Lineage 2M Pre-Registration Faring Well

NCSOFT (036570.KS) Lineage 2M pre-registration faring well

Company Comment │ Sep 9, 2019

Pre-registration for NCSOFT’s Lineage 2M chalked up over 2mn subscribers within the first 18 hours. Large-scale marketing events for the title are scheduled for Oct 15, with an official launch expected in November. In light of strong expectations for Lineage 2M, we anticipate considerable earnings Buy (maintain) growth in 2020. TP W750,000 (maintain) CP (’19/09/09) W552,000 Sector Game Lineage 2M set to make domestic mobile game history Kospi/Kosdaq 2,009.13 / 631.15 Market cap (common) US$10,150.43mn We maintain a Buy rating on NCSOFT, our top pick in the game sector, with a Outstanding shares (common) 22.0mn TP of W750,000. Following a showcase for Lineage 2M and the initiation of 52W high (’19/09/06) W552,000 low (’18/09/06) W399,500 pre-registration for the title on Sep 5, preparations for the game’s official launch Average trading value (60D) US$27.89mn are now in the final stages. Large-scale marketing events are slated for Oct 15, Dividend yield (2019E) 1.10% with an official launch expected in November. With the success of Lineage 2M Foreign ownership 50.8% becoming more and more certain, expectations towards NCSOFT’s earnings Major shareholders should rise, in turn pumping the company’s share price. NPS 12.6% TJ Kim & 8 others 12.0% Pre-registration for Lineage 2M drew over 2mn subscribers in just the first 18 Share perf 3M 6M 12M hours, an incredible figure. For reference, Lineage M gathered 1mn in the first 8 Absolute (%) 20.1 22.8 38.2 hours, 2mn in the first 3 days, 3mn in the first 2 weeks, and 5.5mn overall, Relative (%p) 23.7 33.0 57.3 showing a comparatively slower start versus Lineage 2M’s pre-registration. 2018 2019E 2020F 2021F Sales 1,715 1,689 2,890 3,481 While Lineage M logged healthy first-day sales of W13bn with 2.1mn users, Chg -2.5 -1.5 71.1 20.4 Lineage 2M should enjoy even stronger sales and pre-registration figures, in OP 614.9 489.0 1,036 1,326 light of its broader target audience, advanced game-play elements, and attractive Chg 5.1 -20.5 111.9 28.0 3D graphics. OPM 35.9 29.0 35.8 38.1 NP 418.2 408.7 808.7 1,030 EPS 19,061 18,620 36,835 46,912 Robust earnings growth expected in 2020; 2020F P/E at only 15.0x Chg -5.2 -2.3 97.8 27.4 P/E 24.5 29.6 15.0 11.8 Noting that a strong reception for Lineage 2M should drive significant earnings P/B 4.3 4.6 3.7 2.9 growth at NCSOFT, we forecast 2020 OP of W1.04tn (+111.8% y-y). In EV/EBITDA 15.5 22.0 10.5 7.8 addition, as Lineage 2M is planned to be released globally, NCSOFT appears ROE 16.4 16.3 27.1 27.5 deserving of valuation levels parallel to those of top global game developers. Debt/equity 23.6 26.7 22.5 18.4 The firm’s 2020F P/E remains low at just 15.0x. Net debt -267.1 -443.5 -846.2 -1,450 Unit: Wbn, %, won, x Note 1: NP excludes minority interests Note 2: EPS, P/E, P/B, ROE based on NP (excl minority interests) Lineage 2M, a much-anticipated game of 2019 Source: NH I&S Research Center estimates

Jaemin Ahn, Analyst 02)768-7647, [email protected]

Source: NCSOFT, NH I&S Research Center NCSOFT www.nhqv.com

Pre-registration Pre-registration for Lineage 2M has been smooth, with the number of subscribers four fold faster and increasing two-to-three fold faster than for Lineage M. Based on the time taken to secure expected to 2mn subscribers, the hourly number of subscribers attracted stands at 28,000 for Lineage outweigh Lineage M and 111,000 for Lineage 2M (an increase of roughly 4x). M’s first day sales of W13bn If Lineage 2M’s pre-registered subscribers exceed 8mn, for which 5% record ARPU of more than W50,000 on the first day of launch, the game is expected to book first-day sales of W20bn, far in excess of the W13bn garnered by Lineage M.

Lineage 2M is likely to be well-received by both Korean gamers and global RPG fans, as the MMORPG is a full-3D seamless open world experience that boasts graphics and concurrent player count in line with current PC game standards. We foresee that Lineage 2M will hit the domestic market in 4Q19, and then will be released in Asia in 1H20 and in North America and Europe in early 2021.

Hourly number of subscribers attracted: Lineage 2M vs Lineage M

(10,000 pns) 12 11.1

4 2.8

0 Lineage M Lineage 2M

Source: NH I&S Research Center

Large-scale marketing events for Lineage 2M are slated for Lineage 2M to boast full-3D graphics Oct 15

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

2 NCSOFT www.nhqv.com

Lineage 2M’s ‘View and Target’ Lineage 2M to boast full-3D graphics

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

Lineage M & Lineage 2: Revolution’s first 12-month sales vs Lineage 2M’s first 12-month sales forecast

(Wbn) Lineage M's quarterly sales Lineage 2R's quarterly sales (Wbn) 700 Lineage 2M's quarterly sales Lineage M's first 120month sales (RHS) 1,800 Lineage 2R's first 120month sales (RHS) Lineage 2M's first 120month sales (RHS) 1,600 600 544 1,386 1,400 500 410 1,200 1,112 400 1,000 323 961 270 262 800 300 243 258 240 219 200 202 197 600 200 120 400 82 100 40 200 0 0 Q+1 Q+2 Q+3 Q+4 Q+5

Note: First 12-month sales on a weighted average basis Source: NH I&S Research Center

3 NCSOFT www.nhqv.com

Earnings forecasts (IFRS consolidated) (Unit: Wbn, won, x, %) 2018 2019E 2020F 2021F Sales 1,715 1,689 2,890 3,481 OP 615 489 1,036 1,326 OPM 35.9 29.0 35.8 38.1 EBITDA 643 531 1,077 1,375 NP (excl minority interests) 418 409 809 1,030 EPS 19,061 18,620 36,835 46,912 P/E 24.5 29.6 15.0 11.8 P/B 4.3 4.6 3.7 2.9 EV/EBITDA 15.5 22.0 10.5 7.8 ROE 16.4 16.3 27.1 27.5 Note: EPS, P/E, P/B, and ROE based on NP (excluding minority interests) Source: NH I&S Research Center estimates

Quarterly earnings forecasts (Unit: Wbn, %) 1Q18 2Q18 3Q18 4Q18 1Q19 2Q19 3Q19E 4Q19F 2018 2019E 2020F Sales 475.2 436.5 403.8 399.7 358.8 410.8 398.9 520.7 1,715.1 1,689.1 2,889.8 Game 391.0 344.0 352.3 346.3 301.3 359.2 348.8 469.0 1,433.6 1,478.3 2,668.6 PC 126.9 134.1 135.8 123.5 102.6 135.4 130.7 122.6 520.3 491.2 554.6 Lineage 1 28.3 42.1 40.3 39.0 20.7 50.1 48.0 44.0 149.7 162.8 169.1 Lineage 2 14.2 13.3 15.6 20.7 21.6 21.2 20.4 20.1 63.9 83.2 76.0 Aion 18.8 15.6 16.4 12.7 12.3 12.4 12.7 11.6 63.4 49.0 44.3 B&S 33.9 30.6 30.1 25.0 23.3 21.1 23.5 22.2 119.6 90.1 83.0 Guild Wars 2 23.6 19.9 21.0 15.7 16.3 15.9 14.5 13.1 80.2 59.8 45.6 Mobile 264.1 209.9 216.5 222.8 198.8 223.8 218.1 346.4 913.3 987.1 2,114.1 Lineage RK 0.6 0.3 0.3 0.2 0.2 0.2 0.2 0.0 1.4 0.6 0.0 Final Blade 0.5 0.4 0.3 0.2 0.2 0.2 0.2 0.2 1.5 0.8 0.5 H2 3.2 4.7 3.9 4.7 5.2 5.4 3.5 5.2 16.5 19.4 19.9 Lineage M 258.0 202.4 210.1 215.3 191.6 215.1 212.0 200.8 885.9 819.6 730.5 Lineage 2M ------120.0 - 120.0 928.5 B&S S ------18.0 - 18.0 83.6 Royalties 84.2 92.4 51.6 53.4 57.4 51.6 50.1 51.8 281.6 210.8 221.2 Lineage 2: R 17.8 14.0 12.1 10.2 7.2 6.9 6.7 6.4 54.1 27.2 23.6 Lineage M Taiwan 34.4 17.3 17.2 17.3 13.4 12.7 12.1 11.5 86.2 49.7 40.5 Operating expenses 271.3 277.0 264.8 287.1 279.2 281.4 288.1 351.4 1,100.2 1,200.1 1,854.0 Labor costs 125.0 146.9 128.9 135.7 128.1 105.5 118.3 127.3 536.4 479.2 503.2 Marketing costs 10.8 15.0 16.5 15.9 19.0 24.2 27.2 33.8 58.2 104.2 123.4 OP 203.8 159.5 139.0 112.6 79.5 129.4 110.8 169.3 614.9 489.0 1,035.8 OPM 42.9 36.5 34.4 28.2 22.2 31.5 27.8 32.5 35.9 28.9 35.8 Pre-tax profit 196.4 192.5 141.9 106.6 98.2 147.1 123.0 182.4 637.3 550.7 1,100.1 NP 118.8 139.9 92.9 66.6 74.2 116.4 86.9 131.2 418.2 408.7 808.7 Source: NCSOFT, NH I&S Research Center

4 NCSOFT www.nhqv.com

Game lineup Title Genre Developer Launch date Lineage 2: Blood Alliance MMORPG Snail Games Jul 28, 2016 Lineage RK RPG NCSOFT Dec 8, 2016 Final Blade Side-scrolling RPG Sky People Feb 14, 2017 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 2019 B&S S (global) MMORPG NCSOFT 2019 Aion 2 MMORPG NCSOFT 2020 B&S M MMORPG NCSOFT 2020 B&S 2 MMORPG NCSOFT 2020 Project TL PC MMORPG NCSOFT 2020 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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STATEMENT OF COMPREHENSIVE INCOME Valuation / Profitability / Stability (Wbn) 2018/12A 2019/12E 2020/12F 2021/12F 2018/12A 2019/12E 2020/12F 2021/12F Sales 1,715 1,689 2,890 3,481 Price/ Earnings (X) 24.5 29.6 15.0 11.8 Growth (%) -2.5 -1.5 71.1 20.4 Price/ Book Value (X) 4.3 4.6 3.7 2.9 COGS 0.0 0.0 0.0 0.0 Price/ Gross Cash Flow (X) 15.6 20.7 10.8 8.5 Gross Profit 1,715 1,689 2,890 3,481 Price/ Sales (X) 6.0 7.2 4.2 3.5 Gross margin (%) 100.0 100.0 100.0 100.0 EV/ EBITDA (X) 15.5 22.0 10.5 7.8 SG&A 1,100 1,200 1,854 2,154 EV/ EBIT (X) 16.2 23.9 10.9 8.1 Operating Income 614.9 489.0 1,036 1,326 Fully diluted EPS (W) 19,061 18,620 36,835 46,912 Growth (%) 5.1 -20.5 111.9 28.0 BVPS (W) 107,923 120,784 151,002 190,358 Operating margin (%) 35.9 29.0 35.8 38.1 Sales PS (W) 78,176 76,964 131,630 158,542 EBITDA 642.8 530.9 1,077 1,375 ROE (%) 16.4 16.3 27.1 27.5 Non-Operating Profits 22.5 61.7 64.3 77.7 ROA (%) 13.0 13.0 21.8 22.9 Financial Income(Costs) 25.6 47.4 48.0 61.1 ROIC (%) 47.7 29.4 54.2 61.0 Other Non-Operating Profits -0.7 16.9 17.4 17.4 Dividend Yield (%) 1.3 1.1 1.3 1.5 Gains(Losses) in Associates, Subsidiaries and JVs -2.4 -2.6 -1.1 -0.8 Payout Ratio (%) 29.8 30.5 18.0 16.1 Pre-tax Profit from Cont. Op. 637.3 550.7 1,100 1,404 Total Cash Dividend (Wbn) 124.6 124.7 145.3 165.9 Income Taxes 215.9 139.0 284.8 365.4 Cash DPS (W) 6,050 6,050 7,050 8,050 Profit from Continuing Op. 421.5 411.7 815.2 1,038 Net debt(cash)/ equity (%) -11.2 -16.6 -25.4 -34.5 Net Profit 421.5 411.7 815.2 1,038 Debt/ equity (%) 23.6 26.7 22.5 18.4 Growth (%) -5.1 -2.3 98.0 27.3 Interest-Bearing Debts (Wbn) 155.1 250.0 250.0 250.0 Net margin (%) 24.6 24.4 28.2 29.8 Current Ratio (%) 333.2 352.5 438.8 550.7 Net Profit of Parent 418.2 408.7 808.7 1,030 Total shares (mn) 22 22 22 22 Net Profit to Non-Controlling 3.3 3.1 6.6 8.5 Par value (W) 500 500 500 500 Other Comprehensive Income -341.4 0.0 0.0 0.0 Share price (W) 466,500 552,000 552,000 552,000 Total Comprehensive Income 80.1 411.7 815.2 1,038 Market Cap (Wbn) 10,235 12,119 12,119 12,119

STATEMENT OF FINANCIAL POSITION CASH FLOW STATEMENT (Wbn) 2018/12A 2019/12E 2020/12F 2021/12F (Wbn) 2018/12A 2019/12E 2020/12F 2021/12F Cash and Cash Equivalents 185.6 457.9 827.1 1,403 Operating Cash Flow 352.8 316.5 703.1 954.0 Accounts Receivables 148.5 147.9 169.0 186.2 Net Profit 421.5 411.7 815.2 1,038 Total Current Assets 1,576 1,998 2,586 3,342 Depreciation&Amortization 27.9 41.9 41.1 49.0 Tangible Assets 233.9 253.8 280.9 307.2 + Loss(Gains) from Subs 2.4 0.0 0.0 0.0 Investment Assets 951.5 937.7 1,021 1,125 + FC translation loss(profit) -11.5 15.7 15.7 15.7 Non-Current Assets 1,365 1,380 1,499 1,639 Gross Cash Flow 654.1 584.0 1,126 1,424 Assets 2,941 3,378 4,085 4,981 - Incr. (Decr.) in WC -55.5 -152.8 -168.9 -149.1 Short-Term Debt 155.1 250.0 250.0 250.0 Investing Cash Flow 68.3 -71.8 -209.3 -232.3 Account Payables 1.6 1.6 1.7 2.1 + Decr. In Tangible Assets 1.0 0.0 0.0 0.0 Current Liabilities 473.1 566.8 589.3 606.9 - Incr. In Tangible Assets(CAPEX) -26.7 -60.0 -66.0 -72.6 Long-Term Debt 0.0 57.2 57.2 57.2 + Disp.(Acq.) of Inv. Assets 385.8 13.8 -83.1 -104.3 Long-Term Allowance 11.2 11.1 10.9 10.7 Free Cash Flow 326.1 256.5 637.1 881.4 Non-Current Liabilities 89.2 145.1 159.7 165.9 Net Cash Flow 421.1 244.7 493.8 721.7 Liabilities 562.3 711.9 749.0 772.9 Financing Cash Flow -424.4 27.5 -124.7 -145.3 Capital Stock 11.0 11.0 11.0 11.0 Equity Financing 0.0 0.0 0.0 0.0 Capital Surplus 432.6 432.6 432.6 432.6 Debt Financing -424.4 27.5 -124.7 -145.3 Retained Earnings 2,164 2,448 3,111 3,975 Incr.(Decr.) in Cash -1.7 272.2 369.2 576.4 Non-Controlling Interests Equity 11.3 14.3 20.9 29.3 Ending Cash and Cash Equivalents 185.6 457.8 827.0 1,403 Shareholders' Equity 2,379 2,666 3,336 4,208 Net Debt (Cash) -267.1 -443.5 -846.2 -1,450

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Rating and TP update NCSOFT (036570.KS) Disparity ratio (%) Date Rating TP Avg Max/Min (won) 2019.05.20 Buy W750,000(12M) - - 800,000 2019.02.13 Buy W620,000(12M) -22.9% -15.2% 2018.12.04 Buy W650,000(12M) -26.6% -21.7% 640,000 2018.11.02 Buy W600,000(12M) -21.5% -14.7% 480,000 2018.10.09 Buy W500,000(12M) -16.2% -13.8% 320,000 2018.05.11 Buy W480,000(12M) -20.2% -5.2% Closing Price 160,000 2018.04.04 Buy W600,000(12M) -37.9% -31.0% Target price(12M) 2017.09.15 Buy W640,000(12M) -32.8% -23.8% 0 2017.08.08 Buy W560,000(12M) -31.5% -29.3% '17.9 '18.1 '18.5 '18.9 '19.1 '19.5 '19.9 2017.07.04 Buy W540,000(12M) -31.1% -25.0%

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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.

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