NCsoft (036570 KS) Long-awaited mobile games strategy to be unveiled Game Solid earnings expected in 3Q-4Q In 3Q, we believe royalty income from Blade & Soul China declined QoQ, as the title’s Company Update user indicators have failed to pick up even after its official launch in August. November 4, 2014 Lineage I revenue likely recovered QoQ, boosted by a microtransaction event. Marketing expenses likely fell compared to 2Q, when the company spent heavily on several new releases (WildStar and Blade & Soul Japan ). (Maintain) Buy For 3Q, we forecast revenue and operating profit to come in at W207.3bn (+22% YoY) Target Price (12M, W) 220,000 and W67.1bn (+118% YoY), respectively. We expect revenue to continue to grow in 4Q, supported by multiple microtransaction events for Lineage . Share Price (11/03/14, W) 147,000 New titles & mobile games strategy to be unveiled at G-Star 2014 Expected Return 50% NCsoft will have a significant presence at the annual game trade show, G-Star, which is set to begin in Busan on November 20 th . The company will also hold a premiere event in Seoul two days before the show’s opening. OP (14F, Wbn) 248 Consensus OP (14F, Wbn) 251 At G-Star 2014, NCsoft is expected to build anticipation for upcoming releases , including Master X Master (MXM) and Lineage Eternal , and provide a clearer picture on its mobile EPS Growth (14F, %) 49.8 games strategy. Market EPS Growth (14F, %) 3.7 P/E (14F, x) 13.5 We see two possible strategies for mobile games. The company could go multi-platform, Market P/E (14F, x) 12.5 releasing both mobile and PC versions of blockbuster games (MXM and Lineage Eternal ), KOSPI 1,952.97 or it could debut a separate lineup for middle-core and hardcore mobile games on which Market Cap (Wbn) 3,224 the firm’s 200 mobile game developers have been working. Given NCsoft’s expertise in Shares Outstanding (mn) 22 high-resolution MMORPG, we have high hopes that new, high-quality mobile games will Free Float (%) 75.9 be unveiled. Foreign Ownership (%) 38.4 Maintain Buy and TP of W220,000 Beta (12M) 0.46 52-Week Low 123,500 NCsoft shares sold off this year, after initially high expectations for Blade & Soul China 52-Week High 248,500 were displaced by disappointment. (%)(%)(%) 1M1M1M 6M6M6M 12M12M12M We believe the company’s asset holdings , which include W750bn in cash, W300bn in Absolute 17.6 -27.6 -30.0 treasury stock, and W600bn in property, will provide some downside support to shares. Relative 19.0 -27.3 -26.9 NCsoft’s robust assets, combined with a consistently stable cash flow and a potential increase in dividend payout, could shed renewed light on the company’s underlying 130 NCsoft KOSPI value. We maintain Buy on NCsoft with a target price of W220,000. 110 90 70 50 10.13 2.14 6.14 10.14 Daewoo Securities CCo.,o., Ltd. FY (Dec.) 12/11 12/12 12/13 12/14F 12/15F 12/16F Revenue (Wbn) 609 754 757 817 906 1,049 [Internet/Game/Entertainment] OP (Wbn) 136 151 205 248 289 326 Chang-kwean Kim OP margin (%) 22.3 20.0 27.1 30.4 31.9 31.1 +822-768-4321 NP (Wbn) 121 156 159 238 256 288 [email protected] EPS (W) 5,529 7,120 7,245 10,851 11,696 13,144 Jeong-yeob Park ROE (%) 14.6 16.8 14.8 19.0 17.2 16.5 +822-768-4124 P/E (x) 55.6 21.1 34.3 13.5 12.6 11.2 [email protected] P/B (x) 7.0 3.0 4.4 2.2 1.9 1.6 Notes: All figures are based on consolidated K-IFRS; NP refers to net profit attributable to controlling interests Source: Company data, KDB Daewoo Securities Research estimates Analysts who prepared this report are registered as research analysts in Korea but not in any other jurisdiction, including t he U.S. PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES & DISCLAIMERS IN APPENDIX 1 AT THE END OF REPORT. November 4, 2014 NCsoft Table 111.1. Quarterly and annual earnings (Wbn, %) 1Q131Q131Q13 2Q132Q132Q13 3Q133Q133Q13 4Q134Q134Q13 1Q141Q141Q14 2Q142Q142Q14 3Q14F 4Q14F 201220122012 201320132013 2014F2014F2014F Revenue 185 192 170 210 178 214 207 218 754 757 817 Lineage I 66 85 62 75 41 57 67 77 205 288 242 Lineage II 14 14 13 16 12 14 14 15 65 57 54 Aion 28 23 23 22 22 18 19 19 141 96 79 Blade & Soul 17 14 20 18 19 19 20 19 62 69 78 Guild Wars 2 36 29 24 34 25 22 22 34 165 123 103 WildStar - - - - - 28 15 9 - - 52 Royalties 11 13 10 32 45 38 27 26 64 66 136 Other 13 14 17 14 14 18 23 19 51 58 74 Revenue breakdown Lineage I 35.7 44.2 36.7 35.6 23.0 26.6 32.3 35.3 27.2 38.0 29.6 Lineage II 7.7 7.4 7.7 7.4 6.5 6.3 6.5 7.1 8.6 7.6 6.6 Aion 15.3 12.1 13.3 10.3 12.5 8.6 9.2 8.7 18.8 12.7 9.6 Blade & Soul 8.9 7.4 12.0 8.5 10.8 8.9 9.7 8.8 8.2 9.1 9.5 Guild Wars 2 19.7 15.1 14.4 16.0 14.1 10.4 10.7 15.4 21.9 16.3 12.6 WildStar - - - - - 13.1 7.2 4.0 - - 6.3 Royalties 5.8 6.8 5.8 15.4 25.0 17.6 13.2 12.2 8.5 8.7 16.6 Other 6.9 7.1 10.1 6.8 8.1 8.4 11.1 8.6 6.7 7.6 9.1 Operating profit 56 62 31 57 45 65 67 72 151 205 248 OP margin 30.0 32.4 18.1 27.0 25.0 30.4 32.4 33.0 20.1 27.1 30.4 Net profit 52 34 26 46 37 53 72 77 154 159 238 Net margin 28.3 17.8 15.5 21.8 20.5 24.8 34.7 35.2 20.4 21.0 29.1 YoYYoYYoY growth Revenue 31.0 30.8 -6.8 -25.9 -3.6 11.4 22.1 3.6 23.8 0.4 7.9 Lineage I 51.3 45.1 62.7 15.2 -37.9 -32.9 7.3 2.7 4.9 40.3 -16.1 Lineage II -22.8 -15.5 -1.8 -5.4 -18.5 -5.1 4.0 -1.0 -35.3 -12.2 -5.2 Aion -46.6 -36.0 -16.1 -13.7 -21.4 -21.1 -15.3 -12.9 -36.7 -32.2 -18.0 Blade & Soul - - -37.8 -33.5 16.5 35.2 -1.3 6.9 - 10.8 12.6 Guild Wars 2 - - -46.6 -71.8 -30.9 -23.1 -9.3 0.0 - -25.2 -16.4 Royalties -29.5 -23.9 -34.0 92.1 314.9 188.4 177.8 -18.1 13.3 2.9 106.2 Operating profit 348.4 -660.3 -16.5 -49.9 -19.8 4.3 118.3 26.6 12.3 35.7 21.0 Net profit 321.7 -537.4 -44.2 -55.2 -30.1 54.8 173.1 67.5 28.3 3.2 50.0 QoQQoQQoQ growth Revenue -34.8 3.9 -11.6 23.7 -15.2 20.0 -3.1 5.0 Lineage I 1.8 28.4 -26.5 20.0 -45.1 38.7 17.6 14.8 Lineage II -13.6 0.6 -8.7 19.2 -25.5 17.1 0.0 13.5 Aion 12.9 -17.8 -2.8 -4.4 2.8 -17.4 4.4 -1.7 Blade & Soul -38.7 -14.3 43.5 -11.9 7.5 -0.5 4.7 -4.6 Guild Wars 2 -69.4 -20.6 -15.3 37.1 -25.1 -11.6 0.0 51.0 Royalties -36.2 21.3 -24.4 228.0 37.9 -15.7 -27.2 -3.3 Operating profit -51.0 12.1 -50.6 84.7 -21.5 45.9 3.3 7.1 Net profit -48.7 -34.6 -23.1 73.8 -20.0 44.7 35.6 6.6 Notes: All figures are based on consolidated K-IFRS Source: Company data, KDB Daewoo Securities Research estimates Table 222.2. Earnings forecast revisions (Wbn, W, %, %p) Previous Revised % chg. 2014F2014F2014F 2015F2015F2015F 2014F2014F2014F 2015F2015F2015F 2014F2014F2014F 2015F2015F2015F Revenue 850 963 817 906 -3.9 -5.9 Operating profit 260 317 248 289 -4.6 -8.8 Pretax profit 303 342 291 314 -4.0 -8.2 Net profit 247 279 238 256 -3.6 -8.2 EPS 11,282 12,745 10,851 11,696 -3.8 -8.2 OP margin 30.6 32.9 30.4 31.9 -0.2 -1.0 Net margin 29.1 29.0 29.1 28.3 0.1 -0.7 Notes: All figures are based on consolidated K-IFRS Source: Company data, KDB Daewoo Securities Research estimates KDB Daewoo Securities Research 2 November 4, 2014 NCsoft Figure 111.1. Activision BlizzardBlizzard’’’’ss gamegamegame sales by platform Figure 222.2. EAEAEA’EA ’’’ss gamegamegame sales by platform (US$bn) PC Multi-player online gaming Console Hand-held (US$bn) Other PC Console Cellular handset 5 5 4 4 3 3 2 2 1 1 0 0 FY08 FY09 FY10 FY11 FY12 FY13 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 Source: Company data, KDB Daewoo Securities Research Source: Company data, KDB Daewoo Securities Research Figure 333.3.