Mobile Games (Overweight)

August 14, 2012 Industry Report Mobile Games (Overweight) Shares to rise on 3Q earnings growth and overseas success Daewoo Securities Co., Ltd. Chang-kwean Kim Significant improvements in mobile user indicators in July +822-768-4321 [email protected] According to Nielsen KoreanClick (a survey firm), mobile game user indicators improved drastically in July. Among domestic Android phone users, the number of game users jumped 29.7% MoM in July, while total time spent on mobile games soared 44.6% MoM. In July, two social network games, Rule the Sky (by JCE) and Tiny Farm (Com2uS) remained dominant in terms of total time spent. These two games respectively accounted for 11.2% and 10.1% of the overall time users spent playing mobile games in the month. Rule the Sky remained the leader despite the fact that it has been a year since its rollout. In July, eight of GamevilÊs and Com2uSÊs games were among KoreaÊs 49 most popular mobile games (in terms of time spent), vs. seven in May and 12 in June. 2Q Earnings at Com2uS and Gamevil exceeded the consensus The 2Q results of Com2uS and Gamevil exceeded the consensus. Com2uSÊs 2Q operating revenues and operating profit soared 163.3% YoY and 905.0% YoY, respectively. Gamevil also posted surges in operating revenues (up 55.1% YoY) and operating profit (up 57.3% YoY). We raised our 2012 EPS estimates for Com2uS and Gamevil by 4.9% and 2.5%, respectively. Share rally likely on 3Q earnings growth and overseas success Although they have already experienced surges, we believe that mobile game shares in the KDB Daewoo Universe have further upside potential, as they are likely to benefit from a virtuous cycle (smartphone proliferation an increase in users in Korea and abroad increases in new popular games and genres game companies’ earnings growth). Korean game companies’ overseas success (e.g., in the US, Japan, and China) has just started to emerge. We maintain our Buy call on Gamevil with a target price of W118,000. And we maintain our Buy rating on Com2uS and raise our target price to W60,000 (from W55,000). Rank of mobile game apps based on unique visitors ( Â000 people, %) May June July Rank Domain Provider Unique visitors User share Unique visitors User share Unique visitors MoM User share Game 11,001 100 10,942 100 14,197 29.7 100 1 Temple Run Imangi Studios 2,331 21.2 2,047 18.7 2,477 21.0 17.4 2 Tap Sonic NEOWIZ Corp. 1,113 10.1 1,263 11.5 1,254 -0.7 8.8 3 TinyFarm Com2uS 1,173 10.7 1,127 10.3 1,230 9.2 8.7 4 Kart Rider Rush+ Nexon - - - - 1,028 - 7.2 5 Rule The Sky JCE 645 5.9 552 5.0 919 66.5 6.5 6 Hangame Sachunsung NHN Corp. 610 5.5 532 4.9 914 71.8 6.4 7 Angry Birds Space Rovio Mobile 1,305 11.9 876 8.0 882 0.7 6.2 8 Com2uS Baseball2012 Com2uS 529 4.8 452 4.1 715 58.3 5.0 9 Angry Birds Seasons Rovio Mobile 516 4.7 618 5.6 665 7.6 4.7 10 Coin Dozer Game Circus - - 326 3.0 654 100.6 4.6 Note: Data is based on Android phone users from May to July 2012 Source: Nielsen Koreanclick, KDB Daewoo Securities Research Analysts who prepared this report are registered as research analysts in Korea but not in any other jurisdiction, including the U.S. August 14, 2012 Mobile Games Com2uS: 2Q operating revenue and OP expanded 163.3% and 905.0% YoY, respectively 50% of revenues came In 2Q, Com2uS generated 50% of its revenues from Tiny Farm (social network game) and from Tiny Farm and Com2uS Pro Baseball. The companyÊs new games, including Tower Defense and Swing Com2uS Pro Baseball Shot, fared well at home and abroad. The company, which has the highest proportion of in- house developed games among domestic mobile game companies, is now bolstering its game publishing business. The company posted a remarkable 223.5% YoY increase in domestic revenues in 2Q, while overseas revenues also soared by 85.1% YoY. Operating profit surged by 905.0% YoY and 1,211.5% QoQ, as the burden of game development expenses, the companyÊs major weakness, has started to ease thanks to economies of scale. The company updated Tiny Farm and increased the number of game items in August. In addition, the company plans to launch new games in 3Q - 6 games on ApplesÊs App Store. 11 games on Google Play, and 11 games on Tstore. In 2012, operating revenue is expected to increase by 115.7% YoY, while operating profit is projected to expand by 526.4% YoY. Table 1. Com2uSÊs earnings results and forecasts (Wbn, %) 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12F 3Q12F 4Q12F 2010 2011 2012F Operating revenue 7.4 8.6 9.6 11.3 11.6 22.6 22.9 22.6 31.5 37 79.7 Revenues 7.3 8.5 9.1 11.2 11.2 22 22.7 22.4 30.9 36.2 78.3 Domestic 4.8 4.5 3.6 5.7 5.7 14.5 15.1 13.9 22.2 18.6 49.2 Overseas 2.5 4 5.5 5.6 5.5 7.5 7.6 8.4 8.8 17.6 29.0 Revenue breakdown Domestic 64.4 52.2 37.8 50.3 49.5 64.2 65.6 61.8 70.3 50.3 61.8 Overseas 33.9 47.1 57 49.1 47.4 33.1 33.2 37.4 27.7 47.6 36.4 OP 0.3 0.7 1 1.1 0.5 6.8 5.7 5.8 2.6 3.0 18.8 OP margin 3.7 7.8 10.3 9.3 4.4 29.9 24.7 25.6 8.3 8.1 23.5 NP 0.6 1 1.3 1.2 4.1 6 5.3 5.7 4.1 4.1 21.2 NP margin 8.1 11.9 13.4 10.9 35 26.7 23.3 25.3 13.1 11.2 26.6 YoY Growth Revenues -1.5 16 26.9 25.6 55.9 163.3 138.6 99.4 -0.5 17.2 115.7 Domestic -18.7 -16.4 -24 -7 19.9 223.5 313.9 144.7 -23.2 -16.1 164.6 Overseas 63.5 108.5 106.6 112.5 117.8 85.1 39.1 51.9 205.3 101.2 65.0 OP -70.6 2,296.20 60.3 3.2 84.9 905 474.9 449.4 -50.5 14.5 526.4 NP -61 117 44.8 -0.4 576.4 489.6 314.7 362.2 -29.7 0.2 406 QoQ Growth Revenues -17.3 15.4 11.9 17.6 2.6 95 1.4 -1.7 Domestic -21.7 -6.4 -18.9 56.4 1 152.7 3.7 -7.5 Overseas -3.4 60.3 35.4 1.4 -1 36.2 1.7 10.7 OP -72.6 141.3 46.7 6.5 -50.9 1,211.50 -16.1 1.7 NP -51.4 70.7 25.6 -4.3 229.7 55.1 -11.7 6.7 Note: Based on consolidated K-IFRS / Source: Com2uS, KDB Daewoo Securities Research Table 2. Earnings forecast revisions for 2012-2013 (Wbn, W, %) Before After Difference 2012F 2013F 2012F 2013F 2012F 2013F Revenues 71.7 90.8 79.7 100.9 11.2 11.1 OP 17.9 28.1 18.8 29.5 5.0 5.0 NP 20.2 25.8 21.2 27.1 5.0 5.0 EPS 2,005 2,561 2,104 2,684 4.9 4.8 OP margin 25.0 30.9 23.5 29.3 NP margin 28.2 28.5 26.6 26.8 Note: Based on consolidated K-IFRS / Source: KDB Daewoo Securities Research KDB Daewoo Securities Research 2 August 14, 2012 Mobile Games Gamevil: 2Q operating revenue and OP increased by 55.1% and 57.3% YoY, respectively Overseas gamers have In 2Q, GamevilÊs operating revenues and operating profit respectively increased by 55.1% outnumbered domestic and 57.3% YoY, coming in line with our expectations. On a QoQ basis, operating revenue gamers declined 8.0%, as revenues from sequels of Zenonia and Cartoon Wars (released in end- May), were not fully reflected in 2Q earnings. In 2Q, domestic revenues expanded by 43.6% YoY, while overseas revenues increased by 73.4% YoY. Overseas revenues drove revenue growth during the quarter, as in 1Q. Although operating revenue declined QoQ, OP margin improved, aided by the gains (W500mn) on the sale of fixed assets arising from the relocation of the headquarters building. As of June, GamevilÊs daily average users (DAU) and maximum concurrent users (MCU) stood at 2.3mn and 18mn, respectively. Among GamevilÊs users, overseas gamers have outnumbered domestic gamers. We expect GamevilÊs overseas revenue growth to pick up speed in 2H, as the company has started to offer mobile game services via Line (Japan) following Tencent (China). The company plans to launch 22 new games in 3Q – 10 games on domestic platforms and 22 games on global app stores, including Google Play. In 2012, operating revenue is expected to increase by 74.8% YoY, while operating profit is projected to expand by 68.7% YoY.

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