NCSOFT (036570 KS /Buy ) Lineage M: Ready for launch Game NCsoft revealed official release date (June 21 st ) and key features of new mobile game Lineage M The game will seek to balance mobile-specific features with the advantages of the PC Issue Comment game Lineage May 17, 2017 Maintain Buy and TP of W500,000; expectations are running high for Lineage M st Mirae Asset Daewoo Co., Ltd. NCsoft’s much-anticipated mobile title Lineage M to come out June 21 [Internet/Game/Advertising ] NCsoft confirmed June 21 st as the official release date for its new mobile game, Lineage th M. The company launched a pre-character creation event at midnight on May 16 for Jee -hyun Moon four million of the game’s pre-registered users; a total of 100 servers of 10 different +822 -3774 -1640 types have been set up. We think yesterday’s Lineage M showcase revealed huge market [email protected] interest, as well as the company’s confidence in the game. NCsoft emphasized the game’s extensive content and incorporation of many of the successful features of the PC version, while also highlighting mobile-specific features, like convenience. Overall, we believe the showcase shed light on the game’s longevity and steady revenue potential. Figure 1. NCsoft’s shares have gained sharply recently on expectations for Lineage M (Max=100) (W'000) 100 "Lineage M" search index (L) 400 "Lineage Red Knights" search index (L) 80 "Lineage 2: Revolution" search index (L) 360 NCsoft stock price (R) 60 320 40 280 20 240 0 200 5/16 7/16 9/16 11/16 1/17 3/17 5/17 Source: NAVER Data Lab, Thomson Reuters, Mirae Asset Daewoo Research Table 1. Timeline of Lineage M rollout (W) NCsoft ’s Date Details share price Apr. 12 Pre-registration begins; 1mn reached in just eight hours 337,500 Apr. 14 Pre-registration exceeds 2mn 357,500 Apr. 27 Pre-registration exceeds 3mn 355,000 Pr e-registration exceed s 4mn , the highest for any mobile game (Netmarble May 14 359,000 Games’ record was 3.4 mn ) Pre -character generation begins , with option to choose from 100 servers of 10 May 16 358,500 different types; Lineage M Tal k app released Jun. 21 Official launch Source: Company data, media reports, Mirae Asset Daewoo Research FY (Dec.) 12/14 12/15 12/16 12/17F 12/18F 12/19F Revenue (Wbn) 839 838 984 1,580 1,784 1,857 OP (Wbn) 278 237 329 516 666 711 OP margin (%) 33.1 28.3 33.4 32.7 37.3 38.3 NP (Wbn) 230 165 272 390 504 539 EPS (W) 10,486 7,542 12,416 17,800 23,005 24,559 ROE (%) 18.4 10.6 14.9 19.1 21.1 19.2 P/E (x) 17.4 28.2 19.9 20.1 15.6 14.6 P/B (x) 2.7 2.6 2.7 3.3 2.9 2.5 Dividend yield (%) 1.9 1.3 1.5 1.4 1.5 1.7 Note: All figures are based on consolidated K-IFRS; NP refers to profit attributable to controlling interests Source: Company data, Mirae Asset Daewoo Research estimates May 17, 2017 NCSOFT Lineage M to take a page from Lineage playbook Lineage M is the mobile version of NCsoft’s long-running PC game Lineage , which remains the company’s largest revenue contributor. Some of the key features of the PC version will be incorporated in the mobile title. 1) Like the PC version, Lineage M will feature an open field and player versus player (PVP) combat, letting users go anywhere and play against friends and opponents. This should facilitate the creation of communities, such as blood pledges. 2) The mobile game will follow a free-market economy system, allowing player-to-player trades and running an integrated exchange platform. We think Lineage owes much of its nearly two-decade-long success to its free-market economy system. By bringing this concept to Lineage M , we think NCsoft is trying to make the mobile version into another established title with comparable staying power. Loot boxes, like the “Dragon’s Treasure Chests” featured in Lineage , will also be available in the mobile title. 3) Lineage M will not come with mobile-specific enchanting systems. NCsoft said that it believes the enchantments offered by recent mobile MMORPGs were overly complicated, making it hard for players to move up levels. All items will be obtainable on the field. 4) The mobile game will follow the so-called “sandbox” game style, giving gamers considerable freedom to make choices and set goals. In contrast, most mobile MMORPGs typically hew more closely to the “theme park” game style, where gamers are guided along a specific path set by the developer and must complete assigned quests (e.g., killing monsters). While the latter gameplay approach may make games more accessible initially, it tends to lack creativity and can grow tedious. Emphasizing that games should be fun and not homework, NCsoft said it would give gamers more freedom regarding the growth of their characters by letting them set their own goals. Figure 2. Open field for players Source: Company data, Mirae Asset Daewoo Research Figure 3. Adoption of free-market economy system Source: Company data, Mirae Asset Daewoo Research Mirae Asset Daewoo Research 2 May 17, 2017 NCSOFT Mobile-specific features will also be added Lineage M will, of course, come with several mobile-specific features: 1) The mobile game will be free to download with microtransactions, and auto-play features and tutorials will be available. By comparison, Lineage is based on a monthly subscription model and offers mostly manual gameplay. 2) Players will also have greater ability to select targets, through functions such as “Arc Selector” (which allows the player to designate multiple monsters or adversaries simultaneously) and the exposure of targets chosen by party leaders. 3) The mobile game will have a more advanced PVP “revenge” system, offering a “teleport” function that allows players to look up their previous opponents on a “PvP book” for rematch. This is likely to drive PVP combat and fuel purchases of virtual goods. 4) The mobile game will come with enhanced communication features. Since the small screens of mobile devices make it difficult to exchange texts during gameplay, users instead will be able to voice chat with other members of their blood pledges. A separate communication app, named “M Talk”, will also be released. 5) The routes through which items can be acquired will differ from those of the PC game. The most-prized item in Lineage , “Jin Myung Hwang's Conduct Sword,” was obtainable through synthesis. But in the mobile version, the item can be won through rewards from battles between blood pledges. Figure 4. Advanced “revenge” system Source: Company data, Mirae Asset Daewoo Research Figure 5. “Lineage M Talk” communication app to be introduced Source: Company data, Mirae Asset Daewoo Research Mirae Asset Daewoo Research 3 Mirae Asset Daewoo Research May 17, 2017 NCSOFT Key issue: Potential impact of and response to age rating The launch of Lineage M is just one month away. Below are the highlights of the Q&A session: Age ratings issue: The Game Rating and Administration Committee (GRAC) has recently been taking a tougher stance on age regulations for mobile games. The committee revised the rating for Netmarble Games’ Lineage II: Revolution to adult-only just five months after its release, arguing that trading items with goods that can be acquired through real currencies could incite gambling among teenagers. Currently, item transaction sites in Korea are classified as media harmful to youth. If Lineage M is also designated as adult-only, it would not only block access for younger players, but also limit access for Apple iOS users. Currently, the highest age rating on Apple’s App Store is 17+, meaning adult-only games cannot be registered on the store. This has the potential to become a real issue for NCsoft, which also plans to adopt an item trading system for Lineage M . The company said that it was still mulling possible responses to an unfavorable rating and will make a formal announcement soon. That said, we note that Lineage II: Revolution , currently one of the most popular mobile MMORPGs, has so far seen only a negligible percentage of teenage gamers since its launch in December 2016. We think Lineage M ’’s user group will also be primarily adults. In addition, it should be noted that Google’s Android has a much larger mobile share than iOS in Korea. Figure 6. NCsoft aims at 12+ rating for Lineage M Figure 7. Item transaction system could affect age rating Source: Company data, Mirae Asset Daewoo Research Source: Company data, Mirae Asset Daewoo Research Figure 9. Positive long -term growth potential of Lineage IP Figure 8. Lineage II: Revolution mostly played by adults revenue (%) 100 50-69 35-49 80 19-34 7-18 60 40 20 0 12/16 1/17 2/17 3/17 4/17 Note: Monthly total usage time in Android App by age Note: The presentation shown above was about Lineage ’s annual revenue trend Source: KoreanClick, Mirae Asset Daewoo Research Source: Company data, Mirae Asset Daewoo Research Mirae Asset Daewoo Research 4 May 17, 2017 NCSOFT Other key Q&A highlights Plans for overseas launch: NCsoft intends to roll out Lineage M in Taiwan and Japan, but will first focus on the game’s domestic release. Strategy for Lineage (PC game): The 1Q17 decline in Lineage revenue has raised worries over potential cannibalization.