March 10, 2011 Korea-Equity Research NCsoft (036570 KS)

Game Chang-kwean Kim +822-768-4321 [email protected] Jee-hyun Moon +822-768-3615 [email protected]

Guild Wars 2 to provide a boost to earnings in 2011 Buy (Maintain)

Bloomberg: 036570 KS Target Price (12M, W): 330,000  Maintain Buy rating with TP of W330,000 Share Price (03/09/11, W): 248,500 We expect NCsoft’s earnings to stay stable in 1Q11 and gather momentum in March Expected Return (%): 32.8 and April, thanks to a demonstration of Guild Wars 2 at a video game show and the Sector: Game company’s announcement of the closed beta-testing schedule for Blade & Soul. Sector Rating: Overweight Despite the latest rise in share price, we believe that NCsoft’s shares are still close to EPS Growth (11F, %): 27.2 bottom levels (trading at a P/E of 24.5x), considering this year’s plans for new game Market EPS Growth (11F, %): 23.8 launches and the company’s ten-year share performance history. Since 2003, NCsoft’s P/E (X): 24.5 P/E ratios soared to 39.4x~43.4x during years in which it launched new games (such as Market P/E (03/09/11F, x): 9.8 Lineage II and Tabula Rasa). Market Cap (Wbn): 5,419  Improved user indicators for Aion and Lineage I and II in Jan and Feb Shares Outstanding (mn): 22 NCsoft saw user indicators for its games improve in January and February (compared to Avg Trading Volume (60D, '000): 351 4Q10), despite NHN’s successful commercial launch of TERA (a major rival MMORPG) Avg Trading Value (60D, Wbn): 74 on January 25th. In addition, the company is likely to hold a promotional event (e.g., the Margin Balance ('000 sh): 181 introduction of a micro-transaction model for Lineage I) for White Day (a day on which Dividend Yield (11F, %): 0.2 men traditionally give candy to women) in late March. As such, contrary to concerns, Free Float (%): 65.2 NCsoft’s earnings are forecast to improve QoQ in 1Q11. 52-Week Low/High: 141,000/273,000 In 1Q11, the average number of monthly unique players of Aion and Lineage I and II is Beta (12M, Daily Rate of Return): 0.7 believed to have increased QoQ by 7.0%, 5.3%, and 21.2%, respectively. Meanwhile, the Price Return Volatility (12M Daily,%,SD): 2.6 average number of concurrent users of Aion and Lineage I and II at internet cafés during January~February is believed to have shown respective QoQ growth of 3.3%, 2.0%, and 6.9%. Foreign Ownership (%): 26.7 Major Shareholder(s):  Demonstration of Guild Wars 2 to boost earnings momentum TJ Kim and et. al (25.44%) NCsoft’s Seattle-based wholly-owned subsidiary ArenaNet (a developer of Guild Wars) Treasury stock (9.35%) is slated to demonstrate Guild Wars 2 (for the third time) at PAX East 2011, a video NPS (5.01%) game show to be held this weekend in Boston. The company will run booths together Price Performance with graphics card companies (like Alienware and NVIDIA), where users will get access to Guild Wars 2. ArenaNet also plans to hold Q&A sessions and seminars, and release (%) 1M 6M 12M details about additional game content, such as game characters. Given that Guild Wars Absolute 13.5 3.3 76.9 2 is highly anticipated to become a blockbuster in the U.S., this showcase should Relative 15.6 -8.8 56.4 brighten NCsoft’s earnings outlook.

Share price FY Sales OP OP MarginNP EPS EBITDAFCF ROE P/E P/B EV/EBITDA 200 KOSPI (Wbn) (Wbn) (%) (Wbn) (W) (Wbn)(Wbn) (%) (x) (x) (x) 180 160 12/08 240 46 19.0 27 1,334 57 10 6.4 39.4 2.6 15.6 140 12/09 453 200 44.1 183 8,560 213 234 34.8 17.5 5.1 13.3 120 100 12/10P 515 251 48.7 174 7,985 264 192 24.2 26.1 5.7 15.0 80 12/11F 589 294 49.9 222 10,160 308 254 24.3 24.5 5.4 14.9 60 12/12F 820 460 56.1 390 17,881 475 403 32.3 13.9 3.9 8.8 40 3/10 7/10 11/10 3/11 Source: Company data, Daewoo Securities Research estimates

Please read carefully important notices at the end of this report. March 10, 2011 NCsoft

Figure 1. Unique user trend

Quarterly 4Q10 1Q11 average (Users) Aion 218,212 233,541 Lineage 157,440 165,788 300,000 Aion Lineage Lineage 2 Lineage2 75,225 91,148

250,000

200,000

150,000

100,000

50,000

0 10/10 11/10 12/10 1/11 2/11

Note: Monthly data, Source: Koreanclick, Daewoo Securities Research

Figure 2. Average concurrent user trend at internet cafes

Quarterly 4Q10 1Q11 average (Users) Aion 51,503 53,216 Lineage 10,410 10,621 60,000 Aion Lineage Lineage 2 Lineage2 10,852 11,600

45,000

30,000

15,000

0 10/10 11/10 12/10 1/11 2/11

Note: Average daily data per month, Source: Gametrics, Daewoo Securities Research

Figure 3. Time share trend at internet cafes

25% Aion Lineage 1 Lineage 2 WoW TERA

20% 17.64%

15%

11.91% 10%

5%

0% 10/10 11/10 12/10 1/11 2/11 3/11

Note: Daily data, Source: Gametrics, Daewoo Securities Research

Daewoo Securities Research 2 March 10, 2011 NCsoft

Figure 4. Trend of total time spent at internet cafes

Quarterly 4Q10 1Q11 ('000 hours) average Aion 1,232 1,272 1,600 Aion Lineage Lineage 2 Lineage 249 254 Lineage2 260 278

1,200

800

400

0 10/10 11/10 12/10 1/11 2/11

Note: Average daily data per month Source: Gametrics, Daewoo Securities Research

Table 1. Anticipated MMORPG ranking in the U.S. Game name Developer Voting 1 Guild Wars 2 ArenaNet (NCsoft) 8.70 2 Star Wars: The Old Republic BioWare 7.96 3 TERA Bluehole Studio (NHN) 7.93 4 Blade & Soul NCsoft 7.91 5 The Secret World Funcom 7.89 6 All Points Bulletin Realtime Worlds 7.87 7 Gods and Heroes: Rome Rising Heatwave Interactive 7.85 8 Infinity: The Quest for Earth Flavien Brebion 7.85 9 The Agency Sony Online 7.85 10 Firefall Red 5 Studio 7.85 Note: As of March 7, 2011, ranking of games in development Source: MMORPG.COM, Daewoo Securities Research

Table 2. Anticipated game ranking in China Game name Developer Voting 1 Blade & Soul NCsoft 52,786 2 C9 NHN 43,124 3 Dragon Ball Online Ntl-inc (Shanda) 38,026 4 星辰变 Shanda 34,847 5 九阴真经 Snail Game 33,847 6 洛奇英雄传 Nexon 33,106 7 TERA Bluehole Studio (NHN) 33,060 8 鹿鼎记 Sohu ChangYou 32,990 9 Ghost Story Online NetEase 32,745 10 佣兵天下 LineKong 32,531 Note: As of March 7, 2011 Source: 17173.COM, Daewoo Securities Research

Daewoo Securities Research 3 March 10, 2011 NCsoft

Figure 5. Screenshot of Guild Wars II

Source: ArenaNet (NCsoft), Daewoo Securities Research

Figure 6. Unveiling ofGuild Wars II at GameCom in 2010

Source: shutterstock.com, Daewoo Securities Research

Figure 7. New game release date and P/E trend

(x) Lineage 2 Tabula Rasa Aion 80 Forward P/E

Guild Wars 2 62.4 and Blade & Soul Korea Media 60 to be launched Rating Board in 2011 revised 45.1 43.4 41.9 the minimum 39.4 40 age to play Earnings 34.2 Lineage I surprise from 15 to 18 thanks to 24.5 (regulatory risk) Aion 20 22.3 20.4 17.3 18.3

7.6 6.1 0 01 02 03 04 05 06 07 08 09 10 11F

Source: Daewoo Securities Research

Daewoo Securities Research 4 March 10, 2011 NCsoft

Figure 8. Share performance and domestic institutional investorsÊ net buying trend

('000 shares) (W) 2,000 Shares held by institutional investor (L) 300,000 Share price (R)

1,000 250,000

0 200,000

Share price -1,000 of W200,000 Current position 150,000 is similar to early- December

-2,000 100,000 1/10 4/10 7/10 10/10 1/11

Source: Daewoo Securities Research

Figure 9. Share performance and foreign ownership trend

(%) (W) 40 % of shares held by foreigners (L) 300,000 Share price (R)

35 250,000

30 200,000

25 150,000

Share price of W131,500

20 100,000 1/10 4/10 7/10 10/10 1/11

Source: Daewoo Securities Research

Daewoo Securities Research 5 March 10, 2011 NCsoft

NCsoft (036570 KS/Buy/TP: W330,000)

Income Statement (Summarized) Balance Sheet (Summarized) (Wbn) 12/09 12/10P 12/11F 12/12F (Wbn) 12/09 12/10P 12/11F 12/12F Sales 453 515 589 820 Current Assets 493 688 938 1,383 Cost of Goods Sold 89 79 92 110 Cash and Cash Equivalents 18 -15 45 150 Gross Profit 363 436 498 710 Accounts Receivable 47 60 69 96 SG&A 163 185 204 250 Inventories 0 0 0 0 Operating Profit 200 251 294 460 Other Current Assets 429 643 824 1,137 Non-Operating Income 28 -26 -17 175 Non-Current Assets 287 308 318 337 Interest Income/Expense 14 22 31 45 Investment Assets 128 143 147 162 F/X-Related Gain/Loss -3 3 0 0 Property, Plant and Equipment 157 161 164 168 Equity Method Gain/Loss 17 -12 -30 148 Intangible Assets 3 5 7 8 Asset Disposal Gain/Loss -1 0 0 0 Total Assets 781 997 1,256 1,720 Other Non-Operating Profit/Loss 0 -38 -18 -18 Current Liabilities 130 134 154 214 Pretax Profit 227 225 277 487 Accounts Payable 0 0 0 0 Tax 45 51 55 97 Short-Term Debt 0 0 0 0 Profit from Continuing Operation 183 174 222 390 Current Long-Term Debt 0 0 0 0 Profit from Discontinued Operation 0 0 0 0 Other Current Liabilities 130 134 154 214 Tax Effect 0 0 0 0 Non-Current Liabilities 16 58 69 92 Net Profit 183 174 222 390 Bonds 0 0 0 0 Residual Income 183 174 222 390 Long-Term Debt 0 0 0 0 EBITDA 213 264 308 475 Other Non-Current Liabilities 16 58 69 92 Free Cash Flow 234 192 254 403 Total Liabilities 146 192 222 306 Gross Profit Margin (%) 80.2 84.7 84.4 86.6 Paid-In Capital 11 11 11 11 EBITDA Margin (%) 47.0 51.2 52.3 57.9 Capital Surplus 204 211 211 211 Operating Margin (%) 44.1 48.7 49.9 56.1 Retained Earnings 518 682 894 1,274 Net Margin (%) 40.3 33.8 37.6 47.5 Stockholders' Equity 635 804 1,016 1,396

Cash Flow (Summarized) Forecasts/Valuations (Summarized) (Wbn) 12/09 12/10P 12/11F 12/12F 12/09 12/10P 12/11F 12/12F Cash Flow from Operating Activities 246 207 269 418 P/E (x) 17.5 26.1 24.5 13.9 Net Profit 183 174 222 390 P/CF (x) 16.5 23.3 18.5 10.8 Non-Cash Income and Expense 8 31 46 17 P/B (x) 5.1 5.7 5.4 3.9 Tangible Assets Depreciation 11 11 11 12 EV/EBITDA (x) 13.3 15.0 14.9 8.8 Intangible Assets Depreciation 3 2 3 3 EPS (W) 8,560 7,985 10,160 17,881 Others -5 19 32 2 CFPS (W) 9,053 8,502 10,686 18,427 Chg in Working Capital 56 2 2 11 BPS (W) 29,112 36,652 46,288 63,671 Chg in Accounts Receivable -21 -15 -10 -29 DPS (W) 500 500 500 500 Chg in Inventories 0 0 0 0 Payout Ratio (%) 5.4 5.7 4.5 2.5 Chg in Accounts Payable 0 0 0 0 Dividend Yield (%) 0.3 0.2 0.2 0.2 Others 77 17 12 40 Sales Growth (%) 88.4 13.7 14.5 39.2 Cash Flow from Investment Activities -274 -236 -228 -327 EBITDA Growth (%) 274.0 24.0 16.9 54.1 Chg in Tangible Assets -12 -15 -15 -15 Operating Profit Growth (%) 337.8 25.7 17.3 56.4 Chg in Intangible Assets 0 -2 -4 -4 EPS Growth (%) 541.7 -6.7 27.2 76.0 Chg in Investment Assets -64 -10 -35 -15 Accounts Receivable Turnover (x) 12.0 9.6 9.1 9.9 Others -198 -209 -174 -293 Inventory Turnover (x) - - - - Cash Flow from Financing Activities 38 -4 0 14 Accounts Payable Turnover (x) - - - - Chg in Borrowings 0 1 10 23 ROA (%) 29.1 19.6 19.7 26.2 Chg in Equity 38 -5 -10 -10 ROE (%) 34.8 24.2 24.3 32.3 Dividends -9 10 -10 -10 ROIC (%) 109.9 185.0 217.7 378.1 Others 0 0 0 0 Liability to Equity Ratio (%) 23.0 23.9 21.9 21.9 Chg in Cash 10 -33 42 105 Current Ratio (%) 379.3 513.6 611.2 647.3 Beginning Cash Balance 8 18 -15 45 Net Debt to Equity Ratio (%) -67.0 -72.6 -80.5 -87.1 Ending Cash Balance 18 -15 27 150 Interest Coverage Ratio (x) - - - - Source: Company data, Daewoo Securities Research estimates

Daewoo Securities Research 6 March 10, 2011 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. 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 500,000 Trading Buy Relative performance of +10% or greater, but with volatility 400,000 Hold Relative performance of -10% and +10% 300,000 Sell Relative performance of -10% 200,000 Industry Ratings 100,000 Overweight Fundamentals are favorable or improving 0 Neutral Fundamentals are steady without any material changes 3/09 9/09 3/10 9/10 3/11 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.

Daewoo Securities International Network Daewoo Securities Co. Ltd. (Seoul) Daewoo Securities Co. Ltd. (Europe) Tel: 82-2-768-3026 Fax: 82-2-768-2863 Tel: 44-20-7982-8016 Fax: 44-20-7982-8040 Jin Song [email protected] Sean Kang [email protected] Chris Park [email protected] Daewoo Securities Inc. (Americas) Tokyo Representative Office Tel: 1-212-407-1022 Fax: 1-212-407-1010 Tel: 81-3- 3211-5511 Fax : 81-3- 3211-5544 Jean-Louis Lee [email protected] John (Sejung) Oh [email protected] Beijing Representative Office Daewoo Securities Ltd. (Hong Kong) Tel: 86-10-6567-9699 Fax: 86-10-6568-7899 Tel :85-2-2514-1304 Fax : 85-2-2514-1372 Kang-Won Choe [email protected] Stacey Park [email protected] Ho Chi Minh Representative Office Tel: 84-8-3910-6000 Fax: 84-8-3910-7716 Il-Yong Seo [email protected]

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