June 26, 2012 Company Report NCsoft (036570 KS) Game Daewoo Securities Co., Ltd. Guild Wars 2 momentum should begin to grow Chang-kwean Kim +822-768-4321 Game successes should lead to upward earnings forecast revisions [email protected] Since NCsoftÊs listing, the companyÊs shares have been determined by the pace of its operating profit growth. Over the past 11 years, the companyÊs shares have traded within a wide P/E range (6~60x) due to their vulnerability to various variables (e.g., expectations for online game market growth, regulatory risks, new game setbacks, delays to service launches, and surges in new game-related revenues). NCsoft has announced the commercial launch schedules and pricing policy for Blade & Soul. And we believe that the launch of Guild Wars 2 is also imminent. The Buy (Maintain) success of these potential blockbusters should lead market watchers to raise their 2012 (especially 3Q) and 2013 earnings forecasts for NCsoft. And these upward Target Price (12M, W) 510,000 Share Price (06/25/12, W) 286,500 earnings forecast revisions should provide a boost to the companyÊs shares. Expected Return (%) 78.0 Generally speaking, upward earnings forecast revisions that occur after a game EPS Growth (12F, %) 66.8 finds success tend to be significant, since it is difficult to exactly estimate the Market EPS Growth (12F, %) 18.8 extent of the success beforehand. P/E (12F, x) 31.1 Market P/E (12F, x) 9.1 Momentum from Guild Wars 2 should grow during July~August KOSPI 1,825.38 Since its open-beta testing, Blade & Soul has showed a stellar performance relative Market Cap (Wbn) 6,272 Shares Outstanding (mn) 22 to NCsoftÊs other games (e.g., Aion (launched in 2008) and TERA (2011)). And PC Avg Trading Volume (60D, '000) 247 café user indicators for the companyÊs established games (e.g., Aion, Lineage I and Avg Trading Value (60D, Wbn) 65 II) have remained intact. Dividend Yield (12F, %) 0.3 NCsoft announced that it would begin to provide commercial services for Blade & Free Float (%) 76.3 52-Week Low (W) 207,500 Soul on June 30th. The monthly rate for the game will be W23,000, 16% higher 52-Week High (W) 386,000 than AionÊs (W19,800 for 300 hours per month, including value added tax). And the Beta (12M, Daily Rate of Return) 0.59 company plans to offer no discount even if users pay for three or six months in Price Return Volatility (12M Daily, %, SD) 2.8 advance. This service charge appears high relative to that of Diablo III and League Foreign Ownership (%) 46.1 of Legends (which has adopted a microtransaction model). We believe that this Major Shareholder(s) aggressive pricing shows the companyÊs strong confidence in Blade & Soul. NEXON Co., Ltd.(14.7%) T.J Kim et al. (10.33%) Meanwhile, we expect that momentum from Guild Wars 2 will rise during NPS (9.19%) July~August. Indeed, over the last year, Guild Wars 2 has been the most highly Price Performance anticipated game at mmorpg.com (a North American web-based game magazine). (%) 1M 6M 12M The number of hits to Guild Wars 2-related pages on the website has soared since Absolute 22.7 -5.6 4.2 the companyÊs CD pre-sale (April) and the gameÊs first and second closed-beta Relative 22.6 -3.4 16.9 tests (May and June). Given this positive feedback, we expect Guild Wars 2Ês Key Business launch (expected in 3Q) to be successful. An online game company focusing on MMORPG. § Earnings & Valuation Metrics Share price FY Revenues OP OP Margin NP EPS EBITDAFCF ROE P/E P/B EV/EBITDA 140 KOSPI (Wbn) (Wbn) (%) (Wbn) (Won) (Wbn) (Wbn) (%) (x) (x) (x) 120 12/10 660 174 26.3 144 6,602 243 187 20.8 31.6 6.3 16.3 100 12/11 609 135 22.2 121 5,529 161 -120 15.1 55.6 8.1 38.7 80 12/12F 834 248 29.8 202 9,223 260 134 21.3 31.1 6.2 21.7 60 12/13F 1,116 414 37.1 331 15,121 425 320 27.8 19.0 4.8 12.5 40 12/14F 1,213 480 39.6 391 17,864 492 369 25.8 16.0 3.8 10.1 6/11 10/11 2/12 6/12 Note: 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 the U.S. June 26, 2012 NCsoft Figure 1. AionÊs daily user indicator trend for six months after OBT ('000 hours) 1) Play time increased after OBT 2) Play time stabilized since commercialization on Nov 25 2,000 Aion 1,597 1,500 1,151 1,000 651 500 0 11/11/08 12/11/08 1/11/09 2/11/09 3/11/09 4/11/09 Figure 2. TERAÊs daily user indicator trend for six months after OBT ('000 person) 120 TERA 99 1) The number of users gradually increased after OBT 2) The number of users increased after commercialization 90 on Jan 25, but turned downward after a week 57 60 30 19 0 1/11/11 2/11/11 3/11/11 4/11/11 5/11/11 6/11/11 Figure 3. NCsoftÊs new game momentum and share price trend (W) Tencent unveiled the official trailer and (Wbn) 440,000 Share price (L) Chinese name of Blade & Soul 150 Operating profit (R) Guild Wars 2 was demonstrated at ComicCon in the US; Blade & Soul was introduced at ChinaJoy in China Guild Wars 2 gathered Aion Chinese export contract flor Blade & Soul; 1mn applications commercialization Relaunch of Lineage 1 and 2 in China for CBT testers in the US And Europe 120 1st CBT for Blade & Soul in Korea 330,000 Blade & Soul was demonstrated Aion at G-Star in Korea commercialization in Japan and Taiwan Guild Wars 2 was unveiled 90 at GamesCom in Germany ArenaNet 220,000 Aion OBT; announced plan Commercialization 직 for Guild Wars 2's CBT in China 60 Pax Prime in the U.S. and 2nd CBT of Blade & Soul Aion OBT; 110,000 Success of Commercialization Lineage 1's in Korea 30 microtransactions Schedule Aion CBT Blade & Soul 3Q12 'Guild Wars 2' to be launched in China was unveiled at G-Star In August 'Blade and Soul' FGT to begin in China in Korea In August 'Blade and Soul' to participate in Pox Prime 0 0 1/08 7/08 1/09 7/09 1/10 7/10 1/11 7/11 1/12 7/12 Source: Gametrics, KDB Daewoo Securities Research KDB Daewoo Securities Research 2 June 26, 2012 NCsoft Figure 4. AionÊs UV and NCsoftÊs quarterly revenue trend (Wbn) Total revenues (L) ('000 person) 150 Aion's unique visitors (R) 1,600 120 1,200 90 800 60 400 30 0 1Q08 1Q09 1Q10 1Q11 Source: NCsoft, Nielsen Koreanclick, KDB Daewoo Securities Research Figure 5. Lineage IIÊs UV and NCsoftÊs quarterly revenue trend (Wbn) Total revenues (L) ('000 person) 68 Lineage 2's unique visitors (R) 1,600 56 1,200 44 800 32 400 20 0 1Q03 1Q04 1Q05 1Q06 Source: NCsoft, Nielsen Koreanclick, KDB Daewoo Securities Research Figure 6. NCsoftÊs OP and share price trend (W) (Wbn) 400,000 Adjusted share price (L) Quarterly operating profit (R) 120 Aion Lineage II commercialization commercialization 300,000 90 200,000 60 100,000 30 0 0 01 02 03 04 05 06 07 08 09 10 11 12 Source: NCsoft, KDB Daewoo Securities Research KDB Daewoo Securities Research 3 June 26, 2012 NCsoft Figure 7. NCsoftÊs share performance before and after the launch of Lineage II (W) (Wbn) 120,000 Share price (L) Lineage II 40 Operating profit (R) Lineage II Commercialization CBT 100,000 Lineage II 30 OBT 80,000 60,000 20 40,000 10 20,000 0 0 01 02 03 04 Source: NCsoft, KDB Daewoo Securities Research Figure 8. NCsoftÊs forward P/E trend (x) 70 Forward P/E 60 Online game boom 50 40 30 20 10 0 7/00 7/01 7/02 7/03 7/04 7/05 7/06 7/07 7/08 7/09 7/10 7/11 Source: NCsoft, KDB Daewoo Securities Research Figure 9. NCsoftÊs forward P/E trend and momentum from the launch of new games (x) Forward P/E 70 Online game boom Lineage 2 60 launched 62.4 Tabula Rasa Aion launched launched 50 45.1 43.4 40.9 43.2 40.1 40 32.9 31.2 30 20 25.0 23.2 23.6 3 22.7 20.4 18.3 17.6 18.2 14.1 10 Earnings surprise 9.0 6.5 8.5 thanks to Aion 0 7/00 7/01 7/02 7/03 7/04 7/05 7/06 7/07 7/08 7/09 7/10 7/11 Source: NCsoft, KDB Daewoo Securities Research KDB Daewoo Securities Research 4 June 26, 2012 NCsoft Figure 10. Total time spent after OBT (hours) 2,000,000 Aion 1,888,193 1,800,000 TERA Blade & Soul 1,600,000 1,400,000 1,200,000 1,000,000 800,000 600,000 400,000 200,000 0 OBT+1+2+3+4+5+6+7+8+9+10 Source: gametrics, KDB Daewoo Securities Research Figure 11.