[Korea] Games May 21, 2021

Netmarble Buy (251270 KS ) (Maintain)

Upcoming title likely to be a hit i n Japan TP: W170,000 Upside: 25.0%

Mirae Asset Securities Co., Ltd. Chang-kwean Kim [email protected]

1Q review Disappointing results ó For 1Q21, Netmarble posted revenue of W570.4bn (+7% YoY) and operating profit of W54.2bn (+165% YoY). ó Despite the robust YoY growth, the results were below our expectations and the consensus , with revenue and operating profit slipping 9% and 34% QoQ, respectively. ó The disappointing performance was due to an absence of new title releases and a 58% drop in daily revenue from Seven Knights 2 (down from W1.7bn in 4Q20; released in Nov. 2020). ó Meanwhile, costs remained well managed, with operating expenses decreasing 5% QoQ to W516.2bn.

Ni no Kuni : Cross Worlds slated Ni no Kuni: Cross Worlds expected to find success in Japan for Jun. 10 release ó This year’s most anticipated new title is Ni no Kuni: Cross Worlds , developed by Netmarble Neo , the maker of Lineage 2: Revolution . The game will be released in Korea, Japan, Taiwan, Hong Kong, etc. on Jun. 10. ó Ni no Kuni: Cross Worlds is widely anticipated to fare well in Japan, as the mobile RPG game is based on intellectual property that is popular in the country. Indeed, previous Ni no Kuni titles, which were produced by Level-5 (Japanese game developer) and Studio Ghibli (Japanese animation production company), recorded cumulative sales of 2.8mn copies. ó Titles scheduled for release in 2H21: Marvel Future Revolution (global), Seven Nights Revolution (Korea and Japan), BTS Dream (global), and Merge Kuya Island (global)

Investment r ecommendation Maintain Buy and TP of W170,000 ó We lowered our operating profit estimates by 7% and 11%, respectively, reflecting the weaker- than-expected 1Q21 results and new title release schedule. ó KakaoBank, in which Netmarble has a 3.74% stake, is scheduled to go public in Jul.-Aug., while NCsoft (8.9% stake) is looking to release Blade & Soul 2 in 2Q21 (following the May 20 launch of Trickster M ). ó Netmarble has released a steady stream of new titles and at least one hit title every year. In our view, the company deserves a premium based on its stable content development capabilities.

Key data

Current price (5/20/21, W) 136,000 Market cap (Wbn) 11,690 230 Netmarble KOSPI OP (21F, Wbn) 377 Shares outstanding (mn) 86 180 Consensus OP (21F, Wbn) 339 Free float (%) 31.1 EPS growth (21F, %) 1.7 Foreign ownership (%) 23.7 130 P/E (21F, x) 36.7 Beta (12M) 0.86

80 Market P/E (21F, x) 11.9 52-week low (W) 92,300 5.20 9.20 1.21 5.21 KOSPI 3,162.28 52-week high (W) 197,500

Share performance Earnings and valuation metrics (%) 1M 6M 12M (Dec.) 2018 2019 2020 2021F 2022F 2023F Absolute -7.8 4.2 42.3 Revenue (Wbn) 2,021 2,179 2,485 2,783 3,174 3,620 Relative -6.1 -15.8 -10.5 OP (Wbn) 242 203 272 377 453 535

OP margin (%) 12.0 9.3 10.9 13.5 14.3 14.8 NP (Wbn) 190 156 313 319 367 424 EPS (W) 2,226 1,823 3,647 3,711 4,272 4,935 ROE (%) 4.4 3.5 6.3 5.8 6.3 6.9 P/E (x) 50.1 50.7 36.1 36.7 31.8 27.6 P/B (x) 2.1 1.6 1.9 1.9 1.8 1.7 Div. yield (%) 0.0 0.0 0.6 0.6 0.6 0.6 Notes: Under consolidated K-IFRS; NP is attributable to owners of the parent Source: Company data, Mirae Asset Securities Research estimat es Analysts who prepared this report are registered as research analysts in Korea but not in any other jurisdiction, including t he US. PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES AND DISCLAIMERS IN APPENDIX 1 AT THE END OF REPORT. May 21, 2021 Netmarble

Table 1. Quarterly and annual earnings (Wbn, %) 1Q20 2Q20 3Q20 4Q20 1Q21 2Q21F 3Q21F 4Q21F 2019 2020 2021F Revenue 533 686 642 624 570 672 716 824 2,179 2,485 2,783 Domestic 155 171 164 204 168 171 203 204 726 694 746 Overseas 378 514 479 420 402 501 514 621 1,453 1,791 2,037 Mobile games 510 663 619 601 547 649 693 801 2,084 2,393 2,691 MMORPG 133 171 148 193 171 215 223 288 585 646 897 RPG 197 281 257 206 194 228 258 272 811 941 952 Casual 144 171 161 150 148 168 179 206 550 626 701 Other 35 39 54 52 34 38 33 36 138 180 141 Online games 8 8 7 7 7 6 6 6 37 30 24 Other 15 15 16 16 16 17 17 17 57 62 67 OP 20 82 87 83 54 91 102 131 203 272 377 OP margin 3.8 11.9 13.6 13.2 9.5 13.5 14.2 15.8 9.3 10.9 13.5 NP 58 85 93 103 62 60 103 120 170 339 344 Net margin 10.8 12.4 14.4 16.6 10.9 8.9 14.4 14.5 7.8 13.6 12.4 YoY growth Revenue 11.6 30.3 3.6 12.4 7.0 -2.0 11.5 32.1 7.8 14.0 12.0 Domestic -18.2 -8.5 -16.7 33.4 8.3 0.0 24.0 0.0 19.4 -4.4 7.5 Overseas 31.2 51.7 13.1 4.5 6.5 -2.7 7.3 47.7 2.8 23.3 13.7 Mobile games 12.3 31.9 3.8 13.0 7.4 -2.1 12.0 33.4 8.4 14.8 12.5 MMORPG -12.8 35.7 -11.7 39.4 28.4 25.4 51.0 48.7 -1.4 10.3 38.9 RPG 37.6 30.3 9.1 -4.9 -1.6 -18.7 0.4 32.1 26.5 16.0 1.2 Casual 15.9 35.7 -0.4 7.9 3.1 -2.0 11.5 37.6 0.2 13.7 12.1 Other 6.0 12.9 67.3 37.6 -3.7 -2.8 -38.2 -31.5 -1.1 30.7 -21.9 OP -39.8 146.1 3.6 61.4 165.7 10.9 16.4 58.2 -16.2 34.3 38.6 NP 35.9 124.2 9.2 2052.1 7.7 -29.5 11.2 15.7 -21.0 99.4 1.7 Sou rce: Mirae Asset Securities Research estimates

Table 2. Earnings forecast revisions (Wbn, %) Previous Revised % chg. Notes 2021F 2022F 2021F 2022F 2021F 2022F Revenue 3,018 3,253 2,783 3,174 -7.8 -2.4 OP 405 512 377 453 -6.9 -11.5 NP 391 459 344 367 -12.0 -20.0 OP margin 13.4 15.7 13.5 14.3 - - Net margin 13.0 14.1 12.4 11.6 - - Source: Mirae Asset Securities Research estimates

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Netmarble (251270 KS)

Income statement (summarized) Balance sheet (summarized) (Wbn) 2020 2021F 2022F 2023F (Wbn) 2020 2021F 2022F 2023F Revenue 2,485 2,783 3,174 3,620 Current assets 1,821 1,877 1,975 2,319 Cost of revenue 0 0 0 0 Cash & equivalents 1,257 1,258 1,269 1,515 GP 2,485 2,783 3,174 3,620 AR & other receivables 210 223 254 290 SG&A expenses 2,213 2,406 2,721 3,085 Inventory 5 5 6 7 OP (adj.) 272 377 453 535 Other current assets 349 391 446 507 OP 272 377 453 535 Non-current assets 6,403 6,783 7,238 7,539 Non-operating profit 203 132 96 116 Investments in associates 2,148 2,406 2,744 3,130 Net financial income -7 -21 -22 -22 PP&E 423 424 424 400 Net income from associates 192 -40 -40 0 Intangible assets 1,292 1,412 1,528 1,464 Pretax profit 475 509 549 651 Total assets 8,223 8,660 9,213 9,858 Income tax 137 165 153 193 Current liabilities 1,634 1,719 1,847 1,993 Profit from continuing operations 338 344 397 458 AP & other payables 114 128 146 167 Profit from discontinued operations 0 0 0 0 Short-term financial liabilities 1,234 1,272 1,337 1,411 NP 338 344 397 458 Other current liabilities 286 319 364 415 Attributable to owners 313 319 367 424 Non-current liabilities 939 1,009 1,100 1,203 Attributable to minority interests 25 26 29 34 Long-term financial liabilities 361 361 361 361 Total comprehensive income 1,105 344 397 458 Other non-current liabilities 578 648 739 842 Attributable to owners 1,084 338 389 449 Total liabilities 2,573 2,728 2,947 3,197 Attributable to minority interests 21 7 8 9 Equity attributable to owners 5,407 5,663 5,967 6,328 EBITDA 384 496 577 622 Capital stock 9 9 9 9 FCF 162 556 628 668 Capital surplus 3,887 3,887 3,887 3,887 EBITDA margin (%) 15.5 17.8 18.2 17.2 Retained earnings 1,226 1,482 1,787 2,148 OP margin (%) 10.9 13.5 14.3 14.8 Minority interests 244 269 299 333 Net margin (%) 12.6 11.5 11.6 11.7 Shareholders' equity 5,651 5,932 6,266 6,661

Cash flow statement (summarized) Key valuation metrics/ratios (Wbn) 2020 2021F 2022F 2023F 2020 2021F 2022F 2023F Operating cash flow 372 596 668 668 P/E (x) 36.1 36.7 31.8 27.6 NP 338 344 397 458 P/CF (x) 26.7 17.2 16.1 15.6 Non-cash income/expenses 85 334 329 291 P/B (x) 1.9 1.9 1.8 1.7 Depreciation 39 40 40 23 EV/EBITDA (x) 30.3 24.3 20.9 19.1 Amortization 73 79 85 63 EPS (W) 3,647 3,711 4,272 4,935 Other -27 215 204 205 CFPS (W) 4,928 7,900 8,438 8,722 Chg. in working capital -27 93 107 123 BPS (W) 67,709 70,604 74,144 78,349 Chg. in AR & other receivables -110 -22 -29 -33 DPS (W) 767 767 767 767 Chg. in inventory 0 -1 -1 -1 Dividend payout ratio (%) 18.6 18.2 15.8 13.7 Chg. in AP & other payables 21 8 11 13 Dividend yield (%) 0.6 0.6 0.6 0.6 Income tax -29 -165 -153 -193 Revenue growth (%) 14.0 12.0 14.0 14.1 Cash flow from investing activities -1,529 -272 -282 -48 EBITDA growth (%) 19.6 29.2 16.3 7.8 Chg. in PP&E -210 -40 -40 0 OP growth (%) 34.0 38.6 20.2 18.1 Chg. in intangible assets -27 -200 -200 0 EPS growth (%) 100.1 1.8 15.1 15.5 Chg. in financial assets 497 -32 -42 -48 AR turnover (x) 15.1 14.4 14.6 14.6 Other -1,789 0 0 0 Inventory turnover (x) - - - - Cash flow from financing activities 867 -25 2 12 AP turnover (x) 0.0 0.0 0.0 0.0 Chg. in financial liabilities 989 38 65 74 ROA (%) 4.8 4.1 4.4 4.8 Chg. in equity 6 0 0 0 ROE (%) 6.3 5.8 6.3 6.9 Dividends 0 -63 -63 -63 ROIC (%) 11.6 18.4 22.4 25.8 Other -128 0 0 1 Debt-to-equity ratio (%) 45.5 46.0 47.0 48.0 Chg. in cash -317 1 11 246 Current ratio (%) 111.5 109.2 106.9 116.4 Beginning balance 1,575 1,257 1,258 1,269 Net debt-to-equity ratio (%) 1.4 1.4 1.6 -1.8 Ending balance 1,257 1,258 1,269 1,515 Interest coverage ratio (x) 11.8 11.1 12.9 14.7 Source: Company data, Mirae Asset Securities Research estimates

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Appendix 1

Important disclosures and disclaimers Two-year rating and TP history

Company Date Rating TP (W) (W) Netmarble Netmarble (251270) 11/12/20 Buy 170,000 250,000 08/13/20 Buy 180,000 200,000 05/14/20 Buy 130,000 02/13/20 Buy 115,000 150,000 07/02/19 Buy 127,000 100,000 02/13/19 Buy 149,000 50,000

0 May 19 May 20 May 21

Stock ratings Sector ratings Buy Expected 12-month performance: +20% or greater Overweight Expected to outperform the market over 12 months Trading Buy Expected 12-month performance: +10% to +20% Neutral Expected to perform in line with the market over 12 months Hold Expected 12-month performance: -10% to +10% Underweight Expected to underperform the market over 12 months Sell Expected 12-month performance: -10% or worse

Rating and TP history: Share price (─), TP (▬), Not Rated ( ■), Buy (▲), Trading Buy (■), Hold (●), Sell (◆) * Our investment rating is a guide to the expected return of the stock over the next 12 months. * Outside of the official ratings of Mirae Asset Securities Co., Ltd., analysts may call trading opportunities should technical or short-term material developments arise. * The TP was determined by the research analyst through valuation methods discussed in this report, in part based on estimates of future earnings. * TP achievement may be impeded by risks related to the subject securities and companies, as well as general market and economic conditions.

Ratings distribution and investment banking services Buy Trading Buy Hold Sell Ratings distribution 79.00% 13.00% 7.00% 1.00% Investment banking services 63.16% 31.58% 5.26% 0.00% * Based on recommendations in the last 12-months (as of March 31, 2021)

Disclosures As of the publication date, Mirae Asset Securities Co., Ltd. has acted as a liquidity provider for equity-linked warrants backed by shares of Netmarble as an underlying asset; other than this, Mirae Asset Securities has no other special interests in the covered companies.

Analyst certification The research analysts who prepared this report (the “Analysts”) are registered with the Korea Financial Investment Association and are subject to Korean securities regulations. They are neither registered as research analysts in any other jurisdiction nor subject to the laws or regulations thereof. Each Analyst responsible for the preparation of this report certifies that (i) all views expressed in this report accurately reflect the personal views of the Analyst about any and all of the issuers and securities named in this report and (ii) no part of the compensation of the Analyst was, is, or will be directly or indirectly related to the specific recommendations or views contained in this report. Mirae Asset Securities Co., Ltd. (“Mirae Asset Securities”) policy prohibits its Analysts and members of their households from owning securities of any company in the Analyst’s area of coverage, and the Analysts do not serve as an officer, director, or advisory board member of the subject companies. Except as otherwise specified herein, the Analysts have not received any compensation or any other benefits from the subject companies in the past 12 months and have not been promised the same in connection with this report. Like all employees of Mirae Asset Securities, the Analysts receive compensation that is determined by overall firm profitability, which includes revenues from, among other business units, the institutional equities, investment banking, proprietary trading, and private client divisions. At the time of publication of this report, the Analysts do not know or have reason to know of any actual, material conflict of interest of the Analyst or Mirae Asset Securities except as otherwise stated herein.

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