NCSOFT (036570) the Upcoming Commercialization of Tabula Oftabula the Upcomingcommercialization to Related Expenses Marketing Wars

Home , Guild Wars, Lineage (series), Lineage II, NCSoft

DWS COMPANY REPORT EQUITY RESEARCH Internet KOREA -EQUI 9 May 2007 Source: Companydata,Daewoo Securities Forecasts/Valuations Forecasts/Valuations NCSOFT (036570) the upcoming commercialization of Tabula ofTabula the upcomingcommercialization to related expenses Marketing Wars. Guild of sales the in decline possible and seasonality to due decline should profit operating and sales However, 2Q07. in earnings solid posting Momentum fornewgame launchshould pick up thanks in 1Q07 performance strong recorded end. It is ofitsgamedeve expenses astheusefullife alsoworth year and Thanksgiving Korean of payment the notingmarketingexpenses aswere there that nonew gamelaborcosts following launches2) in1Q, NCsoft’s 1) in: decline the including reductions, cost to thanks 1Q07 in improved Profitability overseas subsidiaries prof (operating our expectations and W12.0bn) W market consensus(salesof in the W14. of profit and net qoq), (+18.4% W13.6bn U.S. andNCsoft postednon-consolidatedsalesof Europe 2Q07 E E Please carefully read important notices 20F3218. 2. ,6 896. 941. . 10.1 12.0 2.0 12.9 15.8 2.4 11.4 2.6 13.5 4.0 19.4 19.9 28.6 23.2 6,166 18.963.6 12/09F 342.1 87.8 5,185 72.846.2 9.4 125.7 3,001 18.7 12/08F 304.8 76.2 105.7 61.2 1,867 48.7 227.2 12/07F -43.5 30.8 3,305 -14.3 -21.6 227.538.1 51.8 12/06 66.7 72.0 232.8 12/05 FY XPECTATION OF Momentum From Upcoming From Momentum NCsoft posted sales of W57.5bn (-0.4% qoq), operating profit of W13.6bn (+18.4% (+18.4% ofW13.6bn profit operating qoq), (-0.4% ofW57.5bn postedsales NCsoft We reiterate Buy with a six-month target price of W84,000. W84,000. of price target a six-month with Buy reiterate We are alsoprojected earnings 2Q07 NCsoft’s Tabula Rasa are slated for 3Q07. Rasaare slated for3Q07. Tabula of commercialization and pack, expansion Wars’ Guild of release the Aion, for testing generated from new games. TabulaRasa will consensus and our expectations. Profitability improved due to cost reductions. reductions. cost to due improved Profitability expectations. our and consensus (-24.3% ofW14.1bn and netprofit qoq), ARNINGS (Wbn) (Wbn) Sales Sales TY RESEARCH

N (Wbn) (Wbn) EW EW OP OP G AMES TO BE (Wbn) NP 57.7bn, operating profit of W12.7bn, and net profit of netprofitof ofW12.7bn,and profit 57.7bn, operating EPS (W) (W) F ACTORED INTO THE in the last pages of thisreport. pages inthe last aaaeas xetdt nrae toincrease. also expected are Rasa lopment equipment and servers are nearing an an are nearing andservers equipment lopment yoy yoy (%) (%) t h opn’ ul asSre. Series. Wars Guild tothecompany’s 072. 362. . 19.5 3.0 23.3 13.6 29.2 60.7 W57.5bn (-0.4% qoq), operating profit of of profit qoq),operating W57.5bn (-0.4% 1bn (-24.3% qoq) in 1Q07, beating both the boththe beating 1Q07, qoq) in 1bn (-24.3% -end bonuses in 4Q06, and 3) depreciation 3)depreciation and bonusesin4Q06, -end to 1.b n e rfto 1.b) of W13.3bn). andnetprofit it ofW13.4bn qoq) in 1Q07,beatingqoq) in boththemarket to be strong, thanks tothe thanks momentum to bestrong, begin beta testing on May 1, while onMay1, begin beta testing beta (Wbn) as NCsoft is anticipated to continue anticipated is NCsoft as tocontinue New Games Starting Starting Games New FCF S ROE (%) HARE P RICE BASED ON ON BASED RICE P/E (x)

P/B (x) EV/EBITDA S OLID OLID (x)

KOSPI Relative performanceChart Par Value: W500 W500 Par Value: W70,000 (08/05/07): Price Share (6M):W84,000 price Target 036570.KS Reuters: KS 036570 Bloomberg: [email protected] +822-768-4321 Kim Chang Kwean Price PerformancePrice Blue Ridge Ltd.Partnership (9.52%) T.J. Kim (27.39%) Shareholder(s): Major Dividend Yield (2006): 0.0% 41.2% Ownership: Foreign Avg Value (60D): US$8.3mn/W7.7bn Avg Volume (60D): 132,177 shr Shares Issued:20.4 mn shr Mkt US$1,545.6mn/W1,428.3bn Cap: KOSPI: 1,582.7p 52-W Lo/Hi: W41,100/72,000 eaie29-. -0.5 8.5 -1.6 13.1 2.9 Relative 9.5 Absolute (%) 100 110 120 Buy 60 70 80 90 /680 20 4/07 12/06 8/06 4/06 KOSPI Share price 1M 6M 12M

9 May 2007 NCsoft

Table 1. Quarterly Earnings Forecasts (Wbn) 1Q06 2Q06 3Q06 4Q06 1Q07P 2Q07F 3Q07F 4Q07F 1Q08F 2Q08F 3Q08F 4Q08F

Sales 57.4 55.5 56.9 57.7 57.5 56.8 56.9 56.0 72.5 73.2 74.2 75.4

Lineage I 28.3 26.8 26.9 27.5 28.8 27.0 25.4 24.1 23.4 22.3 20.7 19.7

Lineage II 20.7 20.2 21.7 21.2 21.0 21.9 22.8 23.0 23.4 23.9 25.0 25.8

New games 1.2 0.2 0.1 0.1 1.1 0.1 1.1 1.0 18.3 18.1 19.1 20.0

Overseas 8.1 8.3 8.2 8.9 7.5 7.8 7.6 7.9 8.3 8.8 9.3 9.9

Sales breakdown (%)

Lineage I 49.3 48.3 47.3 47.7 50.2 47.6 44.7 43.0 32.3 30.5 27.9 26.1

Lineage II 36.1 36.3 38.1 36.8 36.6 38.5 40.1 41.0 32.3 32.7 33.8 34.2

New games 2.2 0.4 0.1 0.2 1.9 0.2 1.9 1.8 25.2 24.8 25.7 26.5

Overseas 14.2 15.0 14.5 15.4 13.0 13.7 13.3 14.1 11.5 12.0 12.6 13.1

Growth (% qoq)

Sales -1.0 -3.3 2.5 1.4 -0.4 -1.1 0.2 -1.5 29.3 1.1 1.3 1.7

Lineage I 2.0 -5.2 0.2 2.4 4.7 -6.3 -5.9 -5.2 -2.8 -4.7 -7.2 -4.9

Lineage II -0.5 -2.7 7.5 -2.1 -0.8 4.0 4.3 0.7 1.8 2.3 4.6 2.9

New games 730.2 -83.6 -63.1 16.0 1,179.3 -89.0 782.4 -5.6 1,692.2 -0.7 5.0 5.0

Overseas -12.3 2.4 -1.0 7.5 -15.5 4.0 -2.8 4.6 5.2 5.7 5.9 6.1

Operating profit 13.6 12.5 14.4 11.5 13.6 11.2 12.8 11.1 23.8 23.7 24.3 24.4

Operating margin (%) 23.6 22.5 25.2 19.9 23.6 19.8 22.4 19.9 32.9 32.3 32.7 32.4

% qoq -2.0 -8.1 15.1 -20.2 18.4 -17.2 13.8 -12.9 114.4 -0.7 2.5 0.6

Recurring profit 8.9 3.0 16.4 19.0 18.3 13.1 19.3 24.2 37.1 37.0 37.6 37.7

Recurring margin (%) 15.5 5.4 28.9 32.9 31.9 23.0 34.0 43.2 51.2 50.5 50.6 50.0

% qoq -60.9 -66.3 447.7 15.6 -3.5 -28.7 48.1 25.3 53.2 -0.5 1.6 0.4

Net profit 6.8 -0.2 12.8 18.6 14.1 10.7 15.8 20.6 30.3 30.2 30.7 30.8

Net margin (%) 11.9 -0.4 22.5 32.3 24.6 18.8 27.8 36.9 41.9 41.3 41.4 40.9

% qoq -67.0 TR TB 45.7 -24.3 -24.4 48.1 30.6 47.0 -0.5 1.6 0.4

Source: Company Data, Daewoo Securities

TABULA RASA, GUILD WARS, AND AION TO BE COMMERCIALIZED IN 2H07

Momentum has been picking up since April, thanks to the upcoming release of Tabula Rasa, Aion, and Guild Wars’ expansion pack in 2Q07 and 3Q07. Tabula Rasa is a MMOFPS being developed by the Garriot Brothers at the U.S. studio since May 2001. Development costs amounted to a whopping W70bn. More than 10,000 players are waiting to beta test Tabula Rasa, which has been in testing by 2,000 players in the U.S. and Europe since May 1. NCsoft’s share price has recently rallied thanks to the positive reviews received at the U.S. Game Developers Conference in May. The game is scheduled to be commercialized in the U.S. and Europe in 3Q07.

Beta testing of Aion in Korea, which should be one of NCsoft’s most prominent games since the 2003 launch of Lineage 2, is slated for the summer vacation season with the commercial roll-out planned for 4Q07.

Guild Wars’ expansion pack called the “Eye of the North” is scheduled for release in 3Q07. Guild Wars generated sales of W11.5bn in the U.S. and Europe during 1Q07, and W18.3bn in 4Q06, when the second expansion pack was released.

We reiterate Buy on NCsoft with a six-month target price of W84,000.

9 May 2007 NCsoft

Chart 1. Game product lineup of NCsoft

1H07F 2H07F

F/F Test Closed Beta Aion

Korea Account integration Ver 2.0 Service Platforms Establish Portfolio for Casual Games

Exteel (Partial commercialization) Tabula Rasa

North America/ Europe Dungeon Runners (CD Sales) Guild Wars (Final Version)

China Guild Wars

Source: Company Data, Daewoo Securities, Korea Click

Chart 2. NCsoft’s Stock Price and Net Visitors to Lineage 2 (W) Share price (L) ('000 people)

120,000 Net v isitors (R) 600

100,000 500

80,000 400

60,000 300 Commercialization 40,000 Open beta 200

20,000 100 2nd closed beta 1st close beta 0 0 4/02 10/02 4/03 10/03 4/04 10/04 4/05 10/05 4/06 10/06 4/07

Source: Daewoo Securities

IMPORTANT NOTICES Equity Research for International Investors (ERII)

As of May 9, 2007, Daewoo Securities Co., Ltd and/or its affiliates do not have any special interest with the subject company and do not own 1% or more of the subject company's shares outstanding.

This report is a translation excerpt of the 'NCsoft' report written by Chang Kwean Kim for research division of Daewoo Securities Co., Ltd publicly released on May 9, 2007.

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 (Chang Kwean Kim) without any external influences by third parties

Ratings Distribution Investment ratings Target return

Buy Relative performance of +10% or greater

Trading Buy Relative performance of +10% or greater, but with variability/volatility

Hold Relative performance of -5% and +5%

Sell Relative performance of -10%

Note: 1) Our investment rating is a guide to the relative return of the stock versus the market over the next six months. 2) Although it is not part of the official ratings at ERII, we may call a trading opportunity in case there is a technical or short-term material development. Source: Daewoo Securities

Analyst Industry Ratings of ERII, Daewoo Securities Overweight Industry fundamentals are favorable or improving Market-weight Industry fundamentals are steady without any material changes

Underweight Industry fundamentals are unfavorable or worsening

Ratings and Target Price History Share price (----), Target price (----), Not covered (░), Buy (▲), Trading Buy (■), Hold (●), Sell (◆)

(W) NCsof t [Buy /TP W84,000] 120,000

100,000

80,000

60,000

40,000

20,000

0 5/05 8/05 11/05 2/06 5/06 8/06 10/06 1/07 4/07

IMPORTANT NOTICES Equity Research for International Investors (ERII)

Daewoo Securities Co., Ltd. may have managed or co-managed a public offering of securities for the subject company, or received compensation for investment banking services from the subject company in the past 12 months.

This report has been provided by the ERII (Equity Research for International Investors) department of Daewoo Securities Co., Ltd. Daewoo Securities ERII is run independently of the research division of Daewoo Securities Co., Ltd. The stock ratings, target prices, estimates and overall viewpoints of ERII may differ from the research division of Daewoo Securities. This report must be viewed as Daewoo Securities ERII's independent opinion and must not be interpreted by any means as an official viewpoint of the research division of Daewoo Securities Co., Ltd. Daewoo Securities ERII was established to service international institutional investors although the reports are released publicly. Investors can access Daewoo Securities ERII's research through Firstcall, Daewoo research direct (www.bestez.com), Multex and Bloomberg (DWIR).

Daewoo Securities Co., Ltd. is a full-service, integrated investment banking, and brokerage firm. We are a leading underwriter of securities and leading participant in virtually all trading markets. We have investment banking and other business relationships with a substantial percentage of the companies covered by the research division of Daewoo Securities and Daewoo Securities ERII. Our research professionals provide important input into our investment banking and other business selection process. Investors should assume that Daewoo Securities Co., Ltd. are seeking or will seek investment banking or other business from the subject companies covered by this report and that the research analysts who involved in preparing this report may participate in the solicitation of such business. Our research analysts’ compensation is determined based upon the activities and services intended to benefit the investors of Daewoo Securities Co., Ltd. Like all employees of Daewoo Securities Co., Ltd., analysts receive compensation that is impacted by overall firm profitability, which includes revenues from, among other business units, the intuitional equities, investment banking, proprietary trading, and private client division.

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.

This document is for distribution in the United Kingdom only to persons who are authorized persons or exempted persons within the meaning of the Financial Services Act 1986 or any order made thereunder.

Daewoo’s U.S. affiliate, Daewoo Securities (America) Inc., distributes this document in the U.S. solely for “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 who wishes to effect transactions in any securities discussed herein should contact and place orders with Daewoo Securities (America) Inc.

DAEWOO SECURITIES INTERNATIONAL NETWORK

DAEWOO SECURITIES CO., LTD 150-716, 34-3, Youido-dong, Yongdungpo-ku, Seoul, Korea Tel : (822) 768-4143 Fax : (822) 768-2126 Contact: Alfred Park [email protected]

Daewoo Securities (Europe) Ltd. Daewoo Securities (America) Inc.

41st floor, Tower 42, 25 Old Broad Street, 600 Lexington Avenue, Suite 301New York, London EC2N 1HQ, U.K. NY 10022 U.S.A. Tel : 4420-7982-8000 Fax : 4420-7982-8040 Tel : 1212-407-1000 Fax : 1212-407-1010 Contact: Sean Kang [email protected] Contact: Jean-Louis Lee [email protected]

Daewoo Securities (Hong Kong) Ltd. Tokyo Representative Office

Suite 816-819, Jardine House, Rm. 701 Build X, 2-1-11 Nihonbashikayaba-Cho, 1 Connaught Place, Central, H.K., China Chuo-Ku, Tokyo, Japan Tel : 852-2845-6332 Fax : 852-2845-5374 Tel : 813-5642-6070 Fax : 813-5642-6228 Contact: H. J. Ahn [email protected] Contact: John Sejung Oh [email protected]