Plenty of Positive Momentum Remains

NCSOFT (036570.KS) Plenty of positive momentum remains

Company Note │Jul 6, 2020

Despite the recent sharp rise in NCSOFT’s share price, we believe that plenty ※ Refer to page 2 for of additional upward momentum remains in play, considering expectations ESG index/event tables for new games, global growth, and platform expansion. Buy (maintain) TP W1,270,000 (raise) Several attractive points on offer CP (’20/07/03) W944,000 Sector Game Adhering to a Buy rating on NCSOFT, our sector top pick, we raise our TP from Kospi/Kosdaq 2,152.41 / 752.18 W1,000,000 to W1,270,000. Given expectations for new title releases, including Market cap (common) US$17,270.50mn Blade & Soul 2 (2H20), Lineage 2M (2H20, Japan & Taiwan), Aion 2 (2021), Outstanding shares (common) 22.0mn and Project TL (2021, PC/console/mobile), the company’s new game 52W high (’20/07/02) W964,000 low (’19/07/03) W468,500 momentum looks to be entering full swing. Believing that it still boasts Average trading value (60D) US$75.08mn significant drivers of positive momentum, including: 1) the entering of a high Dividend yield (2020E) 0.64% OP growth cycle, with OP rising from W479bn in 2019 to W998.1bn (+108.4% Foreign ownership 52.0% y-y) in 2020E and W1.51tn (+51.2% y-y) in 2021F; 2) PC/mobile/console Major shareholders platform expansion; and 3) Korea/global business growth, we expect NCSOFT’s TJ Kim & 9 others 12.0% share price to continue climbing despite its recent sharp increase. NPS 11.5% Share perf 3M 6M 12M Absolute (%) 45.9 67.1 101.5 Low valuations vs those of global competitors Relative (%p) 17.0 68.9 96.2 2019 2020E 2021F 2022F We believe that concerns towards NCSOFT, such as its long break between new Sales 1,701 2,839 3,709 3,983 game launches, high revenue exposure to the domestic market, and slow Chg -0.8 66.9 30.6 7.4 platform expansion, will ease gradually from 2H20. And, in our view, there is no OP 479.0 998.1 1,509 1,615 longer any justification for the firm to be undervalued versus global competitors. Chg -22.1 108.4 51.2 7.0 In particular, given its global top-tier development capabilities, we think that OPM 28.2 35.2 40.7 40.5 NCSOFT deserves valuations on par with the highest among global peers. For NP 358.2 811.0 1,217 1,317 reference, NCSOFT’s 2021F P/E sits at just 17.0x, significantly below that of EPS 16,320 36,942 55,412 59,968 Netmarble (25.5x), EA (26.7x), Blizzard (25.6x), and NetEase (21.0x). Chg -14.4 126.4 50.0 8.2 P/E 33.1 25.6 17.0 15.7 P/B 4.8 6.5 4.9 3.8 2Q20 preview: A phase of rest EV/EBITDA 21.0 18.6 11.9 10.6 We expect NCSOFT to log 2Q20 sales of W617.3bn (+50.3% y-y, -15.6% q-q) ROE 14.7 28.5 32.7 27.2 and OP of W214.1bn (+65.5% y-y, -11.3% q-q), with OP falling short of both Debt/equity 33.2 25.6 20.7 17.4 our previous estimate of W249.8bn and the consensus of W254.1bn. Having Net debt -719.7 -1,258 -2,139 -2,984 come in lackluster in June, the firm’s earnings should recover from July, backed Unit: Wbn, %, won, x Note 1: NP excludes minority interests by the third-anniversary update for Lineage M and Chronicle 3 update for Note 2: EPS, P/E, P/B, ROE based on NP (excl minority interests) Lineage 2M (in progress from July). Source: NH I&S Research Center estimates

2Q20 preview (Unit: Wbn, %) 2Q20E 2Q19 3Q19 4Q19 1Q20 3Q20F Actual y-y q-q Estimate Consen Sales 410.8 397.8 533.8 731.1 617.3 50.3 -15.6 684.4 645.3 651.3 OP 129.4 128.9 141.2 241.4 214.1 65.5 -11.3 249.8 254.1 220.8 OPM 31.5 32.4 26.4 33.0 34.7 - - 36.5 39.4 33.9 Pre-tax profit 147.1 153.2 97.6 255.6 229.8 56.2 -10.1 266.1 264.3 235.2 NP (excl minority Jaemin Ahn, Analyst 116.4 113.3 54.2 195.5 175.6 50.9 -10.1 203.4 198.2 179.9 interests) 822)768-7647, [email protected] Note: K-IFRS consolidated basis; Source: NCSOFT, FnGuide, NH I&S Research Center estimates NCSOFT www.nhqv.com

Summary

Founded in Mar 1997, NCSOFT was listed in May 2003. As a leading domestic mobile and online game developer, the firm booked 2019 sales of W1,705.7bn (-0.8% y-y), with game sales representing about 94% (mobile: 81.1%, PC: 18.9%) of its total revenue. Thanks to the Nov 2019 launch of Lineage 2M (sequel to 2017’s Lineage M) and the planned release of B&S 2 in 2020, the firm’s top line should enjoy strong growth. We present a Buy rating and TP of W1,270,000.

Share price drivers/earnings momentum Downside risks

B&S 2 launch in 2020 High dependency on domestic market due to lack of global hit games Rising game playtime in line with slowing in outside activity amid the spread of Covid-19 Globally competitive game development capabilities sufficient to roll out cloud-based games

Cross valuations (Unit: x, %) Historical valuations (Unit: x, %)

P/E P/B ROE Company Valuations 2018 2019 2020E 2021E 2022F 2020E 2021F 2020E 2021F 2020E 2021F Tencent 38.6 31.1 8.3 6.6 22.2 22.1 P/E 24.5 33.1 25.6 17.0 15.7 Activision Blizzard 28.2 25.6 4.2 3.6 15.9 14.5 P/B 4.3 4.8 6.5 4.9 3.8 Electronic Arts 9.6 26.7 3.9 4.8 47.5 18.4 P/S 6.0 7.0 7.3 5.6 5.2 Zynga 39.1 30.6 5.3 4.5 7.4 16.4 ROE 16.4 14.7 28.5 32.7 27.2 NetEase 24.1 21.0 5.0 4.3 20.8 20.2 ROIC 47.7 27.0 64.0 85.7 80.5 Source: Bloomberg, NH I&S Research Center Source: Bloomberg, NH I&S Research Center

ESG index (Unit: %, Wbn, yrs, hours, 1000 TJ, mntCO2e, mn tons)

BOD composition Human resources 2017 2018 2019 Kim Taek-jin President, CEO, BOD chair Inside Portion of female employees 30.7 31.6 31.9 Park Byeong-mu Compensation Committee chair Inside Portion of contract workers 5.0 4.3 3.1 Audit Committee chair, Outside Director Candidate Hwang Chan-hyeon Outside Average service period per employee 4.8 5.2 5.4 Recommendation Committee chair Hyeon Dong-hun - Outside Average training hours per employee N/A N/A N/A Cho Guk-hyeon - Outside Baek Sang-hun - Outside Environment 2017 2018 2019 Choi Young-joo - Outside Energy consumption N/A N/A N/A Greenhouse gas emissions N/A N/A N/A Recycled water consumption N/A N/A N/A Recycled waste N/A N/A N/A Source: NCSOFT, NH I&S Research Center

ESG events

E - - N/A - Outsourced tasks related to graphic development and character goods production to 30 outside contractors without properly 2017.2 S signing contract sheets 2015.3 - Reaped unjust gains in the process of selecting vendor companies - Nexon expanded its stake in NCSOFT to 15.08%, a development that highlighted the possibility of a hostile takeover; to protect G 2014.10 its management rights, NCSOFT decided to conduct a stake exchange with Netmarble (which has since come to own an 8.9% stake in NCSOFT) Source: NCSOFT, NH I&S Research Center

2 NCSOFT www.nhqv.com

NCSOFT’s new Despite the recent sharp rise in NCSOFT’s share price, we see plenty of additional game momentum to upward momentum in play. enter full swing We believe that the success of Lineage M and Lineage 2M—titles released in 2017 and 2019, respectively, which continue to lead app store gross sales rankings—has proven NCSOFT’s competitiveness in the mobile game market. In addition, the company’s new game momentum looks to be entering full swing, given the anticipated launches of: 1) Blade & Soul 2 and Lineage 2M (Taiwan, Japan) in 2H20; and 2) Aion 2 and Project TL (PC, console, mobile versions) in 2021. Overall, the company appears to be striving to shorten the break between new game launches and diversify its game lineups.

Expanding its Moreover, NCSOFT is set to strengthen its non-MMORPG lineup. Specifically, PC/mobile/console NCSOFT’s US subsidiary NCWEST is planning to roll out Fuser, a new console/PC platform offerings platform music game developed by Harmonix and published by NCSOFT in autumn of this year. NCSOFT has also unveiled three game titles developed by its domestic subsidiary, Ntreev Soft—Trickster M (MMORPG), Pangya M (sports), and Pro Baseball H3 (sports).

Regarding Project TL, for which a closed beta test is planned this year, console, PC, and mobile versions are to be launched. Of note, NCSOFT is also conducting two~three additional console game projects.

Earnings to enter Helped by a series of new game launches, NCSOFT’s earnings are predicted to enter a strong upcycle robust upcycle. We expect the firm’s OP to jump from W479bn in 2019 to W998.1bn (+108.4% y-y) in 2020 to W1.51tn (+51.2% y-y) in 2021.

Earnings to enter full-fledged upcycle

(Wbn)

1,600 OP 1509.5 1,400 1,200 998.1 1,000 800 585.0 614.9 600 479.0 400 278.2 328.8 205.2 237.5 151.3 200 0 '12 '13 '14 '15 '16 '17 '18 '19 '20E '21F

Source: NH I&S Research Center

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Fuser, published by US subsidiary NCSOFT Trickster M, MMORPG developed by subsidiary Ntreev Soft

Source: NCSOFT, NH I&S Research Center Source: NCSOFT, NH I&S Research Center

Pangya M, developed by subsidiary Ntreev Soft Pro Baseball H3, developed by subsidiary Ntreev Soft

Source: NCSOFT, NH I&S Research Center Source: NCSOFT, NH I&S Research Center

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Low valuations vs Also worth noting, while NCSOFT boasts strong game development/publishing those of global capabilities on par with those of global leaders, its shares offer relatively low valuations competitors (even after the recent sharp rise in share price)—another factor boosting its attractiveness to potential investors.

We believe that concerns towards NCSOFT, such as its long break between new game launches, high revenue exposure to the domestic market, and slow platform expansion, will ease gradually from 2H20. And, in our view, there is no longer any justification for the firm to be undervalued relative to global competitors. In particular, given its global top-tier development capabilities, we think that NCSOFT deserves valuations on par with the highest of those seen among global peers.

For reference, NCSOFT’s 2021F P/E sits at just 17.0x, significantly below that of Netmarble (25.5x), EA (26.7x), Blizzard (25.6x), and NetEase (21.0x).

NCSOFT’s 12-month forward P/E

(x) 12M Fwd PER Lineage 2M (global) 60 Lineage M B&S2 B&S China Aion 2 Lineage 2M 50 Project TL

10 B&S / Guild Wars 2 0 '09.1 '10.1 '11.1 '12.1 '13.1 '14.1 '15.1 '16.1 '17.1 '18.1 '19.1 '20.1 '21.1

Source: NH I&S Research Center

2021 P/E multiples for major game companies

(x) 30 26.7 25.5 25.6 25 21.0

20 17.0

0 NCSOFT Netmarble EA Blizzard NetEase

Source: NH I&S Research Center

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Global peer analysis I: Earnings (Unit: US$mn) Activision Gungho Company NCSOFT Netmarble Com2us Tencent EA Zynga Nexon NetEase Blizzard Online Share price ($) 787.0 88.8 103.0 67.7 77.5 133.8 9.5 24.0 21.2 430.9 Market cap 17,281.0 7,619.2 1,325.0 646,566.2 59,720.3 38,641.5 10,225.8 21,248.3 2,019.2 59,553.8 Sales 2019 2,315 1,989 422 54,627 6,489 4,950 1,322 2,280 930 8,577 2020E 2,778 2,154 515 67,120 7,146 5,537 1,916 2,644 744 9,690 2021F 2,936 2,306 540 81,806 7,614 5,589 2,247 2,944 705 11,083 OP 2019 875 199 112 16,125 1,607 996 -272 867 260 1,997 2020E 1,152 253 146 20,436 2,655 1,445 389 1,131 174 2,402 2021F 1,211 299 156 24,512 2,948 1,772 388 1,339 157 2,797 EBITDA 2019 925 285 119 22,593 2,235 1,141 -178 938 269 2,309 2020E 1,204 336 152 25,058 2,859 1,665 401 1,227 188 2,721 2021F 1,272 384 159 30,180 3,182 1,967 456 1,442 153 3,177 NP 2019 681 218 105 13,510 1,503 1,019 42 1,061 166 3,075 2020E 885 257 130 16,075 1,901 3,039 -254 1,029 108 2,065 2021F 938 294 138 19,652 2,119 1,092 84 1,139 100 2,401 EPS (US$) 2019 31.4 2.6 8.3 1.4 2.0 3.4 0.0 1.2 2.4 23.9 2020E 40.7 3.1 10.2 1.7 2.3 10.4 -0.3 1.2 1.7 15.5 2021F 43.3 3.6 11.0 2.0 2.7 3.9 0.1 1.3 1.5 18.2 BPS (US$) 2019 124.0 47.2 68.3 6.5 16.7 17.9 2.1 6.5 11.3 67.2 2020E 156.9 50.3 77.3 8.2 18.6 25.9 1.8 7.7 12.6 85.9 2021F 191.1 56.2 86.6 10.2 21.3 27.9 2.1 9.0 13.3 101.1 Net debt 2019 -1,466 -1,134 -636 6,481 -2,846 -4,451 -645 -4,587 -790 -7,862 (-Net cash) 2020E -2,132 -1,373 -733 -4,420 -4,887 -4,515 -739 -5,178 -820 -8,184 2021F -2,764 -1,699 -825 -13,598 -7,026 -5,705 -1,085 -6,269 -866 -10,202 Note: Based on Jul 3 closing prices Source: Bloomberg

Global peer analysis II: Valuations Activision Gungho Company NCSOFT Netmarble Com2us Tencent EA Zynga Nexon NetEase Blizzard Online P/E (x) 2019 25.1 35.1 12.5 34.1 31.5 29.6 N/A 11.2 9.0 20.8 2020E 19.4 29.5 10.2 38.6 28.2 9.6 39.1 20.7 12.8 24.1 2021F 18.4 25.5 9.5 31.1 25.6 26.7 30.6 18.6 13.9 21.0 P/B (x) 2019 6.3 1.9 1.5 7.4 3.6 5.7 2.9 2.1 1.9 4.6 2020E 5.0 1.8 1.3 8.3 4.2 3.9 5.3 3.1 1.7 5.0 2021F 4.1 1.6 1.2 6.6 3.6 4.8 4.5 2.7 1.6 4.3 EV/EBITDA (x) 2019 17.1 23.3 5.8 21.2 19.2 22.6 N/A 7.8 2.8 14.9 2020E 12.6 19.1 3.9 25.9 19.2 14.6 23.6 13.2 6.6 19.5 2021F 11.4 15.9 3.2 21.2 16.6 16.7 20.1 10.5 7.8 16.1 ROE (%) 2019 28.8 5.8 12.9 24.7 12.4 20.5 2.3 19.7 22.6 39.8 2020E 29.2 6.4 14.1 22.2 15.9 47.5 7.4 16.1 10.9 20.8 2021F 25.2 6.8 13.4 22.1 14.5 18.4 16.4 15.6 8.2 20.2 ROA (%) 2019 22.0 4.5 11.6 11.1 8.0 11.6 1.4 16.9 18.1 21.3 2020E 23.3 5.1 12.6 11.1 9.1 30.3 4.5 12.0 10.4 12.8 2021F 21.2 5.6 11.7 11.5 9.1 11.9 9.0 14.0 7.1 13.2 DY (%) 2019 0.9 0.3 1.1 0.4 0.6 0.0 0.0 0.2 1.3 3.4 2020E 1.2 1.0 1.2 0.2 0.5 0.0 N/A 0.2 1.3 1.0 2021F 1.2 1.2 1.2 0.3 0.5 0.0 N/A 0.2 1.3 1.0 Note: Based on Jul 3 closing prices Source: Bloomberg

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2Q20 earnings to We expect NCSOFT to log 2Q20 sales of W617.3bn (+50.3% y-y, -15.6% q-q) and OP of miss estimates W214.1bn (+65.5% y-y, -11.3% q-q), with OP falling short of both our previous estimate of W249.8bn and the consensus of W254.1bn.

Having come in lackluster in June, the firm’s sales should recover strongly in July, as the third-anniversary update for Lineage M is slated for Jul 8 and the Chronicle 3 update for Lineage 2M should kick off in earnest in July. Turning to Lineage 2M, the game is to see weekly updates from July, including the addition of new server Baium, new class Spear, and new dungeon Tower of Insolence. A siege battle update is scheduled for August as well. We expect these updates to lead to sales growth. In addition, we note that while sales were down in 2Q20, user traffic remained strong, indicating that the sales drop stemmed not from user defection but from a temporary decline in ARPU in the run-up to the updates. We project Lineage 2M’s 2Q20 sales at W262.7bn (daily average of W2.92bn) and 3Q20 sales at W289bn (daily average of W3.21bn).

Lineage M’s 2Q20 sales are estimated at W190.8bn (daily average of W2.12bn), slipping 11.3% y-y and 10.0% q-q.

Quarterly earnings forecasts (Unit: Wbn, %) 1Q19 2Q19 3Q19 4Q19 1Q20 2Q20E 3Q20F 4Q20F 2019 2020E 2021F Sales 358.8 410.8 397.8 533.8 731.1 617.3 651.3 839.6 1,701.2 2,839.2 3,709.0 Game 301.3 359.2 353.6 489.5 678.1 573.6 609.5 797.9 1,503.7 2,659.0 3,529.9 PC 102.6 135.4 140.3 126.7 124.9 114.3 117.7 115.1 504.9 472.1 583.1 Lineage 1 20.7 50.1 51.8 51.4 44.8 39.7 40.8 40.3 174.1 165.5 157.0 Lineage 2 21.6 21.2 23.0 27.8 26.4 23.9 26.1 26.5 93.6 103.0 107.9 Aion 12.3 12.4 13.2 8.1 10.1 8.5 8.5 8.2 46.0 35.3 31.3 B&S 23.3 21.1 21.5 18.0 19.6 18.6 18.9 18.1 83.9 75.3 68.2 Guild Wars 2 16.3 15.9 15.1 11.3 12.3 11.5 10.6 9.6 58.7 44.1 33.5 Mobile 198.8 223.8 213.3 362.9 553.2 459.2 491.8 682.8 998.8 2,187.0 2,946.8 Lineage M 191.6 215.1 207.9 214.7 212.0 190.8 200.4 194.3 829.3 797.5 684.9 Lineage 2M - - - 143.9 341.1 262.7 289.0 274.5 143.9 1,167.3 837.3 L2M Global ------90.0 - 90.0 404.9 B&S 2 ------120.0 - 120.0 742.8 Royalties 57.4 51.6 44.2 44.3 52.8 43.7 41.8 41.7 197.5 180.0 179.0 Lineage 2: R 7.2 7.4 8.7 7.2 6.6 6.2 5.7 5.3 30.4 23.8 19.0 Lineage M Taiwan 13.4 12.1 10.9 9.8 8.8 7.9 7.1 6.4 46.1 30.2 22.6 Operating expenses 279.2 281.4 268.9 392.7 489.7 403.1 430.5 517.8 1,222.2 1,841.1 2,199.5 Labor costs 143.2 125.8 116.1 169.9 211.8 143.5 148.6 157.7 555.1 661.6 670.2 Marketing costs 19.0 24.2 22.8 41.3 39.6 30.8 32.9 46.1 107.3 149.4 183.9 OP 79.5 129.4 128.9 141.2 241.4 214.1 220.8 321.8 479.0 998.1 1,509.5 OPM 22.2 31.5 32.4 26.4 33.0 34.7 33.9 38.3 28.2 35.2 40.7 Pre-tax profit 98.2 147.1 153.2 97.8 255.6 229.8 235.2 339.7 496.3 1,060.4 1,590.4 NP (excl minority interests) 74.2 116.4 113.3 54.4 195.5 175.6 179.9 260.0 358.3 811.0 1,216.5 Source: NCSOFT, NH I&S Research Center estimates

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Chronicle 3 update for Lineage 2M to start in earnest from July

Source: NCSOFT, NH I&S Research Center

Siege battle update scheduled for August

Source: NCSOFT, NH I&S Research Center

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Reiterate Buy We reiterate a Buy rating and raise our TP from W1,000,000 to W1,270,000. And, we rating; raise TP continue to suggest NCSOFT as our top pick for the sector. We expect that the firm’s from W1,000,000 to share price will be bolstered by: 1) earnings growth stemming from the successful launch W1,270,000 of Lineage 2M in Nov 2019; and 2) new game momentum backed by the anticipated launch of B&S 2 in 2020.

Our RIM-derived TP assumes a risk free rate of 1.5%, market risk premium of 5.2%, and beta of 0.9. We revise up our earnings estimates for 2021 and onwards, given that new games are set to hit the market this year, while we revise down the market risk premium to 5.2%, reflecting a rise in market cap. Our new TP equates to a 2021 P/E of 22.9x and offers 34.5% upside from the current share price.

RIM valuation (Unit: Wbn, won) 2020E 2021F 2022F 2023F 2024F 2025F 2026F 2027F 2028F 2029F 2030F 2031F Net profit 811 1,217 1,317 1,222 1,290 1,242 1,430 1,645 1,893 2,179 2,507 2,884 Shareholder’s equity 3,186 4,257 5,407 6,443 7,525 8,540 9,679 10,957 12,390 13,995 15,792 17,801

Forecast ROE (FROE) 28.5% 32.7% 27.2% 20.6% 18.5% 15.5% 15.7% 15.9% 16.2% 16.5% 16.8% 17.2% Spread (FROE-COE) 22.4% 26.5% 21.1% 14.4% 12.3% 9.3% 9.5% 9.8% 10.0% 10.3% 10.7% 11.0%

Residual income 635 987 1,018 856 858 746 867 1,008 1,172 1,363 1,586 1,846

Cost of equity (COE) 6.2% Beta 0.9 Market risk premium (Rm-Rf) 5.2% Risk-free rate (Rf) 1.5%

Beginning shareholder’s equity 2,499 PV of forecast period RI 8,761 PV of continuing value 14,998 Equity value (C+P) 26,259 No of shares (common, mn) 21,954 12M TP Fair price (C) 1,270,004 Current price (C) 944,000 Upside (-downside) 34.5% Implied P/B (x) 9.6 Implied P/E (x) 26.6 Note: The residual income model (RIM) is a cash flow approach that yields a fair shareholder value (value of equity) by adding shareholders’ equity and present value of residual income (meaning income excluding cost of equity). Value of equity = shareholders’ equity + sum of present value of future residual income * Residual income (RIt) = NP (t) – shareholders’ equity (t-1) * cost of equity (t) = shareholders’ equity (t-1) * (ROEt - COEt) NH I&S uses RIM as our primary valuation model as RIM is an objective model that minimizes the subjectivity of valuation indicators while producing the same results as the dividend discount model (DDM) and DCF.

Market risk premium assessment guidelines Mega cap Large cap Mid cap Small cap Market cap of W10tn or higher Market cap of W1~10tn Market cap of W200bn-1tn Market cap of less than W200bn Criteria + credit rating of 'AAA' or higher + credit rating of 'A0' or higher + credit rating of 'BBB+' or higher + credit rating of 'BBB-' or higher Risk premium 5.2% 6.0% 7.0% 8.0% * Risk free rate = 2.0% (standardized)

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Earnings forecasts (IFRS consolidated) (Unit: Wbn, won, x, %) 2019 2020E 2021F 2022F Sales - Revised 1,701 2,839 3,709 3,983 - Previous - 2,900 3,580 3,789 - Change - -2.1 3.6 5.1 OP - Revised 479.0 998.1 1,509 1,615 - Previous - 1,016 1,396 1,468 - Change - -1.8 8.1 10.0 OPM - Revised 28.2 35.2 40.7 40.5 EBITDA 531.5 1,049 1,563 1,673 NP (excl minority interest) 358.2 811.0 1,217 1,317 EPS - Revised 16,320 36,942 55,412 59,968 - Previous - 37,504 51,424 54,866 - Change - -1.5 7.8 9.3 P/E 33.1 25.6 17.0 15.7 P/B 4.8 6.5 4.9 3.8 EV/EBITDA 21.0 18.6 11.9 10.6 ROE 14.7 28.5 32.7 27.2 Note: EPS, P/E, P/B, and ROE based on NP (excluding minority interests) Source: NH I&S Research Center estimates

NCSOFT’s game lineup Game Genre Developer Date of launch Lineage 2: Blood Alliance MMORPG Snail Games Jul 28, 2016 Lineage RK RPG NCSOFT Dec 8, 2016 Side-scrolling Final Blade Sky People Feb 14, 2017 RPG Pro Baseball H2 Sports Ntreev Mar 30, 2017 Lineage M MMORPG NCSOFT Jun 21, 2017 B&S Mobile IP-based game Web game Tencent Aug 8, 2017 (B&S: Hongmoon Rising, China) Arami Puzzventure Puzzle NCSOFT Aug 17, 2017 PangYa Mobile (Southeast Asia) Sports Ntreev Feb 8, 2018 Aion: Legions of War MMORPG NCSOFT Jan 25, 2019 Lineage M (Japan) MMORPG NCSOFT May 29, 2019 Lineage 2M MMORPG NCSOFT Nov 27, 2019 B&S 2 MMORPG NCSOFT 2020 Lineage 2M (Taiwan/Japan) MMORPG NCSOFT 2020 Fuser Music Harmonix 2020 Trickster M MMORPG Ntreev 2020 Pro Baseball H3 Sports Ntreev 2020 PangYa M Sports Ntreev 2021 Aion2 MMORPG NCSOFT 2021 B&S S MMORPG NCSOFT 2021 B&S M MMORPG NCSOFT 2021 Project TL (PC / Console / Mobile) PC MMORPG NCSOFT 2021 Note: RPG = role-playing game; MMORPG = massively multiplayer online role-playing game Source: NCSOFT, media reports, NH I&S Research Center

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Lineage M’s gross sales ranking (Korea) Lineage 2M’s gross sales ranking (Korea)

(Ranking) (Ranking) '17.6 '17.12 '18.6 '18.12 '19.6 '19.12 '20.6 '19.11 '19.12 '20.1 '20.2 '20.3 '20.4 '20.5 '20.6 0 0 1 1 2 2 3 3 4 4 5 5 6 Lineage M(18)(Apple) 7 6 7 8 Lineage M(18)(Google) Lineage 2M(18)(Korea, Google) 9 8 Lineage 2M(12)(Korea, Apple)

Source: AppAnnie, Google, NH I&S Research Center Source: AppAnnie, Apple, NH I&S Research Center

Lineage 2M’s estimated daily sales on Google Lineage M’s estimated daily sales on Google

(Wmn) (Wmn) 8,000 Lineage 2M (Google) 8,000 Lineage M (Google) 7,000 7,000 6,000 6,000 5,000 5,000 4,000 4,000 3,000 3,000 2,000 2,000 1,000 1,000 0 0 '19.11 '19.12 '20.1 '20.2 '20.3 '20.4 '20.5 '20.6 '18.1 '18.4 '18.7 '18.10 '19.1 '19.4 '19.7 '19.10 '20.1 '20.4 '20.7

Source: WiseApp, NH I&S Research Center Source: WiseApp, NH I&S Research Center

11 NCSOFT www.nhqv.com

STATEMENT OF COMPREHENSIVE INCOME Valuation / Profitability / Stability (Wbn) 2019/12A 2020/12E 2021/12F 2022/12F 2019/12A 2020/12E 2021/12F 2022/12F Sales 1,701 2,839 3,709 3,983 Price/ Earnings (X) 33.1 25.6 17.0 15.7 Growth (%) -0.8 66.9 30.6 7.4 Price/ Book Value (X) 4.8 6.5 4.9 3.8 COGS 0.0 0.0 0.0 0.0 Price/ Gross Cash Flow (X) 21.2 19.4 13.1 12.2 Gross Profit 1,701 2,839 3,709 3,983 Price/ Sales (X) 7.0 7.3 5.6 5.2 Gross margin (%) 100.0 100.0 100.0 100.0 EV/ EBITDA (X) 21.0 18.6 11.9 10.6 SG&A 1,222 1,841 2,200 2,369 EV/ EBIT (X) 23.3 19.5 12.3 11.0 Operating Income 479.0 998.1 1,510 1,615 Fully diluted EPS (W) 16,320 36,942 55,412 59,968 Growth (%) -22.1 108.4 51.3 7.0 BVPS (W) 113,836 145,099 193,894 246,306 Operating margin (%) 28.2 35.2 40.7 40.5 Sales PS (W) 77,514 129,325 168,942 181,431 EBITDA 531.5 1,049 1,563 1,673 ROE (%) 14.7 28.5 32.7 27.2 Non-Operating Profit 17.2 62.2 80.9 106.5 ROA (%) 11.4 22.0 26.5 22.9 Financial Income(Costs) 38.2 34.7 54.5 80.2 ROIC (%) 27.0 64.0 85.7 80.5 Other Non-Operating Profit -1.7 31.3 30.9 30.9 Dividend Yield (%) 1.0 0.6 0.7 0.8 Gains(Losses) in Associates, Subsidiaries and -19.3 -3.8 -4.5 -4.6 Payout Ratio (%) 30.0 15.4 11.9 12.6 JVs Pre-tax Profit from Cont. Op. 496.2 1,060 1,590 1,721 Total Cash Dividend (Wbn) 107.6 124.7 145.3 165.9 Income Taxes 137.0 249.6 374.4 405.2 Cash DPS (W) 5,220 6,050 7,050 8,050 Profit from Continuing Op. 359.2 810.7 1,216 1,316 Net debt(cash)/ equity (%) -28.6 -39.3 -50.1 -55.1 Net Profit 359.2 810.7 1,216 1,316 Debt/ equity (%) 33.2 25.6 20.7 17.4 Growth (%) -14.8 125.7 50.0 8.2 Interest-Bearing Debts (Wbn) 260.7 249.4 249.4 249.4 Net margin (%) 21.1 28.6 32.8 33.0 Current Ratio (%) 464.2 627.0 605.7 717.5 Net Profit of Parent 358.2 811.0 1,217 1,317 Total shares (mn) 22 22 22 22 Net Profit to Non-Controlling 1.0 -0.3 -0.5 -0.6 Par value (W) 500 500 500 500 Other Comprehensive Income -94.7 0.0 0.0 0.0 Share price (W) 541,000 944,000 944,000 944,000 Total Comprehensive Income 264.5 810.7 1,216 1,316 Market Cap (Wbn) 11,877 20,725 20,725 20,725

STATEMENT OF FINANCIAL POSITION CASH FLOW STATEMENT (Wbn) 2019/12A 2020/12E 2021/12F 2022/12F (Wbn) 2019/12A 2020/12E 2021/12F 2022/12F Cash and Cash Equivalents 303.4 832.1 1,623 2,350 Operating Cash Flow 392.2 719.3 1,131 1,189 Accounts Receivables 254.4 253.9 287.9 332.0 Net Profit 359.2 810.7 1,216 1,316 Total Current Assets 2,088 2,742 3,788 4,848 Depreciation&Amortization 52.5 50.5 53.8 57.9 Tangible Assets 350.4 371.2 395.3 423.1 + Loss(Gains) from Subs 19.3 0.0 0.0 0.0 Investment Assets 746.9 741.1 804.3 927.4 + FC translation loss(profit) -5.6 3.7 4.1 4.1 Non-Current Assets 1,259 1,274 1,363 1,515 Gross Cash Flow 559.6 1,070 1,584 1,693 Assets 3,346 4,017 5,151 6,364 - Incr. (Decr.) in WC -70.8 -145.6 -142.6 -189.2 Short-Term Debt 42.7 31.1 192.0 208.0 Investing Cash Flow -234.2 -68.8 -236.9 -331.8 Account Payables 4.6 4.6 4.9 6.4 + Decr. In Tangible Assets 0.8 0.0 0.0 0.0 Current Liabilities 449.8 437.3 625.4 675.7 - Incr. In Tangible Assets(CAPEX) -51.0 -70.0 -77.0 -84.7 Long-Term Debt 323.6 320.8 180.7 180.7 + Disp.(Acq.) of Inv. Assets 206.5 5.9 -63.2 -123.2 Long-Term Allowance 20.1 20.0 19.8 19.6 Free Cash Flow 341.2 649.3 1,054 1,104 Non-Current Liabilities 384.4 381.2 257.1 268.9 Net Cash Flow 158.0 650.6 894.4 857.0 Liabilities 834.2 818.5 882.5 944.6 Financing Cash Flow -45.7 -121.9 -103.9 -129.4 Capital Stock 11.0 11.0 11.0 11.0 Equity Financing 2.9 0.0 0.0 0.0 Capital Surplus 435.5 435.5 435.5 435.5 Debt Financing -48.6 -121.9 -103.9 -129.4 Retained Earnings 2,382 3,068 4,140 5,290 Incr.(Decr.) in Cash 117.9 528.7 790.6 727.7 Non-Controlling Interests Equity 13.0 12.7 12.2 11.6 Ending Cash and Cash Equivalents 303.4 832.1 1,623 2,350 Shareholders' Equity 2,512 3,198 4,269 5,419 Net Debt (Cash) -719.7 -1,258 -2,139 -2,984

12 NCSOFT www.nhqv.com

Rating and TP update NCSOFT (036570.KS) Disparity ratio (%) Date Rating TP Avg Max/Min 2020.07.06 Buy W1,270,000(12M) - - (won) Closing Price Target price(12M) 2020.06.07 Buy W1,000,000(12M) -13.1% -3.6% 1,400,000 2020.05.13 Buy W900,000(12M) -13.1% -9.3% 1,200,000 2020.02.28 Buy W850,000(12M) -23.8% -12.1% 1,000,000 2020.02.12 Buy W800,000(12M) -17.2% -14.1% 800,000 2019.05.20 Buy W750,000(12M) -29.4% -10.4% 600,000 2019.02.13 Buy W620,000(12M) -22.9% -15.2% 400,000 2018.12.04 Buy W650,000(12M) -26.6% -21.7% 200,000 2018.11.02 Buy W600,000(12M) -21.5% -14.7% 0 2018.10.09 Buy W500,000(12M) -16.2% -13.8% '18.7 '18.11 '19.3 '19.7 '19.11 '20.3 '20.7 2018.05.11 Buy W480,000(12M) -20.2% -5.2%

NH Investment & Securities stock ratings 1. Rating based on a stock’s forecasted absolute return over a period of 12 months from the date of publication.

l Buy: Greater than +15% l Hold: -15% to +15% l Sell: Less than -15% 2. Regarding listed companies under NH I&S’ coverage, our stock ratings break down as follows (as of Jul 3, 2020).

l NH I&S’ stock rating distribution Buy Hold Sell 72.0% 27.5% 0.5%

- The stock rating on an individual company can change at irregular intervals. Our stock rating distribution is calculated on a weekly basis.

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l NH I&S does not have a stake greater than or equal to 1% in NCSOFT as of the preparation date. l NH I&S is an issuer and liquidity provider of ELWs taking NCSOFT as an underlying asset. l NH I&S has not provided this material to any institutional investor or other third party in advance. l The analyst and his/her spouse do not own any securities of NCSOFT as of the preparation date. l This report correctly reflects the analyst’s opinion and was written without any external influence or intervention.

Disclosures The research is based on current public information that NH I&S considers reliable, but NH I&S does not represent it as accurate or complete and it should not be relied on as such. Furthermore, the research does not take into account particular investment objectives, financial situations or individual client needs, and NH I&S is in no way legally responsible for future returns or loss of original capital. All materials in this report are the intellectual property of NH I&S. Copying, distributing, transmitting, transforming or lending of this material without NH I&S' consent is prohibited.