Ncsoft (036570) �

Home , Auto Assault, City of Heroes, Guild Wars, Guild Wars Factions, Guild Wars Nightfall, Lineage II

DWS COMPANY REPORT EQUITY RESEARCH Internet KOREA -EQUI 13 October 2006 2006 13 October Source: Companydata,Daewoo Securities Forecasts/Valuations Forecasts/Valuations NCSOFT (036570)

Please carefully read important notices 20F2918. 594232. 631. 24196.4 12.1 7.6 15.8 1.9 11.9 2.6 2.2 12.4 4.0 31.6 5.3 15.4 16.3 8.3 23.2 15.3 4,213 24.946.3 21.7 18.7 4.8 12/08F 3,373 299.185.9 85.9 104.6 29.0 1,649 -50.1 27.6 12/07F 3,305 -14.3 -21.6 277.468.7 77.4 33.6 53.1 30.4108.9 226.6 12/06F 66.7 3,855 72.0 232.8 12/05 74.1 246.9 109.0 12/04 FY Upgrade to Overweight Overweight to Upgrade Aion willbedisplayedat momentum for the shares,as3Q06 resultswill in Korea and Tabula Rasa beingdeveloped in In 2007, commercialization is scheduled for tw became a big hit inthe US and Europe. Nightfall, the third vers subsidiaries. In4Q06,profitability should rise in recurring profit in3Q06F on costsavi Quarterly earningsaregradually developer and publisher. Still, evenin this negativeoperating environm development costs, lead to the stumbling of the company’s top line and deterioration of profit. success in the domesticmarket. This alon faltered intheoverseas markets in2006, an of NCsoftuntil 2005, whichwasprimarilydriven Since the launch of Lineage 2, the domestic market has contributed little to the top line growth revenue source until the company commer the commercialization of Lineage inSeptembe NCsoft became a forerunnerin NCsoft becamea Share price fell sharply due to lower 2006F ea 2006F duetolower sharply fell Share price NCsoft plans to unveil Aion, its new MMORPG (Massively Multiplayer Online Role-Playing Role-Playing Online Multiplayer (Massively MMORPG new its Aion, unveil to plans NCsoft We revise up NCsoft from Trading Buy to Overweight based on the following. First, we we First, following. the on based Overweight to Buy Trading from NCsoft up revise We will likely expectations our a exceed notable by margin. game, which is expected to have acritical have to is expected which game, o akey will be This in Korea. 9~12 November G-Star called expo game atthe Game), control costs.also We upgrade oursix-month target pricefrom W60,000 toW65,000. Third, announced. be will introductions game a detailed ourearnings schedule Second, second forecast for theadjust up half. fornew (Wbn) (Wbn) Sales TY RESEARCH (Wbn) (Wbn) OP OP (Wbn) ion of Guild Wars, a Wars, CORPGion ofGuild (Competiti NP Korea’sG-Star. game expo MMORPG (MassivelyMMORPG Multiplayer On EPS EPS (W) (W) mrvn ih20 sbto.W xett e an increase improving with 2Q06 asbottom. Weexpect to see in the last pages of thisreport. pages inthe last yoy yoy (%) cialized Lineage 2in October 2003. afc ntecmayssaepie price. share onthecompany's affect d their new casual games were not acommercial ngs and improved earnings from its overseas overseas its from earnings improved and ngs (Game Show and Show (Game Trade All Round) during ent, NCsoftremainsth MRG Aion currently underdevelopment o MMORPGs - g with the weight of increased new game new of increased weight the g with (Wbn) r 1998,Thegame served asNCsoft’s single rnings guidance. However, 3Q06F earnings earnings 3Q06F However, guidance. rnings likely exceedexpectatio further, as NCsoft by overseas sales. However, their newgames FCF management is taking concrete steps to concrete steps management istaking pportunity for an early review ofthenew review an early for pportunity its studio inthe US. ROE (%) ve Online RolePl line Role-Playing P/E (x) leading global MMORPG e will unveilGuildWars ns and itsnew game We expectpositive

P/B (x) aying Game) that EV/EBITDA Game) with Game) (x)

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KOSPI Relative performance Chart Par Value: W500 W500 Par Value: W52,100 (12/10/06): Price Share (6M):W65,000 price Target 036570.KS Reuters: KS 036570 Bloomberg: [email protected] +822-768-4321 Chang Kwean Kim Price PerformancePrice Robert K.Garriott (2.38%) T.J. Kim (27.44%) Shareholder(s): Major Dividend Yield (2005): 0.0% 42.1% Ownership: Foreign Avg Value (60D): US$9.0mn/W8.7bn Avg Volume (60D): 188,758 shr Shares Issued:20.4 mn shr Mkt Cap: US$1.1bn/W1,062.2bn KOSPI: 1,331.8p 52-W Lo/Hi: W41,100/98,400 eaie51-35-52.5 -23.5 -43.1 5.1 Relative -27.2 5.4 Absolute (%) 100 120 140 Overweight 20 40 60 80 00 /660 10/06 6/06 2/06 10/05 0 KOSPI Share price 1M 6M 12M

13 October 2006 NCsoft

SOLID EARNINGS EXPECTED IN 2H06

NCsoft made a drastic downward adjustment in its 2006F earnings guidance to reflect the potential cost increase of new game development. However, its earnings are expected to turn out solid in the second half, as personnel cost increase is forecast to be marginal in 2006 compared to 2005. NCsoft has already written-off the one-off development cost related to the game Auto Assault in 2Q06, which will add to its profitability in the second half. A slight increase in Lineage 1 and 2’s market share at PC rooms during the summer silenced concerns of potential revenue reduction from intensifying competition.

3Q06F sales and operating profit should increase 1.0% qoq to W56.1bn and 6.7% qoq to W13.3bn, respectively. Net losses should turn into a net profit of W1.31bn.

Table 1. Quarterly earnings forecasts (Wbn) 1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06F 4Q06F Sales 60.4 57.2 57.2 58.0 57.4 55.5 56.1 57.7

Lineage I 26.3 26.1 26.2 27.7 28.3 26.8 25.6 26.4

Lineage II 22.5 20.4 21.2 20.8 20.7 20.2 21.5 21.6

New games 0 0.6 0.8 0.1 1.2 0.2 0.2 0.3

Overseas 11.6 10.1 9.0 9.3 8.1 8.3 8.7 9.4

Sales breakdown (%)

Lineage I 43.5 45.6 45.7 47.8 49.3 48.3 45.8 45.7

Lineage II 37.3 35.7 37.0 35.9 36.1 36.3 38.3 37.4

New games - 1.1 1.5 0.3 2.2 0.4 0.4 0.6

Overseas 19.2 17.6 15.8 16.0 14.2 15.0 15.5 16.2

Growth (% qoq)

Sales -3.5 -5.2 0.1 1.3 -1.0 -3.3 1.02.9

Lineage I 1.3 -0.7 0.3 6.0 2.0 -5.2 -4.3 2.8

Lineage II -14.6 -9.4 3.8 -1.8 -0.5 -2.7 6.6 0.4

New games 0.0 0.0 33.2 -82.1 730.2 -83.6 18.2 41.7

Overseas 13.1 -13.0 -10.1 2.6 -12.3 2.4 4.2 7.9

Operating profit 213 188 181 138 136 125 133 137

Operating margin (%) 35.3 32.8 31.6 23.9 23.6 22.5 23.7 23.8

% qoq -1.0 -11.9 -3.6 -23.6 -2.0 -8.1 6.7 3.1

Recurring profit 173 177 238 227 89 30 173 184

Recurring margin (%) 28.7 30.8 41.7 39.2 15.5 5.4 30.9 32.0

% qoq 11.8 1.8 35.1 -4.7 -60.9 -66.3 478.0 6.5

Net profit 126 129 204 207 68 -2 131 139

Net margin (%) 20.9 22.6 35.6 35.7 11.9 -0.4 23.3 24.1

% qoq -8.4 2.4 57.6 1.5 -67.0 TR TB 6.5

Source: Company Data, Daewoo Securities

13 October 2006 NCsoft

Chart 1. Lineage I and II game market shares at PC rooms (%) Lineage 18 Lineage II

6 4

0 1/04 3/04 5/04 7/04 9/04 11/04 1/05 3/05 5/05 7/05 9/05 11/05 1/06 3/06 5/06 7/06 9/06

Source: Gametrics

AION TO GO ON DISPLAY IN NOVEMBER AT GAME EXPO

AION will be the first MMORPG to be developed by the proprietary R&D capacity of NCsoft since Lineage 2. AION will hold the key to 2007F earnings and share performance. The game is expected to have the high graphic quality of Linage 2, and highly engaging storylines like WOW (World of Warcraft by Blizzard).

AION will introduce a new game-playing scheme of PvPvE (Player vs Payer vs Environment). This is a hybrid of PVP (Player vs Player, users against other users) and PvE (Player vs Environment, users against non-players such as monsters).

NCsoft will partially showcase the beta-version of AION with some added game items at the G-Star game expo in November to take place in Korea.

The launch schedule of other new games should become clearer in 4Q06. Guild Wars Nightfall, the third version of Guild Wars will go on sale in the US, Korea and other Asian nations at the same time in 4Q06. NCsoft also plans to offer a beta service of MMORPG Tabula Rasa, which is currently being developed in its US studio in 4Q06.

Table 2. Game product lineup of NCsoft 1Q06 2Q06 3Q06 4Q06 City of Heroes Guild Wars Nightfall Korea Guild Wars Factions Exteel Aion (Beta test) Guild Wars Nightfall North America/ Guild Wars Factions Tabula Rasa (Beta test)

Europe Auto Assault Exteel Dungeon Runners Asia Guild Wars (Japan, Taiwan) Guild Wars Factions Guild Wars Nightfall

Source: Company Data

13 October 2006 NCsoft

NCsoft (036570) - Financial Statement

Balance Sheet (Summarized) Income Statement (Summarized) (Wbn) 12/05 12/06F 12/07F 12/08F (Wbn) 12/05 12/06F 12/07F 12/08F Current assets 270.0 294.8 352.4 379.9 Sales 232.8 226.6 277.4 299.1 Cash and cash equivalents 10.4 18.1 21.5 23.2 Cost of goods sold 38.3 38.0 46.9 49.9 Short-term financial goods 230.0 240.3 286.3 308.7 Gross profit 194.5 188.7 230.5 249.1 Accounts receivable 20.1 22.3 27.3 29.4 SG&A expenses 122.5 135.6 153.1 163.3 Inventories 0.0 0.0 0.00.0 Operating profit 72.0 53.1 77.4 85.9 Other current assets 9.5 14.1 17.2 18.6 Non-operating profit 9.5 -5.4 13.6 27.9 Non-current assets 151.5 168.6 195.9 213.0 Interest income/expenses 8.3 10.8 12.2 13.8 Investment assets 76.7 64.2 70.0 72.4 FX-related gains/losses -0.9 -0.5 0.0 0.0 Tangible assets 72.1 102.2 124.0 139.0 Equity method gains/losses 1.2 -16.5 0.5 13.2 Intangible assets 2.7 2.3 1.9 1.6 Asset disposal gains/losses -0.2 -0.1 0.0 0.0 Total assets 421.6 463.4 548.3 593.0 Other non-operating profit/losses 1.1 0.9 0.9 0.9 Current liabilities 22.5 27.8 34.1 36.7 Recurring profit 81.6 47.6 91.0 113.7 Accounts payable 0.0 0.0 0.0 0.0 Extraordinary gains/losses 0.0 0.0 0.0 0.0 Short-term borrowings 0.0 0.0 0.0 0.0 Pretax profit 81.6 47.6 91.0 113.7 Current portion of long-term debt 0.0 0.0 0.0 0.0 Tax 14.9 14.0 22.3 27.9 Other current liabilities 22.5 27.8 34.1 36.7 Net profit 66.7 33.6 68.7 85.9 Non-current liabilities 5.7 7.3 6.9 6.4 Free cash flow -21.6 4.8 29.0 46.3 Bonds 0.0 0.0 0.00.0 Residual income 66.7 33.6 68.785.9 Long-term debt 0.0 0.0 0.0 0.0 EBITDA 83.8 66.3 98.9 114.1 Other non-current liabilities 5.7 7.3 6.9 6.4 Depreciation of tangible/intangible assets 11.8 13.3 21.5 28.2 Total liabilities 28.2 35.1 41.0 43.2 Gross margin (%) 83.6 83.3 83.1 83.3 Capital stock 10.2 10.2 10.2 10.2 EBITDA margin (%) 36.0 29.3 35.7 38.2 Capital surplus 396.4 431.3 500.0 585.9 Operating maring (%) 30.9 23.4 27.9 28.7 Capital adjustments -13.2 -25.2 -25.2 -25.2 Recurring margin (%) 35.0 21.0 32.8 38.0 Total stockholders' equity 393.4 416.3 485.0 570.9 Net margin (%) 28.6 14.8 24.8 28.7

Cash Flow (Summarized) Forecasts/Valuations (Summarized) (Wbn) 12/05 12/06F 12/07F 12/08F 12/05 12/06F 12/07F 12/08F Cash flow from operating activities 67.2 64.0 87.8 100.1 P/E (x) 23.2 31.6 15.4 12.4 Net profit 66.7 33.6 68.7 85.9 P/CF (x) 19.9 23.0 11.8 9.3 Non-cash income and expense 16.8 33.1 22.7 16.9 P/S (x) 6.7 4.7 3.8 3.6 Tangible assets depreciation 11.2 12.5 20.9 27.7 P/BV (x) 4.0 2.6 2.2 1.9 Intangible assets depreciation 0.5 0.7 0.6 0.5 P/EBITDAPS (x) 18.5 16.0 10.7 9.3 Others 5.0 19.9 1.2-11.3 EV/EBITDA (x) 15.8 12.1 7.6 6.4 Chg in assets & liabilities from oper. activities -16.3 -2.7 -3.7 -2.7 EPS (W) 3,305 1,649 3,373 4,213 Chg in accounts receivable -0.5 -3.7 -6.8 -4.1 CFPS (W) 3,861 2,264 4,398 5,574 Chg in inventories 0.0 0.0 0.0 0.0 SPS (W) 11,538 11,119 13,612 14,673 Chg in accounts payable 0.0 0.0 0.0 0.0 BVPS (W) 19,192 20,307 23,697 27,922 Others -82.4 1.0 3.11.3 EBITDA per share (W) 4,152 3,254 4,853 5,597 Cash flow from investment activities -96.5 -59.5 -94.2 -54.5 Dividend payout ratio (%) 0.0 - - - Disposal (acquisition) of tangible assets -68.9 -42.7 -42.7 -42.7 Dividend ratio (%) 0.0 0.0 0.0 0.0 Reductions (growth) in intangible assets -2.7 -0.2 -0.2 -0.2 Dividend yield (%) 0.0 - - - Tangible assets investment -10.6 -6.6 -5.2 10.8 Debt-to-equity ratio (%) 7.2 8.4 8.5 7.6 Others -14.4 -9.9 -46.1 -22.3 Current ratio (%) 1,202.2 1,059.1 1,034.4 1,034.4 Cash flow from financing activities 9.3 -8.9 -0.3 -0.5 Borrowings/equity (%) 0.0 - - - Chg in bonds and borrowings 0.0 0.0 0.0 0.0 Net borrowings/equity (%) -61.1 -62.1 -63.5 -58.1 Chg in equity 9.3 -9.0 0.0 0.0 Net borrowings/sales (%) -103.3 -114.0 -111.0 -111.0 Dividends 0.0 0.0 0.0 0.0 Net interest expenses/sales (%) -3.6 -4.8 -4.4 -4.6 Others 0.0 0.1 -0.3-0.5 Interest coverage (x) 0.0 - - - Chg in cash -20.0 -4.4 -6.8 45.1 ROA (%) 17.1 7.6 13.6 15.1 Beginning cash balance 30.4 10.4 18.1 21.5 ROE (%) 18.7 8.3 15.3 16.3 Ending cash balance 10.4 6.0 11.3 66.6 ROIC (%) 91.8 33.6 40.0 38.1

IMPORTANT NOTICES Equity Research for International Investors (ERII)

As of October 13, 2006, Daewoo Securities Co., Ltd and/or its affiliates do not have any special interest with the subject company and do not own 1% or more of the subject company's shares outstanding.

This report is a translation excerpt of the 'NCsoft' report written by Chang Kwean Kim for research division of Daewoo Securities Co., Ltd publicly released on October 13, 2006.

Analyst of the subject company or member of the analyst's household does not have any financial interest in the securities of the subject company and the nature of the financial interest (including without limitation, whether it consists of any option, right, warrant, future, long or short position)

This report reflects the sole opinion of the analyst (Chang Kwean Kim) without any external influences by third parties

Ratings Distribution Investment ratings Target return

Overweight Relative performance of +15% or greater

Trading Buy Relative performance of +10% or greater, but with variability/volatility

Equal-weight Relative performance of –10% and +10%

Underweight Relative performance of -10%

Note: 1) Our investment rating is a guide to the relative return of the stock versus the market over the next six months. 2) Although it is not part of the official ratings at ERII, we may call a trading opportunity in case there is a technical or short-term material development. Source: Daewoo Securities

Analyst Industry Ratings of ERII, Daewoo Securities Positive Industry fundamentals are improving Neutral Industry fundamentals are steady without any material changes

Negative Industry fundamentals are worsening

Ratings and Target Price History Share price (----), Target price (----), Not covered (░),Overweight (▲), Trading Buy (■), Equal-weight (●), Under-weight (◆)

(W) NCsof t [Ov erweight/TP: W65,000] 120,000

100,000

80,000

60,000

40,000

20,000

0 10/04 1/05 4/05 7/05 10/05 1/06 4/06 7/06 10/06

IMPORTANT NOTICES Equity Research for International Investors (ERII)

Daewoo Securities Co., Ltd. may have managed or co-managed a public offering of securities for the subject company, or received compensation for investment banking services from the subject company in the past 12 months.

This report has been provided by the ERII (Equity Research for International Investors) department of Daewoo Securities Co., Ltd. Daewoo Securities ERII is run independently of the research division of Daewoo Securities Co., Ltd. The stock ratings, target prices, estimates and overall viewpoints of ERII may differ from the research division of Daewoo Securities. This report must be viewed as Daewoo Securities ERII's independent opinion and must not be interpreted by any means as an official viewpoint of the research division of Daewoo Securities Co., Ltd. Daewoo Securities ERII was established to service international institutional investors although the reports are released publicly. Investors can access Daewoo Securities ERII's research through Firstcall, Daewoo research direct (www.bestez.com), Multex and Bloomberg (DWIR).

Daewoo Securities Co., Ltd. is a full-service, integrated investment banking, and brokerage firm. We are a leading underwriter of securities and leading participant in virtually all trading markets. We have investment banking and other business relationships with a substantial percentage of the companies covered by the research division of Daewoo Securities and Daewoo Securities ERII. Our research professionals provide important input into our investment banking and other business selection process. Investors should assume that Daewoo Securities Co., Ltd. are seeking or will seek investment banking or other business from the subject companies covered by this report and that the research analysts who involved in preparing this report may participate in the solicitation of such business. Our research analysts’ compensation is determined based upon the activities and services intended to benefit the investors of Daewoo Securities Co., Ltd. Like all employees of Daewoo Securities Co., Ltd., analysts receive compensation that is impacted by overall firm profitability, which includes revenues from, among other business units, the intuitional equities, investment banking, proprietary trading, and private client division.

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