NCsoft (036570 KS) Korea – Equity Research Aion soared in popularity and sales charts after open-beta Internet Buy Maintain previous estimates and target price 10 Sep 2009 The potentiality of AionÊs success in US and Europe was realized through the close-beta Bloomberg: 036570 KS testing in August and the open-beta testing in September, as 1) the number of unique hits Target Price (12M, W): 280,000 for Aion in MMORPG.com has soared since early this week, 2) AionÊs ranking in PC game Share Price (09/09/09, W): 153,000 sales charts in Amazon Europe (Germany, France) has risen to 1st or 2nd, 3) the Expected Return (%): 83.0 Steelbook Edition (same price as Standard Edition), which had ranked poorly, rose to 3rd Sector: Internet Software and Services in PC games sales chart at Amazon.com. Sector Rating: Overweight EPS Growth (09F, %): 594.6 We maintain our previous estimates for Aion box sales of 520,000 in 3Q and a total of Market EPS Growth (09F, %): 52.4 1mn by 1Q10. Our 2009 and 2010 forecast EPS, respectively. We maintain our Buy call P/E (X): 16.5 and 12-month target price of W280,000. Market P/E (09/09/09F, X): 14.7 NCsoft announced that they received preorders for 300,000 Aion boxes prior to open-beta Market Cap (Wbn): 3,318 testing in US and Europe on September 6. The breakdown of box sales by region was Shares Outstanding (mn): 22 55:45 (US:Europe), payment from customers was 30:70 (pre-tail:pre-sale) and distribution Avg Trading Volume (60D, '000): 593 platform was 70:30 (offline stores:online stores). US and Europe are different from Korea Avg Trading Value (60D, Wbn): 85 in that online game products are also distributed through offline stores. Margin Balance ('000 sh): 446 Dividend Yield (09F, %): .7 NCsoft West, the 100% owned subsidiary of NCsoft, distributes Aion in US and Europe. Free Float (%): 64.0 All Aion boxes include a coupon for a free 30-day subscription. Based on the selling price 52-Week Low/High: 24,400/193,000 of $49.99, NCsoft West reflects box sales as follows: net revenue per box of US$25 after Beta (12M, Daily Rate of Return): 0.9 subtracting US$10 for sales commission and US$15 for the 30-day subscription coupon. The 30-day subscription coupon is reflected according to the actual number of days Price Return Volatility (12M Daily, %,SD): 4.4 played by the gamers. As such, revenue per box is calculated as [boxes sold * $25 * Foreign Ownership (%): 17.3 ($15*(n/30)]. Major Shareholder(s): T. J. Kim et al (26.54%) According to the above calculation method, Aion is expected to generate sales of Mirae Asset Mgt. et al (13.01%) W19.5bn in 3Q in US and Europe, and W5.9bn in royalty income (30%) for NCsoft Treasury stock (9.41%) (parent). We assumed that Aion box sales will be 260,000 in 4Q09 and 210,000 in 1Q10 in US and Europe, and forecast royalty income for NCsoft to be W14.2bn in 4Q09 and Price Performance W16.9bn in 1Q10 from US and Europe. (%) 1M 6M 12M Absolute 11.3 99.2 232.2 Relative 9.3 49.2 221.7 FY Sales OP OP Margin NP EPS EBITDAFCF ROE P/E P/B EV/EBITDA Share price (Wbn) (Wbn) (%) (Wbn) (W) (Wbn) (Wbn) (%) (x) (x) (x) 420 KOSPI 12/07 223 47 21.1 45 2,205 56 19 10.4 22.2 2.3 13.3 320 12/08 240 46 19.0 27 1,334 57 10 6.4 39.4 2.6 15.6 220 12/09F 479 236 49.2 201 9,266 250 203 38.3 16.5 5.2 11.6 120 12/10F 574 305 53.2 290 13,379 321 230 37.7 11.4 3.7 8.3 20 12/11F 675 388 57.5 393 18,124 405 298 36.0 8.4 2.6 5.7 9/08 1/09 5/09 9/09 Source: Company data, Daewoo Securities Research estimates Chang Kwean Kim +822-768-4321 [email protected] Jee-Hyun Moon +822-768-3615 [email protected] Please carefully read important notices in the last pages of this report. NCsoft Aion ranked 1st or 2nd in Amazon Europe sites In PC games sales charts in Europe, Aion ranked 2nd in Amazon UK, 1st in Amazon Canada, 1st in Amazon Germany and 2nd in Amazon France as of September 9. We especially note AionÊs rise to the No.1 rank in Germany, a hot spot in the online game market. Figure 1. Aion ranked 2nd in Amazon UK Figure 2. Aion ranked 1st in Amazon Canada Note: based on 3pm Sep. 9 in Seoul, Source: amazon.co.uk Note: based on 3pm Sep. 9 in Seoul, Source: amazon.co.ca Figure 3. Aion ranked 1st in Amazon Germany Figure 4. Aion ranked 2nd in Amazon France Note: based on 3pm Sep. 9 in Seoul, Source: amazon.de Note: based on 3pm Sep. 9 in Seoul, Source: amazon.fr 2 NCsoft Surge in hits for Aion is positive The number of unique hits for Aion soared after open-beta testing started on September 6. This is a good sign as the historical sales trend of offline stores, correlates highly with the popularity ranking of game portals such as MMORPG.com. The number of weekly unique hits for Aion increased by about 30% compared to last week. And the number of monthly unique hits for Aion was 3 times that of WoW, which is ranked 2nd in the chart. Figure 5. Weekly unique hits for Aion at MMORPG.com Figure 6. Monthly unique hits for Aion at MMORPG.com ('000) ('000) 200 weekly 800 monthly Aug 17 150 CBT ended 600 100 400 Sep 6 OBT Started 50 200 0 0 Aug 14 Aug 21 Aug 28 Sep 4 Sep 11 Sep 18 Sep 25 Aug 14 Aug 21 Aug 28 Sep 4 Sep 11 Sep 18 Sep 25 Source: mmorpg.com, Daewoo Securities Research Source: mmorpg.com, Daewoo Securities Research Figure 7. Semi-annual unique hits for Aion at MMORPG.com Figure 8. Annual unique hits for Aion at MMORPG.com ('000) ('000) 2,000 semi-annually 2,500 annually 1,750 2,250 1,500 2,000 1,250 1,750 1,000 1,500 Aug 14 Aug 21 Aug 28 Sep 4 Sep 11 Sep 18 Sep 25 Aug 14 Aug 21 Aug 28 Sep 4 Sep 11 Sep 18 Sep 25 Source: mmorpg.com, Daewoo Securities Research Source: mmorpg.com, Daewoo Securities Research 3 NCsoft Table 1. Top 10 unique hits at MMORPG.com (unique hits) Rank In a week In a month In 6 months In a year 1 Aion 123,870 Aion 454,243 Aion 1,455,699 Warhammer Online 2,460,371 2 Champions Online 43,860 World of Warcraft 167,491 Warhammer Online 790,092 Aion 2,028,214 3 World of Warcraft 32,737 Champions Online 150,804 Star Wars: The Old Republic 691,316 Darkfall 1,612,469 4 Dungeons & Dragons Online 25,842 Warhammer Online 116,987 World of Warcraft 652,216 World of Warcraft 1,285,250 5 Alganon 25,547 Star Wars: The Old Republic 107,353 Age of Conan 617,117 Age of Conan 1,231,536 6 Warhammer Online 25,533 EVE Online 96,856 Darkfall 616,466 Lord of the Rings Online 1,193,449 7 Darkfall 25,265 Darkfall 92,204 Atlantica Online 530,265 Atlantica Online 1,120,472 8 Age of Conan 22,675 Atlantica Online 90,057 EVE Online 528,991 EVE Online 1,016,847 9 Star Wars: The Old Republic 22,315 Age of Conan 88,331 Lord of the Rings Online 525,081 Star Wars: The Old Republic 1,013,395 10 EVE Online 21,823 City of Heroes 85,021 The Chronicles of Spellborn 450,564 The Chronicles of Spellborn 916,816 Note: Based on September 8, 2009, the ranking is calculated by the popularity, number of unique hit, the characteristic of site is in Table 6. Source: mmorpg.com, Daewoo Securities Research Table 2. Aion CollectorÊs Edition and Standard Edition Aion Collector's Edition Aion Standard Edition Price $59.99 ($69.99 as a box in offline-store) $49.99 Package includes a 30-day subscription (37 days if purchased online) Aion Collector's Edition Bonus Items: Sprint Ring, Stat-Boosting Hat, and XP Tailsman (available when game goes live): Contents Black Cloud Earring (gives an HP and MP boost) Package includes a 30-day subscription Special character title ("Pioneer of Aion") with stat boost Color dye to tint one in-game item Two character emotes (Disco and Samba Emotes) Source: Company Data, Daewoo Securities Research Table 3. Top 10 weekly sales of PC games Steam Direct2Drive 1. Champions Online / Cryptic Studios 1. Champions Online / Cryptic 2. Aion Collector's Edition (pre-order) / NCsoft 2. Aion Collector's Edition (Pre-Order) / NCsoft 3. Street Fighter® IV / Valve 3. Fallen Earth (Pre-Order) 4. Left 4 Dead / Valve 4. Section 8 / TimeGate 5. Counter-Strike: Source / Valve 5. Civilization 4: The Complete Edition / Firaxis 6. THQ Collector Pack / THQ 6. Aion (Pre-Order) / NCsoft 7. Section 8 / Timegate 7. Rise of Flight /neoqb 8. Team Fortress 2 / Valve 8. Fallout 3 / Bethesda Softworks 9. Killing Floor / Tripwire Interactive 9. Dawn of Discovery 10. The Orange Box / Valve 10. F.E.A.R. 2 Project Origin / Warner Bros.