August 16, 2010 Korea ă Equity Research NCsoft (036570 KS)

Game Chang Kwean Kim +822-768-4321 [email protected] Jee-Hyun Moon +822-768-3615 [email protected]

New games to drive share price Buy (Maintain)

Bloomberg: 036570 KS Target Price (12M, W): 280,000  2Q sales up 27.2% YoY as Lineage1 becomes popular again Share Price (08/13/10, W): 204,000 NCsoft’s 2Q10 sales jumped 27.2% YoY as the rejuvenation of its oldest game (12-years Expected Return (%): 37.3 old) Lineage1 eclipsed weak seasonality and the negative effect of the World Cup. Revenue Sector: Game from Lineage1 rose again thanks to robust sales of game-related items (micro-transactions). Sector Rating: Overweight On a parent-basis, 2Q sales of Lineage1 outpaced that of Aion. Operating profit surged EPS Growth (10F, %): 17.0 43.7% YoY in 2Q, but net profit fell 12.7% YoY because the company booked W33bn in one- time charges related to the defeat of a lawsuit against its former game developer Richard Market EPS Growth (10F, %): 68.1 Garriott. P/E (X): 20.4 Market P/E (08/13/10F, x): 9.2  3Q10F Sales to increase 2.2% QoQ Market Cap (Wbn): 4,447 Shares Outstanding (mn): 22 We forecast the company’s 3Q10 sales will increase 2.2% QoQ in the absence of new game launches. Profit margin will decline only marginally QoQ due to an increase in labor costs. Avg Trading Volume (60D, '000): 187 Net profit is forecast to rebound to W59.6bn because the company booked all of the one-time Avg Trading Value (60D, Wbn): 37 charges related to the legal battle with Richard Garriot in 2Q10. Furthermore, equity method Margin Balance ('000 sh): 107 gains should steadily flow from overseas subsidiaries. In 2H10, the company will try to apply Dividend Yield (10F, %): .2 the micro-transaction model to other games, such as Lineage2 and Aion. Free Float (%): 65.2 52-Week Low/High: 116,000/213,500  2 to hit market with fanfare; Maintain Buy Beta (12M, Daily Rate of Return): 1.0 The share price should respond positively to promotional events in 3Q for new games, such Price Return Volatility (12M Daily,%,SD): 2.9 as Guild Wars2 and Blade and Soul. The shares rallied in August 2009 when it first Foreign Ownership (%): 29.4 introduced Guild Wars2 at in Germany and in November when it revealed an early version of Blade and Soul at G-Star in Korea. NCsoft is scheduled to go to GamesCom Major Shareholder(s): in August and the U.S. conference PAX in September to show how well Guild Wars2 has TJ Kim and et. al (25.45%) developed thus far. The new games have long been anticipated to hit the market with fanfare Treasury stock (9.36%) in 2011 given the favorable reviews they have received to date. We maintain our Buy Call Mirae Asset Mgmt. and et. al (8.91%) and target price of W280,000 on the counter. Price Performance Guild Wars2 is being developed by NCsoft’s wholly-owned U.S. subsidiary ArenaNet. NCsoft (%) 1M 6M 12M sold 6.5mn copies of Guild Wars1 globally. Guild Wars2 holds the highest rating in Absolute 3.3 61.3 54.5 MMORPG.COM, the official MMORPG community. Relative 2.6 51.7 42.9

Share price FY Sales OP OP MarginNP EPS EBITDAFCF ROE P/E P/B EV/EBITDA 180 KOSPI (Wbn) (Wbn) (%) (Wbn) (W) (Wbn)(Wbn) (%) (x) (x) (x) 160 12/08 240 46 19.0 27 1,334 57 10 6.4 39.4 2.6 15.6 140 120 12/09 453 200 44.1 183 8,560 213 234 34.8 17.5 5.1 13.3 100 12/10F 548 289 52.7 218 10,013 301 195 29.8 20.4 5.4 12.7 80 12/11F 748 438 58.5 403 18,496 449 338 39.2 11.0 3.6 7.6 60 12/12F 1,112 672 60.4 538 24,669 683 573 36.1 8.3 2.5 4.2 40 8/09 12/09 4/10 8/10 Source: Company data, Daewoo Securities Research estimates

Please read carefully important notices at the end of this report. August 16, 2010 NCsoft

Figure 1. NCsoftÊs share price after the unveiling of at GamesCom 2009

(W) 200,000

180,000 GamesCom 2009 (Aug 17-23): Guild Wars2 was unveiled; Aion named best game 160,000

140,000

120,000

100,000 7/1/09 7/15/09 7/29/09 8/12/09 8/26/09 9/9/09 9/23/09

Source: Thomson Reuters, Daewoo Securities Research

Figure 2. NCsoftÊs share price after the unveiling of Blade and Soul at G-Star 2009

(W) 180,000 G-Star Premier (Nov 24): NCsoft unofficially unveiled Blade and Soul 160,000

140,000

G-Star in Busan (Nov 26-29): NCsoft introduced 120,000 Blade & Soul

100,000 10/1/09 10/15/09 10/29/09 11/12/09 11/26/09 12/10/09 12/24/09

Source: Thomson Reuters, Daewoo Securities Research

Figure 3. Guild Wars 2 holds the highest rating among MMORPG

Source: MMORPG.COM

Daewoo Securities Research 2 August 16, 2010 NCsoft

Table 1. Quarterly and annual earnings trend and forecast (Wbn, %) 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10F 4Q10F 2008 2009 2010F Sales 103 104 106 139 132 133 136 148 240 453 548 1 25 21 21 44 43 48 49 51 102 111 190 Lineage 2 20 18 21 22 17 16 17 24 84 80 75 Aion 43 39 36 40 45 42 43 44 10 158 174 Overseas 14 25 26 30 24 25 27 28 42 96 105 Sales breakdown Lineage 1 24.7 20.0 19.7 31.8 32.4 35.7 35.8 34.4 42.6 24.6 34.6 Lineage 2 19.2 16.9 19.6 15.6 13.2 12.0 12.4 16.5 35.2 17.7 13.6 Aion 41.4 37.5 34.3 28.8 34.1 31.9 31.6 29.9 4.0 35.0 31.8 Overseas 13.5 24.2 24.6 21.9 18.1 18.7 20.2 19.2 17.7 21.2 19.1 Operating profit 43 48 40 68 71 69 69 80 46 200 289 OP margin 42.1 45.9 37.6 49.2 53.7 51.8 51.0 54.3 19.0 44.1 52.7 Pretax profit 45 46 50 86 75 40 76 90 37 227 282 Pretax margin 43.9 43.9 47.4 61.8 57.1 30.4 56.2 60.8 15.5 50.2 51.4 Net profit 35 35 43 70 58 30 60 70 27 183 218 Net margin 33.7 33.3 40.5 50.4 44.1 22.9 43.9 47.5 11.4 40.3 39.8 YoY growth Sales 71.6 84.8 91.7 103.4 28.1 27.2 28.1 6.3 7.9 88.4 21.2 Lineage 1 -7.2 -17.3 -16.6 78.8 68.3 127.1 132.8 15.3 -2.9 8.7 70.4 Lineage 2 -10.1 -16.7 -0.3 6.5 -12.3 -10.0 -18.8 12.2 -0.6 -5.3 -6.8 Aion 313.1 5.8 8.0 17.9 10.4 1,464.1 1,534.0 10.3 Overseas 36.3 161.1 191.6 124.2 71.2 -1.5 5.0 -6.9 34.5 125.6 9.2 Operating profit 215.6 439.4 291.6 435.5 63.8 43.7 73.4 17.3 -2.8 337.8 45.0 Pretax profit 406.7 409.8 525.1 656.9 66.9 -12.1 51.9 4.6 -36.0 509.0 24.1 Net profit 330.6 468.4 756.7 763.8 67.5 -12.7 38.7 0.0 -39.4 568.2 19.6 QoQ growth Sales 51.1 1.3 1.5 31.0 -4.8 0.6 2.2 8.7 Lineage 1 3.1 -17.8 -0.1 111.0 -2.9 11.0 2.4 4.5 Lineage 2 -2.7 -11.0 17.7 4.4 -19.9 -8.6 6.3 44.2 Aion 340.5 -8.1 -7.2 10.0 12.8 -6.1 1.2 3.0 Overseas 3.1 81.2 3.2 16.3 -21.3 4.2 10.0 3.1 Operating profit 239.8 10.5 -16.7 71.2 3.9 -3.0 0.5 15.8 Pretax profit 298.7 1.5 9.6 70.7 -12.1 -46.6 89.3 17.6 Net profit 328.9 0.1 23.4 63.1 -16.8 -47.8 96.0 17.6 Source: Company data, Daewoo Securities Research

Table 2. 2010~2011 Earnings forecast revisions (Wbn, W, %, %p) Previous Revised %Diff. 2010F 2011F 2010F 2011F 2010F 2011F Sales 540 709 548 748 1.5 5.5 Operating profit 287 389 289 438 0.7 12.6 Net profit 254 387 218 403 -14.2 4.1 EPS 11,658 17,740 10,013 18,496 -14.1 4.3 OP margin 53.3 54.9 52.7 58.5 -0.6 3.6 Net margin 47.1 54.5 39.8 53.9 -7.3 -0.6 Source: Daewoo Securities Research Estimates

Daewoo Securities Research 3 August 16, 2010 NCsoft

Table 3. Global game companiesÊ earnings and growth forecasts (2010F) (Each countryÊs currency, %, x) Company Name FY Sales OP NP Share price ROE EPS EPSG PER OP margin NP margin NCsoft 201012 548 289 218 204,000 29.8 10,013 17.0 20.4 52.7 39.8 Neowiz Games 201012 422 111 82 36,700 30.8 3,735 73.8 9.8 26.3 19.4 Korea CJ Internet 201012 238 47 11 11,550 4.6 484 -57.9 23.9 19.7 4.6 Average 21.7 17.6 37.0 25.7 Activision Blizzard 201012 4,474 1,300 925 10.83 8.6 0.74 7.4 14.6 29.1 20.7 Electronic Arts 201103 3,792 293 218 15.76 6.5 0.65 47.5 24.3 7.7 5.7 US Take-Two 201012 970 5 -9 8.51 -7.2 -0.12 RR -- 0.6 -0.9 THQ 201012 845 5 -1 3.70 -4.3 -0.03 TTR -- 0.6 -0.1 Average 3.6 19.4 15.9 11.2 Nintendo 201103 1,308 293 162 22,390 10.8 1,259 -29.6 17.8 22.4 12.4 Gungho Online 201012 11 2 1 172,300 23.8 10,810 2,710.0 15.9 16.3 11.4 Japan Sega Sammy 201103 401 50 27 1,307 10.9 107 33.2 12.2 12.5 6.8 Average 15.1 15.3 20.0 11.1 Shanda 201012 840 241 163 42.38 8.8 2.45 -27.2 17.3 28.7 19.4 Netease.com 201012 780 371 319 37.18 25.7 2.40 14.9 15.5 47.6 40.9 The9 201012 33 -45 -40 5.16 -12.6 -1.55 RR -- -135.2 -119.6 China Perfect World 201012 373 173 167 24.81 40.0 3.12 10.5 8.0 46.4 44.8 Tencent 201012 18,796 9,418 7,884 125.04 49.3 4.36 56.3 28.7 50.1 41.9 Kingsoft 201012 1,116 486 430 3.69 24.9 0.39 9.4 9.4 43.5 38.5 Average 22.7 15.8 43.3 37.1 Global Average 15.7 16.8 19.3 13.6 Note: Closing price as of Aug. 13, 2010; Among Chinese companies, two from the bottom are listed on Hong Kong Stock Exchange, while the rest are listed on NASDAQ; All units in billions (Korea, Japan) and millions (others), except for per share data Source: Thomson Reuters, Daewoo Securities Research

Table 4. Global game companiesÊ earnings and growth forecasts (2011F) (Each countryÊs currency, %, x) Company Name FY Sales OP NP Share price ROE EPS EPSG PER OP margin NP margin NCsoft 201112 748 438 403 204,000 39.2 18,496 84.7 11.0 58.5 53.9 Neowiz Games 201112 550 157 118 36,700 32.6 5,401 44.6 6.8 28.5 21.5 Korea CJ Internet 201112 262 50 33 11,550 13.0 1,445 198.6 8.0 19.0 12.6 Average 28.3 9.9 41.3 35.5 Activision Blizzard 201112 4,736 1,406 1,013 10.83 9.5 0.82 18.2 13.3 29.7 21.4 Electronic Arts 201203 4,009 366 287 15.76 9.1 0.85 94.0 18.5 9.1 7.2 US Take-Two 201112 1,191 126 106 8.51 14.8 1.29 TTB 6.6 10.6 8.9 THQ 201112 924 32 23 3.70 0.9 0.31 65.3 11.8 3.4 2.5 Average 6.5 12.5 17.8 13.2 Nintendo 201203 1,362 325 207 22,390 12.2 1,589 -11.1 14.1 23.9 15.2 Gungho Online 201112 13 2 2 172,300 23.9 13,164 3,321.9 13.1 18.4 11.7 Japan Sega Sammy 201203 439 54 30 1,307 11.0 117 44.9 11.2 12.2 6.7 Average 15.7 12.8 21.0 13.2 Shanda 201112 1,001 299 204 42.38 10.1 3.10 -7.7 13.7 29.8 20.4 Netease.com 201112 954 448 393 37.18 24.2 2.93 40.2 12.7 47.0 41.2 The9 201112 70 -24 -21 5.16 -7.8 -0.80 RR -- -34.3 -29.5 China Perfect World 201112 445 202 196 24.81 33.7 3.61 27.9 6.9 45.4 44.1 Tencent 201112 24,454 12,142 10,412 125.04 42.3 5.74 105.6 21.8 49.7 42.6 Kingsoft 201112 1,298 586 515 3.69 25.6 0.47 30.5 7.9 45.2 39.6 Average 21.4 12.6 43.4 37.6 Global Average 18.3 11.8 26.0 21.0 Note: Closing price as of Aug. 13, 2010; Among Chinese companies, bottom two are listed on Hong Kong Stock Exchange, while the rest are listed on NASDAQ; All units in billions (Korea, Japan) and millions (others), except for per share data Source: Thomson Reuters, Daewoo Securities Research

Daewoo Securities Research 4 August 16, 2010 NCsoft

NCsoft (036570 KS/Buy/TP: W280,000)

Income Statement (Summarized) Balance Sheet (Summarized) (Wbn) 12/09 12/10F 12/11F 12/12F (Wbn) 12/09 12/10F 12/11F 12/12F Sales 453 548 748 1,112 Current Assets 493 698 1,137 1,746 Cost of Goods Sold 89 92 106 160 Cash and Cash Equivalents 18 152 304 541 Gross Profit 363 457 642 951 Accounts Receivable 47 54 74 110 SG&A 163 167 204 280 Inventories 0 0 0 0 Operating Profit 200 289 438 672 Other Current Assets 429 491 759 1,095 Non-Operating Income 28 -7 93 165 Non-Current Assets 287 297 309 329 Interest Income/Expense 14 22 35 57 Investment Assets 128 137 148 167 F/X-Related Gain/Loss -3 0 0 0 Property, Plant and Equipment 157 158 160 161 Equity Method Gain/Loss 17 11 98 148 Intangible Assets 3 1 1 1 Asset Disposal Gain/Loss -1 0 0 0 Total Assets 781 995 1,445 2,075 Other Non-Operating Profit/Loss 0 -40 -40 -40 Current Liabilities 130 145 198 295 Pretax Profit 227 282 517 689 Accounts Payable 0 0 0 0 Tax 45 64 114 152 Short-Term Debt 0 0 0 0 Profit from Continuing Operation 183 218 403 538 Current Long-Term Debt 0 0 0 0 Profit from Discontinued Operation 0 0 0 0 Other Current Liabilities 130 145 198 295 Tax Effect 0 0 0 0 Non-Current Liabilities 16 19 23 29 Net Profit 183 218 403 538 Bonds 0 0 0 0 Residual Income 183 218 403 538 Long-Term Debt 0 0 0 0 EBITDA 213 301 449 683 Other Non-Current Liabilities 16 19 23 29 Free Cash Flow 234 195 338 573 Total Liabilities 146 164 222 324 Gross Profit Margin (%) 80.2 83.3 85.8 85.6 Paid-In Capital 11 11 11 11 EBITDA Margin (%) 47.0 54.9 60.1 61.5 Capital Surplus 204 204 204 204 Operating Margin (%) 44.1 52.7 58.5 60.4 Retained Earnings 518 717 1,110 1,638 Net Margin (%) 40.3 39.8 53.9 48.4 Stockholders' Equity 635 831 1,224 1,752

Cash Flow (Summarized) Forecasts/Valuations (Summarized) (Wbn) 12/09 12/10F 12/11F 12/12F 12/09 12/10F 12/11F 12/12F Cash Flow from Operating Activities 246 207 350 586 P/E (x) 17.5 20.4 11.0 8.3 Net Profit 183 218 403 538 P/CF (x) 16.5 19.7 10.9 8.2 Non-Cash Income and Expense 8 6 -70 15 P/B (x) 5.1 5.4 3.6 2.5 Tangible Assets Depreciation 11 10 11 11 EV/EBITDA (x) 13.3 12.7 7.6 4.2 Intangible Assets Depreciation 3 1 1 1 EPS (W) 8,560 10,013 18,496 24,669 Others -5 -6 -81 4 CFPS (W) 9,053 10,487 18,978 25,159 Chg in Working Capital 56 -18 17 33 BPS (W) 29,112 38,041 56,109 80,336 Chg in Accounts Receivable -21 -10 -22 -40 DPS (W) 500 500 500 500 Chg in Inventories 0 0 0 0 Payout Ratio (%) 5.4 4.5 2.5 1.8 Chg in Accounts Payable 0 0 0 0 Dividend Yield (%) 0.3 0.2 0.2 0.2 Others 77 -8 39 73 Sales Growth (%) 88.4 21.2 36.4 48.6 Cash Flow from Investment Activities -274 -63 -193 -344 EBITDA Growth (%) 274.0 41.6 49.3 52.1 Chg in Tangible Assets -12 -12 -12 -12 Operating Profit Growth (%) 337.8 45.0 51.4 53.4 Chg in Intangible Assets 0 0 0 0 EPS Growth (%) 541.7 17.0 84.7 33.4 Chg in Investment Assets -64 -27 73 -20 Accounts Receivable Turnover (x) 12.0 10.9 11.6 12.1 Others -198 -23 -254 -312 Inventory Turnover (x) 6,757.9 5,528.2 4,814.4 4,987.6 Cash Flow from Financing Activities 38 -10 -6 -4 Accounts Payable Turnover (x) - - - - Chg in Borrowings 0 0 4 6 ROA (%) 29.1 24.6 33.0 30.5 Chg in Equity 38 -10 -10 -10 ROE (%) 34.8 29.8 39.2 36.1 Dividends -9 -10 -10 -10 ROIC (%) 109.9 209.2 315.3 573.6 Others 0 0 0 0 Liability to Equity Ratio (%) 23.0 19.8 18.1 18.5 Chg in Cash 10 135 151 237 Current Ratio (%) 379.3 479.7 572.8 592.1 Beginning Cash Balance 8 18 152 304 Net Debt to Equity Ratio (%) -67.0 -73.3 -82.8 -89.3 Ending Cash Balance 18 152 304 541 Interest Coverage Ratio (x) - - - - Source: Company data, Daewoo Securities Research estimates

Daewoo Securities Research 5 August 16, 2010 NCsoft

Important Notices

As of the publication date, Daewoo Securities Co., Ltd. has acted as a liquidity provider for equity-linked warrants backed by shares of NCsoft as an underlying asset, and other than this, Daewoo Securities has no other special interests in the covered companies. As of the publication date, Daewoo Securities Co., Ltd. issued equity-linked warrants with NCsoft as an underlying asset, and other than this, Daewoo Securities has no other special interests in the covered companies. This report is a translation excerpt of the Korean version publicly released on August 16, 2010. 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 without any external influences by third parties.

Stock Ratings (W) NCsoft Buy Relative performance of +20% or greater 350,000 Trading Buy Relative performance of +10% or greater, but with volatility 300,000 Hold Relative performance of -10% and +10% 250,000 200,000 Sell Relative performance of -10% 150,000 Industry Ratings 100,000 Overweight Fundamentals are favorable or improving 50,000 0 Neutral Fundamentals are steady without any material changes 8/08 2/09 8/09 2/10 8/10 Underweight Fundamentals are unfavorable or worsening

* 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 Daewoo Securities, we may call a trading opportunity in case there is a technical or short-term material development. This report has been provided by the research division of Daewoo Securities Co., Ltd. The stock ratings, target prices, estimates and overall viewpoints are from the research division of Daewoo Securities. Investors can access Daewoo SecuritiesÊ research through Daewoo research direct (www.bestez.com), FirstCall Research, Reuters, FnGuide, WiseFn, FactSet and Bloomberg (DWIR). This document was prepared by Daewoo Securities Co., Ltd. („Daewoo‰). Information and opinions contained herein have been compiled from sources believed to be reliable and in good faith. The information has not been independently verified. Daewoo makes no guarantee, representation or warranty, express or implied, as to the fairness, accuracy or completeness of the information and opinions contained in this document. Daewoo accepts no responsibility or liability whatsoever for any loss arising from the use of this document or its contents or otherwise arising in connection therewith. Information and opinions contained herein are subject to change without notice. This document is for information purposes only. It is not and should not be construed as an offer or solicitation of an offer to purchase or sell any securities or other financial instruments. This document may not be reproduced, further distributed or published in whole or in part for any purpose. Daewoo and/or other affiliate companies, their directors, representatives, or employees may have long or short positions in any of the securities or other financial instruments mentioned in this document or of issuers described herein and may purchase and/or sale, or offer to purchase and/or sale, at any time, such securities or other financial instruments in the open market or otherwise, as either a principal or agent. This document is for distribution within the United Kingdom to persons authorized under the Financial Services Act 1986. Daewoo Securities is the sole provider of information contained in this document. DaewooÊs U.S. affiliate, Daewoo Securities (America) Inc., a member of FINRA/SIPC, is the sole distributor of this document within the U.S. This document may be distributed in the U.S. only to major U.S. institutional investors as defined in Rule 15a-6 of the U.S. Securities Exchange Act of 1934. Any U.S. recipient of this document wishing to effect any transactions in any securities discussed herein should contact and place orders with Daewoo Securities (America) Inc.

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