Ncsoft (036570 KS ) June Offers Good Entry Point

NCsoft (036570 KS ) June offers good entry point

Game Strong earnings momentum expected in 2Q19 Company Report For 2Q19, we forecast NCsoft’s revenue and operating profit to grow 21.1% and 71.6% QoQ to W434bn and W136bn, respectively. We expect Lineage revenue to surge 150% May 28, 2019 QoQ to W52bn and revenue from mobile titles, including Lineage M , to expand 22% QoQ to W243b n. Our 2Q19 mobile title revenue estimate reflects W20bn in revenue from Lineage M Japan (assuming daily average revenue of W0.7bn and no. 11-15 ranking among top-grossing games), which begins service on May 29 th . (Maintain) Buy New titles and global advance to drive si gnificant earnings growth for the next three years Target Price (12M, W) 700,000 The biggest risk to NCsoft’s stock is delays in new title releases. Titles released by the company’s domestic studios over the past two decades have had a 100% success rate. Share Price (05/27/19, W) 480,000 As such, operating profit h as grown exponentially QoQ in the first quarter of a new release, driving a strong rally by the stock. Expected Return 46% Many investors are waiting for the right entry point, but are hesitant, due to the company’s changing comments about the release schedule for Lineage 2M , which was OP (19F, Wbn) 814 pushed from 1H19 to 3Q19 and later to 2H19. What has not changed, however, is that the company will roll out several large-scale titles—including Lineage 2M , Aion 2 , and Consensus OP (19F, Wbn) 582 Blade & Soul 2 —first in Korea, and then in overseas markets, including Jap an, Taiwan, EPS Growth (19F, %) 49.5 the US, Europe, Southeast Asia, and China. Market EPS Growth (19F, %) -19.7 In the case of Lineage 2 , Aion , and Blade & Soul , overseas revenue has been either in P/E (19F, x) 16.8 line with domestic revenue or around 2.5 times higher on a cumulative basis. Market P/E (19F, x) 11.5 Expectations are growing on the overseas success of upcoming titles. Once Lineage 2M KOSPI 2,044.21 comes out in Korea during 2H19, we expect a new title/ma rket release in almost every quarter for the next three years, which could lead to exponential QoQ earnings Market Cap (Wbn) 10,531 growth. Shares Outstanding (mn) 22 Free Float (%) 81.9 June offers good entry point on six -month, one-year, and five-year Foreign Ownership (%) 50.3 investment horizons Beta (12M) 0.75 Expectations on 2Q19 earnings should begin to build up in June-July. Even if Lineage 52-Week Low 351,000 2M is launched in 4Q19, we still think the market will start to price in new title 52-Week High 526,000 momentum in 3Q19.

(%) 1M 6M 12M Microsoft is set to unveil its new cloud gaming platform at next month’s E3 2019 in Los Angeles. Apple, Microsof t, and Google will launch their cloud (streaming) gaming Absolute -4.8 -1.0 31.9 services in 2H19, while Amazon is also expected to join the race in 2020. We believe Relative 1.5 1.6 58.7 such changes in industry dynamics will fuel multiple expansions for globally competitive developers with intellectual property (content). 150 NCsoft KOSPI

130 Current estimates on NCsoft’s 2019 performance differ widely (P/E of 16.8x based on our estimate, versus 22.2x based on consensus), as views on the success and schedule 110 of new releases are highly subjective. Looking at earni ngs for 2020 (when new title

90 effects will be reflected for the full year), the stock is trading at a P/E of 14.3x based on our estimate and 13.3x based on consensus—the low end of its multiple range over the 70 past two decades. We maintain our Buy rating and target price of W700,000 on NCsoft. 5.18 9.18 1.19 5.19

Mirae Asset Daewoo Co., Ltd.

[ Internet ] FY (12) 12/16 12/17 12/18 12/19F 12/20F 12/21F Revenue (Wbn) 984 1,759 1,715 2,095 2,335 2,882 Chang -kwean Kim +822 -3774 -1614 OP (Wbn) 329 585 615 814 1,029 1,497 [email protected] OP margin (%) 33.4 33.3 35.9 38.9 44.1 51.9

NP (Wbn) 272 441 418 625 734 1,074 EPS (W) 12,416 20,104 19,061 28,503 33,450 48,938 ROE (%) 14.9 19.1 16.4 23.9 23.1 27.2

P/E (x) 19.9 22.3 24.5 16.8 14.3 9.8 P/B (x) 2.7 3.4 3.7 3.2 2.7 2.2 Dividend yield (%) 1.5 1.6 1.3 1.3 1.3 1.3 Note: All figures are based on consolidated K-IFRS; NP refers to net profit attributable to controlling interests Source: Company data, Mirae Asset Daewoo Research estimates

May 28, 2019 NCsoft

I. Growing expectations for 2Q earnings

For 2Q19, NCsoft’s revenue and operating profit are expected to improve sharply QoQ on the back of: 1) a steep increase in users following updates of Lineage and Lineage M in March; and 2) the recognition of Lineage’s M ’s Japanese revenue from May 29th onwards.

Lineage has seen peak concurrent users more than double following the Remastered update, while Lineage M peak concurrent users reached a record level after the Eclipse update in March.

According to Korean Click, Lineage M ’s unique visitors in March and April increased about 35% from the January-February average (Figure 2). As for Lineage , unique visitors in March were five times higher than the February levels and total time spent in April was four times longer than the January-March average.

For 2Q19, we forecast NCsoft’s revenue and operating profit to grow 21.1% and 71.6% QoQ to W434bn and W136bn, respectively. We expect Lineage revenue to surge 150% QoQ to W52bn and revenue from mobile titles, including Lineage M , to expand 22% QoQ to W243bn.

Our 2Q19 mobile title revenue estimate reflects W20bn in revenue from Lineage M Japan (assuming daily average revenue of W0.7bn and no. 11-15 ranking among top-grossing games), which begins service on May 29th.

Table 1. Quarterly and annual earnings (Wbn, % ) 1Q18 2Q18 3Q18 4Q18 1Q19 2Q19F 3Q19F 4Q19F 2018 2019F 2020F Sales 475 436 404 400 359 434 449 853 1,715 2,095 2,335 Lineage 28 42 40 39 21 52 49 49 150 171 158 Lineage 2 14 13 16 21 22 18 19 20 64 79 73 Aion 19 16 16 13 12 12 12 13 63 51 48 Blade & Soul 34 31 30 25 23 24 24 27 120 98 81 Guild Wars 2 24 20 21 16 16 16 16 15 80 63 61 Mobile game 264 210 216 223 199 243 263 650 913 1,354 1,612 Others 8 13 12 11 8 10 9 20 44 47 45 Royalties 84 92 52 53 57 59 56 59 282 232 257 OP 204 160 139 113 80 136 142 457 615 814 1,029 OPM 42.9 36.5 34.4 28.3 22.2 31.4 31.7 53.5 35.9 38.9 44.1 NI 119 140 94 68 75 106 115 336 422 630 740 Net margin 25.1 32.1 23.4 16.9 20.8 24.3 25.6 39.4 24.6 30.1 31.7 YoY growth Sales 98.3 68.8 -44.5 -25.0 -24.5 -0.4 11.1 113.2 -2.5 22.2 11.5 Lineage -45.1 24.5 14.0 15.7 -26.7 23.3 22.3 26.2 -3.0 14.3 -7.7 Lineage 2 -22.7 -19.9 0.0 37.0 51.5 35.8 20.5 -2.1 -2.9 23.3 -6.8 Aion 41.1 44.3 61.1 0.4 -34.3 -20.0 -24.2 5.9 35.2 -20.1 -5.0 Blade & Soul -23.9 -21.4 -20.8 -36.8 -31.3 -21.3 -21.3 9.0 -25.8 -17.8 -17.8 Guild Wars 2 66.2 46.6 4.0 -55.0 -30.9 -19.3 -22.8 -7.1 -3.2 -21.3 -3.8 Mobile game 1028.2 124.0 -60.7 -31.9 -24.7 15.7 21.4 191.7 -8.2 48.3 19.0 Others -24.8 -15.6 -6.5 2.2 4.6 -23.1 -27.4 79.5 -11.3 6.4 -3.0 Royalties 32.5 155.8 18.3 -10.3 -31.8 -35.7 9.4 10.4 38.9 -17.5 10.6 OP 569.1 324.8 -57.6 -40.2 -61.0 -14.4 2.3 303.6 5.1 32.4 26.4 NI 584.9 355.0 -65.7 -44.0 -37.3 -24.6 21.5 396.7 -5.0 49.4 17.4 Source: Company data, Mirae Asset Daewoo Research estimates

Mirae Asset Daewoo Research 2 May 28, 2019 NCsoft

Table 2. Earnings forecast revisions (Wbn, %) Previous Revised % chg. Notes 2019F 2020F 2019F 2020F 2019F 2020F Revenue 2,095 2,335 2,095 2,335 0.0 0.0 Operating profit 805 1,024 814 1,029 1.2 0.5 Net profit 624 736 630 740 1.0 0.5 OP margin 38.4 43.9 38.9 44.1 - - Net margin 29.8 31.5 30.1 31.7 - - Source: Mirae Asset Daewoo Research

Figure 1. Lineage M ’s quarterly revenue trend

(Wbn) 270 264

Assumed daily revenue at W2.5bn 240 (4Q18 level) 223 225 217 210 210 199

180

150 1Q18 2Q18 3Q18 4Q18 1Q19 2Q19(F)

Source: SensorTower, Mirae Asset Daewoo Research

Figure 2. Lineage M’s monthly unique visitors

('000 persons) 25 'Eclipse' and 'World Dungeon' update effects (35% increase over January and February) 20 20 18 16 15 15 15 13 13 13

10 10

5 18.08 18.09 18.10 18.11 18.12 19.01 19.02 19.03 19.04

Source: KoreanClick, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 3 May 28, 2019 NCsoft

Figure 3. Lineage ’s ranking (in terms of total time spent) in Korea after the Remastered update

3/22 3/29 4/5 4/12 4/19 4/26 5/3 5/10 5/17 5

7

9

11

13

15 'Lineage Remastered' released (March 27th) 17

Source: Gametrics, Mirae Asset Daewoo Research

Figure 4. Lineage ’s monthly unique visitors Figure 5. Monthly trend of total time spent on Lineage

('000 persons) ('000 minutes) 200 2500 'Lineage Remastered' released Total time spent in April was 4x (March 27th) longer than Jan.-Mar. avg. 2000 150

1500 100 1000

50 500

0 0 01/19 02/19 03/19 04/19 2019/01 2019/02 2019/03 2019/04 Source: KoreanClick, Mirae Asset Daewoo Research Source: KoreanClick, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 4 May 28, 2019 NCsoft

II. Strong earnings momentum for 2019-2021

Revenue from existing games like Lineage and Lineage M is believed to be rebounding in 2Q19, boosted by an expanded user base. This uptrend is expected to continue through 2H19.

Releasing 1Q results, NCsoft reconfirmed that Blade & Soul S and Lineage 2M will be launched as scheduled in 2H19. Of note, Lineage 2M is currently undergoing final procedures, like resolution adjustments, ahead of commercialization.

In addition, new mobile titles based on blockbuster MMORPGs, including Aion 2 and Blade & Soul 2, are also anticipated to be commercialized in Korea in 2020 .

Lineage 2M targets domestic MMORPG users who have not played Lineage M and gamers who have not played mobile MMORPGs. As NCsoft’s lineup is only limited to the single genre of MMORPGs, the company is focusing on the overseas markets in developing new titles.

Unlike Lineage , Lineage 2 (launched in 2003) has generated similar levels of cumulative revenue from the domestic and overseas markets (Figure 6). In the cases of Aion (launched in 2008) and Blade & Soul (launched in 2013), cumulative overseas revenue is higher domestic revenue (Figure 7, 8).

NCsoft announced that it would introduce three PC and console games over the next five years. After launch in Korea, Lineage 2M is expected to be released in Japan, the US, Europe, and Southeast Asia in 2020. The company is also anticipated to launch Aion 2 and Blade & Soul 2 in Japan, the US, Europe, Southeast Asia, and China (if approved) in 2021.

Table 3. NCsoft’s momentum for 2019-2021 Notes

Lineage users have doubled since the Remastered update in March (Figure 4, 5). Quarterly revenue of around W50bn is expected for 2Q-4Q19 (vs. 1Q revenue of W20bn). Existing games (after 2Q19) Lineage M update (March): Peak concurrent users reached a record level (Figure 2). Daily average revenue, which slid to W2.1bn in 1Q19 from W2.4bn in 3Q18 and W2.5bn in 4Q18, is expected to rebound to W2.5bn in 2Q19. 2H19: Blade & Soul S , Lineage 2M New tile launches 2020: Aion 2 (mobile), Blade & Soul 2 (mobile) 2020: Beta tests for The Lineage (a PC/console game) IPs with strong global potential: Lineage 2, Aion, Blade & Soul (Figure 6, 7, 8) * New titles based on the content with established global user bases: - Lineage 2 : Domestic cumulative revenue = overseas cumulative revenue Global success - Aion : Domestic cumulative revenue < overseas cumulative revenue - Blade & Soul : Domestic cumulative revenue << overseas cumulative revenue (2.5 times) Lineage 2M in 2020: Japan, the US, Europe, and Southeast Asia Aion 2 and Blade & Soul 2 in 2021: Japan, the US, Europe, Southeast Asia, and China (if approved) PC→ mobile → console → cloud NCsoft is developing three to four PC/console games, including The Lineage, which are believed to be candidates for potential Multi-platform story switch to the cloud game platform 2019 -2020: Global platform giants, namely Apple, Google, Microsoft (Sony), and Amazon, are expected to launch cloud game (streaming) game services. Source: Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 5 May 28, 2019 NCsoft

Figure 6. Lineage 2: Overseas (cumulative) revenue and breakdown by country

Lineage 2 Revenues Breakdown Lineage2 overseas revenue b/w Overseas and Korea(~2017) breakdown by region (~2017) (Wbn) (Wbn) 900 826 827 400 378 800 350 700 - For Lineage 2 , overseas revenue is equivalent to 300 domestic revenue on a cumulative basis 600

250 500 - Japan is the largest market 200 400 159 146 - Overseas revenue shows lower volatility than 300 150 domestic revenue 100 84 200 58 100 50 0 0 Overseas Korea Japan Taiwan Europe US China

Source: Company data, Mirae Asset Daewoo Research

Figure 7. Aion : Overseas (cumulative) revenue and breakdown by country

AION Revenues Breakdown AION overseas revenue b/w Overseas and Korea(~2017) breakdown by region (~2017) (Wbn) (Wbn) 1200 600 516 - For Aion , overseas revenue is slightly higher than 1013 500 domestic revenue on a cumulative basis 1000 931 - The largest market is China 400

800 - Overseas revenue trend has been in line with its 300 230 domestic counterpart 600 200 - Aion recorded 1.5mn CD sales in the US and 117 104 Europe in 2009 400 100 46

200 0 Overseas Korea China Europe Japan US Taiwan

Source: Company data, Mirae Asset Daewoo Research

Figure 8. Blade & Soul : Overseas (cumulative) revenue and breakdown by country

B&S Revenues Breakdown B&S overseas revenue b/w Overseas and Korea(~2017) breakdown by region (~2017) (Wbn) (Wbn) 1200 900 776 1024 800 700 - For Blade & Soul , overseas revenue is more than 600 double domestic revenue on a cumulative basis 800 500 438 - The largest market for the game is China 400

438 300 - Overseas revenue has always exceeded its domestic 200 counterpart 400 115 89 100 31 14 0

0 Overseas Korea

Source: Company data, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 6 May 28, 2019 NCsoft

III. Lineage M slated for Japan launch in May

Lineage M is expected to make its official Japan debut on May 29 th , following its launch in both Korea and Taiwan. For reference, Netmarble’s Lineage 2: Revolution ranked the third in gross revenue after its commercial launch in 2017. Pearl Abyss’s Black Desert Mobile , released in February 2019, took the 9 th spot in average revenue in March, with daily revenue of W1bn. For Lineage M , expectations for the Japanese market are somewhat low. Regarding our 2Q18 earnings estimates, we assumed the game’s daily average revenue in Japan at W700mn and revenue ranking in the 11 th -15 th range. Meanwhile, the number of pre- registered players for Lineage M is forecast to exceed those of Lineage 2: Revolution (1.63mn), and Black Desert Mobile (1.5mn). The relatively low expectations on Lineage M ’s Japan performance, despite the large number of pre-registration accounts, are attributable to the game’s relatively small pool of players in Japan. For reference, Lineage exhibited weaker performance in Japan than in Taiwan; meanwhile, in Japan, user data and revenue for Lineage are ten times those of Lineage 2: Revolution . Meanwhile, in light of the lukewarm expectations in Japan, we believe any increases in Lineage M ’s user and revenue data beyond expectations following its Japan release would provide a boost to NCsoft shares.

Table 4. Overseas market performances of Lineage and Lineage 2 in the past Game Country Category 2Q04 3Q04 4Q04 1Q05 2Q05 3Q05 4Q05 1Q06 No. of servers 34 36 36 36 36 36 38 39 Peak concurrent users 147907 150219 141783 155014 138623 135731 134462 157365 QoQ growth 3% 2% -6% 9% -11% -2% -1% 17% Taiwan Daily connected users 336564 296034 265839 272370 217872 208467 218101 233797 Monthly connected users 720076 652063 592341 579679 475066 428152 472156 470855 Royalties (Wmn) 5908 5519 4787 4513 3696 3185 3385 3128 Revenue/Peak concurrent users (W0,000) 39944 36740 33763 29113 26662 23466 25174 19877 No. of servers 6 6 6 6 6 6 6 6 Peak concurrent users 17064 17315 13614 16864 13498 12550 14534 12448 QoQ growth 6% 1% -21% 24% -20% -7% 16% -14% Lineage Japan Daily connected users 36104 35519 30994 28957 26524 24992 26742 20807 Monthly connected users 77438 77889 70885 86431 68182 69538 74671 76027 Royalties (Wmn) 638 723 690 683 469 440 404 361 Revenue/Peak concurrent users (W0,000) 37389 41756 50683 40500 34746 35060 27797 29001 No. of servers 11 11 11 11 11 10 10 10 Peak concurrent users 10820 10080 9853 10473 12564 14586 14149 18376 QoQ growth -5% -7% -2% 6% 20% 16% -3% 30% China Daily connected users 42194 32582 28670 30247 30389 29737 28880 37240 Monthly connected users 169697 140422 115805 123665 108388 140422 110182 152466 Royalties (Wmn) 111 86 71 63 64 72 78 77 Revenue/Peak concurrent users (W0,000) 10259 8532 7206 6015 5094 4936 5513 4190 No. of servers 8 9 9 9 10 10 10 11 Peak concurrent users 27441 33926 36200 33745 39727 35381 40088 44631 QoQ growth - 24% 7% -7% 18% -11% 13% 11% Lineage Japan Daily connected users 51298 59687 49887 52104 66019 49947 48684 54478 2 Monthly connected users 113279 82625 82409 86260 104797 102774 105097 111046 Royalties (Wmn) 135 960 960 962 1317 1475 1545 1325 Revenue/Peak concurrent users (W0,000) 4920 28297 26519 28508 33151 41689 38540 29688 Source: Company data, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 7 May 28, 2019 NCsoft

Table 5. Japan’s mobile gaming market Mobile game ranking Daily revenue Notes

1st W3bn-4bn - Japan is the world’s third largest mobile gaming market (after China and the US) nd th - The value of Japan’s mobile gaming market is estimated at W15tr, which 2 -4 W1.5bn-3bn is nearly three times that of its Korean counterpart - Role-playing games (PRG) are the mainstay genre - User loyalty is high, with relatively high percentage of paying users 5th -15 th W0.5bn-1bn

Note: Daily revenues are based on mobile market research firm Sensor Tower’s data Source: SensorTower, AppAnnie, Mirae Asset Daewoo Research estimates

Table 6. Daily revenue rankings of Japanese mobile games ) 'AppStore+PlayStore' Daily revenue Ranking App name Company Genre Daily average revenue estimate (W100mn ) 1 モンスタ ーストライク mixi Slingshot RPG US$2,695,092 31.9 2 Fate/Grand Order Aniplex Story Collective RPG US$2,374,725 28.1 ๟ׄඇ動 NetEase Battle royal US$1,532,172 18.2 3 4 パズル＆ドラゴンズ GungHo Online Entertainment Puzzle RPG US$1,243,332 14.7 プロ ׄ球 スピリッツＡ Konami Baseball US$613,445 7.3 5 6 Pokémon GO Niantic AR US$580,999 6.9 7 ⧹いͦý MOBILE Pearl Abyss Corp. MMORPG US$514,400 6.1 8 プリンセスコネクト！Re:Dive CyberAgent Character Collective RPG US$476,908 5.7 9 Șచё女 〜百花繚乱 のĿ姫たち 〜 C4 Character Collective RPG US$449,493 5.3 10 Mafia City YottaGames Strategy simulation US$441,463 5.2 11 ONE PIECE トレジャ ークル ーズ BANDAI NAMCO Entertainment Turn-type RPG US$432,335 5.1 実๖パワフルプロ ׄ球 Konami Baseball US$427,134 5.1 12 Idol group training 13 あんさんぶるスタ ーズ！ Happy Elements K.K US$403,346 4.8 simulation 14 LINE ポコポコ NAVER Corp. Puzzle US$379,299 4.5 15 Yu-Gi-Oh! Duel Links Konami Card US$345,780 4.1 Note 1: Based on estimates of SensorTower Note 2: Daily revenue of games is based on the average daily revenue in recent one month Source: Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 8 May 28, 2019 NCsoft

Table 7. Rankings of Japanese mobile games (((in terms of revenue) Ranking Game Genre

1 Monster Strike Slingshot RPG

Story 2 Fate/Grand Order Collective RPG

3 Knivesout Battle Royal

4 Puzzle and Dragon Puzzle RPG

Professional Baseball 5 Baseball Spirits A

Source: SensorTower, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 9 May 28, 2019 NCsoft

IV. New driver for the next decade: Takeoff of cloud gaming market

Cloud gaming services allow users to play games across various devices (e.g., smartphones, tablets, PCs, smart TV) anytime, anywhere, thanks to servers offered by platform (gaming services) companies.

Advances in internet technologies and improved accessibility of services have led to the takeoff of the cloud gaming market. Microsoft (xCloud), Apple (Apple Arcade), and Google (Stadia) are set to unveil their cloud gaming services in 2019, with Amazon also expected to join the race in 2020.

Meanwhile, for the cloud gaming market to expand significantly, we believe that a number of issues (e.g., lags for high-performance games, gap in internet connection rates) need to be addressed first.

First of all, revenue models have yet to be established. It remains unclear which pricing models will be introduced in the US and European gaming market, where most games are sold via downloads. In addition, with a growing number of players accessing cloud games, it should be determined who will assume the costs of the massive traffic arising from an increase in the number of players accessing cloud games. Furthermore, it is still an open question how competitive gaming content can be secured in the global market.

We expect cloud gaming to offer long-term momentum of three to five years for the gaming market. With all content, including music, videos, dramas, film, and webtoons evolving toward cloud services, we believe that the cloud gaming market will consolidate and expand the mobile, console, and PC gaming markets in the long term.

The takeoff of the cloud gaming market will likely lead to the re-rating of globally competitive developers with intellectual property on games.

Figure 9. Cloud gaming industry outlook

Mobile games > AR, VR games

- Mostly leveraging existing content (with proven track

records)

- Convenient for both gamers and developers

- Costs are borne by companies

- Compatible with existing platforms, hardware and content

⇒ Cloud is now mainstream

Source: Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 10 May 28, 2019 NCsoft

Figure 10. Global cloud gaming market outlook Figure 11. M&A activities across global gaming industry

(US$mn) 500 450 450 400 350 307 300 CAGR 250 +46% 209 200 143 150 97 100 66 50 0 2018 2019(F) 2020(F) 2021(F) 2022(F) 2023(F)

Source: Statista, Mirae Asset Daewoo Research Source: AppAnnie, Financial Times, Mirae Asset Daewoo Research

Table 8. Global status of cloud gaming Compan Supporting Product Release date No. of games Details y devices 300,000 • About 300,000 games (free and paid) are currently available in the App Store iPhone, iPad, games Apple Apple Arcade Fall 2019 • 100 games to be added after launch Mac, Apple TV available in the App Store • No ads or additional purchases; can be played offline; device shift feature available • Initial services to be offered via Google Chrome; can be accessed on all types of devices Google Stadia 2019 All devices TBD • Stadia is a platform for game players, developers, and YouTube streamers • Wi -Fi -enabled Stadia controller has been unveiled (directly connects to Google’s data center) • Game streaming service that allows users to play Xbox games via PCs, consoles, or PC, Console, More than mobile devices Microsoft Project xCloud 2019 Phone, Tablet 3,000 games • Building hardware for cloud services; preparing kits for developers and users • Aiming to conduct Azure-based tests in October • Plans to allow global game players to enjoy tens of thousands of games via Amazon Amazon TBD 2020 All devices TBD Web Services • Already offering Twitch Prime to Amazon Prime subscribers Shield TV, Shield • Released the Nvidia Shield version of GeForce Now in 2015 and the PC version in Portable, MAC 2017; currently in beta testing 2015, 2017 More than 500 Nvidia GeForceNow OS/Windows • 5G mobile service is currently undergoing internal testing; plans to offer an Android - (beta) games OS/Android based GeForce cloud gaming service through partnerships with LG Uplus and devices SoftBank PlayStation PS4, PS3, PS Vita, More than 700 • Cloud gaming service PlayStation Now available since 2015 Sony 2014 Now PS console, PC games • More than 700 game titles are available in 12 countries Verizon Shield, Android More than 135 • PC games are offered via Android-based Shield TV Verizon TBD gaming OS games • Initiated alpha testing of Verizon Gaming in January 2019 • Already conducting Project Atlas by inputting more than 1,000 employees EA Project Atlas TBD EA Server TBD • Plans to offer a streaming service via its gaming platform Origin Access • Plans to launch Tencent Instant Play via a partnership with Intel Tencent Tencent TBD PC, Android, TV TBD instant play • Aims to support a frame rate of 60FPS, a delay time of less than 40ms, and a resolution of 1080p Source: Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 11 May 28, 2019 NCsoft

V. Foreign net buying to continue

Current estimates on NCsoft’s 2019 performance differ widely (P/E of 16.8x based on our estimate, versus 22.2x based on consensus), as views on the success and schedule of Lineage 2M are highly subjective.

Looking at earnings for 2020 (when new title effects will be reflected for the full year), the stock is trading at a P/E of 14.3x based on our estimate and 13.3x based on consensus—the low end of its multiple range (15-50x) over the past two decades (Figure12). We have higher expectations on 2019F earnings than 2020F earnings.

Of note, the stock has displayed robust foreign net buying despite unstable market conditions. In the global market, gaming companies, which have the ability to build game franchises with solid intellectual property, are trading at a high P/E, whereas those without franchises are trading at a low P/E (Table 9).

Notably, leaders in the RPG genre, such as Activision Blizzard (publisher of World of Warcraft ) and Take-Two ( Grand Theft Auto and Red Dead Redemption ), are trading at a higher valuation than their peers in soccer, baseball, and shooting games, as RPG games have higher gamer loyalty, longer life cycles, and diverse revenue models (such as item sales and a monthly fixed-rate scheme).

Figure 12. NCsoft's P/E trend

Source: Bloomberg, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 12 May 28, 2019 NCsoft

Table 9. Global peer group valuation (Wbn, x, %) Sales OP NI EV/EBITDA PER PBR ROE Company MKT CAP 19F 20F 19F 20F 19F 20F 19F 20F 19F 20F 19F 20F 19F 20F Netmarble (KR) 9,699 2,384 2,714 328 475 266 355 16.4 12.2 36.2 26.7 2.1 1.9 5.9 7.3 NCsoft 10,805 1,802 2,508 582 1,007 467 767 15.4 9.2 23.0 14.0 3.9 3.2 18.6 25.1 Com2Us 1,247 507 570 153 181 134 156 3.3 2.9 9.2 8.0 1.3 1.1 14.8 15.0 NHN Entertainment 1,481 1,573 1,754 110 158 82 123 7.0 5.5 18.0 12.0 0.9 0.8 5.3 7.5 Pearl Abyss 2,548 607 732 203 285 158 224 10.6 7.9 15.9 11.2 4.3 3.1 32.5 32.6 Webzen 556 186 219 49 70 42 56 8.9 6.2 13.2 9.7 1.6 1.4 11.3 13.6 DoubleU Games 1,295 537 597 160 187 113 140 8.5 7.5 11.4 9.2 2.0 1.6 19.8 20.1 WeMade 674 132 155 -1 8 2 13 483.0 43.6 1067.4 56.0 2.4 2.4 0.5 5.2 Activision Blizzard (US) 39,157 7,603 8,470 2,488 2,925 1,989 2,371 13.6 11.5 19.7 16.6 2.7 2.4 12.9 14.1 Electronic Arts 33,492 6,160 6,522 1,919 2,144 1,616 1,786 13.4 12.2 20.8 18.5 4.6 4.0 22.7 22.4 Take Two Interactive 13,974 3,197 3,417 690 782 592 669 16.2 14.5 23.9 21.5 4.4 3.8 19.4 16.1 Zynga 6,919 1,755 1,967 287 354 204 280 20.6 16.6 30.7 24.4 3.4 3.0 11.7 14.4 Glumobile 1,459 538 626 67 111 68 101 20.3 13.9 22.2 16.8 5.5 4.4 26.5 30.7 Ubisoft (FR) 10,713 3,020 3,222 641 734 501 611 8.3 7.6 23.9 20.3 7.0 5.6 30.0 30.1 Nintendo (JP) 54,790 14,408 14,523 3,617 4,033 2,633 2,968 11.3 10.5 19.1 16.9 2.9 2.7 16.2 16.0 Nexon 16,088 2,907 3,177 1,163 1,314 976 1,035 9.2 8.1 16.3 15.4 2.3 2.0 14.8 13.7 Square Enix 4,773 2,989 3,125 370 412 259 282 7.4 6.9 17.9 16.7 1.9 1.8 11.1 11.3 DeNA 3,398 1,313 1,327 130 156 103 118 8.9 7.8 31.3 26.8 1.2 1.1 4.0 4.4 Gungho Online 3,498 1,280 1,145 384 331 245 210 7.1 8.8 11.3 13.2 2.8 2.4 23.7 17.4 GREE 1,303 784 807 58 60 45 42 5.8 4.9 29.6 30.6 1.0 1.0 3.4 3.7 Tencent (CH) 476,219 68,397 86,481 21,147 24,934 16,191 20,448 21.2 17.3 29.8 23.9 6.5 5.2 24.5 24.1 NetEase 39,753 14,021 16,510 1,765 2,011 1,666 1,959 16.0 13.6 23.1 19.6 4.1 3.6 16.1 16.4 Kingsoft 3,846 1,457 1,875 74 116 139 187 15.7 11.3 27.3 19.9 1.6 1.5 5.1 6.2 Youzu Interactive 2,749 787 929 214 263 212 258 11.5 9.5 12.8 10.5 2.8 2.3 21.3 21.6 Changyou 1,137 553 565 147 150 131 123 3.4 3.1 8.6 9.2 1.5 1.4 17.0 17.1 Source: Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 13 May 28, 2019 NCsoft

NCsoft (036570 KS/Buy/TP: W700,000)

Comprehensive Income Statement (Summarized) Statement of Financial Condition (Summarized) (Wbn) 12/18 12/19F 12/20F 12/21F (Wbn) 12/18 12/19F 12/20F 12/21F Revenue 1,715 2,095 2,335 2,882 Current Assets 1,576 2,034 2,720 3,808 Cost of Sales 0 0 0 0 Cash and Cash Equivalents 186 545 1,169 2,116 Gross Profit 1,715 2,095 2,335 2,882 AR & Other Receivables 152 186 208 257 SG&A Expenses 1,100 1,281 1,306 1,385 Inventories 1 1 1 2 Operating Profit (Adj) 615 814 1,029 1,497 Other Current Assets 1,237 1,302 1,342 1,433 Operating Profit 615 814 1,029 1,497 Non-Current Assets 1,365 1,353 1,339 1,338 Non-Operating Profit 22 63 43 71 Investments in Associates 56 69 77 95 Net Financial Income 26 30 42 59 Property, Plant and Equipment 234 211 191 174 Net Gain from Inv in Associates -2 0 0 0 Intangible Assets 54 52 50 48 Pretax Profit 637 877 1,072 1,568 Total Assets 2,941 3,387 4,059 5,147 Income Tax 216 247 332 486 Current Liabilities 473 394 438 539 Profit from Continuing Operations 421 630 740 1,082 AP & Other Payables 27 33 37 45 Profit from Discontinued Operations 0 0 0 0 Short-Term Financial Liabilities 155 5 5 5 Net Profit 421 630 740 1,082 Other Current Liabilities 291 356 396 489 Controlling Interests 418 625 734 1,074 Non-Current Liabilities 89 109 121 150 Non-Controlling Interests 3 5 6 8 Long-Term Financial Liabilities 0 0 0 0 Total Comprehensive Profit 80 630 740 1,082 Other Non-Current Liabilities 89 109 121 150 Controlling Interests 77 605 710 1,039 Total Liabilities 562 503 560 689 Non-Controlling Interests 3 25 30 43 Controlling Interests 2,368 2,869 3,478 4,427 EBITDA 643 839 1,051 1,516 Capital Stock 11 11 11 11 FCF (Free Cash Flow) 326 699 790 1,165 Capital Surplus 433 433 433 433 EBITDA Margin (%) 37.5 40.0 45.0 52.6 Retained Earnings 2,164 2,665 3,274 4,223 Operating Profit Margin (%) 35.9 38.9 44.1 51.9 Non-Controlling Interests 11 16 22 30 Net Profit Margin (%) 24.4 29.8 31.4 37.3 Stockholders' Equity 2,379 2,885 3,500 4,457

Cash Flows (Summarized) Forecasts/Valuations (Summarized) (Wbn) 12/18 12/19F 12/20F 12/21F 12/18 12/19F 12/20F 12/21F Cash Flows from Op Activities 353 699 790 1,165 P/E (x) 24.5 16.8 14.3 9.8 Net Profit 421 630 740 1,082 P/CF (x) 15.6 12.2 10.1 6.9 Non-Cash Income and Expense 233 230 300 434 P/B (x) 3.7 3.2 2.7 2.2 Depreciation 26 23 20 18 EV/EBITDA (x) 14.0 10.5 7.7 4.7 Amortization 2 2 2 2 EPS (W) 19,061 28,503 33,450 48,938 Others 205 205 278 414 CFPS (W) 29,813 39,195 47,368 69,119 Chg in Working Capital -56 44 28 64 BPS (W) 127,548 150,373 178,144 221,404 Chg in AR & Other Receivables 45 -33 -21 -47 DPS (W) 6,050 6,050 6,050 6,050 Chg in Inventories 0 0 0 0 Payout ratio (%) 29.6 19.8 16.8 11.5 Chg in AP & Other Payables -1 0 0 1 Dividend Yield (%) 1.3 1.3 1.3 1.3 Income Tax Paid -281 -247 -332 -486 Revenue Growth (%) -2.5 22.2 11.5 23.4 Cash Flows from Inv Activities 68 -53 -33 -76 EBITDA Growth (%) 4.6 30.5 25.3 44.2 Chg in PP&E -26 0 0 0 Operating Profit Growth (%) 5.1 32.4 26.4 45.5 Chg in Intangible Assets -4 0 0 0 EPS Growth (%) -5.2 49.5 17.4 46.3 Chg in Financial Assets 2,422 -53 -33 -76 Accounts Receivable Turnover (x) 10.0 12.7 12.2 12.8 Others -2,324 0 0 0 Inventory Turnover (x) 2,260.8 1,878.5 1,800.7 1,887.1 Cash Flows from Fin Activities -424 -275 -125 -125 Accounts Payable Turnover (x) 0.0 0.0 0.0 0.0 Chg in Financial Liabilities 5 -150 0 0 ROA (%) 13.0 19.9 19.9 23.5 Chg in Equity 0 0 0 0 ROE (%) 16.4 23.9 23.1 27.2 Dividends Paid -155 -125 -125 -125 ROIC (%) 279.0 338.3 537.3 1,201.7 Others -274 0 0 0 Liability to Equity Ratio (%) 23.6 17.4 16.0 15.5 Increase (Decrease) in Cash -2 359 624 947 Current Ratio (%) 333.2 516.9 620.9 705.9 Beginning Balance 187 186 545 1,169 Net Debt to Equity Ratio (%) -51.1 -61.6 -69.5 -77.5 Ending Balance 186 545 1,169 2,115 Interest Coverage Ratio (x) 184.7 465.5 9,301.0 13,527.3 Source: Company data, Mirae Asset Daewoo Research estimates

Mirae Asset Daewoo Research 14 May 28, 2019 NCsoft

APPENDIX 1

Important Disclosures & Disclaimers 2-Year Rating and Target Price History

Company (Code) Date Rating Target Price (W) NCsoft NCsoft (036570) 11/26/2018 Buy 700,000 800,000 08/27/2018 No Coverage 05/10/2018 Buy 500,000 600,000 04/16/2018 Buy 600,000 09/26/2017 Buy 640,000 400,000 07/09/2017 Buy 600,000 200,000 05/01/2017 Buy 500,000

0 May 17 May 18 May 19

Stock Ratings Industry Ratings Buy : Relative performance of 20% or greater Overweight : Fundamentals are favorable or improving Trading Buy : Relative performance of 10% or greater, but with volatility Neutral : Fundamentals are steady without any material changes Hold : Relative performance of -10% and 10% Underweight : Fundamentals are unfavorable or worsening Sell : Relative performance of -10% 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 Mirae Asset Daewoo Co., Ltd., we may call a trading opportunity in case there is a technical or short-term material development. * The target price was determined by the research analyst through valuation methods discussed in this report, in part based on the analyst’s estimate of future earnings. * The achievement of the target price may be impeded by risks related to the subject securities and companies, as well as general market and economic conditions.

Equity Ratings Distribution & Investment Banking Services Buy Trading Buy Hold Sell Equity Ratings Distribution 83.52% 8.24% 8.24% 0.00% Investment Banking Services 82.61% 4.35% 13.04% 0.00% * Based on recommendations in the last 12-months (as of March 31, 2019)

Disclosures As of the publication date, Mirae Asset Daewoo Co., Ltd. has acted as a liquidity provider for equity-linked warrants backed by shares of NCsoft as an underlying asset; other than this, Mirae Asset Daewoo 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 Daewoo Co., Ltd. (“Mirae Asset Daewoo”) 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 Daewoo, 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 division. 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 Daewoo except as otherwise stated herein.

Disclaimers This report was prepared by Mirae Asset Daewoo, a broker-dealer registered in the Republic of Korea and a member of the Korea Exchange. Information and opinions contained herein have been compiled in good faith and from sources believed to be reliable, but such information has not been independently verified and Mirae Asset Daewoo makes no guarantee, representation or warranty, express or implied, as to the fairness, accuracy, completeness or correctness of the information and opinions contained herein or of any translation into English from the Korean language. In case of an English translation of a report prepared in the Korean language, the original Korean language report may have been made available to investors in advance of this report. The intended recipients of this report are sophisticated institutional investors who have substantial knowledge of the local business environment, its common practices, laws and accounting principles and no person whose receipt or use of this report would violate any laws or regulations or subject Mirae Asset Daewoo or any of its affiliates to registration or licensing requirements in any jurisdiction shall receive or make any use hereof. This report is for general information purposes only and it is not and shall not be construed as an offer or a solicitation of an offer to effect transactions in any securities or other financial instruments. The report does not constitute investment advice to any person and such person shall not be treated as a client of Mirae Asset Daewoo by virtue of receiving this report. This report does not take into account the particular investment objectives, financial

Mirae Asset Daewoo Research 15 May 28, 2019 NCsoft

situations, or needs of individual clients. The report is not to be relied upon in substitution for the exercise of independent judgment. Information and opinions contained herein are as of the date hereof and are subject to change without notice. The price and value of the investments referred to in this report and the income from them may depreciate or appreciate, and investors may incur losses on investments. Past performance is not a guide to future performance. Future returns are not guaranteed, and a loss of original capital may occur. Mirae Asset Daewoo, its affiliates and their directors, officers, employees and agents do not accept any liability for any loss arising out of the use hereof. Mirae Asset Daewoo may have issued other reports that are inconsistent with, and reach different conclusions from, the opinions presented in this report. The reports may reflect different assumptions, views and analytical methods of the analysts who prepared them. Mirae Asset Daewoo may make investment decisions that are inconsistent with the opinions and views expressed in this research report. Mirae Asset Daewoo, its affiliates and their directors, officers, employees and agents may have long or short positions in any of the subject securities at any time and may make a purchase or sale, or offer to make a purchase or sale, of any such securities or other financial instruments from time to time in the open market or otherwise, in each case either as principals or agents. Mirae Asset Daewoo and its affiliates may have had, or may be expecting to enter into, business relationships with the subject companies to provide investment banking, market-making or other financial services as are permitted under applicable laws and regulations. No part of this document may be copied or reproduced in any manner or form or redistributed or published, in whole or in part, without the prior written consent of Mirae Asset Daewoo.

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Mirae Asset Daewoo Research 16 May 28, 2019 NCsoft

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