187.7 46.9 89.34 0.32%

France 2,967.1 57.4 51.71 0.14%

Canada 1,947.4 33.5 58.21 0.14%

Spain 1,913.0 38.5 49.74 0.19%

Italy 1,874.6 43.1 43.45 0.14%

Note: As of 2016 Source: Newzoo, Bloomberg, Mirae Asset Daewoo Research

10 | 2018 Outlook [Internet/Game/Advertising] Mirae Asset Daewoo Research II. 2018 outlook

Advertising: Defense  Offense (e.g., M&As, strengthening ties with affiliates)

Ad firms: Absence of major events, deteriorating business conditions in 2017 vs. boosts from international sporting events and strengthening ties with affiliates in 2018 (1/17=100) 200 SEC Cheil Worldwide

150

100

50 1/17 4/17 7/17 10/17

(1/17=100) 150 HMC Kia INNOCEAN Worldwide 125

100

75 1/17 4/17 7/17 10/17

Note: Charts on the right side show share performance Source: IOC, FIFA, Thomson Reuters, Mirae Asset Daewoo Research

11 | 2018 Outlook [Internet/Game/Advertising] Mirae Asset Daewoo Research Internet (Overweight)

• Shift in business focus: Ads  Commerce • Issue 1: Introduction of voice interfaces • Issue 2: Cloud in the AI era III. [Internet] Commerce: The next online battleground

Current stage: • The domestic internet index has displayed three distinct growth stages: Looking for growth via AI 1) 2007-12: The index gained 35%, in line with the expansion of the internet ad market from W1tr to W2tr. and commerce 2) 2013-16: The index advanced 70%, with the pickup in mobile revenue pushing up the value of the internet ad market to W3tr. 3) 2017 and beyond: Internet ad revenue has caught up with TV ad revenue; companies are looking for new growth opportunities via AI and penetration into retail market.

Korea internet index: Seeking growth through AI

(P) (Wtr)

400 Korean internet ad market (R) Rise of AI 5 Korean internet sector index (L) commerce Korean TV ad market (R) 4 300

Mobile ad-driven growth 3

200 Internet ad market growth period(W1tr → W2tr) 2 Financial Crisis 100 1

0 0 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18F

Source: Thomson Reuters, Advertising Yearbook, Mirae Asset Daewoo Research

13 | 2018 Outlook [Internet/Game/Advertising] Mirae Asset Daewoo Research III. [Internet] Commerce: The next online battleground

Commerce: • For internet firms, it is time to shift focus from online ads to online commerce. Next growth engine • Internet ad market growth has slowed to the single-digit range in 2017; in Korea, the online ad market now accounts for 33% of the total ad market. • Online shopping as a percentage of total Korean retail sales is expected to increase to 19% in 2017, which suggests that there is room for further online retail market growth. • Online commerce expansion to play a key role in boosting growth for both the existing ad and new AI businesses

Online commerce expansion to spur growth for both the ad and AI businesses

(%)

40 Online penetration of retail market Online penetration of ad market

Reinforcement of solutions for payment and orders 10 Combining commerce and ads AI curation engines Introduction of voice interfaces

0 07 08 09 10 11 12 13 14 15 16 17F 18F

Source: KOSTAT, Mirae Asset Daewoo Research

14 | 2018 Outlook [Internet/Game/Advertising] Mirae Asset Daewoo Research III. [Internet] Commerce: The next online battleground

Success of the commerce • A company that wants to maintain steady growth and become one of the industry leaders in the commerce space business hinges on the should secure a “flywheel.” • Most online shopping malls now offer a variety of products at low prices and fast delivery services. “flywheel” • The success of the commerce business hinges on a company’s ability to provide a differentiated customer experience and establish a sustainable cost structure.

Commerce firms’ success hinges on customer experience and cost structure

Amazon’s “flywheel” [Lower cost structure] - A flywheel continuously provides Lower prices Economies of scale, platform effects, partnerships energy to engines. The system requires enormous energy to initiate movement. Once it spins Selection and picks up speed, however, it should continue spinning on the back of rotational inertia. - Jeff Bezos, Amazon’s CEO, called its Prime membership program a “flywheel” that both facilitates Customer [Customer experience] Sellers Growth Amazon’s future businesses and Lower prices, fast delivery, convenience, benefits customers at the same multi-functionality time.

Traffic

Source: Amazon, Mirae Asset Daewoo Research

15 | 2018 Outlook [Internet/Game/Advertising] Mirae Asset Daewoo Research III. [Internet] Commerce: The next online battleground

Commerce + ads  • To establish a sustainable structure, a commerce firm should improve profitability, as well as pursue top-line Google growth. • Ads are a major source of profitability for internet platforms. • The eventual purpose of advertising is to maximize advertisers’ revenue by motivating customers to buy. • At Google, the contribution of Google Product Listing Ads (PLAs) to total click-throughs has been on a steady rise.

Contribution of Google PLAs to total number of click-throughs has been rising steadily

(%) 80

0 1Q14 3Q14 1Q15 3Q15 1Q16 3Q16 1Q17 Source: Google, Merkle Digital Marketing Report, Mirae Asset Daewoo Research

16 | 2018 Outlook [Internet/Game/Advertising] Mirae Asset Daewoo Research III. [Internet] Commerce: The next online battleground

Commerce + ads  • In an effort to combine search ads and commerce, NAVER launched shopping search ads in November NAVER 2016. • We believe that NAVER’s high-margin search ad business is offsetting marketing expenses related to its payment business. • Search ads could help sellers enhance conversion rates (compared to existing search ads) by providing direct links to products at lower rates. NAVER awards NAVER Pay points for purchases initiated via shopping search ads, which should appeal to buyers.

NAVER has linked shopping search ads with NAVER Pay

NAVER provides points to customers who click on shopping search ads and purchase goods from NAVER Pay partner Mobile stores.

Note: NAVER launched shopping search ads on November 25, 2016 Source: NAVER, Mirae Asset Daewoo Research

17 | 2018 Outlook [Internet/Game/Advertising] Mirae Asset Daewoo Research III. [Internet] Commerce: The next online battleground

Commerce + ads  • Kakao launched Shopping Plus (i.e., shopping search ads featuring images) on its Daum Mobile app on Kakao November 7, 2017. • As results appear in the top two lines in the shopping category of search results, Shopping Plus is expected to attract greater attention from users who are willing to buy products. • The key features of Shopping Plus include an intuitive display, easier ad buying, and automatic keyword matching.

Kakao launched Shopping Plus in November

Automatic Registration keyword matching

Keyword A

Keyword B Product A Keyword C

Keyword Y

Price Keyword Z

Advertisers register System automatically products and decide matches keywords General Image prices through CLIX with products

Note: Launched on November 7, 2017 Source: Kakao, Mirae Asset Daewoo Research

18 | 2018 Outlook [Internet/Game/Advertising] Mirae Asset Daewoo Research III. [Internet] Commerce: The next online battleground

Commerce + ads  • Search ads are evolving from text to image search. Image search • Conventional keyword searches based on text have limitations (e.g., in the event that a user lacks information). • A single photo is estimated to have information equivalent to 1,000 words; the use of AI—including computer vision and deep learning technologies—and big data should facilitate the proliferation of image search services. • Commerce-focused image search functionality should enhance conversion (image search  purchase) and boost search accuracy.

NAVER’s Smart Lens and Shopping Lens to improve search accuracy and enhance conversion (image search  purchase)

Source: NAVER, Mirae Asset Daewoo Research

19 | 2018 Outlook [Internet/Game/Advertising] Mirae Asset Daewoo Research III. [Internet] Commerce: The next online battleground

Commerce + content • Media content area is increasingly adopting commerce business models. • US examples include BuzzFeed and the New York Times.  The two outlets have applied commerce models to their cooking sections. • In China, Alibaba is ushering in an era of video commerce, as the internet giant holds both Taobao (an online shopping mall) and Youku Tudou (a video streaming site). • NAVER, which has been expanding its footprint in live-streaming for non-celebrities, is likely to link beauty-related videos to its online shopping services, including StoreFarm.

NAVER has been expanding its footprint in live-streaming, which could bolster commerce ecosystem growth

Note: Popular video clips from NAVER TV’s Beauty TV Source: NAVER, Mirae Asset Daewoo Research

20 | 2018 Outlook [Internet/Game/Advertising] Mirae Asset Daewoo Research III. [Internet] Commerce: The next online battleground

Commerce + content • Video commerce aims to boost conversion rates via video-based brand marketing. • Video product introductions could capture user attention (and deliver information on brands and products), which could lead to higher conversion rates. • Commerce platforms are actively adopting video commerce, primarily targeting users in their 20s and 30s (the major consumers of video content). • Currently, video commerce is concentrated in fashion and beauty products, but it will likely be embraced by a wider range of segments going forward.

Flow of video commerce

User Content Platform Purchase

Information + 20s and 30s entertainment Commerce (shopping) Brand awareness ↑

Growth in digital video Short clips Video Conversion rates ↑ content consumption Vicarious experience Social media

Increase in the power Video commerce of influencers

Source: Nasmedia, Mirae Asset Daewoo Research

21 | 2018 Outlook [Internet/Game/Advertising] Mirae Asset Daewoo Research III. [Internet] Commerce: The next online battleground

Commerce + FinTech  • Data related to consumers’ online purchases/payments and small businesses owners’ online sales/purchases can Alibaba be utilized by financial services players. • Ant Financial, a FinTech affiliate of Alibaba, connects the data of merchants on Alibaba’s commerce platform to its loan services. • Huabei, Alipay’s loan service (extending unsecured loans of RMB500-5,000), is growing rapidly, backed by Chinese born in the 1990s. • Out of 45mn Huabei loan applicants, 27% applied for unsecured loans.

Alibaba integrates Alipay (payment) and Huabei (unsecured loans), providing a convenient commerce experience for young customers

(%) 40 % of Alipay users who set Huabei (Ant Check Later) as their primary payment method

Increase in usage

30 Infrastructure

0 Born in 1990s Born in 1980-85 Born in 1986-89

Source: TechWeb.com.cn , Mirae Asset Daewoo Research

22 | 2018 Outlook [Internet/Game/Advertising] Mirae Asset Daewoo Research III. [Internet] Commerce: The next online battleground

Commerce + FinTech  • Since 2011, Amazon has offered Amazon Lending services to its Marketplace sellers (minimum annual Amazon interest rate of around 6%). • Amazon sets interest rates based on its commerce data. • Amazon could expand its commerce network by attracting sellers who cannot afford to create their own platforms due to cost burden. • As of 1H17, Amazon Lending’s cumulative loans are estimated at more than US$3bn.

Amazon offers Amazon Lending services (based on its commerce data) to Marketplace sellers

Source: Amazon, secondhalfdreams.com, Mirae Asset Daewoo Research

23 | 2018 Outlook [Internet/Game/Advertising] Mirae Asset Daewoo Research III. [Internet] Commerce: The next online battleground

Commerce + FinTech  • Facebook also runs online marketplaces in North America and Europe. Facebook • In February 2017, Facebook teamed up with the Canadian FinTech firm Clearbanc to launch the Chrged program, which allows small/medium-sized advertisers on Facebook to pay advertising fees and commissions (5-10%) to Clearbanc, not in advance, but after they make profits. • Currently, around 1,000 companies use this program.

Facebook offers the Chrged program, which allows small/medium-sized advertisers to pay advertising fees after booking profits

Note: Clearbanc is a Canadian FinTech firm Source: Clearbanc, Mirae Asset Daewoo Research

24 | 2018 Outlook [Internet/Game/Advertising] Mirae Asset Daewoo Research III. [Internet] Commerce: The next online battleground

Possible restructuring of • In the highly competitive Korean online shopping market, no dominant player has emerged yet. the online shopping • Online malls by full-service retailers, such as Shinsegae (004170 KS/CP: W300,500) and Lotte Mart, have seen solid online shopping revenue growth since early 2017. industry • Industry restructuring likely: Many brick-and-mortar retailers face the risk of a slowdown, but are flush with cash. • In contrast, online shopping companies have high-traffic platforms and a lot of marketing know-how, but most of them incur massive losses every year and suffer from dwindling cash reserves.

Online shopping malls of full-service retailers on a rapid growth path since early 2017; Online channels to grow in importance

(%, YoY) Overall retail market 50 Offline total

40 Online intermediary (open market) Online mall by full-service retailer 30

-10 1/16 4/16 7/16 10/16 1/17 4/17 7/17 10/17

Note: Online intermediaries include open market operators such as eBay Korea (Gmarket, Auction), 11th Street, Interpark, and Coupang; online malls by full-service retailers include malls operated by full- service retailers (e.g., Emart, Shinsegae, AK Mall, Homeplus, Galleria Mall, Lotte.com, Lotte Mart Mall) and social commerce companies (e.g., WeMakePrice and TMON); online revenue surged YoY in September 2017, as the Chuseok holiday (during which deliveries are suspended) fell in October rather than September. Source: MOTIE, Mirae Asset Daewoo Research 25 | 2018 Outlook [Internet/Game/Advertising] Mirae Asset Daewoo Research III. [Internet] Commerce: The next online battleground

The global online • Amazon and Alibaba boast sizable market caps in the global online shopping market. shopping market is • In terms of global transaction value, Alibaba accounts for 27% (Taobao and Tmall combined) of the global online shopping market, while Amazon controls 16%. dominated by China and • JD.com and eBay currently rank third and fourth, respectively, in terms of both market cap and share. the US

Market caps of global online retailers: Amazon and Alibaba lead rivals by wide margins

(Wtr) 2016 global transaction value market share 800 Market cap Alibaba Tmall 11% Amazon 16% 619 Alibaba JD.com 5% 600 Taobao 16% eBay 4%

484 Suning 2%

400 Other 39%

200

63 44 28 14 15 11 10 3 1 0.3 0 Amazon Alibaba JD.com eBay NAVER Rakuten MercadoLibre Shopify Kakao Groupon NHN Interpark Entertainment North America China China North America Korea Japan South America North America Korea North America Korea Korea

Note: As of December 15, 2017; NAVER, Kakao, and NHN Entertainment are included in the chart due to their e-commerce revenue streams Source: Bloomberg, WSJ Activate, Mirae Asset Daewoo Research

26 | 2018 Outlook [Internet/Game/Advertising] Mirae Asset Daewoo Research III. [Internet] Commerce: The next online battleground

Overseas online • Overseas online shopping markets are highly consolidated. shopping markets are • In China, Germany, the US, and the UK, the second-largest players lag the market leaders by wide margins (over 10%p in terms of market share). already highly • In Japan, leading players Amazon and Rakuten are garnering over 10%p more market share than the third-largest consolidated players. • In Korea, eBay Korea, the operator of Gmarket and Auction, is believed to have emerged as the largest online retailer, in terms of transaction value, followed by 11th Street and NAVER.

M/S of top-two online shopping sites in key regions

(%) 60

0 Alibaba JD.com Amazon eBay Flipkart Snapdeal Amazon Walmart Amazon eBay Amazon Rakuten China Germany India US UK Japan Note: Based on B2C transactions in 2016 Source: JETRO, Mirae Asset Daewoo Research

27 | 2018 Outlook [Internet/Game/Advertising] Mirae Asset Daewoo Research III. [Internet] Commerce: The next online battleground

Traffic to internet portal- • Amid the overall expansion of the domestic online shopping market, traffic to e-commerce services linked related commerce sites to internet portals is displaying marked growth. • Notably, traffic on social commerce sites has shown a sharp downtrend this year, but major domestic portals, growing markedly including NAVER, Kakao, and Daum, have seen user increases at their shopping and payment services. • In our view, portals’ introduction of easy payment solutions and diversification of commerce services have attracted traffic.

Traffic to internet portal-related commerce sites has leveled up since 2H16

(mn) Open market Social commerce Malls Portal commerce 70

10 2013 2014 2015 2016 2017

Note: The number of monthly net visitors to commerce sites via PC and mobile (Android) devices; open markets includes 11th Street, Gmarket, Auction, and Interpark; social commerce includes Coupang, WeMakePrice, and TMON; malls include the online websites of Shinsegae, Homeplus, AK Mall, Lotte Mall, Lotte Mart, Galleria, and Emart; data for portal commerce is the combined number of visitors to commerce/payment-related subdomains of NAVER, Daum, and Kakao Source: Nielson KoreanClick, Mirae Asset Daewoo Research

28 | 2018 Outlook [Internet/Game/Advertising] Mirae Asset Daewoo Research III. [Internet] Commerce: The next online battleground

Traffic to internet portal- • Among internet portals, NAVER is seeing especially impressive traffic growth to its commerce services. related commerce • In addition to its existing shopping services, namely Knowledge Shopping, the company has launched StoreFarm and NAVER Pay, which have led to user base expansion. services growing • StoreFarm and NAVER Pay allow users to buy products from even small/mid-sized online shopping malls. markedly • Furthermore, the company has also embraced offline retailers with its shopping platform by launching Shopping Window services. • For NAVER and Kakao, the product recommendation functionality of their AI-enabled speakers (launched in 2017) should further boost commerce traffic.

NAVER displaying marked growth in commerce traffic

(mn) NAVER commerce Kakao/Daum commerce 11th Street 40 Gmarket Auction WeMakePrice Coupang TMON Interpark

0 2013 2014 2015 2016 2017

Note: Number of monthly net visitors to commerce sites via PC and mobile (Android) devices; data for NAVER and Daum/Kakao are based on the combined number of visitors to commerce/payment- related subdomains; as KakaoPay is embedded in the KakaoTalk app, traffic to Kakao’s commerce service is based on estimated number of monthly active users of KakaoTalk on Android Source: Nielson KoreanClick, Mirae Asset Daewoo Research

29 | 2018 Outlook [Internet/Game/Advertising] Mirae Asset Daewoo Research III. [Internet] Commerce: The next online battleground

The Amazon effect • A key impact of online shopping is downward pressure on inflation. • In the US, the Amazon effect has emerged, suggesting that the spread of online shopping could depress inflation. • In Korea, the growth of online shopping malls’ transaction value picked up speed in 2013-16, while the product price index growth rate remained in negative territory and consumer price growth rate fell below the 2012 level. • We believe that the negative product price index growth rate and the decline in the consumer price growth rate are attributable to intense marketing competition among social commerce companies.

Online malls’ transaction value growth picked up speed in 2013-16, Fierce competition among online shopping malls appears to while the product price index growth rate stayed negative have contributed to a slowdown in consumer price growth rate

(%) Product price index growth rate (L) (%) (%) Consumer price growth rate (L) (Wbn) 2 Online shopping mall transaction growth (R) 25 2.5 Operating losses of 11th Street and 3 social commerce companies (R) 0

0 22 2.0 -300

-2 19 1.5 -600

-4 16 1.0 -900

-6 13 0.5 -1,200

-8 10 0.0 -1,500 2012 2013 2014 2015 2016 2012 2013 2014 2015 2016

Source: KOSTAT, Mirae Asset Daewoo Research Note: The three social commerce companies are Coupang, WeMakePrice, and TMON Source: KOSTAT, company data, Media, Mirae Asset Daewoo Research

30 | 2018 Outlook [Internet/Game/Advertising] Mirae Asset Daewoo Research III. [Internet] Commerce: The next online battleground

Shopping solutions, • Internet firms’ shopping solutions are boosting consumer market growth and small merchants’ revenue. especially easy payment • From the perspective of the consumer, the introduction of easy payment services has been driving consumption growth. services, are driving • Mobile transactions as a percentage of online shopping malls’ total transaction value has been rising, backed by: consumption growth 1) broad mobile accessibility; and 2) the proliferation of easy payment services.

Easy payments: Simplification of the payment process to two Mobile card purchases have been climbing steadily or three steps (Wbn) (%) Fee 80 Daily average mobile card transaction value (L) 4 Mobile contribution to total credit card transaction value (R)

VAN 60 3

Easy payment Merchant fee Card Consumer Merchant solution company 40 2

PG fee PG 20 1

Fee

0 0 1H15 2H15 1H16 2H16 1H17

Source: Mirae Asset Daewoo Research Source: BOK, Mirae Asset Daewoo Research

31 | 2018 Outlook [Internet/Game/Advertising] Mirae Asset Daewoo Research III. [Internet] Commerce: The next online battleground

Convenient shopping • From the perspective of merchants, revenue is being boosted by a wide array of solutions, such as solutions boosting login/booking via major portal IDs, chatbots, and easy payments. • Software and hosting platform firms that help small merchants build online shopping malls (e.g., Shopify and merchants’ revenue Cafe24) also deserve attention. • Shopify, a Canadian online shopping platform firm, ranks third in transaction value in the US e-commerce market. • In Korea, the percentage of shopping malls adopting Cafe24’s solutions in NAVER’s Knowledge Shopping is estimated at around 60%.

Combined transaction value of shopping malls adopting Searches for Shopify are increasing sharply Cafe24 solutions rising steadily (Wbn) 1,600 Cafe24 transaction value

1,200

800

400

0 1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16

Source: Shopify, Mirae Asset Daewoo Research Source: Cafe24, Mirae Asset Daewoo Research

32 | 2018 Outlook [Internet/Game/Advertising] Mirae Asset Daewoo Research III. [Internet] Commerce: The next online battleground

Investment strategy: • Among the internet firms operating in the commerce space, companies enjoying growth based on positive Pursuit of both growth customer experiences and a sustainable profit structure should fare better. • NAVER is believed to have successfully established a sustainable profit structure by combining its high-margin and profitability search ad business with its commerce and payment services. • In November 2017, Kakao launched Shopping Plus and Moment Circle (a new ad platform designed to better funnel traffic into commerce services), which are expected to provide a further boost to the company’s ad revenue.

NAVER’s search ad and shopping revenue highly correlated Kakao’s share price has risen in line with growth in ad revenue with its OP (Wbn) (Wbn) (%, YoY) (Wtr) 600 NAVER business platform revenue (L) 400 30 Ad revenue growth (L) 10 NAVER operating profit (R) Market cap (R)

20 550 350 9

500 300 7

450 250 6 -10

400 200 -20 4 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17F 1Q16 3Q16 1Q17 3Q17

Note: NAVER’s business platform revenue includes search ads and shopping revenue Source: Kakao, Thomson Reuters, Mirae Asset Daewoo Research Source: NAVER, Mirae Asset Daewoo Research

33 | 2018 Outlook [Internet/Game/Advertising] Mirae Asset Daewoo Research III. [Internet] Commerce: The next online battleground

Investment strategy: • We believe that companies set to expand their footholds in the retail space via enhanced commerce Commerce solutions to solutions (e.g., easy payments, shopping sites) deserve attention. • Notably, the development of commerce solutions should contribute to expansion of the online market as a boost growth whole. • Relevant players could deploy targeted marketing for corporate customers that use their commerce solutions and expand into relevant businesses (e.g., financial services). • With regard to easy payment solutions, NAVER (NAVER Pay) and NHN Entertainment (PAYCO) deserve attention. Concurrent uptrends in NAVER’s IT platform and business NHN Entertainment: PAYCO monthly usage vs. other revenue platform revenue (Wbn) (Wbn) (Wbn) (mn times) 80 NAVER business platform revenue (R) 580 120 NHN Entertainment other revenue (L) 40

NAVER IT platform revenue (L) PAYCO monthly usage (R)

60 520 100 30

40 460 80 20

20 400 60 10

0 340 40 0 1Q16 3Q16 1Q17 3Q17 3Q15 1Q16 3Q16 1Q17 3Q17

Note: NAVER’s IT platform revenue includes NAVER Pay revenue; business platform revenue Note: Consolidated basis; PAYCO was launched in August 2015; PAYCO app monthly usage is includes search ad/shopping revenues based on Android mobile data Source: NAVER, Mirae Asset Daewoo Research Source: NHN Entertainment, Nielson KoreanClick, Mirae Asset Daewoo Research

34 | 2018 Outlook [Internet/Game/Advertising] Mirae Asset Daewoo Research Internet (Overweight)

• Shift in business focus: Ads  Commerce • Issue 1: Introduction of voice interfaces • Issue 2: Cloud in the AI era III. [Internet] The voice interface age

Voice interface adoption • Previously, internet firms focused on websites and mobile apps. helps internet firms • Voice recognition and audio features could help internet firms expand the influence of their platforms. expand the influence of • They are now turning their eyes to unclaimed areas—living rooms and cars—with the development of voice- activated speakers, car infotainment, and autonomous driving systems. their platforms

Media consumption breakdown: Transportation audio consumption is extremely high

(%) 100 Exhibition space media

Gaming devices 80 Video devices

Audio devices 60 Recording devices

Phones 40 Computers

TV 20 Print media

0 Home/company/school Recreational/service/other Transportation

Note: Based on 2016 data Source: KISDI, Mirae Asset Daewoo Research

36 | 2018 Outlook [Internet/Game/Advertising] Mirae Asset Daewoo Research III. [Internet] The voice interface age

Internet firms to make • Voice recognition AI technologies could facilitate further penetration by internet firms into cars. inroads into cars over • Cars account for a large share of audio consumption and offer a number of potential applications for voice recognition. the medium to long term • Notably, NAVER has been developing car infotainment and autonomous driving systems based on AI technology.

Proportion of audio consumption in transportation has expanded markedly

Use of smartphones while (%) driving is cumbersome and 60 2010 audio illegal 2016 audio

50 2010 mobile

2016 mobile

0 Home/company/school Recreational/service/other Transportation Note: Based on survey of Korean users Source: KISDI, Mirae Asset Daewoo Research

37 | 2018 Outlook [Internet/Game/Advertising] Mirae Asset Daewoo Research III. [Internet] The voice interface age

Translation and • NAVER has developed a translation and interpretation application called Papago that relies on a deep learning interpretation apps model known as neural machine translation (NMT). • The NMT model is more advanced than the phrase-based approach of statistical machine translation (SMT). developed by internet • The NMT model interprets sentences in their entirety. firms

NAVER’s Papago interpretation/translation app

NMT outperforms SMT. Facilitating more comfortable Displaying images to Translating by taking conversations with clarify words/phrases and dragging photos foreigners

Source: Google

Source: NAVER, Mirae Asset Daewoo Research

38 | 2018 Outlook [Internet/Game/Advertising] Mirae Asset Daewoo Research III. [Internet] The voice interface age

Value-added translation/ • Translation and interpretation apps utilize a combination of AI recognition, translation, and expression interpretation technologies. • Translation and interpretation technologies can add value to other services. technology • If related technologies are integrated into wearable devices, robots, autonomous taxis, and VR devices, new markets could take shape.

Three technologies needed for interpretation and translation: Recognition, machine translation, voice synthesis

Google’s Pixel Buds are capable of translating 40 languages

1. Recognition technology 2. Translation technology 3. Descriptive technology

Source: Google Voice recognition: ASR Machine translation: MT Voice synthesis: TTS

NAVER’s MARS translates 10 Text recognition: OCR languages Writing recognition: HWR

Source: NAVER Source: NAVER, Mirae Asset Daewoo Research

39 | 2018 Outlook [Internet/Game/Advertising] Mirae Asset Daewoo Research III. [Internet] The voice interface age

Release of AI speakers: • Voice-activated speakers are spearheading internet firms’ efforts to expand AI-based platform-based NAVER businesses. • Sales of hardware equipped with voice recognition AI should increase; membership and exclusive service offerings are essential to retain customers and generate replacement demand. Commerce revenue is expected to expand; NAVER has introduced various commerce solutions, including NAVER Shopping Window, NAVER Reservation and NAVER Pay. • NAVER invested W35bn in Woowa Brothers, the operator of Korea’s leading food delivery app Baedal Minjok, in October 2017; commerce should serve as a major application of voice-activated speakers. NAVER’s Wave, the first AI speaker introduced by a Korean NAVER’s Friends, AI speakers with LINE Friends designs internet firm

Source: NAVER, Mirae Asset Daewoo Research Source: NAVER, Mirae Asset Daewoo Research

40 | 2018 Outlook [Internet/Game/Advertising] Mirae Asset Daewoo Research III. [Internet] The voice interface age

Release of AI speakers: • Kakao released Kakao Mini, an AI voice-activated speaker. Kakao • In the early stages, Kakao has focused on music subscription and streaming services in partnership with Melon. • Kakao plans to combine its AI speaker with voice commerce (e.g., grocery shopping services). • Kakao is rapidly to widening its pool of partners to include the likes of SEC (005930 KS/Buy/TP: W3,400,000/CP: W2,560,000).

Kakao’s AI speaker Kakao Mini AI-enabled speakers are focusing on music services for now

Hey Kakao, Recommend some music to me.

Kakao and Melon will recommend music that fits your tastes.

Music We will recommend music that fits your tastes and play your playlist.

Source: Kakao, Mirae Asset Daewoo Research Source: Kakao, Mirae Asset Daewoo Research

41 | 2018 Outlook [Internet/Game/Advertising] Mirae Asset Daewoo Research III. [Internet] The voice interface age

Increasing investments • In 2018, the penetration of AI speakers will likely drive content market expansion beyond video to audio. in audio content • NAVER has been investing in audio content; examples include: 1) the release of Audio Clip using voice technology; 2) a partnership with YG Entertainment (122870 KS/Buy/TP: W39,000/CP: W30,300); and 3) equity investments in Devialet and Sound Hound. • Apple (AAPL US/CP: US$176.4) acquired music recognition app Shazam, while Tencent Music invested in Spotify. • In the US, podcast audiences and ad revenue are expected to increase at respective annual rates of 11% and 22% over the next five years.

US podcast listeners and ad revenue to expand by 11% and NAVER launched Audio Clip using voice technology 22% annually over the next five years (mn) (US$mn) Voice synthesis 120 Podcast listeners (L) 700

nVoice Podcast ad revenue (R) 600 100

500 80 Audio stories that have the power to 400 transport you to 60 new worlds 300 40 200

20 100

0 0 14 15 16 17F 18F 19F 20F 21F

Source: NAVER, Mirae Asset Daewoo Research Source: WSJ Activate, Mirae Asset Daewoo Research

42 | 2018 Outlook [Internet/Game/Advertising] Mirae Asset Daewoo Research III. [Internet] The voice interface age

AI-driven business • For AI, cloud services are critical to data acquisition, continuous machine learning, and functional model: Cloud revenue expansion. • NAVER’s AI-platform Clova operates based on cloud technology. • Amazon’s cloud business has expanded rapidly since the releases of Alexa and Echo in November 2014. • Companies that want to build cloud-based services for Alexa must use AWS Lambda, Amazon’s pay-as-you-go cloud service.

NAVER’s AI platform Clova operates based on cloud technology Amazon’s Alexa Skills are also based on cloud technology

Cloud AI Platform, Clova

Source: NAVER, Mirae Asset Daewoo Research Source: Amazon, Mirae Asset Daewoo Research

43 | 2018 Outlook [Internet/Game/Advertising] Mirae Asset Daewoo Research III. [Internet] The voice interface age

Era of voice commerce • Easy payment services have already been introduced via mobile visual interfaces. • Voice-activated features can further simplify payment procedures. • According to research conducted in 2017, 8% of US adults have encountered voice payment services—and this percentage is projected to climb to around 30% in 2022. • Voice interfaces are currently providing the greatest value to users of virtual assistant applications.

Order placements and payment via AI voice-activated speakers will likely proliferate

(mn) (%) 100 40 No. of voice payment users (L) % of voice payment users (R)

80 30

10 20

0 0 2017 2018F 2019F 2020F 2021F 2022F

Note: Based on US adults Source: BI Intelligence, Mirae Asset Daewoo Research

44 | 2018 Outlook [Internet/Game/Advertising] Mirae Asset Daewoo Research III. [Internet] The voice interface age

Voice recognition • Commerce functionality will take on the highest importance for AI voice-activated devices. speakers and shopping • Voice commerce creates a subscription-based sustainable revenue source on a significant scale. • Commerce that involves tangible products is expected to generate higher revenue than intangible services. • Amazon’s Echo is expected to facilitate the proliferation of voice commerce.

Long-term goal of AI devices, including Amazon’s Echo: Proliferation of voice commerce

AI speakers and voice commerce - The global AI speaker market is estimated to reach US$2.1bn in Alexa Voice Service Earning 2020. • commissions Cloud-based service (%) - Amazon offers shopping data • Analyzing patterns for providing online shopping services Request an Uber through Echo and voice based on voice data commerce using AI technology Subscription Shop on Amazon (Alexa). services for music and Shopping list media content Control lights

Providing Play a song payment services Set a timer Alexa Skills Kit • Establishing an open Expanding ecosystem partnerships • Anyone can add a newly developed skill

Amazon Echo ecosystem Amazon Echo business model

Source: Amazon, Mirae Asset Daewoo Research

45 | 2018 Outlook [Internet/Game/Advertising] Mirae Asset Daewoo Research III. [Internet] The voice interface age

Personalized voice • During the initial stages of voice commerce development, daily necessities—for which personal preferences commerce are of little significance—will make up the largest market. Going forward, however, the fashion market, which is concerned with personal preferences, will start to grow. • Eric Colson, the Chief Algorithms Officer (CAO) at Stitch Fix (SFIX US/CP: US$23.9), is a former VP of data science at Netflix (NFLX US/CP: US$190.4). • Orders can be placed with a simple voice command (e.g., “Can you send me an outfit for my best friend’s wedding next week?”).

•StitchBody Fix, an AI-based fashion retailer, is profitable, a rare case for a start-up

About Stitch Fix (US$mn) Katrina Lake founded Stitch Fix at 1,000 Revenue the age of 28. The company went Operating profit public six years later. Stitch Fix works with AI technology and has 750 over 3,400 stylists and 1,500 fulfillment staff to offer personalized services. The firm ships a “Fix” of five items from 500 more than 700 brands to its 2.2mn customers every month. The average price per item is US$55. 250

-250 2014 2015 2016 2017

Source: Stitch Fix, Mirae Asset Daewoo Research

46 | 2018 Outlook [Internet/Game/Advertising] Mirae Asset Daewoo Research III. [Internet] The voice interface age

Personalized voice • Amazon is developing an algorithm that can design clothing. commerce • The algorithm analyzes a series of images to identify style trends and then applies them to new items generated from scratch. • The application of machine learning technology to the fashion industry should allow Amazon to transcend its roots as a retailer and become a trendsetting fashion creator. • Amazon is emerging as a partner as well as a competitor in the fashion realm by enhancing its planning, production, and distribution capabilities.

Amazon is developing a fashion design algorithm using deep learning technology (generative adversarial network)

Google also designs and produces apparel.

Project Muse (September 2016): In partnership with German e- commerce company Zalando, Google unveiled a virtual fashion design engine, Project Muse, powered by Google’s machine learning framework TensorFlow.

Data Dress (February 2017): Through collaboration with H&M Group's digital fashion house, Ivyrevel, Google launched Data Dress, which designs personalized dresses by tracking a user’s lifestyle data through a smartphone app.

Source: Amazon, Atlas Review, Mirae Asset Daewoo Research

47 | 2018 Outlook [Internet/Game/Advertising] Mirae Asset Daewoo Research III. [Internet] The voice interface age

Internet engines shifting • The application of AI technology to voice interfaces should also lead to changes in engine algorithms for the from search to commerce business. • Traditional commerce engines have been driven by search/display-based mechanisms leveraging statistical data. recommendation • Engines for voice interfaces are backed by AI-powered recommendations and curation. • The emergence of AI-based recommendation engines could pose a threat to the search ad market; however, voice interfaces offer a limited number of ad slots.

Importance of AI curation engines to grow amid proliferation of voice recognition and AI

Search ad mechanisms and challenges Advertisers pay for higher positions on the search engine results page. Text Search Text Unlike visual interfaces, voice interfaces cannot generate AI area Image countless search results on Image command, limiting ad impressions; Information Voice nevertheless, voice commerce Audio functions (e.g., purchase and Audio payment services) will gain Communication Answering/ attention. Conversation Natural curation Video system Commerce language engine voice

Source: Mirae Asset Daewoo Research

48 | 2018 Outlook [Internet/Game/Advertising] Mirae Asset Daewoo Research III. [Internet] The voice interface age

Commerce engines • The voice interface age will enable different ad models to complement one another. shifting from search to • Voice interfaces, which have limited ad slots, should complement visual interfaces. recommendation • Advertisers are likely to vie for the limited number of ad slots provided by voice recommendation services, driving up ad rates. • The rise of voice interfaces should further widen service quality gaps between internet companies, as the sophistication of AI engines should gain greater importance for user experience going forward.

NAVER’s AI product recommendation algorithm AiTEMS

NAVER’s AiTEMS AiTEMS was first applied to NAVER User profile information Mobile Shopping. Based on deep learning, AiTEMS automatically Customized curation analyzes purchase history and User info metadata to make personalized product recommendations. Less- popular shopping malls and products can be included in the Curation recommendation list. model Curation based on list Product info ANN

Product metadata

Source: NAVER, Mirae Asset Daewoo Research

49 | 2018 Outlook [Internet/Game/Advertising] Mirae Asset Daewoo Research III. [Internet] The voice interface age

Cars as a new internet • Over the medium to long term, the adoption of voice interfaces should enable internet companies to expand into service platform the automotive market. • In-car voice recognition technologies are growing in importance. • Internet companies are approaching the automotive market from a “post-smartphone” perspective. • Kakao has integrated its key transportation services, including taxi hailing, chauffeur, and navigation services into a single app called Kakao T.

Kakao new integrated mobility app Kakao T

Kakao T: Mobility for everyone Taxis, designated drivers, parking, and navigation

Hello, this is Kakao T

Source: Kakao, Mirae Asset Daewoo Research

50 | 2018 Outlook [Internet/Game/Advertising] Mirae Asset Daewoo Research III. [Internet] The voice interface age

Autonomous driving • Autonomous car technologies are enabling people to become users rather than drivers. prompts a shift from • Demand for integrated transportation services will likely increase when fully autonomous cars are available. drivers to users • The Finnish company MaaS Global has recently launched an all-in mobility app called Whim, which gives users access to a huge range of mobility options for a monthly subscription fee. • Going forward, MaaS is likely to be integrated into an “autonomous vehicle network.”

MaaS Global’s (Finland) mobility app Whim

Development of autonomous driving in urban areas Imagine if all modes of …and available at your fingertips Present Future transportation were for one monthly fixed fee integrated on one platform… Taxi

Ride sharing intermediary Ride sharing Autonomous carpool center driving vehicle Car sharing network (traditional) Car sharing (free floating) Ride sharing (neighborhood)

Car Car

Source: F. Dudenhoffer

Source: MaaS Global, Mobile Trends 2018, Mirae Asset Daewoo Research

51 | 2018 Outlook [Internet/Game/Advertising] Mirae Asset Daewoo Research III. [Internet] The voice interface age

Autonomous driving • Connected Car Commerce makes the car a payment terminal for e-commerce services. prompts a shift from • In Korea, OWiN, an IoT-based commerce platform startup, is working on the Connected Car Commerce service in partnership with LG Uplus (032640 KS/Buy/TP: W19,000/CP: W14,450), GS Caltex, and Shinhan Card. drivers to users • Connected car credit card payments will offer various services and greater convenience than the Hi-pass card, encompassing payments at toll plazas, gas stations, restaurants, and drive-through facilities.

Connected Car Commerce: Cars as payment terminals

Connected Car Commerce Service - The service began on November 7th at 100 locations within the Seoul capital area (e.g., Gangnam-gu, Seocho-gu, Songpa-gu, Seongnam). - GS Caltex’s directly-run gas stations, restaurants, flower shops, desert cafes, dining Search Choose Order Confirmation Navigation places, cafes for shops menu items and pay - A car becomes a credit card en route terminal with the Car ID device, which can be plugged into the cigarette lighter socket. - Bluetooth data range of up to 150 meters Share information about vehicle location

Source: Connected Car Commerce, Mirae Asset Daewoo Research

52 | 2018 Outlook [Internet/Game/Advertising] Mirae Asset Daewoo Research III. [Internet] The voice interface age

Voice-activated • Although various in-car services are already available, behind-the-wheel cellphone use is cumbersome and infotainment strictly regulated. • The development of voice-activated automotive infotainment systems has been increasing; NAVER is set to release its AWAY infotainment system in the automotive aftermarket. • The current infotainment system provides audio content and voice-activated location search. • As autonomous cars can calculate routes and travel times, they can make relevant restaurant/product recommendations and display targeted ads en route to a destination.

NAVER Labs’ automotive infotainment system AWAY

NAVER Labs’ AWAY - AWAY offers destination search capabilities backed by voice- activated location search, natural language recognition, and nationwide location information. - In-car services (personalized content, NAVER Music, Audio Clip, NAVER Sports) are already available; AWAY’s favorites list is synchronized with NAVER Map. - AWAY is deployed in Green Car, a car sharing service.

Source: NAVER, Mirae Asset Daewoo Research

53 | 2018 Outlook [Internet/Game/Advertising] Mirae Asset Daewoo Research III. [Internet] The voice interface age

Expansion of the car • In the age of autonomous driving, cars can be more than a means of transportation; they can also be smart concept payment terminals, personal spaces, and showrooms. • Fully autonomous vehicles will free drivers from the task of driving, creating time for non-driving tasks • The time previously spent on driving can give rise to opportunities for new revenue for internet companies. • Internet firms are researching autonomous driving technologies to generate new revenue opportunities.

NAVER Labs’ autonomous test vehicle

NAVER’s investments in the automotive sector Mar. 2017: Epipolar (3D mapping) Aug. 2017: Dabeeo (multi-language map) Sep. 2017: Innoviz Technologies (LiDAR sensor company in Israel) Oct. 2017: Poolus (car pooling)

Source: NAVER, Mirae Asset Daewoo Research

54 | 2018 Outlook [Internet/Game/Advertising] Mirae Asset Daewoo Research Internet (Overweight)

• Shift in business focus: Ads  Commerce • Issue 1: Introduction of voice interfaces • Issue 2: Cloud in the AI era III. [Internet] Cloud in the AI era

Cloud evolving into a • In the age of AI, cloud is going beyond storage and evolving into a supercomputing solution. supercomputing solution • Through stored data, cloud provides the framework that enables AI to learn on its own and produce better functions and results. • The big question in 2018 will be, who will successively tap into cloud and its supercomputing capabilities?

Cloud evolving into a supercomputing solution

Source: IT Insight, Mirae Asset Daewoo Research

56 | 2018 Outlook [Internet/Game/Advertising] Mirae Asset Daewoo Research III. [Internet] Cloud in the AI era

Cloud becoming a bigger • AlphaGo, Google’s artificially intelligent Go player, sent shockwaves across the world by beating Lee Se-dol. presence in our lives • Enabled by cloud computing, AlphaGo has the computing power of a supercomputer (ranked around 300th among the world’s fastest supercomputers). • AlphaGo raised Google’s profile as the global leader in AI and cloud.

Google used AlphaGo to promote its machine learning chip AlphaGo, Google’s AI Go player cloud TPU

Source: Deep Mind, Mirae Asset Daewoo Research Source: Google, Mirae Asset Daewoo Research

57 | 2018 Outlook [Internet/Game/Advertising] Mirae Asset Daewoo Research III. [Internet] Cloud in the AI era

In 2018, cloud will be • Huawei (002502 CH/CP: RMB8.86) predicts that 90% of users will benefit from AI services on their essential to mobile smartphones by 2025. • The Chinese company announced its entry into cloud computing in September 2016. services • At its “Growth with Cloud” conference held in September 2017, the company unveiled a number of cloud solutions. • Huawei sold 39.1mn smartphones in 3Q17, holding the third-largest market share (10.5%) after SEC and Apple.

Huawei’s cloud solution structure

Source: Huawei, Mirae Asset Daewoo Research

58 | 2018 Outlook [Internet/Game/Advertising] Mirae Asset Daewoo Research III. [Internet] Cloud in the AI era

Cloud is also driving • The IT market has continued to expand with the arrival of cloud. growth in the IT market • The PC market is estimated at US$25bn, while the client/server market is estimated at US$250bn. • The mobile/cloud market is forecast to grow to US$2.5tr, while the intelligent cloud market is expected to grow to US$4.5tr.

The IT market is growing along with cloud

IT market size

Source: Microsoft, Mirae Asset Daewoo Research

59 | 2018 Outlook [Internet/Game/Advertising] Mirae Asset Daewoo Research III. [Internet] Cloud in the AI era

Cloud forms the basis of • Cloud forms the basis of “Service as a Service.” There are three primary types of cloud services: Infrastructure as a “Service as a Service” Service (IaaS), Platforms as a Service (PaaS), and Software as a Service (SaaS). • These three types of services differ in terms of how much control the user has.

Types of cloud services 2016 cloud service M/S breakdown

IaaS PaaS SaaS Delivered by theservice provider provider Delivered by theservice Delivered by theservice provider Software Software Software 19%

Data Data Data

Middleware Middleware Middleware US$98.7bn (as of 2016) 13% OS OS OS

Server Server Server 68%

Networking Networking Networking

IaaS PaaS Saas

Source: KDI, Company data, Mirae Asset Daewoo Research Source: IDC, Mirae Asset Daewoo Research

60 | 2018 Outlook [Internet/Game/Advertising] Mirae Asset Daewoo Research III. [Internet] Cloud in the AI era

Paradigm shift in cloud • Reasons for adopting cloud: Cost savings  Business model innovation  Intelligent value addition • The accelerating integration of AI and cloud has been a key driver behind this paradigm shift. • Cloud is increasingly being viewed from a value-added perspective, rather than a cost-savings perspective.

Paradigm shift in the cloud industry

Business Adding Cost model savings intelligent innovation value

Source: Mirae Asset Daewoo Research

61 | 2018 Outlook [Internet/Game/Advertising] Mirae Asset Daewoo Research III. [Internet] Cloud in the AI era

Advantages of cloud: • Individual users: 1) extended battery life; 2) better processing power and more storage space; 3) enhanced Cost savings reliability • Corporate/government users: 1) cost savings; 2) increased competitiveness; 3) eco-friendliness

Individual users primarily use cloud for storage purposes Corporations/governments primarily use cloud to save costs

(cents/hour) 120

100

Reduction by 80 over 33% Development costs

Maintenance costs 60 (salaries) Easy backup Easy management Licensing costs

Software costs 40 Hardware costs

20 Equipment costs

0 Current Cloud

Source: Google, NAVER, Dropbox, SK Telecom, Mirae Asset Daewoo Research Source: Oracle, Mirae Asset Daewoo Research

62 | 2018 Outlook [Internet/Game/Advertising] Mirae Asset Daewoo Research III. [Internet] Cloud in the AI era

Advantages of cloud: • Rolls-Royce (RR LN/CP: GBP855.5) is engaged in the manufacture of commercial/defense aircraft engines; its New business model customers include over 500 airline companies and over 100 military clients. • With regard to aircraft engine manufacturing, even one failure or mistake can cost hundreds of millions of dollars and human lives. As such, close monitoring is essential. • The firm has its own data storage/processing capabilities based on a dedicated cloud platform.  Revenue from aftermarket services will be generated (TotalCare business model).

Rolls-Royce is expanding revenue with cloud-based service revenue

Note: OE refers to original equipment Source: Rolls-Royce, Mirae Asset Daewoo Research

63 | 2018 Outlook [Internet/Game/Advertising] Mirae Asset Daewoo Research III. [Internet] Cloud in the AI era

Advantages of cloud: • AI services are operating based on cloud technology. Potential to take • Global internet firms are promoting their cloud businesses through AI services: Amazon (Alexa), Google (TensorFlow), NAVER (Clova). advantage of AI

Major internet firms are promoting their cloud businesses via AI services

Source: Amazon, NAVER, LINE, Google, Mirae Asset Daewoo Research

64 | 2018 Outlook [Internet/Game/Advertising] Mirae Asset Daewoo Research III. [Internet] Cloud in the AI era

Global cloud markets are • Global infrastructure (IaaS/PaaS) M/S breakdown (2Q17): Amazon (34%), Microsoft (MSFT US/CP: US$86.4; 11%), currently highly IBM (IBM US/CP: US$153.3; 8%) • Global cloud PaaS M/S breakdown (2016) : Microsoft (18%), Amazon (11%), Salesforce.com (CRM US/US$105.1; fragmented 11%), Google (6%) • Asian cloud firms (e.g., Alibaba, Tencent, NAVER) are also growing at a rapid pace.

Global cloud market is now highly fragmented

Source: Company materials, Mirae Asset Daewoo Research

65 | 2018 Outlook [Internet/Game/Advertising] Mirae Asset Daewoo Research III. [Internet] Cloud in the AI era

Amazon Web Services • Cloud computing addresses the fact that computing resources can be idle and unused at certain points cloud (AWS) (i.e., off-peak season/times). • For server computing resources, which are usually underutilized, demand grows over 10-fold during the Black Friday/Cyber Monday shopping season for Amazon. • In 3Q17, Amazon’s AWS revenue and operating profit grew 42% YoY and 36% YoY, respectively.

Quarterly revenue and operating profit from Amazon’s cloud business (AWS)

Source: Amazon, Mirae Asset Daewoo Research

66 | 2018 Outlook [Internet/Game/Advertising] Mirae Asset Daewoo Research III. [Internet] Cloud in the AI era

Cloud services are the • For internet firms, AI-driven voice recognition should be viewed as a service/interface rather than a true revenue actual generator of source. • Cloud services are the primary generator of revenue related to AI technology. revenue related to AI • Amazon’s cloud revenue has been expanding at an accelerated pace since the launch of Alexa in November 2014; services the OP margin for its cloud services currently stands at 25%.

For Amazon, cloud-related operating profit exceeds company’s total operating profit

(US$bn) 5 Cloud revenue Cloud operating profit Total operating profit 4

0 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17

Source: Amazon, Mirae Asset Daewoo Research

67 | 2018 Outlook [Internet/Game/Advertising] Mirae Asset Daewoo Research III. [Internet] Cloud in the AI era

Overseas internet firms • For Amazon, growth in e-commerce (mainstay business) revenue is in the 20% range, but top-line growth delivering strong cloud- for the cloud business is far greater, at the 40% level. • Microsoft’s cloud products, including Office 365 (SaaS) and Azure (PaaS), are delivering strong revenue growth. related revenue growth • Chinese internet firms Alibaba and Tencent have also seen rapid growth in their cloud revenue.

Amazon, Microsoft, Alibaba, and Tencent are all displaying strong cloud growth

아마존 마이크로소프트 알리바바 텐센트

Revenue growth +42% +97% +99% +143% (YoY, %)

Revenue contribution 10% - 5% - (%)

Note: As of 3Q17; Tencent’s cloud revenue growth is based on the results of the company’s other businesses Source: Company data, Mirae Asset Daewoo Research

68 | 2018 Outlook [Internet/Game/Advertising] Mirae Asset Daewoo Research III. [Internet] Cloud in the AI era

Competition facilitates • IDC expects the global cloud market to grow at a CAGR of 22% through 2020. growth • The competitive environment is shifting from price discounts to regional expansion and functional enhancements: both quantitative and qualitative growth are underway. • Among cloud services, IaaS will likely grow more rapidly than SaaS. AWS is representative of IaaS.

Among cloud services, IaaS will likely grow the most rapidly

(US$bn) 80 PaaS IaaS SaaS

0 2016 2017 2018F 2019F 2020F

Source: Gartner, Bloomberg, Mirae Asset Daewoo Research

69 | 2018 Outlook [Internet/Game/Advertising] Mirae Asset Daewoo Research III. [Internet] Cloud in the AI era

Cloud market: • Existing hardware/infrastructure-based cloud service providers, including IBM and Oracle (ORCL US/CP: US$47.7), Existing players vs. are losing ground. • Meanwhile, new services/AI-based players, such as Amazon, Microsoft, and Google, are emerging. new players • Global cloud infrastructure market share: 34% for Amazon, 11% for Microsoft, 8% for IBM

Expected gains/losses over next three years among major IT vendors (based on survey of CIOs)

Note: As of July 2017 Source: Alphawise, Business Insider, Mirae Asset Daewoo Research

70 | 2018 Outlook [Internet/Game/Advertising] Mirae Asset Daewoo Research III. [Internet] Cloud in the AI era

Intense capex • Competition for cloud data center expansion is underway globally. competition • Cloud data center expansion has been driven by global IT firms based in the US; since 2017, internet-based Asian cloud companies have also jumped on the bandwagon. • Amazon, Google, IBM, Alibaba, and NAVER are currently expanding their cloud data center capacities.. • SEC and NVIDIA (NVDA US/CP: US$197.9) are benefiting from the growth of data center-use semiconductor demand.

Shares of SEC and NVIDIA have advanced 42% and 75%, respectively, since the beginning of 2017

(1/17=100) 225 SEC NVIDIA 200

175

150

125

100

50 1/17 2/17 3/17 4/17 5/17 6/17 7/17 8/17 9/17 10/17 11/17 12/17

Source: Thomson Reuters, Mirae Asset Daewoo Research

71 | 2018 Outlook [Internet/Game/Advertising] Mirae Asset Daewoo Research III. [Internet] Cloud in the AI era

Cloud-driven changes: • Zynga (ZNGA US/CP: US$4.1): Based on AWS; cloud-based gameplay tracking; data-based decision making Game • NCsoft’s Lineage M: Based on NAVER’s cloud platform; game downloads via CDN infrastructure • Bluehole’s PlayerUnknown’s Battlegrounds (PUBG): AWS was adopted during its release; recently, Microsoft’s Azure was also adopted

NCsoft’s Lineage M: Initial downloads are available via cloud Bluehole’s PUBG: Utilizing multiple cloud vendors (AWS, Azure)

In addition to AWS, Microsoft’s Azure has recently been adopted to ensure server stability.

Initial downloads were stable thanks to NAVER’s cloud platform

Source: NBP, Mirae Asset Daewoo Research Source: Inven, Bluehole, Mirae Asset Daewoo Research

72 | 2018 Outlook [Internet/Game/Advertising] Mirae Asset Daewoo Research III. [Internet] Cloud in the AI era

Cloud-driven changes: • In 2016, Netflix completely shifted from internal data center operations to Amazon’s cloud services. Media content • This move is designed to reduce costs and content download times, and to facilitate the development of original content using big data. • Since 3Q17, the number of non-North American subscribers has exceeded that of North American subscribers.

For Netflix, non-North American subscribers outnumber Netflix has adopted AWS North American subscribers

(mn) 60 North America Ex-North America

0 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17

Source: AWS, Netflix, Mirae Asset Daewoo Research Source: Netflix, Mirae Asset Daewoo Research

73 | 2018 Outlook [Internet/Game/Advertising] Mirae Asset Daewoo Research III. [Internet] Cloud in the AI era

Cloud-driven changes: • Dow Jones is running all of its Asia traffic through AWS. The use of Amazon’s cloud computing services has Financial industry helped the company reduce costs by 25% compared to the costs of leasing a data center. • NH Bank is providing application programming interfaces (APIs) for its cloud computing services to domestic FinTech firms and cloud-based cash management systems (CMS) to corporate customers.  Demand from small/mid-sized firms should increase sharply.

Dow Jones is running its Asia traffic through AWS NH Bank adopted cloud services to support FinTech firms

NH FinTech open platform

API Utilization Enrollment Service introduction procedure enrollment

Source: Dow Jones, AWS, Mirae Asset Daewoo Research Source: NH Bank, Mirae Asset Daewoo Research

74 | 2018 Outlook [Internet/Game/Advertising] Mirae Asset Daewoo Research III. [Internet] Cloud in the AI era

Government usage • The US and UK governments have already adopted cloud computing, primarily targeting cost reductions. • The US government has adopted cloud computing since 1995, and has actively employed cloud-based big data analytics for border protection since the 9/11 terrorist attacks. • The UK government started discussions on adopting cloud computing technology in 2009 in pursuit of greater cost efficiency. Currently, Transport for London is widely adopting cloud computing for big data analysis.

US adopted cloud computing for border protection: AVATAR Transport for London uses Oyster card data to plan services

Source: University of Arizona, Mirae Asset Daewoo Research Source: Alexandrine Press, Mirae Asset Daewoo Research

75 | 2018 Outlook [Internet/Game/Advertising] Mirae Asset Daewoo Research III. [Internet] Cloud in the AI era

Korean government • In Korea, cloud computing is only in the nascent stages.  The government should play a critical role in spurring the growth of cloud computing technology. • The government designated cloud computing one of the four major technologies to drive the Fourth Industrial Revolution, along with IoT, big data, and mobile. • In 2017, the government spent W438.5bn on supporting cloud computing technology (out of the total IT budget of W5.2tr). The government plans to open a new cloud service center in 2019.

Korean government’s utilization of cloud computing Government’s road map for cloud computing technology

Statistics Korea Ministry of Education

E-Census system Korean history exam system

• Access via PC/mobile • Population and housing • Application, issuance of test ID slips, census Services test venue selection, sample Backup centers SDDC • Agriculture/fishery census questions, etc. - Data backup - Intelligent data • Surge in traffic during application between centers centers • Convenience and the announcement of successful - Active/active • To be used for other purposes Details applicants architecture after the completion of census • Explosive growth in applicants • Previously operated by a private IDC

• Total: More than 30% of the • Total: 1,185,223 population User base • Concurrent users: Up to 5,000 • Concurrent users: 38,000 New cloud Sophistication of • Verification of G-Cloud stability Cloud platforms • Verification of G-Cloud stability in service centers cloud technology in facilitating massive user facilitating massive user access access Key issues • Efficient resource utilization via the - Cloud - AaaS, PaaS, SaaS • Cost reductions via swift expansion and recovery of connections - 60% of tasks repurposing of resources after resources between centers conducted via the completion of census cloud

Source: NIRS, Mirae Asset Daewoo Research Source: NIRS, Mobile Trends 2018, Mirae Asset Daewoo Research

76 | 2018 Outlook [Internet/Game/Advertising] Mirae Asset Daewoo Research III. [Internet] Cloud in the AI era

Era of AI cloud • AI-based cloud computing technology is expected to take off starting in 2018. computing on the • Currently, cloud computing technology is most widely used for data storage; the technology will likely develop into a supercomputing solution in the upcoming AI era. horizon • In particular, AI cloud computing, which could generate added value via AI as a Service (AaaS) should be adopted in wide-ranging areas.

Searches for AI-based cloud technology on Google have increased markedly over the past five years

AI Cloud AWS Alexa

Source: Google Trends, Mirae Asset Daewoo Research

77 | 2018 Outlook [Internet/Game/Advertising] Mirae Asset Daewoo Research III. [Internet] Cloud in the AI era

Cloud computing • The number of companies operating in-house data centers should decline sharply going forward. businesses to be treated • Companies are now using cloud computing services based on pay-as-you-go schemes. like utilities in the future • In our view, only a handful of global cloud data center players will enjoy greater business opportunities (based on steady cash flow and big data analytics).

Global cloud data center map

Source: Atomia, NBP, Alibaba, Mirae Asset Daewoo Research

78 | 2018 Outlook [Internet/Game/Advertising] Mirae Asset Daewoo Research Internet (Overweight)

• Top pick: NAVER • Other notable stocks: Kakao, NHN Entertainment, Interpark Top pick NAVER (035420 KS)

E-commerce (domestic) and FinTech (overseas) businesses to gain traction

Investment points (Maintain) Buy • E-commerce (domestic): NAVER is about to complete its retail value chain, encompassing shopping, logistics, marketing, and data management. Target Price (12M, W) 1,200,000 • FinTech (overseas): LINE Pay (Korea) is outperforming NAVER Pay (overseas) in terms of both transaction volume and subscriber base. It ranks relatively high in the Japanese and Taiwanese easy payment solution markets. Share Price (12/18/17, W) 860,000 • AI: The firm is expanding the dominance of its internet platform via launches of robotics and machine learning-based hardware products, thus driving up its cloud revenue. Expected Return 40%

Risk factors OP (17F, Wbn) 1,253 • Regulatory risks could emerge amid growing domestic revenue. Consensus OP (17F, Wbn) 1,215 • Expenses related new businesses (e.g., AI, FinTech) could mount. EPS Growth (17F, %) 12.2 • Relatively slow monetization of global businesses Market EPS Growth (17F, %) 45.6

P/E (17F, x) 33.7 Market P/E (17F, x) 10.2 KOSPI 2,481.88

Market Cap (Wbn) 28,348 130 NAVER FY (Dec.) 12/14 12/15 12/16 12/17F 12/18F 12/19F KOSPI Shares Outstanding (mn) 33 125 Revenue (Wbn) 2,758 3,254 4,023 4,712 5,486 6,266 120 Free Float (%) 78.7 OP (Wbn) 758 830 1,102 1,253 1,585 1,852 115 Foreign Ownership (%) 59.6 OP margin (%) 27.5 25.5 27.4 26.6 28.9 29.6 110 Beta (12M) 0.72 NP (Wbn) 454 519 749 841 1,115 1,297 105

52-Week Low 720,000 100 EPS (W) 13,787 15,737 22,732 25,515 33,838 39,348

52-Week High 960,000 95 ROE (%) 27.8 26.5 26.2 19.9 20.7 19.8 (%) 1M 6M 12M90 P/E (x) 51.6 41.8 34.1 33.7 25.4 21.9 Absolute 6.8 -3.6 6.785 P/B (x) 8.7 6.8 5.2 4.7 4.0 3.4 80 Relative 9.1 -8.3 -12.216.12 17.4 17.8 17.12 Div.Yield (%) 0.1 0.2 0.1 0.1 0.2 0.2 Note: All figures are based on consolidated K-IFRS; NP refers to net profit attributable to controlling interests Source: NAVER, Mirae Asset Daewoo Research estimates

80 | 2018 Outlook [Internet/Game/Advertising] Mirae Asset Daewoo Research Top pick NAVER (035420 KS)

Completion of retail value chain

NAVER’s e-commerce business structure and ecosystem

Source:, Mirae Asset Daewoo Research

81 | 2018 Outlook [Internet/Game/Advertising] Mirae Asset Daewoo Research Top pick NAVER (035420 KS)

NAVER is taking advantage of AI to expand the dominance of its internet platforms

NAVER is expanding the competitiveness of its platforms by leveraging AI

Industrial Living room Large indoor space Outdoors On the road facilities

Source: NAVER, NAVER Lab, Mirae Asset Daewoo Research

82 | 2018 Outlook [Internet/Game/Advertising] Mirae Asset Daewoo Research Top pick NAVER (035420 KS)

Integration of the AI business with cloud to positively affect IT platform revenue

Full-fledged expansion of AI-based cloud businesses

Source: NAVER Cloud Platform, Mirae Asset Daewoo Research

83 | 2018 Outlook [Internet/Game/Advertising] Mirae Asset Daewoo Research Top pick NAVER (035420 KS)

LINE is expanding its advertising (cash cow) and game businesses

LINE’s ad business is expanding to include webtoon, blog, and LINE’s game business: Establishment of LINE Games, vertical video ads new game releases

Source: LINE, Mirae Asset Daewoo Research Note: Destiny Child (top) was developed by NextFloor (acquired by LINE); LINE Pokopang (bottom) was released on December 14, 2017. Source: LINE, Mirae Asset Daewoo Research

84 | 2018 Outlook [Internet/Game/Advertising] Mirae Asset Daewoo Research Top pick NAVER (035420 KS)

LINE Pay is emerging as a global FinTech platform

LINE Pay: No. of global subscribers topped 40mn; Monthly transaction value exceeded W500bn

Source: LINE, Mirae Asset Daewoo Research

85 | 2018 Outlook [Internet/Game/Advertising] Mirae Asset Daewoo Research Top pick NAVER (035420 KS)

Comprehensive Income Statement (Summarized) Statement of Financial Condition (Summarized) Forecasts/Valuations (Summarized)

(Wbn) 12/16 12/17F 12/18F 12/19F (Wbn) 12/16 12/17F 12/18F 12/19F 12/16 12/17F 12/18F 12/19F

Revenue 4,023 4,712 5,486 6,266 Current Assets 4,200 5,628 7,077 8,685 P/E (x) 34.1 33.7 25.4 21.9

Cost of Sales 0000Cash and Cash Equivalents 1,726 2,667 3,654 4,776 P/CF (x) 18.5 19.5 16.3 14.4

Gross Profit 4,023 4,712 5,486 6,266 AR & Other Receivables 694 831 942 1,076 P/B (x) 5.2 4.7 4.0 3.4

SG&A Expenses 2,921 3,459 3,901 4,415 Inventories 10 12 14 16 EV/EBITDA (x) 18.2 17.2 13.4 11.0

Operating Profit (Adj) 1,102 1,253 1,585 1,852 Other Current Assets 1,770 2,118 2,467 2,817 EPS (W) 22,732 25,515 33,838 39,348

Operating Profit 1,102 1,253 1,585 1,852 Non-Current Assets 2,171 2,338 2,342 2,370 CFPS (W) 41,966 44,151 52,764 59,800

Non-Operating Profit 30 52 53 53 Investments in Associates 182 218 254 290 BPS (W) 150,192 182,529 215,297 253,487

Net Financial Income 30 35 47 59 Property, Plant and Equipment 863 901 763 647 DPS (W) 1,131 1,200 1,300 1,400

Net Gain from Inv in Associates -9 -2 0 0 Intangible Assets 112 139 124 111 Payout ratio (%) 4.3 4.2 3.4 3.2

Pretax Profit 1,132 1,305 1,638 1,905 Total Assets 6,371 7,967 9,420 11,056 Dividend Yield (%) 0.1 0.1 0.2 0.2

Income Tax 361 455 516 600 Current Liabilities 1,804 2,091 2,401 2,713 Revenue Growth (%) 23.6 17.1 16.4 14.2

Profit from Continuing Operations 771 851 1,122 1,305 AP & Other Payables 425 509 592 676 EBITDA Growth (%) 28.3 13.2 21.3 14.0

Profit from Discontinued Operations -12 -3 0 0 Short-Term Financial Liabilities 227 203 203 203 Operating Profit Growth (%) 32.8 13.7 26.5 16.8

Net Profit 759 848 1,122 1,305 Other Current Liabilities 1,152 1,379 1,606 1,834 EPS Growth (%) 44.4 12.2 32.6 16.3

Controlling Interests 749 841 1,115 1,297 Non-Current Liabilities 437 494 550 607 Accounts Receivable Turnover (x) 9.1 9.0 8.9 8.8

Non-Controlling Interests10778Long-Term Financial Liabilities 150 150 150 150 Inventory Turnover (x) 311.2 414.5 409.3 405.6

Total Comprehensive Profit 724 864 1,122 1,305 Other Non-Current Liabilities 287 344 400 457 Accounts Payable Turnover (x) 0.0 0.0 0.0 0.0

Controlling Interests 733 842 1,094 1,273 Total Liabilities 2,241 2,585 2,951 3,320 ROA (%) 14.1 11.8 12.9 12.7

Non-Controlling Interests -9 21 28 32 Controlling Interests 3,595 4,845 5,925 7,183 ROE (%) 26.2 19.9 20.7 19.8

EBITDA 1,265 1,432 1,737 1,981 Capital Stock 16 16 16 16 ROIC (%) 169.2 251.1 857.8 -741.7

FCF (Free Cash Flow) 1,010 1,051 1,508 1,648 Capital Surplus 1,217 1,448 1,448 1,448 Liability to Equity Ratio (%) 54.3 48.0 45.6 42.9

EBITDA Margin (%) 31.4 30.4 31.7 31.6 Retained Earnings 3,810 4,587 5,667 6,925 Current Ratio (%) 232.8 269.2 294.8 320.1

Operating Profit Margin (%) 27.4 26.6 28.9 29.6 Non-Controlling Interests 535 537 544 552 Net Debt to Equity Ratio (%) -73.1 -80.1 -87.0 -91.5

Net Profit Margin (%) 18.6 17.8 20.3 20.7 Stockholders' Equity 4,130 5,382 6,469 7,735 Interest Coverage Ratio (x) 181.5 2,823.0 3,694.6 4,317.1

Source: NAVER, Mirae Asset Daewoo Research estimates

86 | 2018 Outlook [Internet/Game/Advertising] Mirae Asset Daewoo Research Kakao (035720 KS)

Investments for the future to expand

Investment points (Maintain) Trading Buy • Domestic businesses: Kakao has been working to expand the commerce/advertising capabilities of its KakaoTalk platform. Target Price (12M, W) 170,000 • Business value: The value of subsidiaries will likely come to the fore, as the company is pursuing a 2018 IPO for Kakao Games and considering an IPO for Podotree. Increasing investments: On December 15th, Kakao announced its decision to issue US$1bn worth of new Share Price (12/18/17, W) 134,500 • shares/GDRs; the company is likely to purse growth via global content/platform/AI investments.

Expected Return 26% Risk factors • Share dilution arising from new share issue OP (17F, Wbn) 177 • Uncertainties regarding the use of the funds and synergy effects Consensus OP (17F, Wbn) 185 • Low profitability and high valuation relative to peers EPS Growth (17F, %) 108.1

Market EPS Growth (17F, %) 45.5

P/E (17F, x) 74.0 Market P/E (17F, x) 10.2

KOSPI 2,481.88 Market Cap (Wbn) FY (Dec.) 12/14 12/15 12/16 12/17F 12/18F 12/19F 9,132 220 Kakao Corp. Shares Outstanding (mn) Revenue (Wbn) 499 932 1,464 1,961 2,244 2,382 68 200 KOSPI Free Float (%) 59.9 OP (Wbn) 176 89 116 177 236 257 180 Foreign Ownership (%) 22.5 OP margin (%) 35.3 9.5 7.9 9.0 10.5 10.8 160 Beta (12M) 0.84 NP (Wbn) 150 76 58 123 139 152

52-Week Low 74,800 140 EPS (W) 6,116 1,269 874 1,818 2,040 2,241 52-Week High ROE (%) 11.4 3.0 1.9 3.3 3.4 3.6 161,000 120 (%) 1M 6M 12M P/E (x) 20.2 91.2 88.1 74.0 65.9 60.0 100 Absolute -14.6 30.7 73.5 P/B (x) 2.9 2.7 1.5 2.3 2.2 2.1

Relative -12.8 24.4 42.880 Div.Yield (%) 0.1 0.1 0.2 0.1 0.2 0.2 16.12 17.4 17.8 17.12 Note: All figures are based on consolidated K-IFRS; NP refers to net profit attributable to controlling interests Source: Kakao Corp., Mirae Asset Daewoo Research estimates

87 | 2018 Outlook [Internet/Game/Advertising] Mirae Asset Daewoo Research Kakao (035720 KS)

Kakao is enhancing the features of its KakaoTalk platform

Kakao’s commerce business structure and ecosystem

Core services KakaoTalk

Gifts Ordering Shopping Commerce services Shopping Kakao Friends How

Payment/financing services

Logistics partnerships Emart delivers orders placed via KakaoTalk

Marketing services/ Plus Friend Shopping Plus data management platforms AD

Cloud computing Kakao Cloud Computing

Source: Mirae Asset Daewoo Research

88 | 2018 Outlook [Internet/Game/Advertising] Mirae Asset Daewoo Research Kakao (035720 KS)

Subsidiary value to come to the fore

Kakao Games, officially launched in November 2017, is Kakao Mobility, officially established in August 2017, released expected to go public next summer Kakao T in October 2017

Note: Kakao owns an 80% stake Note: Kakao owns a 69.3% stake; Kakao T integrates taxi, designated driver, parking, and Source: Kakao Games, Mirae Asset Daewoo Research navigation services; Source: Kakao Mobility, Mirae Asset Daewoo Research Podotree could also come into focus following the successful KakaoPay to expand its user base on the back of its Alipay IPO of Tencent’s subsidiary, China Literature partnership and linkage with Kakao Bank

Note: Kakao owns a 57.6% stake Note: Kakao owns a 60.9% stake in KakaoPay and 10% stake in Kakao Bank Source: Podotree, Mirae Asset Daewoo Research Source: KakaoPay, Mirae Asset Daewoo Research

89 | 2018 Outlook [Internet/Game/Advertising] Mirae Asset Daewoo Research Kakao (035720 KS)

Kakao has decided to issue new shares and GDRs to increase capital for future investments

Purpose of the issuance of new shares and GDRs

Value Notes

M&As and investments in mobile-focused global content and platform companies

Companies with superior content, such as - Target year: 2018 (subject to change, depending on Global content games, video content, webtoons, etc., and those with outstanding development capabilities available M&A targets) - Regions: Japan, China, and North America 900 - M&A decisions to be made in consideration of profitability, growth potential, synergies, and Platform companies that display steady Global platforms shareholder value maximization subscriber growth

Investments in Fourth Industrial Revolution-related companies and technologies (AI, etc.)

Source technologies and talent related to AI-related companies and reinforcement learning, unsupervised technologies learning, and neural network learning - Target year: 2018-19 (subject to change) 100 - Regions: Korea, China, and North America Other Fourth Industrial Revolution-related IoT, robots, and autonomous driving companies and technologies

Total 1,000 Unit: US$mn

Source: Kakao, FSS, Mirae Asset Daewoo Research

90 | 2018 Outlook [Internet/Game/Advertising] Mirae Asset Daewoo Research Kakao (035720 KS)

Comprehensive Income Statement (Summarized) Statement of Financial Condition (Summarized) Forecasts/Valuations (Summarized)

(Wbn) 12/16 12/17F 12/18F 12/19F (Wbn) 12/16 12/17F 12/18F 12/19F 12/16 12/17F 12/18F 12/19F

Revenue 1,464 1,961 2,244 2,382 Current Assets 1,217 2,084 2,430 2,732 P/E (x) 88.1 74.0 65.9 60.0

Cost of Sales 0000Cash and Cash Equivalents 642 1,407 1,664 1,919 P/CF (x) 23.1 29.0 27.6 26.7

Gross Profit 1,464 1,961 2,244 2,382 AR & Other Receivables 251 295 330 350 P/B (x) 1.5 2.3 2.2 2.1

SG&A Expenses 1,348 1,784 2,007 2,124 Inventories 13 15 17 18 EV/EBITDA (x) 24.3 29.4 24.6 23.2

Operating Profit (Adj) 116 177 236 257 Other Current Assets 311 367 419 445 EPS (W) 874 1,818 2,040 2,241

Operating Profit 116 177 236 257 Non-Current Assets 4,267 4,268 4,198 4,117 CFPS (W) 3,339 4,643 4,877 5,041

Non-Operating Profit -16 -16 -17 -17 Investments in Associates 117 138 157 167 BPS (W) 50,777 58,982 60,823 62,824

Net Financial Income -5000Property, Plant and Equipment 254 250 202 163 DPS (W) 148 200 240 260

Net Gain from Inv in Associates -10 -8 0 0 Intangible Assets 3,733 3,687 3,622 3,559 Payout ratio (%) 15.3 9.7 10.4 10.2

Pretax Profit 100 161 219 240 Total Assets 5,484 6,351 6,628 6,849 Dividend Yield (%) 0.2 0.1 0.2 0.2

Income Tax 35 21 61 67 Current Liabilities 806 868 970 1,020 Revenue Growth (%) 57.1 33.9 14.4 6.1

Profit from Continuing Operations 65 140 157 173 AP & Other Payables 263 309 354 376 EBITDA Growth (%) 40.2 31.3 15.6 3.2

Profit from Discontinued Operations 0000Short-Term Financial Liabilities 211 168 170 171 Operating Profit Growth (%) 30.3 52.6 33.3 8.9

Net Profit 65 140 157 173 Other Current Liabilities 332 391 446 473 EPS Growth (%) -31.1 108.0 12.2 9.9

Controlling Interests 58 123 139 152 Non-Current Liabilities 975 1,006 1,036 1,051 Accounts Receivable Turnover (x) 11.1 10.4 10.2 9.9

Non-Controlling Interests 8 17 19 21 Long-Term Financial Liabilities 796 795 795 795 Inventory Turnover (x) 163.5 143.6 141.8 136.8

Total Comprehensive Profit 65 147 157 173 Other Non-Current Liabilities 179 211 241 256 Accounts Payable Turnover (x) 0.0 0.0 0.0 0.0

Controlling Interests 58 132 141 155 Total Liabilities 1,781 1,873 2,006 2,071 ROA (%) 1.5 2.4 2.4 2.6

Non-Controlling Interests 7 15 16 18 Controlling Interests 3,433 4,004 4,129 4,265 ROE (%) 1.9 3.3 3.4 3.6

EBITDA 230 302 349 360 Capital Stock 34 34 34 34 ROIC (%) 2.6 4.2 5.5 5.8

FCF (Free Cash Flow) 236 156 353 313 Capital Surplus 3,105 3,553 3,553 3,553 Liability to Equity Ratio (%) 48.1 41.8 43.4 43.3

EBITDA Margin (%) 15.7 15.4 15.6 15.1 Retained Earnings 304 417 542 678 Current Ratio (%) 151.0 240.2 250.6 268.0

Operating Profit Margin (%) 7.9 9.0 10.5 10.8 Non-Controlling Interests 270 474 493 514 Net Debt to Equity Ratio (%) 3.3 -16.3 -22.2 -27.3

Net Profit Margin (%) 4.0 6.3 6.2 6.4 Stockholders' Equity 3,703 4,478 4,622 4,779 Interest Coverage Ratio (x) 8.1 0.0 0.0 0.0

Source: Kakao Corp., Mirae Asset Daewoo Research estimates

91 | 2018 Outlook [Internet/Game/Advertising] Mirae Asset Daewoo Research NHN Entertainment (181710 KS)

Easy payment solutions expected to evolve into a platform

Investment points (Maintain) Buy • E-commerce: NHN Entertainment has created an ecosystem encompassing payments, shopping mall sites, commerce solutions, marketing, data management, and cloud infrastructure. Target Price (12M, W) 83,000 • NHN PAYCO: The subsidiary is currently focusing on its easy payment service PAYCO. The service is expected to develop into a broader platform for financial and shopping services. Game: New title launches are expected to pick up; the business environment is likely to improve. Share Price (12/18/17, W) 69,300 •

Expected Return 20% Risk factors • Low profitability due to costs related to new businesses • A potential increase in competition in the easy payment and mobile game markets OP (17F, Wbn) 42 • Uncertainties over the releases of new games Consensus OP (17F, Wbn) 41

EPS Growth (17F, %) 344.5 Market EPS Growth (17F, %) 45.5

P/E (17F, x) 24.4

Market P/E (17F, x) 10.2

KOSPI 2,481.88 Market Cap (Wbn) FY (Dec.) 12/14 12/15 12/16 12/17F 12/18F 12/19F 1,356 180 NHN Entertainment 170 Shares Outstanding (mn) 20 KOSPI Revenue (Wbn) 557 645 856 911 1,028 1,097 160 Free Float (%) 50.4 OP (Wbn)12-5426426675 150 Foreign Ownership (%) 13.1 OP margin (%) 2.2 -8.4 3.0 4.6 6.4 6.8 140 Beta (12M) 0.98 NP (Wbn) 51 164 13 56 85 93 130 52-Week Low EPS (W) 3,236 8,836 639 2,842 4,323 4,730 47,700 120

52-Week High 84,000 110 ROE (%) 5.0 13.4 0.9 3.7 5.4 5.6

(%) 1M 6M 12M100 P/E (x) 26.1 6.4 78.7 24.4 16.0 14.7 Absolute -2.8 -10.9 44.590 P/B (x) 1.3 0.8 0.7 0.9 0.8 0.8

Relative -0.8 -15.2 18.980 Div.Yield (%) 0.0 0.0 0.0 0.0 0.0 0.0 16.12 17.4 17.8 17.12 Note: All figures are based on consolidated K-IFRS; NP refers to net profit attributable to controlling interests Source: NHN Entertainment, Mirae Asset Daewoo Research estimates

92 | 2018 Outlook [Internet/Game/Advertising] Mirae Asset Daewoo Research NHN Entertainment (181710 KS)

Commerce business structure is nearing completion

NHN Entertainment’s commerce business and ecosystem

Source: Mirae Asset Daewoo Research

93 | 2018 Outlook [Internet/Game/Advertising] Mirae Asset Daewoo Research NHN Entertainment (181710 KS)

To improve profitability by combining advertising with commerce business models

NHN Entertainment’s ownership structure

Note: As of 1H17; Incross was merged on November 30th Source: NHN Entertainment, Mirae Asset Daewoo Research

94 | 2018 Outlook [Internet/Game/Advertising] Mirae Asset Daewoo Research NHN Entertainment (181710 KS)

Game regulations will likely be eased

Regulations on web board games: To be reviewed in March 2018

Details

Subparagraph 8 of Table 2, which outlines matters to be addressed by game-providing business entities that offer game products that resemble betting, such as card/Go-Stop games, through information and communications networks:

① The payment limit for game users is set at W300,000 per month.

② The betting limit is W30,000 per play. Effective from February 2014 ③ If a player loses over W100,000 in a single day, he/she is blocked from accessing the game for 24 hours. through February 2016 ④ A player is prohibited from choosing his/her opponent.

⑤ Automatic betting is not allowed.

⑥ A player is required to undergo authentication every quarter.

 The enforcement decree is valid through February 23, 2016 (Paragraph 2 of Article 25).

The amendment entered into force on March 22, 2016.

① The monthly payment limit for game users was increased to W500,000.

② The betting limit was raised to W50,000 per play.

③ If a player loses over W100,000 in a single day, he/she is blocked from accessing the game for 24 hours. Amended in March 2016; abolition and review ④ A player is prohibited from choosing his/her opponent. scheduled for March 2018 ⑤ Automatic betting is not allowed.

⑥ A player is required to undergo authentication every year

The Ministry of Culture, Sports and Tourism shall examine the appropriateness of subparagraph 8 of Table 2 and take measures, such as making improvements, biennially from March 15, 2016.

Source: Game industry white paper, Mirae Asset Daewoo Research

95 | 2018 Outlook [Internet/Game/Advertising] Mirae Asset Daewoo Research NHN Entertainment (181710 KS)

Comprehensive Income Statement (Summarized) Statement of Financial Condition (Summarized) Forecasts/Valuations (Summarized)

(Wbn) 12/16 12/17F 12/18F 12/19F (Wbn) 12/16 12/17F 12/18F 12/19F 12/16 12/17F 12/18F 12/19F

Revenue 856 911 1,028 1,097 Current Assets 750 785 839 922 P/E (x) 78.7 24.4 16.0 14.7

Cost of Sales 0000Cash and Cash Equivalents 301 334 330 379 P/CF (x) 13.7 14.8 11.4 11.1

Gross Profit 856 911 1,028 1,097 AR & Other Receivables 181 182 205 219 P/B (x) 0.7 0.9 0.8 0.8

SG&A Expenses 830 868 962 1,022 Inventories 22 22 25 26 EV/EBITDA (x) 9.3 12.4 9.7 8.5

Operating Profit (Adj) 26 42 66 75 Other Current Assets 246 247 279 298 EPS (W) 639 2,842 4,323 4,730

Operating Profit 26 42 66 75 Non-Current Assets 1,089 1,111 1,150 1,169 CFPS (W) 3,682 4,668 6,075 6,235

Non-Operating Profit 0 39 39 40 Investments in Associates 187 188 212 226 BPS (W) 76,086 78,884 83,207 87,936

Net Financial Income 19 9 10 11 Property, Plant and Equipment 114 146 130 118 DPS (W) 0000

Net Gain from Inv in Associates -13 -5 0 0 Intangible Assets 323 317 308 301 Payout ratio (%) 0.0 0.0 0.0 0.0

Pretax Profit 26 81 105 115 Total Assets 1,838 1,896 1,989 2,090 Dividend Yield (%) 0.0 0.0 0.0 0.0

Income Tax 19 34 32 36 Current Liabilities 268 266 279 298 Revenue Growth (%) 32.7 6.4 12.8 6.7

Profit from Continuing Operations 7 47 72 79 AP & Other Payables 92 93 105 112 EBITDA Growth (%) - 19.0 21.3 3.3

Profit from Discontinued Operations 0000Short-Term Financial Liabilities 23 20 2 2 Operating Profit Growth (%) - 61.5 57.1 13.6

Net Profit 7 47 72 79 Other Current Liabilities 153 153 172 184 EPS Growth (%) -92.8 344.8 52.1 9.4

Controlling Interests 13 56 85 93 Non-Current Liabilities 60 62 68 72 Accounts Receivable Turnover (x) 8.0 8.0 8.5 8.3

Non-Controlling Interests -5 -9 -12 -13 Long-Term Financial Liabilities 10 11 11 11 Inventory Turnover (x) 78.3 41.5 43.9 42.7

Total Comprehensive Profit 53 43 72 79 Other Non-Current Liabilities 50 51 57 61 Accounts Payable Turnover (x) 0.0 0.0 0.0 0.0

Controlling Interests 59 51 85 93 Total Liabilities 328 327 348 370 ROA (%) 0.4 2.5 3.7 3.9

Non-Controlling Interests -6 -7 -13 -14 Controlling Interests 1,462 1,518 1,602 1,694 ROE (%) 0.9 3.7 5.4 5.6

EBITDA 63759194Capital Stock 10101010ROIC (%) 1.34.17.89.1

FCF (Free Cash Flow) 48 -47 100 100 Capital Surplus 1,238 1,238 1,238 1,238 Liability to Equity Ratio (%) 21.7 20.9 21.2 21.5

EBITDA Margin (%) 7.4 8.2 8.9 8.6 Retained Earnings 263 318 403 495 Current Ratio (%) 280.1 295.6 300.4 309.4

Operating Profit Margin (%) 3.0 4.6 6.4 6.8 Non-Controlling Interests 48 51 39 26 Net Debt to Equity Ratio (%) -29.4 -30.6 -31.5 -33.7

Net Profit Margin (%) 1.5 6.1 8.3 8.5 Stockholders' Equity 1,510 1,569 1,641 1,720 Interest Coverage Ratio (x) 13.2 162.1 369.5 712.7

Source: NHN Entertainment, Mirae Asset Daewoo Research estimates

96 | 2018 Outlook [Internet/Game/Advertising] Mirae Asset Daewoo Research Interpark (108790 KQ)

Leader in the vertical commerce space; Gradually overcoming weaknesses

Investment points (Downgrade) Trading Buy • E-commerce: Leader in the vertical commerce space (e.g., tour, concert tickets) • The acquisition of Song-in Books should boost the book division’s top-line growth; the shopping unit should Target Price (12M, W) 11,000 improve its cost efficiency. • Profit-focused management: The tour division is strengthening its package tour sales while cutting promotional spending; the open market shopping unit should focus on launching specialized shopping sites Share Price (12/18/17, W) 9,460 while improving its mobile competitiveness.

Expected Return 16% Risk factors • The firm’s margin recovery in 2017 is mostly priced in. OP (17F, Wbn) 28 • Risk of being left behind by formidable competitors (i.e., large open market sites and major portals) Consensus OP (17F, Wbn) 24 • The shopping and book divisions could remain in the red. EPS Growth (17F, %) 532.8 Market EPS Growth (17F, %) 45.6

P/E (17F, x) 21.2 Market P/E (17F, x) 10.2 KOSDAQ 770.50

160 Market Cap (Wbn) 313 Interpark FY (Dec.) 12/14 12/15 12/16 12/17F 12/18F 12/19F

Shares Outstanding (mn) 33 150 KOSDAQ Revenue (Wbn) 407 402 466 485 528 545

Free Float (%) 30.9 140 OP (Wbn) 17 23 9 28 31 33

Foreign Ownership (%) 13.0 130 OP margin (%) 4.2 5.7 1.9 5.8 5.9 6.1 Beta (12M) 0.55 NP (Wbn) 11 17 2 15 17 19 120 52-Week Low 8,100 EPS (W) 335 516 71 447 518 563 110 52-Week High 13,350 ROE (%) 8.5 10.5 1.4 8.7 9.4 9.6 100 (%) 1M 6M 12M P/E (x) 68.6 44.3 144.3 21.2 18.3 16.8 90 Absolute 1.4 -18.4 -9.9 P/B (x) 4.8 4.4 2.0 1.8 1.7 1.6 80 Relative 2.1 -29.0 -27.316.12 17.4 17.8 17.12 Div.Yield (%) 0.4 1.1 1.0 1.6 1.6 1.6 Note: All figures are based on consolidated K-IFRS; NP refers to net profit attributable to controlling interests Source: Interpark, Mirae Asset Daewoo Research estimates

97 | 2018 Outlook [Internet/Game/Advertising] Mirae Asset Daewoo Research Interpark (108790 KQ)

Interpark’s business structure

Interpark’s e-commerce business overview

Source: Mirae Asset Daewoo Research

98 | 2018 Outlook [Internet/Game/Advertising] Mirae Asset Daewoo Research Interpark (108790 KQ)

Comprehensive Income Statement (Summarized) Statement of Financial Condition (Summarized) Forecasts/Valuations (Summarized)

(Wbn) 12/16 12/17F 12/18F 12/19F (Wbn) 12/16 12/17F 12/18F 12/19F 12/16 12/17F 12/18F 12/19F

Revenue 466 485 528 545 Current Assets 313 345 391 425 P/E (x) 144.3 21.2 18.3 16.8

Cost of Sales 245 257 280 289 Cash and Cash Equivalents 67 89 113 138 P/CF (x) 21.8 10.0 9.0 8.4

Gross Profit 221 228 248 256 AR & Other Receivables 89 92 100 103 P/B (x) 2.0 1.8 1.7 1.6

SG&A Expenses 213 200 218 222 Inventories 40 41 45 46 EV/EBITDA (x) 14.3 5.9 4.9 4.0

Operating Profit (Adj) 9 28 31 33 Other Current Assets 117 123 133 138 EPS (W) 71 447 518 563

Operating Profit 9 28 31 33 Non-Current Assets 155 146 137 128 CFPS (W) 467 949 1,055 1,121

Non-Operating Profit -5-6-5-5Investments in Associates3444BPS (W) 4,9815,3165,6856,098

Net Financial Income -2000Property, Plant and Equipment 46 41 36 31 DPS (W) 100 150 150 150

Net Gain from Inv in Associates3000Intangible Assets 83 78 74 69 Payout ratio (%) 131.9 31.4 27.1 24.9

Pretax Profit 4 22 26 28 Total Assets 467 490 528 553 Dividend Yield (%) 1.0 1.6 1.6 1.6

Income Tax 2678Current Liabilities299309333343Revenue Growth (%) 15.9 4.1 8.9 3.2

Profit from Continuing Operations 3 16 18 20 AP & Other Payables 66 68 74 77 EBITDA Growth (%) -42.4 94.7 8.1 7.5

Profit from Discontinued Operations 0000Short-Term Financial Liabilities 35 35 0 0 Operating Profit Growth (%) -60.9 211.1 10.7 6.5

Net Profit 3 16 18 20 Other Current Liabilities 198 206 259 266 EPS Growth (%) -86.2 529.6 15.9 8.7

Controlling Interests 2151719Non-Current Liabilities4444Accounts Receivable Turnover (x) 15.4 22.0 22.5 21.9

Non-Controlling Interests0111Long-Term Financial Liabilities 3300Inventory Turnover (x)12.712.012.312.0

Total Comprehensive Profit 3 16 18 20 Other Non-Current Liabilities 1144Accounts Payable Turnover (x) 10.6 11.4 11.6 11.3

Controlling Interests 2 15 17 19 Total Liabilities 303 313 338 347 ROA (%) 0.5 3.3 3.6 3.7

Non-Controlling Interests0111Controlling Interests165176188201ROE (%) 1.48.79.49.6

EBITDA 19 37 40 43 Capital Stock 17 17 17 17 ROIC (%) 7.2 25.0 32.6 44.0

FCF (Free Cash Flow) -1 28 33 32 Capital Surplus 98 98 98 98 Liability to Equity Ratio (%) 184.0 176.9 177.3 169.0

EBITDA Margin (%) 4.1 7.6 7.6 7.9 Retained Earnings 50 61 74 87 Current Ratio (%) 104.7 111.5 117.3 123.8

Operating Profit Margin (%)1.95.85.96.1Non-Controlling Interests0124Net Debt to Equity Ratio (%)-41.6-52.2-62.9-71.0

Net Profit Margin (%) 0.4 3.1 3.2 3.5 Stockholders' Equity 165 177 190 205 Interest Coverage Ratio (x) 3.4 0.0 0.0 0.0

Source: Interpark, Mirae Asset Daewoo Research estimates

99 | 2018 Outlook [Internet/Game/Advertising] Mirae Asset Daewoo Research [Internet] Valuation overview

Valuation comparison with global peers (Wbn, x, %) Operating Market Revenue Net profit P/E EV/EBITDA P/B ROE Company Ticker CP profit cap 17F 18F 17F 18F 17F 18F 17F 18F 17F 18F 17F 18F 17F 18F NAVER 035420 KS W860,000 28,348 4,712 5,486 1,253 1,585 848 1,122 33.7 25.4 17.2 13.4 4.7 4.0 19.9 20.7 Kakao 035720 KS W134,500 9,132 1,961 2,244 177 236 140 157 74.0 65.9 29.4 24.6 2.3 2.2 3.3 3.4 NHN 181710 KS W69,300 1,356 911 1,028 42 66 47 72 24.4 16.0 12.4 9.7 0.9 0.8 3.7 5.4 Entertainment Interpark 108790 KQ W9,460 313 485 528 28 31 16 18 21.2 18.3 5.9 4.9 1.8 1.7 8.7 9.4 Alphabet GOOGL US US$1,085.1 807,144 96,836 114,536 40,059 48,112 32,060 38,481 24.8 21.8 14.5 12.2 4.6 3.8 15.3 16.1 Amazon AMZN US US$1,190.6 618,150 192,833 248,398 3,809 7,145 6,173 8,899 100.9 74.6 31.2 23.1 21.6 15.9 9.6 14.3 Facebook FB US US$180.8 572,074 43,796 58,383 21,068 24,942 21,173 25,235 27.5 25.4 19.1 15.5 6.9 5.5 24.3 22.7 eBay EBAY US US$38.2 43,604 10,411 11,151 3,053 3,281 2,354 2,510 19.1 17.2 12.8 11.9 3.9 3.4 19.4 18.4 Snap SNAP US US$16.1 20,635 863 1,410 -887 -942 -813 -868 - - - - 6.9 9.9 -33.9 -33.1 Twitter TWTR US US$24.7 17,964 2,607 2,768 486 498 327 356 53.6 48.9 17.8 16.5 3.3 3.2 6.1 5.6 Shopify SHOP US US$107.6 11,362 720 1,039 -2 27 6 27 2,063.1 366.6 506.2 192.3 10.5 10.7 0.8 2.6 MercadoLibre MELI US US$326.1 15,320 1,483 2,115 157 138 136 143 120.6 110.8 69.4 66.6 32.8 27.6 26.8 25.2 Yahoo Japan 4689 JP JPY512 28,153 8,805 9,498 1,884 2,121 1,300 1,449 21.9 19.6 10.8 9.6 2.9 2.6 13.5 13.7 Rakuten 4755 JP JPY1,026 14,206 9,055 10,051 1,442 1,338 827 768 16.5 17.3 0.2 0.2 2.0 1.8 12.8 10.7 LINE 3938 JP JPY4,725 10,159 1,676 1,895 279 291 138 147 69.9 61.3 26.3 24.6 5.8 5.3 9.2 9.2 Tencent 700 HK HK$394.2 523,669 39,376 54,950 13,923 16,906 10,734 14,044 48.6 37.4 34.4 26.7 13.5 10.0 31.2 30.1 Alibaba BABA US US$173.4 483,568 40,086 54,596 12,103 16,986 14,244 18,525 33.2 25.9 26.8 20.2 7.9 6.2 20.0 22.1 Baidu BIDU US US$240.9 87,855 13,928 17,167 2,518 3,231 3,205 3,505 27.7 25.4 23.1 19.3 4.8 4.1 17.3 16.1 JD.com JD US US$41.7 62,655 59,707 77,777 60 727 809 1,403 78.2 47.3 78.4 38.8 8.7 7.6 1.8 9.8 Weibo WB US US$108.0 24,433 1,234 1,821 437 720 416 674 60.7 37.6 49.1 29.4 20.1 13.2 37.0 39.8 Momo MOMO US US$25.4 5,379 1,433 1,877 377 496 382 490 15.3 11.8 10.6 8.3 5.2 3.7 37.9 33.5 Average 38.3 33.2 25.8 19.8 8.1 6.8 15.9 16.4

Note: Data for Korean companies are based on our estimates; other companies’ data are based on the Bloomberg consensus. Source: Bloomberg, Mirae Asset Daewoo Research

100 | 2018 Outlook [Internet/Game/Advertising] Mirae Asset Daewoo Research Game (Overweight)

• Strategic shift: Domestic  Overseas • Issue 1: Growth in overseas revenue • Issue 2: New title momentum to continue IV. [Game] Overseas revenue growth & new titles

Long-term trends: • The domestic game industry’s market cap trend can be divided into three growth stages: Increasingly large-scale 1) 2000s: Rapid growth of online games; diversification and increasing sophistication of PC online games games and industry 2) 2012-15: Growth driven by mobile casual games; the rise of games based on messaging apps/social networking services restructuring • 3) 2016 and beyond: Blockbuster mobile games and industry restructuring; the introduction of MMORPGs; increasing M&A activity among global players

Game industry is undergoing restructuring, spurred by increasingly elaborate mobile titles and a wave of M&A deals

(Wtr) (Wtr) 14 Mobile games become 40 Korean game market revenue (L) more large-scale; Major Korean game companies - total market cap (R) global restructuring taking shape Mobile casual game-driven growth

11 Period of double-digit growth for online games 30

7 20

4 10

0 0 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18F

Note: Combined market cap is based on the market caps of NCsoft, Com2uS, NHN Entertainment, Webzen, DoubleU Games, and Neowiz Games as of mid-May of each year. For Netmarble Games, estimated valuations during 2014-16 were included. Combined revenue includes revenue from PC online, mobile, console, PC CD, arcade, and internet café games. Source: KOCCA, Thomson Reuters, Mirae Asset Daewoo Research

102 | 2018 Outlook [Internet/Game/Advertising] Mirae Asset Daewoo Research IV. [Game] Overseas revenue growth

Netmarble Games: Lineage II: Revolution in Korea (December 2016)  Taiwan/Southeast Asia (June 2017)  Japan (August)  North America/Europe (November)  China (2018)

Status of global launches of Lineage II: Revolution

Application Company Price Release date

Free June 13, 2017

Free June 14, 2017

Free August 22, 2017

Free August 21, 2017

Lineage II: Revolution Free December 13, 2016

Source: App Annie, Mirae Asset Daewoo Research

103 | 2018 Outlook [Internet/Game/Advertising] Mirae Asset Daewoo Research IV. [Game] Overseas revenue growth

NCsoft: Lineage M in Korea (June 2017)  Taiwan (December); Southeast Asia  Japan  North America/Europe  China (expected)

Share performances of NCsoft and Gamania (6180 TT/(CP: NT$77.5), the Taiwanese publisher of Lineage M

(1/17=100) 400 NCsoft Gamania

300

200

100

0 1/17 2/17 3/17 4/17 5/17 6/17 7/17 8/17 9/17 10/17 11/17 12/17

Source: Thomson Reuters, Mirae Asset Daewoo Research

104 | 2018 Outlook [Internet/Game/Advertising] Mirae Asset Daewoo Research IV. [Game] Overseas revenue growth

Global game market to grow at a CAGR of 8% through 2020

Global game market outlook: Mobile games to account for 46% of the market in 2018

Source: Newzoo

105 | 2018 Outlook [Internet/Game/Advertising] Mirae Asset Daewoo Research IV. [Game] Overseas revenue growth

Global game market: Coverage expansion possible via mobile games alone

Increasing M/S of mobile games to present opportunities Global game market breakdown by platform to domestic mobile game firms

(US$bn) 60

0 Mobile Console PC

Source: Newzoo Source: Newzoo, Mirae Asset Daewoo Research

106 | 2018 Outlook [Internet/Game/Advertising] Mirae Asset Daewoo Research IV. [Game] Overseas revenue growth

Global game market: Asia including China is still the most critical market; Expansion in NA and Europe to spur growth

Global game market breakdown by region Asia-Pacific accounts for nearly half of the global game market

Asia-Pacific (US$bn) 60 North America EMEA South America 50 4%

Other 24% 40

2017 TOTAL 47% $116.0Bn 30

25% China

0 Asia-Pacific North America EMEA South America

Source: Newzoo, Mirae Asset Daewoo Research Source: Newzoo, Mirae Asset Daewoo Research

107 | 2018 Outlook [Internet/Game/Advertising] Mirae Asset Daewoo Research IV. [Game] Overseas revenue growth

China game market: To grow at a CAGR of 13% through 2020

Chinese game market outlook: Mobile emerged as the largest platform in 2017

Source: Newzoo

108 | 2018 Outlook [Internet/Game/Advertising] Mirae Asset Daewoo Research IV. [Game] Overseas revenue growth

China game market: Tencent vs. NetEase

M/S of major Chinese mobile game developers and breakdown of active mobile players by age/gender

(%) 30

0 Tencent NetEase Ourpalm Seesun Games G-bits Perfect World Giant Interactive Shanda Games Snail Game Loong Entertainment

Note: M/S data are based on 2016 revenue; user data are based on surveys in 2017. Source: China Lab, Newzoo, Mirae Asset Daewoo Research

109 | 2018 Outlook [Internet/Game/Advertising] Mirae Asset Daewoo Research IV. [Game] Overseas revenue growth

China game market: Domestic game companies with exposure Tencent

Domestic game companies with exposure to Tencent

Company Date Detail Lineage II: Revolution 2018 - Domestic launch in December 2016; to be launched in China Penta Storm (Kings of Glory) Netmarble Games April 2017 - Local services launched on November 26, 2015; domestic launch in April 2017 - Publication of Tencent’s game in Korea Stone Age Begins 2018 - Domestic launch in June 2016; to be launched in China Blade & Soul November 2013 - Domestic launch in June 2012; launched in China on November 28, 2013 NCsoft Blade & Soul Mobile March 2016 - Launched in China in March 2016 November 2017 Partnership with Tencent for Chinese services Bluehole (PUBG) Joint development of mobile version of PUBG November 2017 - Tencent to develop; Bluehole to provide resources (to be launched in China first) Dungeon & Fighter Online November 2007 - Domestic launch in 2005; launched in China in November 2007 Dungeon & Fighter Mobile Nexon 2018 - Chinese launch scheduled for 2018 Moonlight Blade November 2015 - Nexon plans to publish Tencent’s Moonlight Blade in Korea in 2018 Continent of the Ninth 2010 - Domestic launch in 2009; Chinese launch in 2010 Webzen MU: Awakening 2018 - To be launched in China Mobile version of The Legend of Mir 2 WeMade Entertainment 2015 - Launched in China in 2015 CrossFire Smilegate 2008 - Domestic launch in 2007; launched in China in 2008 (peak concurrent players of 8mn) - CrossFire Stars (CFS), an international CrossFire tournament, is held every year. Source: Company materials, media reports, Mirae Asset Daewoo Research

110 | 2018 Outlook [Internet/Game/Advertising] Mirae Asset Daewoo Research IV. [Game] Overseas revenue growth

Chinese game market: Different strategy needed amid changing market environment

Comparison of the Chinese PC online and mobile game markets

PC online (traditional) Mobile (new)

• Entered the market as industry growth was maturing; • Entered the market at the early stage of industry regulations emerged growth; lack of regulations • Technological gap among competitors is minimal, • Technological advantages and localization were localization is the key to success. relatively low in importance. • Chinese, Korean, and global firms are in intense • Competition was low. competition. • A single-client version was sufficient. • There are too many apps and platforms. • Game developers held market leadership. • Publishers (operators) hold market leadership. • Core systems were important. • Business model design is integral.

Source: China Lab, Mirae Asset Daewoo Research

111 | 2018 Outlook [Internet/Game/Advertising] Mirae Asset Daewoo Research IV. [Game] Overseas revenue growth

E-sports will be included as an official discipline at the 2022 Asian Games in Hangzhou, China; Demand for viewable PvP games to increase

Chinese e-sports event E-sports market: China ranks second (2017)

North America

China

Korea

Other

36% 41% 2017 market size: US$660mn

7% 16%

Market size expected to reach US$1.5bn

Source: China Lab, Mirae Asset Daewoo Research Source: Newzoo, Mirae Asset Daewoo Research

112 | 2018 Outlook [Internet/Game/Advertising] Mirae Asset Daewoo Research IV. [Game] Overseas revenue growth

Increasing likelihood of • The global game industry has seen increased M&A deals thanks to the rise of the mobile era. M&As • In 2011, mobile games sharply gained popularity with the rapid penetration of smartphones, and major game companies’ acquisitions of mobile game studios picked up significantly. • The most significant M&A deal in 2015 was Activision Blizzard’s acquisition of mobile game developer King Digital. • M&A activity will likely pick up going forward as: 1) global game companies pursue revenue growth; 2) individual titles grow more ambitious; and 3) the development studio system proliferates.

M&As and investments have surged in the global game Domestic game companies’ export and import trends Industry since the proliferation of smartphones (US$bn) (No. of deals) (US$mn) (US$mn) 80 Scale of investments (L) 600 4,000 Exports (L) 480 Number of investments (R) Imports (R)

60 500 3,000 360

40 400 2,000 240

20 300 1,000 120

0 200 0 0 06 07 08 09 10 11 12 13 14 15 16 17F 18F 06 07 08 09 10 11 12 13 14 15 16 17F 18F

Note: 2017 and 2018 data are our forecasts Note: 2017 and 2018 data are our forecasts Source: Bloomberg, Mirae Asset Daewoo Research Source: KOCCA, Mirae Asset Daewoo Research

113 | 2018 Outlook [Internet/Game/Advertising] Mirae Asset Daewoo Research IV. [Game] Overseas revenue growth

Regulatory issues • China: There are mounting concerns over games, due to: 1) teenagers’ excessive game playing; 2) violent content; 3) obscenity; and 4) the fact that certain in-game purchases involve an element of chance. • US: Issues related to excessive charging of teenagers and loot boxes (random reward items) have been raised. • Europe: Issues related to loot boxes in Electronic Arts’ Star Wars Battlefront II have been raised. Electronic Arts released a plan to revise its microtransaction structure. • Korea: Self-regulation of loot boxes and the “shutdown law” (which aims to block those under the age of 16 from accessing gaming websites after midnight) are already in place.

Shares of Electronic Arts are picking up after falling on Overseas regulations Star Wars Battlefront II issues (US$) Region Issues and details 130 Electronic Arts • 5/17: Strengthened the supervision of online game operations and monitoring protocols 120 • 7/17: Self-regulation of teenagers’ game usage China • 11/17: Crackdown on mobile games’ violent 110 content/obscenity and in-game purchases • 12/17: Enhanced supervision/control of internet and game content 100 • 10/17: A non-profit watchdog announced that it did not consider loot boxes to be gambling. 90 US • 11/17: A congressman urged a ban on excessive charges Wars Battlefront II to teenagers. 80 • 10/17: In the UK, investigations into games with gambling elements were conducted. 70 Europe • 11/17: In Belgium, loot boxes in Electronic Arts’ Star were investigated. In France, a senator urged online gambling regulators to 60 step in. 1/17 3/17 5/17 7/17 9/17 11/17

Source: Thomson Reuters, EA, Mirae Asset Daewoo Research Source: Media reports, Mirae Asset Daewoo Research

114 | 2018 Outlook [Internet/Game/Advertising] Mirae Asset Daewoo Research Game (Overweight)

• Strategic shift: Domestic  Overseas • Issue 1: Growth in overseas revenue • Issue 2: New title momentum to continue IV. [Games] New title momentum to continue

Large MMORPGs set for • For 2018, the mobile game market will likely to continue to revolve around large MMORPGs. release in 2018 • Expectations for new titles (i.e., new sources of revenue) serve as the strongest momentum driver for game stocks. • Best-case scenario: Generation of new revenue without cannibalization of existing game revenue • For this scenario to actually materialize, game companies need to pursue genre and market diversification and strategically set user targets.

Mobile MMORPGs driving competition Major domestic game firms’ new titles scheduled for launch in 2018

Company Games (%) Sports Puzzle Arcade Strategy RPG 100 Blade & Soul 2 (developed in-house) Lineage II M (developed in-house ) NCsoft Aion: Legions of War (developed in-house) Aion Tempest (developed in-house) 80 Blade & Soul Revolution (based on NCsoft’s IP) Netmarble Seven Knights II (developed in-house) Games Icarus M(developed by WeMade Entertainment) Stone Age Begins (developed in-house) 60 Durango: Wild Lands (developed in-house) Mabinogi Mobile (developed in-house) Nexon Project Rapa Nui (developed by Moai Games) 40 Tree of Savior: Mobile version (publishing) Com2uS Summoners War MMORPG (developed in-house) Royal Blood (developed in-house) Gamevil Talion (3D; developed by UTPlus Interactive) 20 Dragon Nest M (developed by Shanda Games; co-published Kakao Games with Actoz Soft)

Pearl Abyss Black Desert Mobile (developed in-house) 0 Webzen MU Miracle 2 (China) 2014 2015 2016 2017 YTD Gravity Ragnarok M (developed in-house) Note: Revenue breakdown by genre for top-10 best-selling mobile games; RPGs include Source: Company data, Media report, Mirae Asset Daewoo Research MMORPGs. Source: KOCCA, App Annie, Mirae Asset Daewoo Research 116 | 2018 Outlook [Internet/Game/Advertising] Mirae Asset Daewoo Research IV. [Games] New title momentum to continue

Expectations for new • For game stocks, expectations for key events tend to move shares ahead of actual launch of the events. games priced in • Shares of Pearl Abyss have recently risen amid growing interest in its new mobile title Black Desert Mobile slated for release in January 2018. • Heightened interest in MU Miracle 2, slated for release in 1Q18, has also driven up shares of Webzen. • In 2018, other game stocks are also likely to move ahead of actual game launches.

Pearl Abyss’s share price vs. searches for Black Desert Mobile Webzen’s share price vs. searches for MU Miracle 2

(W) (P) (W) (P) 220,000 Stock price (L) 60 40,000 Stock price (L) 100 Black Desert Mobile search index (R) MU Miracle 2 search index (R)

50 35,000 190,000 80

40 30,000 160,000 60

30 25,000

130,000 40 20 20,000

100,000 20 10 15,000

70,000 0 10,000 0 9/17 10/17 11/17 12/17 1/17 3/17 5/17 7/17 9/17 11/17

Note: 100 marks the 2017 peak. Note: 100 marks the 2017 peak. Source: NAVER, Thomson Reuters, Mirae Asset Daewoo Research Source: NAVER, Thomson Reuters, Mirae Asset Daewoo Research

117 | 2018 Outlook [Internet/Game/Advertising] Mirae Asset Daewoo Research IV. [Games] New title momentum to continue

Key share price drivers: New game launches and overseas expansion

Dual sources of share price momentum: Launches of mobile games based on IP of existing PC games and expansion into overseas markets (1/17=100) 200 NCsoft Com2uS Taiwan release Netmarble Games Pearl Abyss PC IP → Mobile game 180 PC IP → Mobile

160 NA revenue highlighted

140

NA revenue highlighted PC IP → Mobile game 120

100 Taiwan release Japan release NA release

80 1/17 2/17 3/17 4/17 5/17 6/17 7/17 8/17 9/17 10/17 11/17 12/17

Source: Thomson Reuters, Mirae Asset Daewoo Research

118 | 2018 Outlook [Internet/Game/Advertising] Mirae Asset Daewoo Research IV. [Games] New title momentum to continue

Domestic market: Among new games, Korean MMORPGs are the best-selling games followed by foreign games

Korean MMORPGs are currently the top-grossing games, followed by Nexon’s RPGs and Chinese-made games

Lineage M

Lineage II: Revolution

Tera M

Houkai 3rd (China)

Clash Royale (Finland) Nueva Salida (China)

Note: Based on Google Play’s top-grossing game chart as of December 16, 2017 Source: App Annie, Mirae Asset Daewoo Research

119 | 2018 Outlook [Internet/Game/Advertising] Mirae Asset Daewoo Research IV. [Games] New title momentum to continue

New title releases

NCsoft

Blade & Soul: Hongmoon Rising in China (MMORPG; developed jointly with Tencent; PC online): October 12th 4Q17 Lineage M in Taiwan (MMORPG; developed in-house; mobile): December 11th

Blade & Soul 2 (MMORPG; developed in-house; mobile) Lineage II M (MMORPG; developed in-house; mobile) Aion: Legions of War in North America/Europe (RPG; developed in-house; mobile) Aion Tempest (MMORPG; developed in-house; mobile) Project TL: The Lineage (MMORPG; developed in-house; PC)  Closed beta testing

2018 Project Orca (RPG; developed in-house; mobile) Pangya Mobile in Taiwan/Southeast Asia (Sports; based on Pangya IP; mobile)  Closed beta testing: December 14th-18th in 2017 in Taiwan and Thailand Blade & Soul M (TCG  RPG; developed in-house; mobile) Overseas launch of Lineage M (MMORPG; developed in-house; mobile) MXM Mobile (tentative title; shooting AOS; developed in-house; mobile)

Note: Subject to change. Source: Companies, media reports, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 120 IV. [Games] New title momentum to continue

New title releases

Netmarble Games

Lineage II: Revolution in Europe/North America: November 15th 4Q17 Fate/Grand Order (RPG; publishing; mobile): November 21st Tera M (MMORPG; developed by Bluehole Squall; publishing; mobile): November 28th

Blade & Soul Revolution (MMORPG; based on NCsoft’s IP; mobile): 2018 Unveiled at Seven Knights 2 (MMORPG; developed in-house; mobile)  Official teaser unveiled on October 25th; to be launched in 2018 G-Star Icarus M (MMORPG; developed by WeMade Entertainment; publishing; mobile): 2018

Stone Age Begins in China (MMORPG; developed in-house; mobile) The King of Fighters All Star in Japan (action RPG, developed in-house based on existing IP; mobile) Teria Saga in Japan (RPG; developed in-house; mobile)  Domestic launch TBD Phantom Gate in North America/Europe (adventure RPG; developed in-house; mobile) G.I. Joe (strategy; developed in-house based on existing IP; mobile) 2018 First Born in North America/Europe (tactical RPG; developed in-house; mobile) Global launch of Trendy Town (MMOSNG; developed by InnoSpark; global publishing; mobile) Yo-kai Watch: Medal Wars in Japan (RPG; developed in-house based on existing IP; mobile) Fishing Strike (sports; publishing; mobile) Lineage 2: Revolution in China (MMORPG; to be published by Tencent; mobile)

Note: Subject to change; titles unveiled at G-Star will mostly be released in 2018. Source: Companies, media reports, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 121 IV. [Games] New title momentum to continue

New title releases

Nexon

Tank Commanders (TPS; publishing; mobile): October 26th Overhit (RPG; developed by NAT Games; mobile): November 28th 4Q17 Need For Speed EDGE (racing; publishing; PC): December 14th Dragon Nest 2: Legend (action RPG; developed by Eyedentity Games; mobile): November 19th pre-registration Yulgang M (action RPG; publishing; mobile): December 14th pre-registration

TitanFall Online (FPS; developed by Nexon GT; IP-based; PC) IFA Online 4 (sports; publishing; PC): Closed beta test in December; to be released before the 2018 World Cup Need For Speed EDGE (racing; publishing; PC); Moonlight Blade (MMORP; publishing; PC) Unveiled at Battlerite (AOS; publishing; mobile); Overhit (RPG; developed by NAT Games; mobile) G-Star Mabinogi (to be released in 2018; mobile); Maple Blitz X (strategy; developed in-house; mobile): November 10th soft launch in nine regions Durango: Wild Lands (MMORPG; developed in-house; mobile): December 19th pre-registration; to be released in January 2018

Moonlight Blade (MMORPG; publishing; PC): To be released on January 25th Tree of Savior Mobile (MMORPG; publishing; mobile) Peria Chronicles (MMORPG; developed in-house; PC); Project DH (Action RPG; developed in-house; mobile); DownFall (team strategy RPG; developed in-house; mobile) Talesweaver M (RPG; developed in-house; mobile); Astellia (MMORPG; publishing; PC); Unknown Heroes (crossover RPG; 2018 publishing; mobile) Project RED (FPS; developed in-house; mobile); Project Meta (action RPG; developed in-house; PC); Project Rapa Nui (MMORPG; developed by Moai Games; mobile) Dave (arcade action game; developed by Neople; mobile: Early 2019 Project Wifun (TPS; developed in-house; mobile); Project Blast (strategy RPG; developed in-house; mobile) Fantasy Town (casual; publishing; mobile); Total Clash (strategy; publishing; mobile)

Note: Subject to change; most of the titles unveiled during G-Star will be released in 2018 Source: Company data, media reports, Mirae Asset Daewoo Research

122 | 2018 Outlook [Internet/Game/Advertising] Mirae Asset Daewoo Research IV. [Games] New title momentum to continue

New title releases

Com2uS

4Q17 Ace Fishing: Wild Catch VR (sports VR; developed in-house; mobile: September 12th

Skylanders Mobile (MMORPG; developed in-house; mobile): 1H18 Summoners War (MMORPG; developed in-house; mobile): 2H18 2018 Pocket Dungeon (RPG; developed in-house; mobile)  Based on Summoners War IP: TBD Dancevil (casual; developed in-house; mobile); Birdie Crush (sports; developed in-house; mobile) Chain Strike (simulation RPG; developed in-house; mobile)

Gamevil

ArcheAge Begins (RPG; publishing; mobile): October 25th 4Q17 RoyalBlood (MMORPG; developed in-house; mobile): December 11th pre-registration

RoyalBlood (MMORPG, developed in-house, mobile): To be released on January 12th Talion (3D MMORPG; developed by UTPlus; mobile): 2Q18 Heir of Light (strategy RPG; publishing; mobile): 1Q18; Giants War (strategy RPG; publishing; mobile): 2Q18 NBA Basketball Game (tentatively named; sports; second-party; mobile): 1H18 2018 ACE (simulation RPG; publishing; mobile) Cosmo Duel (puzzle; publishing; mobile): 2Q18 Fishing Master 2 (sports; developed in-house; mobile), Pro Baseball (sports, developed in-house, mobile): 2H18 Elune (strategy RPG; developed in-house; mobile): 2H18

Note: Subject to change Source: Company data, media reports, Mirae Asset Daewoo Research

123 | 2018 Outlook [Internet/Game/Advertising] Mirae Asset Daewoo Research IV. [Games] New title momentum to continue

New title releases

Pearl Abyss

4Q17 Black Desert Mobile (MMORPG; developed in-house; mobile): Pre-registration began on November 23rd

Black Desert Mobile (MMORPG; developed in-house; mobile): January 2018 Black Desert Xbox console exclusive (MMORPG; developed in-house): 2Q18 2018 A new PC/console game: 2H18 A new mobile game: 2H18 Black Desert in China (MMORPG; developed in-house; to be published by Snail Games; PC): 2018

Webzen

MU Classic in China (MMORPG; developed in-house; HTML5): September 29th MU Miracle: The Strongest in China (MMORPG; developed in-house; mobile): December 7th 4Q17 Archlord Awake (MMORPG, developed in-house; mobile): December 12th MU Tempest (MMORPG; developed in-house; web): December 14th

MU Miracle 2 in China (MMORPG; developed in China; to be published by Tencent; mobile): To be released on January 3rd 2018 MU Legend (MMORPG; developed in-house; PC): Japan release date yet to be confirmed Shot Online M (sports; developed in-house; mobile): North America/Europe release dates yet to be confirmed

Note: Subject to change Source: Company data, media reports, Mirae Asset Daewoo Research

124 | 2018 Outlook [Internet/Game/Advertising] Mirae Asset Daewoo Research IV. [Games] New title momentum to continue

New title releases

NHN Entertainment

Hangame Baduk (mobile/PC): Global release on December 7th 4Q17 Jumanji: The Mobile Game (strategy board game; developed by Idiocracy Games; mobile): December 17th

Unveiled at Critical Ops (FPS; mobile) G-Star

Summoners Clash (PvP; TBD) Wooparoo Saga Season 2 (tentative title; casual game; developed in-house based on existing IP; mobile) Wooparoo Mountain (tentative title; 3D SNG; developed in-house based on existing IP; mobile) 2018 Football Day in Europe (sports; in-house developed; PC/mobile) Monogatari (tentative title) ToonPop (tentative title; casual puzzle; developed in-house based on a popular NAVER webtoon; mobile)

LINE (Japan)

Brown Farm (social network game; developed based on existing IP; mobile): October 23rd 4Q17 Destiny Child in Japan (action): November 24th PokoPang Town in Japan (social network game): December 14th

Nple Games (tentative title: action RPG; mobile) 2018 The Legendary Moonlight Sculptor (MMORPG; publishing; mobile) Hundred Soul (action RPG; publishing; mobile)

Note: Subject to change; most games unveiled at G-Star 2017 will be released in 2018. Source: Company data, media reports, Mirae Asset Daewoo Research

125 | 2018 Outlook [Internet/Game/Advertising] Mirae Asset Daewoo Research IV. [Games] New title momentum to continue

New title releases

Kakao Games

PUBG (survival FPS; publishing; developed by Bluehole; PC): November 14th 4Q17 Lost Havana (RPG; developed by Peoplug; mobile); pre-registration began on October 24th Friends Marble for Kakao (casual board game; developed by WonderPeople; mobile): December 12th

Unveiled at Grand Chase for Kakao (RPG; publishing; developed by KOG; mobile) G-Star

Blade 2 for Kakao (action RPG; publishing; mobile) A:IR in North America/Europe (MMORPG; publishing; PC) Dragon Nest M (MMORPG; mobile; developed based on a Chinese IP; co-published with Actoz Soft) 2018 A mobile game (based on Noblesse IP) A mobile game (based on the IP of popular webtoon Lookism) Pristontale Mobile (mobile)

Bluehole

4Q17 PUBG (survival FPS; developed in-house; published by Kakao Games): December 20th

Unveiled at Tera M (MMORPG; to be published by Netmarble Games; mobile): November 28th G-Star A:IR (MMORPG, developed in-house; PC): 2018; closed beta test December 13th-17th

PUBG (developed in-house; Xbox console exclusive) 2018 Lost Lands (RPG VR; based on Tera IP; mobile)

Note: Subject to change; most games unveiled at G-Star 2017 are to be released in 2018. Source: Company data, media reports, Mirae Asset Daewoo Research

126 | 2018 Outlook [Internet/Game/Advertising] Mirae Asset Daewoo Research Game (Overweight)

• Top pick: NCsoft • Notable stocks: Netmarble Games, Com2uS, Pearl Abyss, Webzen Top pick NCsoft (036570Soul KS) Revolution

Adopting an “Avengers-style” development model

Investment points (Maintain) Buy • Popular IP: NCsoft has released new mobile games based on the IP of PC/online games to limit potential losses and reduce uncertainty (by tapping into a well-established fan base). Target Price (12M, W) 640,000 • Expectations for new titles: Cannibalization of Lineage M and Blade & Soul by Blade & Soul 2 will be limited; NCsoft is taking aim at the Chinese market. Royalty revenue growth: Lineage M’s overseas revenue and royalty revenue from Netmarble Games’ Blade & Share Price (12/18/17, W) 472,500 • will bolster OP margin.

Expected Return 35% Risk factors • Uncertainties over the release schedules for new titles and their market performance OP (17F, Wbn) 629 • Intensifying competition in the domestic mobile MMORPG market Consensus OP (17F, Wbn) 629 • Growing operating expenses (e.g., fees, marketing and labor expenses) EPS Growth (17F, %) 85.0 Market EPS Growth (17F, %) 45.5

P/E (17F, x) 20.6

Market P/E (17F, x) 10.2

KOSPI 2,481.88 Market Cap (Wbn) FY (Dec.) 12/14 12/15 12/16 12/17F 12/18F 12/19F 10,366 170 NCSOFT 160 Shares Outstanding (mn) 22 KOSPI Revenue (Wbn) 839 838 984 1,832 2,616 2,631 150 Free Float (%) 84.5 OP (Wbn) 278 237 329 629 957 972 140 Foreign Ownership (%) 44.5 OP margin (%) 33.1 28.3 33.4 34.3 36.6 36.9 130 Beta (12M) -0.55 NP (Wbn) 230 165 272 504 723 735 120 52-Week Low EPS (W) 10,486 7,542 12,416 22,968 32,975 33,482 245,500 110

52-Week High 488,000 100 ROE (%) 18.4 10.6 14.9 22.5 25.2 21.4

(%) 1M 6M 12M90 P/E (x) 17.4 28.2 19.9 20.6 14.3 14.1 Absolute 7.9 16.0 79.080 P/B (x) 2.7 2.6 2.7 3.8 3.1 2.7

Relative 10.1 10.3 47.370 Div.Yield (%) 1.9 1.3 1.5 1.5 1.9 1.9 16.12 17.4 17.8 17.12 Note: All figures are based on consolidated K-IFRS; NP refers to net profit attributable to controlling interests Source: NCSOFT, Mirae Asset Daewoo Research estimates

128 | 2018 Outlook [Internet/Game/Advertising] Mirae Asset Daewoo Research Top pick NCsoft (036570 KS)

Lineage M: “Castle Siege” update and new character class in November; Stabilization of traffic in 4Q17

Playing time for Lineage M (Android) has begun to stabilize in 4Q17

(mn min.) Total time spent on Lineage M - 19 years old and over (L) (min.) 1,000 1,600 Total time spent on Lineage M - 12 years old and over (L) Average duration on Lineage M - 19 years old and over (R)

750 1,200

Lineage M 500 4Q17 new “dark elf” class 800

Lineage M "Castle Siege"

250 400

0 0 6/19 7/10 7/31 8/21 9/11 10/2 10/23 11/13 12/4

Note: Total playing time = (no. of unique visitors) x (average time spent); based on Android app market data; Android’s market share estimated at 80% in Korea Source: Nielson KoreanClick, Mirae Asset Daewoo Research

129 | 2018 Outlook [Internet/Game/Advertising] Mirae Asset Daewoo Research Top pick NCsoft (036570 KS)

Royalty revenue from IP will likely support profitability improvement

NCsoft’s royalty revenue and OP margin displays a high correlation; Royalty revenue will likely continue expanding in 2018

(Wbn) (%) 240 Royalty revenue (L) Contribution of royalties to total revenue (R) OP margin (R) 40

180 30

120 20

60 10

0 0 2009 2010 2011 2012 2013 2014 2015 2016 2017F 2018F Notes: All figures are based on consolidated K-IFRS; royalty revenue and mobile game revenue likely made positive earnings contribution in 2017 Source: NCsoft, Mirae Asset Daewoo Research

130 | 2018 Outlook [Internet/Game/Advertising] Mirae Asset Daewoo Research Top pick NCsoft (036570 KS)

Long-term scenario: NCsoft is expected to follow in the footsteps of NetEase, which has enjoyed a secular stock rally after producing a string of mobile hits based on PC game IP

NetEase has enjoyed a secular growth in valuation and market cap, after producing a string of mobile hits based on PC game IP

(x) (US$bn) 30 NetEase market cap (R) 40 NetEase P/E (L)

Onmyoji

25 30 Westward Journey

Fantasy Westward 20 Journey 20

15 10

10 0 1/14 7/14 1/15 7/15 1/16 7/16 1/17 7/17

Source: Thomson Reuters, NetEase, Mirae Asset Daewoo Research

131 | 2018 Outlook [Internet/Game/Advertising] Mirae Asset Daewoo Research Top pick NCsoft (036570 KS)

Comprehensive Income Statement (Summarized) Statement of Financial Condition (Summarized) Forecasts/Valuations (Summarized)

(Wbn) 12/16 12/17F 12/18F 12/19F (Wbn) 12/16 12/17F 12/18F 12/19F 12/16 12/17F 12/18F 12/19F

Revenue 984 1,832 2,616 2,631 Current Assets 1,192 2,295 2,935 3,508 P/E (x) 19.9 20.6 14.3 14.1

Cost of Sales 188 345 492 495 Cash and Cash Equivalents 145 1,996 2,508 3,079 P/CF (x) 14.1 15.7 10.6 10.4

Gross Profit 796 1,487 2,124 2,136 AR & Other Receivables 161 297 425 427 P/B (x) 2.7 3.8 3.1 2.7

SG&A Expenses 467 858 1,167 1,164 Inventories 1122EV/EBITDA (x) 12.712.98.17.4

Operating Profit (Adj)329629957972Other Current Assets885100EPS (W) 12,41622,96832,97533,482

Operating Profit 329 629 957 972 Non-Current Assets 1,169 532 502 472 CFPS (W) 17,610 30,073 44,636 45,320

Non-Operating Profit 17532020Investments in Associates71000BPS (W) 93,096124,902 151,097 175,861

Net Financial Income 19 25 27 27 Property, Plant and Equipment 225 217 190 164 DPS (W) 3,820 7,000 9,000 9,000

Net Gain from Inv in Associates7100Intangible Assets 53 52 49 46 Payout ratio (%) 29.9 29.5 26.5 26.1

Pretax Profit 346 682 977 992 Total Assets 2,361 2,827 3,437 3,980 Dividend Yield (%) 1.5 1.5 1.9 1.9

Income Tax 75 178 254 258 Current Liabilities 284 84 120 120 Revenue Growth (%) 17.4 86.2 42.8 0.6

Profit from Continuing Operations 271 504 723 734 AP & Other Payables 28 84 120 120 EBITDA Growth (%) 32.7 82.5 49.8 1.5

Profit from Discontinued Operations 0000Short-Term Financial Liabilities 0000Operating Profit Growth (%)38.891.252.11.6

Net Profit 271 504 723 734 Other Current Liabilities 256000EPS Growth (%) 64.685.043.61.5

Controlling Interests 272 504 723 735 Non-Current Liabilities 181 150 150 150 Accounts Receivable Turnover (x) 8.0 8.2 7.4 6.3

Non-Controlling Interests -1 0 -1 -1 Long-Term Financial Liabilities 150 150 0 0 Inventory Turnover (x) 1,455.7 1,842.3 1,628.7 1,388.5

Total Comprehensive Profit 329 838 723 734 Other Non-Current Liabilities 31 0 150 150 Accounts Payable Turnover (x) 21.0 52.1 61.7 52.6

Controlling Interests 329 838 723 734 Total Liabilities 465 234 269 270 ROA (%) 11.9 19.4 23.1 19.8

Non-Controlling Interests0000Controlling Interests1,8862,5853,1593,702ROE (%) 14.922.525.221.4

EBITDA 361 659 987 1,002 Capital Stock 11 11 11 11 ROIC (%) 61.8 76.8 91.0 90.5

FCF (Free Cash Flow) 95 45 661 762 Capital Surplus 432 434 434 434 Liability to Equity Ratio (%) 24.5 9.0 8.5 7.3

EBITDA Margin (%) 36.7 36.0 37.7 38.1 Retained Earnings 1,544 1,904 2,478 3,022 Current Ratio (%) 419.1 2,739.3 2,453.0 2,915.6

Operating Profit Margin (%)33.434.336.636.9Non-Controlling Interests10998Net Debt to Equity Ratio (%)-44.0-71.2-74.5-79.0

Net Profit Margin (%) 27.6 27.5 27.6 27.9 Stockholders' Equity 1,896 2,594 3,168 3,710 Interest Coverage Ratio (x) 110.4 394.7 0.0 0.0

Source: NCSOFT, Mirae Asset Daewoo Research estimates

132 | 2018 Outlook [Internet/Game/Advertising] Mirae Asset Daewoo Research Netmarble Games (251270 KS)

Expectations for new titles and Chinese approval

Investment points (Maintain) Buy • Overseas revenue growth: Overseas revenue is expected to account for 61% of the total figure in 2018; Netmarble Games expanded overseas markets via Lineage II: Revolution in 2017. Target Price (12M, W) 230,000 • Forays into China: The company plans to launch Lineage II: Revolution via Tencent in China in 2018 after receiving regulatory approval. Expectations for new titles: Mobile MMORPGs, including Blade & Soul Revolution and Seven Knights II, are Share Price (12/18/17, W) 190,500 • waiting for launch.

Expected Return 21% Risk factors • Potential volatility from uncertainties over the release schedule and success of new titles OP (17F, Wbn) 544 • Potential changes in the launch schedule for new games in the company’s pipeline 568 Consensus OP (17F, Wbn) • Lower profitability relative to dedicated game developers due to marketing expenses related to the publishing EPS Growth (17F, %) 62.7 business Market EPS Growth (17F, %) 45.5

P/E (17F, x) 45.6

Market P/E (17F, x) 10.2

KOSPI 2,481.88

Market Cap (Wbn) 16,197 130 Netmarble Games FY (Dec.) 12/14 12/15 12/16 12/17F 12/18F 12/19F Corporation Shares Outstanding (mn) 85 KOSPI Revenue (Wbn) 362 1,073 1,500 2,434 2,676 2,678 120 Free Float (%) 28.2 OP (Wbn) 89 225 295 544 631 613

Foreign Ownership (%) 27.4 110 OP margin (%) 24.6 21.0 19.7 22.4 23.6 22.9 Beta (12M) 0.89 NP (Wbn) 25 121 174 355 417 402 100 52-Week Low 127,500 EPS (W) 457 2,024 2,567 4,176 4,910 4,733

52-Week High 199,500 90 ROE (%) 7.8 14.8 15.3 13.2 9.5 8.4 (%) 1M 6M 12M P/E (x) - - - 45.6 38.8 40.2 80 Absolute 3.0 25.3 0.0 P/B (x) - - - 3.9 3.5 3.2

Relative 5.1 19.3 0.070 Div.Yield (%) - - - 0.0 0.0 0.0 16.12 17.4 17.8 17.12 Note: All figures are based on consolidated K-IFRS; NP refers to net profit attributable to controlling interests Source: Netmarble Games Corporation, Mirae Asset Daewoo Research estimates

133 | 2018 Outlook [Internet/Game/Advertising] Mirae Asset Daewoo Research Netmarble Games (251270 KS)

Growing expectations for in-house developed new mobile MMORPG titles to be released in 2018

Blade & Soul Revolution: To be the first new game of 2018 Seven Knights II: Mobile game based on existing IP

Source: Netmarble Games Source: Netmarble Games

134 | 2018 Outlook [Internet/Game/Advertising] Mirae Asset Daewoo Research Netmarble Games (251270 KS)

Comprehensive Income Statement (Summarized) Statement of Financial Condition (Summarized) Forecasts/Valuations (Summarized)

(Wbn) 12/16 12/17F 12/18F 12/19F (Wbn) 12/16 12/17F 12/18F 12/19F 12/16 12/17F 12/18F 12/19F

Revenue 1,500 2,434 2,676 2,678 Current Assets 721 3,609 4,075 4,559 P/E (x) - 45.6 38.8 40.2

Cost of Sales 751 1,178 1,275 1,287 Cash and Cash Equivalents 273 2,881 3,275 3,758 P/CF (x) - 28.9 25.0 25.7

Gross Profit 749 1,256 1,401 1,391 AR & Other Receivables 247 401 441 441 P/B (x) - 3.9 3.5 3.2

SG&A Expenses 454 711 770 777 Inventories 2333EV/EBITDA (x) -23.519.919.7

Operating Profit (Adj) 295 544 631 613 Other Current Assets 199 324 356 357 EPS (W) 2,567 4,176 4,910 4,733

Operating Profit 295 544 631 613 Non-Current Assets 1,236 1,544 1,601 1,571 CFPS (W) 5,004 6,592 7,613 7,404

Non-Operating Profit -19 -9 -9 -9 Investments in Associates 6 10 11 11 BPS (W) 17,949 49,130 54,039 58,772

Net Financial Income 2000Property, Plant and Equipment 123 115 107 98 DPS (W) 0000

Net Gain from Inv in Associates-3000Intangible Assets 540 518 495 473 Payout ratio (%) 0.0 0.0 0.0 0.0

Pretax Profit 276 535 622 604 Total Assets 1,957 5,153 5,676 6,130 Dividend Yield (%) - 0.0 0.0 0.0

Income Tax 66 135 153 151 Current Liabilities 421 616 666 666 Revenue Growth (%) 39.8 62.3 9.9 0.1

Profit from Continuing Operations 209 400 469 453 AP & Other Payables 152 246 271 271 EBITDA Growth (%) 31.0 76.9 15.1 -2.7

Profit from Discontinued Operations 0000Short-Term Financial Liabilities 109 109 0 0 Operating Profit Growth (%) 31.1 84.4 16.0 -2.9

Net Profit 209 400 469 453 Other Current Liabilities 160 261 395 395 EPS Growth (%) 26.8 62.7 17.6 -3.6

Controlling Interests 174 355 417 402 Non-Current Liabilities 226 222 226 226 Accounts Receivable Turnover (x) 8.1 7.6 6.4 6.1

Non-Controlling Interests 35 45 52 51 Long-Term Financial Liabilities 200 180 0 0 Inventory Turnover (x) 1,374.8 984.4 833.2 795.8

Total Comprehensive Profit 275 400 469 453 Other Non-Current Liabilities 26 42 226 226 Accounts Payable Turnover (x) 8.5 8.3 6.9 6.6

Controlling Interests 239 347 407 393 Total Liabilities 647 837 892 892 ROA (%) 12.3 11.2 8.7 7.7

Non-Controlling Interests 36 53 62 60 Controlling Interests 1,216 4,177 4,595 4,997 ROE (%) 15.3 13.2 9.5 8.4

EBITDA 325575662644Capital Stock 7777ROIC (%) 38.961.375.777.0

FCF (Free Cash Flow) 107 453 505 484 Capital Surplus 1,200 3,806 3,806 3,806 Liability to Equity Ratio (%) 49.4 19.4 18.6 17.0

EBITDA Margin (%) 21.7 23.6 24.7 24.0 Retained Earnings 294 649 1,066 1,469 Current Ratio (%) 171.3 586.3 612.0 684.1

Operating Profit Margin (%) 19.7 22.4 23.6 22.9 Non-Controlling Interests 94 139 190 241 Net Debt to Equity Ratio (%) -8.4 -65.6 -67.9 -71.2

Net Profit Margin (%) 11.6 14.6 15.6 15.0 Stockholders' Equity 1,310 4,316 4,785 5,238 Interest Coverage Ratio (x) 149.2 0.0 0.0 0.0

Source: Netmarble Games Corporation, Mirae Asset Daewoo Research estimates

135 | 2018 Outlook [Internet/Game/Advertising] Mirae Asset Daewoo Research Com2uS (078340 KQ)

Game lineup diversification underway

Investment points Expectations for new title releases: An MMORPG version of Summoners War and a mobile version of (Maintain) Buy • Skylanders (based on Activision Blizzard’s IP) are slated for release in 2018. • Overseas revenue: Overseas revenue contribution will likely reach 87% in 2018, driven by the solid global Target Price (12M, W) 160,000 performance of Summoners War, particularly in North America and Europe. • Ample cash holdings: The company has decided to pay out a DPS of W1,400, and is likely to continue to seek Share Price (12/18/17, W) 131,800 M&As.

Expected Return 21% Risk factors • Volatility around new title releases and uncertainties surrounding commercial potential Overreliance on a single game, Summoners War OP (17F, Wbn) 200 • Weak domestic revenue growth relative to overseas growth Consensus OP (17F, Wbn) 198 •

EPS Growth (17F, %) 2.5 Market EPS Growth (17F, %) 45.5

P/E (17F, x) 10.9

Market P/E (17F, x) 10.2

KOSDAQ 770.50 Market Cap (Wbn) FY (Dec.) 12/14 12/15 12/16 12/17F 12/18F 12/19F 1,696 170 Com2uS

Shares Outstanding (mn) 13 160 KOSDAQ Revenue (Wbn) 235 434 513 514 588 628 Free Float (%) 72.7 150 OP (Wbn) 101 166 192 200 228 248

Foreign Ownership (%) 27.9 140 OP margin (%) 43.0 38.2 37.4 38.9 38.8 39.5 Beta (12M) 0.58 130 NP (Wbn) 79 126 152 156 177 191

52-Week Low 85,500 120 EPS (W) 6,981 9,779 11,796 12,090 13,758 14,880

52-Week High 135,800 110 ROE (%) 49.8 35.0 26.5 22.1 20.8 18.8 (%) 1M 6M 12M100 P/E (x) 17.3 12.1 7.4 10.9 9.6 8.9

Absolute 4.3 8.1 49.490 P/B (x) 6.4 3.0 1.7 2.1 1.8 1.5

Relative 5.0 -5.9 20.680 Div.Yield (%) 0.0 0.0 1.6 1.1 1.1 1.1 16.12 17.4 17.8 17.12 Note: All figures are based on consolidated K-IFRS; NP refers to net profit attributable to controlling interests Source: Com2uS, Mirae Asset Daewoo Research estimates 136 | 2018 Outlook [Internet/Game/Advertising] Mirae Asset Daewoo Research Com2uS (078340 KQ)

Reliance on a single game to decrease thanks to new title releases in 2018

Currently developing the mobile version of Skylanders Currently developing the MMORPG version of Summoners War (based on Activision Blizzard’s IP)

Source: Com2uS Source: Com2uS

137 | 2018 Outlook [Internet/Game/Advertising] Mirae Asset Daewoo Research Com2uS (078340 KQ)

Comprehensive Income Statement (Summarized) Statement of Financial Condition (Summarized) Forecasts/Valuations (Summarized)

(Wbn) 12/16 12/17F 12/18F 12/19F (Wbn) 12/16 12/17F 12/18F 12/19F 12/16 12/17F 12/18F 12/19F

Revenue 513 514 588 628 Current Assets 654 796 966 1,148 P/E (x) 7.4 10.9 9.6 8.9

Cost of Sales 52 52 59 63 Cash and Cash Equivalents 90 230 320 457 P/CF (x) 5.7 8.3 7.2 6.7

Gross Profit 461 462 529 565 AR & Other Receivables 64 64 73 78 P/B (x) 1.7 2.1 1.8 1.5

SG&A Expenses 270 262 300 316 Inventories 0000EV/EBITDA (x) 2.84.83.62.6

Operating Profit (Adj) 192 200 228 248 Other Current Assets 500 502 573 613 EPS (W) 11,796 12,090 13,758 14,880

Operating Profit 192 200 228 248 Non-Current Assets 58 55 55 53 CFPS (W) 15,166 15,947 18,201 19,717

Non-Operating Profit 7101111Investments in Associates3333BPS (W) 51,15061,88474,28287,800

Net Financial Income 8888Property, Plant and Equipment 3 1 -1 -3 DPS (W) 1,400 1,400 1,400 1,400

Net Gain from Inv in Associates0000Intangible Assets 3 1 0 -1 Payout ratio (%) 11.5 11.3 9.9 9.1

Pretax Profit 199 210 239 259 Total Assets 712 850 1,021 1,201 Dividend Yield (%) 1.6 1.1 1.1 1.1

Income Tax 47 55 62 67 Current Liabilities 74 75 85 91 Revenue Growth (%) 18.2 0.2 14.4 6.8

Profit from Continuing Operations152156177191AP & Other Payables0000EBITDA Growth (%)15.44.113.88.7

Profit from Discontinued Operations 0000Short-Term Financial Liabilities 0000Operating Profit Growth (%)15.74.214.08.8

Net Profit 152 156 177 191 Other Current Liabilities 74 75 85 91 EPS Growth (%) 20.6 2.5 13.8 8.2

Controlling Interests 152156177191Non-Current Liabilities3333Accounts Receivable Turnover (x) 8.3 8.3 8.8 8.6

Non-Controlling Interests0000Long-Term Financial Liabilities 0000Inventory Turnover (x)0.00.00.00.0

Total Comprehensive Profit 145 156 177 191 Other Non-Current Liabilities 3333Accounts Payable Turnover (x) 0.0 0.0 0.0 0.0

Controlling Interests 145 156 177 191 Total Liabilities 77 77 88 94 ROA (%) 23.5 19.9 18.9 17.2

Non-Controlling Interests0000Controlling Interests6357739331,107ROE (%) 26.522.120.818.8

EBITDA 195203231251Capital Stock 6666ROIC (%) 322.3 344.4 417.1 479.5

FCF (Free Cash Flow) 155 159 179 194 Capital Surplus 208 208 208 208 Liability to Equity Ratio (%) 12.1 10.0 9.5 8.5

EBITDA Margin (%) 38.0 39.5 39.3 40.0 Retained Earnings 435 573 732 906 Current Ratio (%) 879.0 1,067.0 1,133.6 1,260.5

Operating Profit Margin (%)37.438.938.839.5Non-Controlling Interests0000Net Debt to Equity Ratio (%)-89.9-92.1-93.3-94.5

Net Profit Margin (%) 29.6 30.4 30.1 30.4 Stockholders' Equity 635 773 933 1,107 Interest Coverage Ratio (x) 6,487.4 0.0 0.0 0.0

Source: Com2uS, Mirae Asset Daewoo Research estimates

138 | 2018 Outlook [Internet/Game/Advertising] Mirae Asset Daewoo Research Pearl Abyss (263750 KQ)

Moving beyond Black Desert

Key points Not Rated • Expansion in platform: The scheduled launches of Black Desert Mobile (in Korea) in January 2018 and the console version in 2Q18 should lead to expansion in the firm’s game publishing platform. Target Price (12M, W) - • New title development: The firm plans to release a new PC/console game and a new mobile game in 2H18. • Profitability: As a game developer, the firm should see greater operating leverage effects if its new games Share Price (12/18/17, W) 216,400 prove successful.

Expected Return - Risk factors • Volatility around new title releases and uncertainties surrounding commercial potential

OP (18F, Wbn) - • Relatively high revenue exposure to the existing PC version of Black Desert Consensus OP (18F, Wbn) 156 • Increases in new title releases and expansion of publishing markets could drive up operating expenses. EPS Growth (18F, %) -

Market EPS Growth (18F, %) 12.1 P/E (18F, x) -

Market P/E (18F, x) 9.0

KOSDAQ 770.50

240 Market Cap (Wbn) 2,611 PearlAbyss Corp. FY (Jun.) 12/12 12/13 12/14 12/15 06/16 06/17

Shares Outstanding (mn) 12 220 KOSDAQ Revenue (Wbn)----3493

Free Float (%) 40.8 200 OP (Wbn) - - - - 28 60

Foreign Ownership (%) 3.3 180 OP margin (%)----82.464.5 Beta (12M) 0.77 NP (Wbn) - - - - 24 51 160 52-Week Low 98,900 EPS (W) - - - - 2,379 4,954 140 52-Week High 216,400 ROE (%)----112.9101.5 120 (%) 1M6M12M P/E (x)------100 Absolute 31.2 0.0 0.0 P/B (x) ------80 Relative 32.1 0.0 0.016.12 17.4 17.8 17.12 Div.Yield (%) ------Note: All figures are based on consolidated K-IFRS; NP refers to net profit attributable to controlling interests Source: PearlAbyss Corp., Mirae Asset Daewoo Research estimates

139 | 2018 Outlook [Internet/Game/Advertising] Mirae Asset Daewoo Research Pearl Abyss (263750 KQ)

Comprehensive Income Statement (Summarized) Statement of Financial Condition (Summarized) Forecasts/Valuations (Summarized)

(Wbn) 12/14 12/15 06/16 06/17 (Wbn) 12/14 12/15 06/16 06/17 12/14 12/15 06/16 06/17

Revenue - - 34 93 Current Assets - - 40 93 P/E (x) ----

Cost of Sales - - 0 0 Cash and Cash Equivalents - - 31 47 P/CF (x) ----

Gross Profit --3493AR & Other Receivables--923P/B (x) ----

SG&A Expenses - - 6 33 Inventories - - 0 0 EV/EBITDA (x) ----

Operating Profit (Adj) - - 28 60 Other Current Assets - - 0 23 EPS (W) - - 2,379 4,954

Operating Profit - - 28 60 Non-Current Assets - - 4 8 CFPS (W) - - 2,732 6,232

Non-Operating Profit - - 0 -2 Investments in Associates - - 0 2 BPS (W) - - 2,107 8,073

Net Financial Income - - 0 0 Property, Plant and Equipment - - 1 3 DPS (W) - - 0 0

Net Gain from Inv in Associates - - 0 0 Intangible Assets - - 0 1 Payout ratio (%) - - 0.0 0.0

Pretax Profit - - 28 58 Total Assets - - 44 102 Dividend Yield (%) ----

Income Tax - - 4 8 Current Liabilities - - 9 20 Revenue Growth (%) - - - 173.5

Profit from Continuing Operations - - 24 51 AP & Other Payables - - 0 4 EBITDA Growth (%) - - - 110.3

Profit from Discontinued Operations - - 0 0 Short-Term Financial Liabilities - - 0 1 Operating Profit Growth (%) - - - 114.3

Net Profit - - 24 51 Other Current Liabilities - - 9 15 EPS Growth (%) - - - 108.2

Controlling Interests - - 24 51 Non-Current Liabilities - - 14 3 Accounts Receivable Turnover (x) - - 3.8 5.9

Non-Controlling Interests - - 0 0 Long-Term Financial Liabilities - - 6 0 Inventory Turnover (x) - - 0.0 0.0

Total Comprehensive Profit - - 24 51 Other Non-Current Liabilities - - 8 3 Accounts Payable Turnover (x) - - 0.0 0.0

Controlling Interests - - 24 51 Total Liabilities - - 23 23 ROA (%) - - 55.1 69.7

Non-Controlling Interests - - 0 0 Controlling Interests - - 22 79 ROE (%) - - 112.9 101.5

EBITDA - - 29 61 Capital Stock - - 0 5 ROIC (%) - - 610.1 662.2

FCF (Free Cash Flow) - - 22 44 Capital Surplus - - 1 3 Liability to Equity Ratio (%) - - 105.0 29.5

EBITDA Margin (%) - - 85.3 65.6 Retained Earnings - - 20 70 Current Ratio (%) - - 441.6 468.7

Operating Profit Margin (%) - - 82.4 64.5 Non-Controlling Interests - - 0 0 Net Debt to Equity Ratio (%) - - -117.1 -86.7

Net Profit Margin (%) - - 70.6 54.8 Stockholders' Equity - - 22 79 Interest Coverage Ratio (x) - - 81.0 395.8

Source: PearlAbyss Corp., Mirae Asset Daewoo Research estimates

140 | 2018 Outlook [Internet/Game/Advertising] Mirae Asset Daewoo Research Webzen (069080 KQ)

Chinese gaming market exposure

Key points Not Rated • IP value: MU is as popular in China as Lineage is in Korea. • New titles: MU Miracle 2 to be released by China’s Tencent in early 2018 Target Price (12M, W) - • Partnerships with Chinese developers: Webzen collects IP royalties from Chinese developers and publishes their games in Korea and Western countries Share Price (12/18/17, W) 38,400 Risk factors Expected Return - • Uncertainties over the releases of new titles and their market reception • Revenue slowdown for existing game titles in Korea OP (17F, Wbn) - • Lack of control over development and publishing schedules in China Consensus OP (17F, Wbn) 44

EPS Growth (17F, %) -

Market EPS Growth (17F, %) 45.6 P/E (17F, x) -

Market P/E (17F, x) 10.2

KOSDAQ 770.50

280 Market Cap (Wbn) 1,356 Webzen FY (Dec.) 12/11 12/12 12/13 12/14 12/15 12/16 260 Shares Outstanding (mn) 35 KOSDAQ Revenue (Wbn) 59 57 72 73 242 220 240 Free Float (%) 61.6 OP (Wbn)9 9 3147557 220 Foreign Ownership (%) 26.1 OP margin (%) 15.3 15.8 4.2 19.2 31.0 25.9 200 Beta (12M) 1.18 NP (Wbn) 6 2 2 8 60 45 180

52-Week Low 14,050 160 EPS (W) 169 64 52 236 1,713 1,280

52-Week High 38,400 140 ROE (%) 5.8 2.0 1.4 6.2 35.7 20.6 (%) 1M 6M 12M120 P/E (x) 73.5 116.9 142.4 122.9 13.8 11.7 Absolute 32.2 63.4 168.5100 P/B (x) 2.7 1.6 1.5 5.7 3.5 1.9 80 Relative 33.1 42.2 116.816.12 17.4 17.8 17.12 Div.Yield (%) 0.0 0.0 0.0 0.0 0.0 0.0 Note: All figures are based on consolidated K-IFRS; NP refers to net profit attributable to controlling interests Source: Webzen, Mirae Asset Daewoo Research estimates

141 | 2018 Outlook [Internet/Game/Advertising] Mirae Asset Daewoo Research Webzen (069080 KQ)

Comprehensive Income Statement (Summarized) Statement of Financial Condition (Summarized) Forecasts/Valuations (Summarized)

(Wbn) 12/13 12/14 12/15 12/16 (Wbn) 12/13 12/14 12/15 12/16 12/13 12/14 12/15 12/16

Revenue 72 73 242 220 Current Assets 39 55 172 208 P/E (x) 142.4 122.9 13.8 11.7

Cost of Sales 0000Cash and Cash Equivalents 12 29 27 28 P/CF (x) 17.8 40.1 10.6 9.4

Gross Profit 72 73 242 220 AR & Other Receivables 9 13 32 28 P/B (x) 1.5 5.7 3.5 1.9

SG&A Expenses 69 59 168 163 Inventories 0000EV/EBITDA (x) 23.245.28.55.4

Operating Profit (Adj) 3 14 75 57 Other Current Assets 18 13 113 152 EPS (W) 52 236 1,713 1,280

Operating Profit 3 14 75 57 Non-Current Assets 119 105 106 94 CFPS (W) 415 724 2,241 1,598

Non-Operating Profit 2-3-90Investments in Associates0000BPS (W) 4,8595,0646,7488,008

Net Financial Income 1124Property, Plant and Equipment 29 31 31 33 DPS (W) 0000

Net Gain from Inv in Associates0000Intangible Assets 63 55 47 42 Payout ratio (%) 0.0 0.0 0.0 0.0

Pretax Profit 5 11 66 57 Total Assets 158 160 278 302 Dividend Yield (%) 0.0 0.0 0.0 0.0

Income Tax 3 3 6 12 Current Liabilities 16 11 68 53 Revenue Growth (%) 26.3 1.4 231.5 -9.1

Profit from Continuing Operations 2 8 60 45 AP & Other Payables 2 2 29 23 EBITDA Growth (%) -28.6 120.0 272.7 -19.5

Profit from Discontinued Operations 0000Short-Term Financial Liabilities 0000Operating Profit Growth (%)-66.7366.7 435.7 -24.0

Net Profit 2 8 60 45 Other Current Liabilities 14 9 39 30 EPS Growth (%) -18.8 353.8 625.8 -25.3

Controlling Interests 2 8 60 45 Non-Current Liabilities 12 10 9 9 Accounts Receivable Turnover (x) 10.6 7.6 10.8 7.4

Non-Controlling Interests0000Long-Term Financial Liabilities 0110Inventory Turnover (x)0.00.00.06,703.1

Total Comprehensive Profit 1 7 59 44 Other Non-Current Liabilities 12989Accounts Payable Turnover (x) 0.0 0.0 0.0 0.0

Controlling Interests 1 7 59 45 Total Liabilities 28 21 77 62 ROA (%) 1.1 5.3 27.5 15.5

Non-Controlling Interests0000Controlling Interests130139200239ROE (%) 1.46.235.720.6

EBITDA 10 22 82 66 Capital Stock 18 18 18 18 ROIC (%) 1.0 9.7 79.9 68.2

FCF (Free Cash Flow) -19 10 99 44 Capital Surplus 148 150 150 150 Liability to Equity Ratio (%) 21.5 14.9 38.2 25.9

EBITDA Margin (%) 13.9 30.1 33.9 30.0 Retained Earnings 4 11 71 115 Current Ratio (%) 243.6 522.9 253.4 392.4

Operating Profit Margin (%)4.219.231.025.9Non-Controlling Interests0011Net Debt to Equity Ratio (%)-21.1-29.0-67.4-72.3

Net Profit Margin (%) 2.8 11.0 24.8 20.5 Stockholders' Equity 130 139 201 240 Interest Coverage Ratio (x) 154.0 4,857.1 104,943.1 497,249.4

Source: Webzen, Mirae Asset Daewoo Research estimates

142 | 2018 Outlook [Internet/Game/Advertising] Mirae Asset Daewoo Research [Game] Valuation

Valuation comparison with global peers (Wbn, x, %)

Operating Market Revenue Net profit P/E EV/EBITDA P/B ROE Company Ticker CP profit cap 17F 18F 17F 18F 17F 18F 17F 18F 17F 18F 17F 18F 17F 18F Netmarble Games 251270 KS W190,500 16,197 2,434 2,676 544 631 400 469 45.6 38.8 23.5 19.9 3.9 3.5 13.2 9.5 NCsoft 036570 KS W472,500 10,366 1,832 2,616 629 957 504 723 20.6 14.3 12.9 8.1 3.8 3.1 22.5 25.2 Com2uS 078340 KQ W131,800 1,696 514 588 200 228 156 177 10.9 9.6 4.8 3.6 2.1 1.8 22.1 20.8 NHN Entertainment 181710 KS W69,300 1,356 911 1,028 42 66 47 72 24.4 16.0 12.4 9.7 0.9 0.8 3.7 5.4 Pearl Abyss 263750 KQ W216,400 2,611 93 225 60 124 51 104 17.8 25.2 15.2 19.5 8.5 14.0 68.7 79.5 Webzen 069080 KQ W38,400 1,356 169 248 40 82 31 65 42.9 20.7 23.6 11.7 4.3 3.6 12.4 21.6 DoubleU Games 192080 KS W53,700 938 324 495 86 153 52 87 18.1 10.8 14.6 7.2 1.9 1.6 14.0 18.7 WeMade 112040 KS W46,800 786 110 137 4 27 8 25 97.7 31.7 51.6 17.5 2.6 2.5 2.1 7.4 Activision Blizzard ATVI US US$66 54,890 7,622 8,062 2,592 2,960 1,875 2,167 29.7 26.0 20.2 17.3 4.9 4.3 14.8 15.6 Electronic Arts EA US US$107.3 36,609 5,652 6,088 1,834 2,160 1,454 1,699 25.6 21.9 16.4 14.2 7.1 5.9 29.0 27.8 Take-Two TTWO US US$110.3 13,797 2,196 3,157 421 779 400 635 36.9 23.4 22.6 14.4 7.6 5.7 23.5 24.5 Zynga ZNGA US US$4.1 3,826 920 1,006 96 141 93 124 43.4 30.8 21.8 16.2 2.2 2.1 5.2 6.9 Glu Mobile GLUU US US$4.1 663 325 348 -13 17 -11 13 - 50.6 - 38.3 3.4 3.2 -5.4 8.6 Ubisoft UBI FP EUR64.7 9,108 2,187 2,666 330 536 236 381 40.8 25.7 10.1 8.0 5.8 4.8 14.1 18.5 Nintendo 7974 JP JPY43,030 58,841 9,804 12,504 1,382 2,623 1,107 1,875 45.6 26.6 33.7 18.3 4.0 3.7 8.9 14.4 Nexon 3659 JP JPY3,265 13,913 2,235 2,449 894 1,023 690 816 20.7 17.4 10.9 10.0 3.3 2.7 17.6 17.7 Square Enix 9684 JT JPY5,670 6,698 2,503 2,693 396 431 265 291 25.8 23.3 11.7 10.7 3.4 3.0 14.1 13.9 DeNA 2432 JT JPY2,325 3,384 1,424 1,492 259 324 180 213 18.2 15.5 7.5 6.4 1.3 1.3 7.6 8.3 Gungho Online 3765 JP JPY316 2,904 918 824 356 295 222 186 10.4 12.4 6.6 7.4 4.2 3.3 46.2 32.7 GREE 3632 JT JPY730 1,705 804 868 129 155 83 99 19.8 16.7 5.7 5.1 1.4 1.3 7.5 8.2 Tencent 700 HK HK$394.2 523,669 39,376 54,950 13,923 16,906 10,734 14,044 48.6 37.4 34.4 26.7 13.5 10.0 31.2 30.1 NetEase NTES US US$363.4 50,381 8,749 11,097 2,242 2,601 2,195 2,562 23.2 19.9 18.9 16.0 6.4 5.1 29.2 27.6 Kingsoft 3888 HK HK$22.2 4,067 865 1,185 142 237 189 270 21.4 15.3 16.4 10.7 2.6 2.3 12.8 14.7 Youzu Interactive 002174 CH RMB23.4 3,413 583 758 126 177 134 184 24.2 17.6 22.2 16.4 6.0 4.7 24.7 26.9 Changyou CYOU US US$36.1 2,041 636 670 105 205 143 196 14.2 10.6 6.5 5.1 1.7 1.5 13.8 14.2 Average 31.1 22.8 18.2 13.7 4.4 3.5 18.0 17.3

Note: Data related to Netmarble Games, NCsoft, Com2uS, NHN Entertainment, Pearl Abyss and Webzen are based on our estimates; Pearl Abyss data for 2017 and 2018 are based on 6M and 12M estimates; other companies’ data are based on the Bloomberg consensus Source: Bloomberg, Mirae Asset Daewoo Research

143 | 2018 Outlook [Internet/Game/Advertising] Mirae Asset Daewoo Research Advertising (Overweight)

• Strategic change: Defense  Offense • Issue 1: Aggressive M&A-driven growth • Issue 2: Stabilization backed by affiliate billings V. [Advertising] Inorganic growth & stable affiliate billings

Growing importance of • Korean advertising firms’ market cap trend can be divided into three phases: digital media platforms 1) Early/mid-2000s: Dominance of single-entity business structure; dependence on the domestic market and affiliates and M&As 2) 2008-13: Expansion into overseas markets amid the global financial crisis and limited upside to domestic advertising market growth 3) 2014 and beyond: Shift toward an M&A-driven, group-based business structure; development of digital media capabilities holds the key

Advertising firms’ overseas gross profit growth slowed in 2017; M&A wave will resume amid growing focus on global brand marketing

(Wbn) (Wtr) 1,250 Ad universe overseas gross profit (L) 6 Digital becomes more significant Ad universe market cap (R) Steady overseas M&A activity

5 1,000

750 Overseas network expansion Start of overseas M&A activity 3

500 2 Focused on domestic market, a few key advertisers, and traditional media 250 1

0 0 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18F

Note: Ad universe includes Cheil Worldwide, INNOCEAN and Nasmedia; based on consolidated earnings; reflected respective earnings results at the time of IPO Source: Company data, Thomson Reuters, Mirae Asset Daewoo Research

145 | 2018 Outlook [Internet/Game/Advertising] Mirae Asset Daewoo Research V. [Advertising] Inorganic growth & stable affiliate billings

1) Environmental factors: • Ad firms must proactively and flexibly respond to changes in both advertiser base and the media environment. Advertiser-driven shifts • Advertisers: Cheil Worldwide and INNOCEAN Worldwide have been endeavoring to expand orders from affiliates, especially those abroad. They have been focusing on expanding affiliate billings, rather than on diversifying their and media platforms advertiser bases. • Media: Nasmedia, a media rep, has expanded into the search ad market through the acquisition of N Search Marketing; digital-driven platform diversification

Focus on expanding affiliate billings: Cheil Worldwide and Nasmedia: Beneficiary of intensifying competition INNOCEAN endeavoring to expand affiliate billings overseas Online display ads Set to expand affiliate billings overseas Online search ads IPTV ads Outdoor ads 14% Cheil Worldwide INNOCEAN

5% SEC-driven ad billings Growth in 2018, growth at overseas driven by newly acquired 2018F subsidiaries (Pengtai in D&G, which handles Nasmedia China, TBG in North Kia Motors’ creative revenue 19% breakdown America, and India); marketing 62% M&A push in North America

Source: Adweek, Company data, Mirae Asset Daewoo Research Source: Mirae Asset Daewoo Research

146 | 2018 Outlook [Internet/Game/Advertising] Mirae Asset Daewoo Research V. [Advertising] Inorganic growth & stable affiliate billings

1) Environmental factors: • The global ad market is expected to grow by 4.5% YoY in in 2018. Global market • Growth: TV media will likely expand thanks to major global sporting events; however, the internet media market is set to overtake the TV media market. • Contraction: Print media (newspapers, magazines) will likely continue to weaken, underscoring the importance of digital capabilities.

Major sporting events in 2018 to create strategic marketing Global ad market competition opportunities for advertisers (US$bn) Outdoor & Others (L) Print (L) (%, YoY) 800 TV & Radio (L) Internet (L) 5 Global ad market growth (R) 700 4 600 54 52 500 77 3 81

400

224 2 300 222

200 1 100 204 226

0 0 2017F 2018F

Source: Zenith, Bloomberg, Mirae Asset Daewoo Research Source: IOC, FIFA, Mirae Asset Daewoo Research

147 | 2018 Outlook [Internet/Game/Advertising] Mirae Asset Daewoo Research V. [Advertising] Inorganic growth & stable affiliate billings

2) Efforts to address • Ad firms seek M&As as part of voluntary and aggressive efforts to address market changes. market changes: M&As • Ad agencies create synergies through M&As in the following ways: • 1) Existing clients could forge additional deals in recognition of the acquired company’s capabilities. • 2) If acquired companies are allowed to operate independently, ad agencies can increase their account coverage while avoiding conflicts between clients that operate in the same industry. • 3) Market regions and business areas can be further diversified.

Global ad industry M&A trend: Increasing M&A deals since 2010 INNOCEAN Worldwide to acquire D&G

(US$bn) (No. of deals) 40 M&A value (L) 1,000 No. of M&As (R) M&A

30 750

Internalization of Expansion of 20 500 overseas non-affiliate orders media capabilities

10 250 Global business expansion

0 0 06 07 08 09 10 11 12 13 14 15 16 17F

Note: 2017F data are based on our estimates Source: INNOCEAN Worldwide, Mirae Asset Daewoo Research Source: Bloomberg, Mirae Asset Daewoo Research

148 | 2018 Outlook [Internet/Game/Advertising] Mirae Asset Daewoo Research V. [Advertising] Inorganic growth & stable affiliate billings

Korean ad shares outperforming global counterparts on relatively strong growth and M&A momentum

Share performance: Korean and global ad firms

(1/17=100) 140 Cheil Worldwide INNOCEAN Worldwide Dentsu 130 WPP Omnicom Publicis 120

110

100

60 1/17 2/17 3/17 4/17 5/17 6/17 7/17 8/17 9/17 10/17 11/17 12/17 Source: Thomson Reuters, Mirae Asset Daewoo Research

149 | 2018 Outlook [Internet/Game/Advertising] Mirae Asset Daewoo Research V. [Advertising] Inorganic growth & stable affiliate billings

Digital-driven ad stocks display notable growth momentum in the Korean advertising sector

Share performance: Korean and global ad firms

(1/17=100) 200 Cheil Worldwide INNOCEAN Worldwide Nasmedia 180 Incross

160

140

120

100

60 1/17 2/17 3/17 4/17 5/17 6/17 7/17 8/17 9/17 10/17 11/17 12/17 Source: Thomson Reuters, Mirae Asset Daewoo Research

150 | 2018 Outlook [Internet/Game/Advertising] Mirae Asset Daewoo Research Advertising (Overweight)

• Notable stocks: Cheil Worldwide, INNOCEAN Worldwide, Nasmedia Cheil Worldwide (030000 KS)

To benefit from sporting events and management changes

Investment points (Maintain) Buy • To benefit from Winter Olympics: Cheil Worldwide should benefit greatly from the event, as it is handling campaigns not only for SEC (official IOC sponsor), but also for KT (030200 KS/Buy/TP: W40,000/CP: W31,200); Target Price (12M, W) 25,000 official partner) and the PyeongChang organizing committee. • New markets: Affiliate business should also grow in emerging markets, where SEC is expanding its presence (India, Southeast Asia, and Latin America). We also see potential for M&A deals in emerging markets. Share Price (12/18/17, W) 20,900 • Changes in management: Cheil Worldwide is expected to enhance its business capabilities after promoting its marketing strategy head to CEO. Expected Return 20%

Risk factors OP (17F, Wbn) 186 • High reliance on revenue from group affiliates Consensus OP (17F, Wbn) 172 • Slow recovery in China and business expansion expenses EPS Growth (17F, %) 68.6 • Labor costs (variable costs for the agency) to limit margin improvement Market EPS Growth (17F, %) 45.5

P/E (17F, x) 16.2

Market P/E (17F, x) 10.2

KOSPI 2,481.88 Market Cap (Wbn) FY (Dec.) 12/14 12/15 12/16 12/17F 12/18F 12/19F 2,404 130 Cheil Worldwide 125 Shares Outstanding (mn) 115 KOSPI Revenue (Wbn) 2,666 2,807 3,233 3,375 3,553 3,656 120 Free Float (%) 59.6 OP (Wbn) 127 127 150 186 215 228 115 Foreign Ownership (%) 33.7 OP margin (%) 4.8 4.5 4.6 5.5 6.1 6.2 110 Beta (12M) 0.54 NP (Wbn) 102 80 88 149 152 161 105 52-Week Low EPS (W) 883 691 767 1,293 1,322 1,399 15,050 100

52-Week High 21,400 95 ROE (%) 13.2 9.6 11.4 18.6 17.0 16.1

(%) 1M 6M 12M90 P/E (x) 19.5 29.9 20.5 16.2 15.8 14.9 Absolute 1.5 13.6 36.285 P/B (x) 2.0 2.2 1.7 2.1 2.0 1.8

Relative 3.6 8.1 12.080 Div.Yield (%) 0.0 1.4 1.9 2.2 2.2 2.3 16.12 17.4 17.8 17.12 Note: All figures are based on consolidated K-IFRS; NP refers to net profit attributable to controlling interests Source: Cheil Worldwide, Mirae Asset Daewoo Research estimates

152 | 2018 Outlook [Internet/Game/Advertising] Mirae Asset Daewoo Research Cheil Worldwide (030000 KS)

Ongoing marketing campaigns for the PyeongChang Winter Olympics

Cheil Worldwide is handling marketing for SEC (official IOC sponsor) and KT (official partner)

Source: Press materials, Cheil Worldwide, Mirae Asset Daewoo Research

153 | 2018 Outlook [Internet/Game/Advertising] Mirae Asset Daewoo Research Cheil Worldwide (030000 KS)

Comprehensive Income Statement (Summarized) Statement of Financial Condition (Summarized) Forecasts/Valuations (Summarized)

(Wbn) 12/16 12/17F 12/18F 12/19F (Wbn) 12/16 12/17F 12/18F 12/19F 12/16 12/17F 12/18F 12/19F

Revenue 3,233 3,375 3,553 3,656 Current Assets 1,795 1,921 2,131 2,315 P/E (x) 20.5 16.2 15.8 14.9

Cost of Sales 2,235 2,362 2,494 2,567 Cash and Cash Equivalents 373 459 592 732 P/CF (x) 8.8 10.7 9.9 9.7

Gross Profit 998 1,013 1,059 1,089 AR & Other Receivables 1,196 1,229 1,293 1,331 P/B (x) 1.7 2.1 2.0 1.8

SG&A Expenses 848 828 844 862 Inventories 0000EV/EBITDA (x) 7.58.77.36.5

Operating Profit (Adj) 150 186 215 228 Other Current Assets 226 233 246 252 EPS (W) 767 1,293 1,322 1,399

Operating Profit 150 186 215 228 Non-Current Assets 357 342 315 291 CFPS (W) 1,784 1,959 2,102 2,161

Non-Operating Profit -22544Investments in Associates7788BPS (W) 9,0909,75710,68311,668

Net Financial Income 5 6 7 10 Property, Plant and Equipment 103 94 80 68 DPS (W) 300 450 470 490

Net Gain from Inv in Associates 0 -1 0 0 Intangible Assets 169 157 141 127 Payout ratio (%) 33.5 29.9 30.5 30.1

Pretax Profit 128 191 219 232 Total Assets 2,151 2,263 2,446 2,606 Dividend Yield (%) 1.9 2.2 2.2 2.3

Income Tax 37 38 64 67 Current Liabilities 1,245 1,278 1,344 1,382 Revenue Growth (%) 15.2 4.4 5.3 2.9

Profit from Continuing Operations 91 152 156 165 AP & Other Payables 713 732 771 793 EBITDA Growth (%) 13.3 17.0 11.4 3.7

Profit from Discontinued Operations 0000Short-Term Financial Liabilities 19 18 18 18 Operating Profit Growth (%) 18.1 24.0 15.6 6.0

Net Profit 91 152 156 165 Other Current Liabilities 513 528 555 571 EPS Growth (%) 11.0 68.6 2.2 5.8

Controlling Interests 88 149 152 161 Non-Current Liabilities 130 134 141 145 Accounts Receivable Turnover (x) 3.1 2.8 2.8 2.8

Non-Controlling Interests2444Long-Term Financial Liabilities 0000Inventory Turnover (x)0.00.00.00.0

Total Comprehensive Profit 75 145 156 165 Other Non-Current Liabilities 130 134 141 145 Accounts Payable Turnover (x) 3.7 3.5 3.5 3.5

Controlling Interests 74 139 149 158 Total Liabilities 1,375 1,412 1,485 1,527 ROA (%) 4.5 6.9 6.6 6.5

Non-Controlling Interests1667Controlling Interests7638409461,059ROE (%) 11.418.617.016.1

EBITDA 188 220 245 254 Capital Stock 23 23 23 23 ROIC (%) 25.1 36.5 39.9 44.6

FCF (Free Cash Flow) 78 97 185 191 Capital Surplus 54 51 51 51 Liability to Equity Ratio (%) 177.1 165.9 154.5 141.6

EBITDA Margin (%) 5.8 6.5 6.9 6.9 Retained Earnings 996 1,084 1,191 1,304 Current Ratio (%) 144.2 150.3 158.5 167.5

Operating Profit Margin (%) 4.6 5.5 6.1 6.2 Non-Controlling Interests 13 11 15 19 Net Debt to Equity Ratio (%) -52.8 -58.6 -66.1 -72.0

Net Profit Margin (%) 2.7 4.4 4.3 4.4 Stockholders' Equity 776 851 961 1,078 Interest Coverage Ratio (x) 67.9 82.6 99.1 106.3

Source: Cheil Worldwide, Mirae Asset Daewoo Research estimates

154 | 2018 Outlook [Internet/Game/Advertising] Mirae Asset Daewoo Research INNOCEAN Worldwide (214320 KS)

Taking off with new car momentum and David & Goliath

Investment points (Maintain) Buy • M&A effects: INNOCEAN is likely to strengthen its overseas capabilities with the acquisition of D&G, which handles Kia's (000270 KS/Trading Buy/TP: W38,000/CP: W33,300) creative in the US. Target Price (12M, W) 96,000 • New car marketing: Major affiliate clients Hyundai Motor (HMC; 005380 KS/Trading Buy/TP: W177,000/CP: W154,000) and Kia have a number of new models lined up for 2018. Sporting events: As official sponsors of FIFA, HMC and Kia plan to actively take advantage of the 2018 World Share Price (12/18/17, W) 76,000 • Cup to market their new models.

Expected Return 26% Risk factors • Overreliance on affiliate billings OP (17F, Wbn) 114 • Regulatory risks over related-party transactions 111 Consensus OP (17F, Wbn) • Labor costs (variable costs for the agency) to limit margin improvement EPS Growth (17F, %) 8.5 Market EPS Growth (17F, %) 45.5

P/E (17F, x) 21.4

Market P/E (17F, x) 10.2

KOSPI 2,481.88

Market Cap (Wbn) 1,520 140 INNOCEAN FY (Dec.) 12/14 12/15 12/16 12/17F 12/18F 12/19F Worldwide Shares Outstanding (mn) 20 KOSPI Revenue (Wbn) 745 988 1,052 1,178 1,449 1,550 130 Free Float (%) 57.0 OP (Wbn) 83 93 99 114 133 142

Foreign Ownership (%) 33.8 120 OP margin (%) 11.1 9.4 9.4 9.7 9.2 9.2 Beta (12M) 0.58 NP (Wbn) 82 70 65 71 82 89 110 52-Week Low 56,200 EPS (W) 4,551 3,696 3,267 3,546 4,100 4,451

52-Week High 77,800 100 ROE (%) 21.5 13.7 10.4 10.4 11.2 11.2 (%) 1M 6M 12M P/E (x) - 18.9 17.5 21.4 18.5 17.1 90 Absolute 1.2 19.5 25.0 P/B (x) - 2.3 1.7 2.2 2.0 1.8

Relative 3.3 13.7 2.980 Div.Yield (%) - 1.3 1.7 1.4 1.6 1.8 16.12 17.4 17.8 17.12 Note: All figures are based on consolidated K-IFRS; NP refers to net profit attributable to controlling interests Source: INNOCEAN Worldwide, Mirae Asset Daewoo Research estimates

155 | 2018 Outlook [Internet/Game/Advertising] Mirae Asset Daewoo Research INNOCEAN Worldwide (214320 KS)

INNOCEAN is enhancing media/creative capabilities through M&As with a focus on North America

INNOCEAN’s acquisition of D&G, a creative agency in North America, to drive earnings growth beginning in 2018

INNOCEAN Worldwide Holdings

2018 ~

Source: INNOCEAN Worldwide, Mirae Asset Daewoo Research

156 | 2018 Outlook [Internet/Game/Advertising] Mirae Asset Daewoo Research INNOCEAN Worldwide (214320 KS)

Comprehensive Income Statement (Summarized) Statement of Financial Condition (Summarized) Forecasts/Valuations (Summarized)

(Wbn) 12/16 12/17F 12/18F 12/19F (Wbn) 12/16 12/17F 12/18F 12/19F 12/16 12/17F 12/18F 12/19F

Revenue 1,052 1,178 1,449 1,550 Current Assets 1,550 1,738 2,076 2,260 P/E (x) 17.5 21.4 18.5 17.1

Cost of Sales 670 766 956 1,023 Cash and Cash Equivalents 231 242 236 293 P/CF (x) 10.3 12.3 11.4 10.8

Gross Profit 382 412 493 527 AR & Other Receivables 853 967 1,189 1,272 P/B (x) 1.7 2.2 2.0 1.8

SG&A Expenses 282 298 360 385 Inventories 0000EV/EBITDA (x) 4.76.75.24.4

Operating Profit (Adj) 99 114 133 142 Other Current Assets 466 529 651 695 EPS (W) 3,267 3,546 4,100 4,451

Operating Profit 99 114 133 142 Non-Current Assets 125 127 129 128 CFPS (W) 5,559 6,202 6,694 7,046

Non-Operating Profit 10 10 10 10 Investments in Associates 19 22 27 29 BPS (W) 32,728 35,225 38,245 41,446

Net Financial Income 9 9 11 12 Property, Plant and Equipment 31 30 26 23 DPS (W) 950 1,080 1,250 1,350

Net Gain from Inv in Associates5100Intangible Assets 60 57 56 55 Payout ratio (%) 24.4 24.6 24.5 24.3

Pretax Profit 109 124 143 152 Total Assets 1,675 1,864 2,205 2,388 Dividend Yield (%) 1.7 1.4 1.6 1.8

Income Tax 32 36 41 41 Current Liabilities 975 1,106 1,361 1,456 Revenue Growth (%) 6.5 12.0 23.0 7.0

Profit from Continuing Operations 78 88 102 111 AP & Other Payables 900 1,021 1,256 1,344 EBITDA Growth (%) 6.1 14.3 15.0 5.8

Profit from Discontinued Operations 0000Short-Term Financial Liabilities 1122Operating Profit Growth (%)6.515.216.76.8

Net Profit 78 88 102 111 Other Current Liabilities 74 84 103 110 EPS Growth (%) -11.6 8.5 15.6 8.6

Controlling Interests 65 71 82 89 Non-Current Liabilities 22 24 30 32 Accounts Receivable Turnover (x) 1.4 1.3 1.4 1.3

Non-Controlling Interests 13 17 20 22 Long-Term Financial Liabilities 0000Inventory Turnover (x)0.00.00.00.0

Total Comprehensive Profit 81 85 102 111 Other Non-Current Liabilities 22 24 30 32 Accounts Payable Turnover (x) 0.9 0.8 0.9 0.8

Controlling Interests 68 69 83 91 Total Liabilities 997 1,131 1,391 1,488 ROA (%) 5.0 5.0 5.0 4.8

Non-Controlling Interests 14 16 19 21 Controlling Interests 654 704 765 829 ROE (%) 10.4 10.4 11.2 11.2

EBITDA 105 120 138 146 Capital Stock 10 10 10 10 ROIC (%) 520.7 -744.2 -281.5 -183.7

FCF (Free Cash Flow) 102 109 138 127 Capital Surplus 133 133 133 133 Liability to Equity Ratio (%) 147.0 154.2 171.0 165.4

EBITDA Margin (%) 10.0 10.2 9.5 9.4 Retained Earnings 519 571 631 695 Current Ratio (%) 158.9 157.0 152.5 155.2

Operating Profit Margin (%) 9.4 9.7 9.2 9.2 Non-Controlling Interests 24 29 49 71 Net Debt to Equity Ratio (%) -98.7 -100.7 -104.2 -105.2

Net Profit Margin (%) 6.2 6.0 5.7 5.7 Stockholders' Equity 678 733 814 900 Interest Coverage Ratio (x) 2,323.1 1,399.0 1,374.5 1,286.5

Source: INNOCEAN Worldwide, Mirae Asset Daewoo Research estimates

157 | 2018 Outlook [Internet/Game/Advertising] Mirae Asset Daewoo Research Nasmedia (089600 KQ)

Strong growth to continue, driven by digital ads

Investment points (Maintain) Buy • Digital-driven business: As Korea’s leading new media rep, Nasmedia has a promising portfolio driven by digital ads. Target Price (12M, W) 83,000 • Robust demand: Nasmedia stands to benefit from its advertisers operating in highly competitive markets (game and commerce). Growth and stability: Even in the absence of M&A effects, we expect the company to continue to enjoy strong Share Price (12/18/17, W) 69,000 • top-line growth of around 20% in 2018. Shareholder returns will likely continue to be solid (dividend payout ratio of 30%). Expected Return 20%

Risk factors OP (17F, Wbn) 34 • Removal of M&A effects (N Search Marketing) from 4Q17 Consensus OP (17F, Wbn) 34 • The weakening of growth potential in the IPTV and outdoor ad segments EPS Growth (17F, %) 105.1 • Potential losses related to account receivables and credit cost recognition Market EPS Growth (17F, %) 45.5

P/E (17F, x) 24.9

Market P/E (17F, x) 10.2

KOSDAQ 770.50 Market Cap (Wbn) FY (Dec.) 12/14 12/15 12/16 12/17F 12/18F 12/19F 604 240 Nasmedia

Shares Outstanding (mn) 9 220 KOSDAQ Revenue (Wbn) 30 45 70 122 148 175 Free Float (%) OP (Wbn)91215344353 39.4 200 Foreign Ownership (%) 10.2 OP margin (%) 28.8 26.7 21.4 27.9 29.1 30.3 180 Beta (12M) 0.49 NP (Wbn)81012243037 160 52-Week Low 33,000 EPS (W) 965 1,202 1,350 2,768 3,484 4,228 140 52-Week High 73,300 ROE (%) 13.4 14.3 14.1 22.3 23.4 23.8 120 (%) 1M 6M 12M P/E (x) 24.7 41.6 29.3 24.9 19.8 16.3

Absolute -2.1 38.3 76.5100 P/B (x) 3.1 5.9 3.5 5.1 4.3 3.6

Relative -1.4 20.4 42.580 Div.Yield (%) 1.2 0.7 1.0 1.2 1.6 1.9 16.12 17.4 17.8 17.12 Note: All figures are based on consolidated K-IFRS; NP refers to net profit attributable to controlling interests Source: Nasmedia, Mirae Asset Daewoo Research estimates

158 | 2018 Outlook [Internet/Game/Advertising] Mirae Asset Daewoo Research Nasmedia (089600 KQ)

Nasmedia annual parent earnings (Wbn, %)

2014 2015 2016 2017F 2018F

Revenue 30 45 62 86 108

Online display ads 17 18 19 25 33

IPTV ads 4 6 5 7 7

Outdoor ads 5 7 14 19 21

Operating profit 9 12 15 25 33

P m r i 28.8OP margin 25.7 23.7 29.0 30.7

Net profit 8 10 11 20 26

e a g n26.7Net margin 21.8 18.6 22.7 24.0

Source: Nasmedia, Mirae Asset Daewoo Research

Subsidiary N Search Marketing’s annual earnings (Wbn, %)

2014 2015 2016 2017F 2018F

Revenue 28 29 31 36 40

Online search ads 20 21 22 26 29

Online display ads 8 7 10 10 11

Operating profit 2 5 7 9 10

P m r i 6.8 OP margin 17.1 21.9 25.0 25.0

Net profit 1 3 5 7.0 7.8

e a g n4.7Net margin 11.8 15.6 19.5 19.5

Notes: Nasmedia owns 66.7% of N Search Marketing Source: Nasmedia, Mirae Asset Daewoo Research

159 | 2018 Outlook [Internet/Game/Advertising] Mirae Asset Daewoo Research Nasmedia (089600 KQ)

Comprehensive Income Statement (Summarized) Statement of Financial Condition (Summarized) Forecasts/Valuations (Summarized)

(Wbn) 12/16 12/17F 12/18F 12/19F (Wbn) 12/16 12/17F 12/18F 12/19F 12/16 12/17F 12/18F 12/19F

Revenue 70 122 148 175 Current Assets 188 320 399 487 P/E (x) 29.3 24.9 19.8 16.3

Cost of Sales 0000Cash and Cash Equivalents 28 39 60 86 P/CF (x) 17.8 16.9 13.5 11.1

Gross Profit 70 122 148 175 AR & Other Receivables 155 272 328 388 P/B (x) 3.5 5.1 4.3 3.6

SG&A Expenses 55 88 105 122 Inventories 0000EV/EBITDA (x) 19.416.212.49.7

Operating Profit (Adj) 15 34 43 53 Other Current Assets 5 9 11 13 EPS (W) 1,350 2,768 3,484 4,228

Operating Profit 15 34 43 53 Non-Current Assets 76 82 84 87 CFPS (W) 2,223 4,090 5,106 6,203

Non-Operating Profit 1000Investments in Associates0000BPS (W) 11,20713,58516,20919,336

Net Financial Income 0000Property, Plant and Equipment 12 11 11 10 DPS (W) 390 860 1,100 1,300

Net Gain from Inv in Associates0000Intangible Assets 48 48 47 46 Payout ratio (%) 28.5 28.3 28.7 27.8

Pretax Profit 16 34 43 53 Total Assets 264 402 484 574 Dividend Yield (%) 1.0 1.2 1.6 1.9

Income Tax 4 8 10 12 Current Liabilities 141 246 297 351 Revenue Growth (%) 55.6 74.3 21.3 18.2

Profit from Continuing Operations 12 27 34 41 AP & Other Payables 133 233 281 332 EBITDA Growth (%) 41.7 105.9 28.6 22.2

Profit from Discontinued Operations 0000Short-Term Financial Liabilities 0000Operating Profit Growth (%)25.0126.7 26.5 23.3

Net Profit 12 27 34 41 Other Current Liabilities 8 13 16 19 EPS Growth (%) 12.3 105.0 25.9 21.4

Controlling Interests 12 24 30 37 Non-Current Liabilities 19 28 33 38 Accounts Receivable Turnover (x) 3.1 2.8 2.4 2.4

Non-Controlling Interests0234Long-Term Financial Liabilities 6600Inventory Turnover (x)0.00.00.00.0

Total Comprehensive Profit 10 27 34 41 Other Non-Current Liabilities 13 22 33 38 Accounts Payable Turnover (x) 0.0 0.0 0.0 0.0

Controlling Interests 10 27 34 41 Total Liabilities 160 274 330 389 ROA (%) 5.9 8.0 7.6 7.7

Non-Controlling Interests0000Controlling Interests98119142169ROE (%) 14.122.323.423.8

EBITDA 17354555Capital Stock 5555ROIC (%) 20.130.435.541.7

FCF (Free Cash Flow) 17 26 34 41 Capital Surplus 43 43 43 43 Liability to Equity Ratio (%) 152.7 215.0 214.8 210.4

EBITDA Margin (%) 24.3 28.7 30.4 31.4 Retained Earnings 50 71 94 121 Current Ratio (%) 133.6 130.0 134.3 138.6

Operating Profit Margin (%) 21.4 27.9 29.1 30.3 Non-Controlling Interests 6 9 12 16 Net Debt to Equity Ratio (%) -24.4 -31.4 -40.6 -48.6

Net Profit Margin (%) 17.1 19.7 20.3 21.1 Stockholders' Equity 104 128 154 185 Interest Coverage Ratio (x) 171.6 0.0 0.0 0.0

Source: Nasmedia, Mirae Asset Daewoo Research estimates

160 | 2018 Outlook [Internet/Game/Advertising] Mirae Asset Daewoo Research [Advertising] Valuation

Valuation comparison with global peers (Wbn, x, %) Operating Revenue Net profit P/E EV/EBITDA P/B ROE profit Company Ticker CP Market cap 17F 18F 17F 18F 17F 18F 17F 18F 17F 18F 17F 18F 17F 18F

Cheil Worldwide 030000 KS W20,900 2,404 3,375 3,553 186 215 152 156 16.2 15.8 8.7 7.3 2.1 2.0 18.6 17.0 INNOCEAN 214320 KS W76,000 1,520 1,178 1,449 114 133 88 102 21.4 18.5 6.7 5.2 2.2 2.0 10.4 11.2 Worldwide Nasmedia 089600 KQ W69,000 604 122 148 34 43 27 34 24.9 19.8 16.2 12.4 5.1 4.3 22.3 23.4

Incross 216050 KS W21,600 170 40 50 11 14 9 12 18.5 14.3 10.9 8.4 2.9 2.4 16.9 17.8

BlueFocus 300058 CH RMB6.4 2,334 2,631 3,321 121 160 115 151 19.5 15.0 15.7 12.7 2.1 1.8 11.3 12.3

Guangdong Ad 002400 CH RMB5.5 1,574 2,007 2,233 103 161 71 114 22.9 14.4 18.0 10.8 1.6 1.5 8.5 11.1

Dentsu 4324 JP JPY4,830 13,446 9,015 9,560 1,280 1,386 812 886 16.5 15.1 9.6 9.2 1.3 1.2 8.4 8.4

Hakuhodo DY 2433 JP JPY1,478 5,546 12,762 13,255 495 529 279 300 19.3 17.9 8.1 7.7 1.7 1.6 9.2 9.5

Asatsu-DK 9747 JP JPY3,620 1,459 3,452 3,518 58 64 51 55 28.2 26.4 17.7 16.4 - - 4.5 4.3

WPP WPP LN GBP1,365 25,617 21,285 21,776 3,139 3,251 2,223 2,275 11.5 11.1 8.9 8.7 3.1 3.0 16.3 15.8

Omnicom OMC US US$73.5 18,662 16,747 17,302 2,291 2,388 1,302 1,358 14.6 13.7 8.9 8.6 7.6 7.2 49.6 48.0

Publicis PUB FP EUR56.9 16,998 12,466 12,614 1,940 2,071 1,322 1,411 12.7 11.9 9.0 8.6 2.0 1.8 16.1 16.0

Interpublic IPG US US$20.3 8,650 8,574 8,869 1,060 1,115 610 659 14.6 13.1 8.1 7.7 3.8 3.7 26.7 27.3

Average 18.5 15.9 11.3 9.5 3.0 2.7 16.8 17.1

Notes: Cheil Worldwide, INNOCEAN Worldwide, and Nasmedia’s data are based on our estimates; other companies’ data are based on the Bloomberg consensus Source: Bloomberg, Mirae Asset Daewoo Research

161 | 2018 Outlook [Internet/Game/Advertising] Mirae Asset Daewoo Research [Conclusion] Focus on strategic changes to pursue growth

New strategies amid shifting market conditions - Game/Advertising in 1H: New title releases and sporting events - Internet in 2H: New business performance and M&A momentum

Internet Game Advertising

Strategy: Strategy: Strategy: Ads  Commerce Domestics  Overseas Defense  Offense

Top pick: NAVER Top pick: NCsoft

Other notable stocks: Other notable stocks: Other notable stocks: NHN Entertainment, Netmarble Games, Cheil Worldwide, Kakao, Interpark Com2uS, Pearl Abyss, INNOCEAN Worldwide, Webzen Nasmedia

Source: Mirae Asset Daewoo Research

162 | 2018 Outlook [Internet/Game/Advertising] Mirae Asset Daewoo Research Coverage overview

Target Price Current Price Company Ticker Rating (12M, W) (12/18/17, W)

NAVER 035420 KS Buy 1,200,000 860,000

Kakao 035720 KS Trading Buy 170,000 134,500

NHN Entertainment 181710 KS Buy 83,000 69,300

Interpark 108790 KQ Trading Buy 11,000 9,460

NCsoft 036570 KS Buy 640,000 472,500

Netmarble Games 251270 KS Buy 230,000 190,500

Com2uS 078340 KQ Buy 160,000 131,800

Pearl Abyss 263750 KQ Not Rated - 216,400

Webzen 069080 KQ Not Rated - 38,400

Cheil Worldwide 030000 KS Buy 25,000 20,900

INNOCEAN Worldwide 214320 KS Buy 96,000 76,000

Nasmedia 089600 KQ Buy 83,000 69,000

Source: Company data, Mirae Asset Daewoo Research

163 | 2018 Outlook [Internet/Game/Advertising] Mirae Asset Daewoo Research APPENDIX 1

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

Company (Code) Date Rating Target Price Company (Code) Date Rating Target Price NAVER(035420) 10/26/2017 Buy 1,200,000 01/26/2016 Buy 150,000 04/04/2017 Buy 1,160,000 08/16/2015 Buy 170,000 01/02/2017 No Coverage Interpark(108790) 12/18/2017 Trading Buy 11,000 08/30/2016 Buy 1,050,000 11/05/2017 Buy 11,000 04/28/2016 Buy 900,000 08/08/2017 Buy 15,000 07/30/2015 Buy 820,000 05/22/2017 Trading Buy 15,000 NHN Entertainment(181710) 11/05/2017 Buy 83,000 04/04/2017 Trading Buy 12,000 01/02/2017 No Coverage 01/02/2017 No Coverage Kakao Corp.(035720) 12/17/2017 Trading Buy 170,000 08/10/2016 Hold 11/05/2017 Buy 190,000 02/14/2016 Buy 27,000 08/10/2017 Buy 130,000 08/04/2015 Buy 30,000 06/18/2017 Buy 125,000 NCSOFT(036570) 09/26/2017 Buy 640,000 05/11/2017 Buy 115,000 07/09/2017 Buy 600,000 04/04/2017 Buy 105,000 05/01/2017 Buy 500,000 01/02/2017 No Coverage 01/02/2017 No Coverage 10/13/2016 Buy 100,000 03/11/2016 Buy 420,000 08/11/2016 Buy 110,000 02/05/2016 Buy 400,000 07/15/2016 Buy 120,000 05/13/2015 Buy 270,000 05/12/2016 Buy 135,000

(W) NAVER (W) NHN Entertainment(W) Kakao Corp. (W) Interpark (W) NCSOFT

1,500,000 100,000 200,000 40,000 800,000

80,000 150,000 30,000 600,000 1,000,000 60,000 100,000 20,000 400,000 40,000 500,000 50,000 10,000 200,000 20,000

0 0 0 0 0 Dec 15 Dec 16Dec Dec 1517 Dec 16Dec Dec 15 17 Dec 16Dec Dec 15 17 Dec 16Dec Dec 15 17 Dec 16 Dec 17

164 | 2018 Outlook [Internet/Game/Advertising] Mirae Asset Daewoo Research APPENDIX 1

2-Year Rating and Target Price History

Company (Code) Date Rating Target Price Company (Code) Date Rating Target Price Netmarble Games Corporation(251270) 11/08/2017 Buy 230,000 11/24/2015 Buy 30,000 08/31/2017 Buy 190,000 INNOCEAN Worldwide(214320) 12/14/2017 Buy 96,000 08/14/2017 Trading Buy 150,000 10/31/2017 Buy 93,000 05/01/2017 Buy 200,000 01/30/2017 Buy 90,000 Com2uS(078340) 12/18/2017 Buy 160,000 10/28/2016 Buy 100,000 08/08/2017 Buy 135,000 06/01/2016 Buy 108,000 05/02/2017 Trading Buy 135,000 04/28/2016 Buy 98,000 Cheil Worldwide(030000) 12/18/2017 Buy 25,000 01/29/2016 Buy 96,000 10/30/2017 Buy 24,000 11/24/2015 Buy 86,000 07/30/2017 Trading Buy 22,000 Nasmedia(089600) 12/18/2017 Buy 83,000 04/28/2017 Trading Buy 21,000 10/30/2017 Buy 75,000 01/30/2017 Buy 21,000 07/28/2017 Buy 71,000 11/28/2016 Buy 19,000 10/30/2016 Buy 65,000 04/22/2016 Trading Buy 19,000 07/31/2016 Buy 61,000 02/21/2016 Trading Buy 20,000 01/13/2016 Buy 71,000 01/28/2016 Buy 29,000 11/24/2015 Buy 58,000

(W) Netmarble Games Corporation(W) Com2uS (W) Cheil Worldwide (W) INNOCEAN Worldwide(W) Nasmedia

250,000 200,000 40,000 120,000 100,000

200,000 100,000 80,000 150,000 30,000 80,000 150,000 60,000 100,000 20,000 60,000 100,000 40,000 40,000 50,000 10,000 50,000 20,000 20,000

0 0 0 0 0 Dec 15 Dec 16Dec Dec 15 17 Dec 16Dec Dec 15 17 Dec 16Dec Dec 15 17 Dec 16Dec Dec 15 17 Dec 16 Dec 17

165 | 2018 Outlook [Internet/Game/Advertising] Mirae Asset Daewoo Research APPENDIX 1

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 74.52% 12.50% 12.98% 0.00% Investment Banking Services 70.73% 19.51% 9.76% 0.00% * Based on recommendations in the last 12-months (as of September 30, 2017)

Disclosures As of the publication date, Mirae Asset Daewoo Co., Ltd. and/or its affiliates own 1% or more of NAVER`s shares outstanding. As of the publication date, Mirae Asset Daewoo Co., Ltd. has been acting as a financial advisor to Webzen for its treasury stock trust.

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.

166 | 2018 Outlook [Internet/Game/Advertising] Mirae Asset Daewoo Research APPENDIX 1

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 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 International Network

Mirae Asset Daewoo Co., Ltd. (Seoul) Mirae Asset Securities (HK) Ltd. Mirae Asset Securities (UK) Ltd. Global Equity Sales Team Suites 1109-1114, 11th Floor 41st Floor, Tower 42 Mirae Asset Center 1 Building Two International Finance Centre 25 Old Broad Street, 26 Eulji-ro 5-gil, Jung-gu, Seoul 04539 8 Finance Street, Central London EC2N 1HQ Korea Hong Kong United Kingdom China Tel: 82-2-3774-2124 Tel: 852-2845-6332 Tel: 44-20-7982-8000

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