NCsoft (036570) Korea – Equity Research Visit to NCsoft West: Earnings, target price under review Internet Buy Oct. performance may warrant revision of TP 30 Sep 2009 We maintain our Buy call and target price of W280,000, as we keep our 2009F EPS of Bloomberg: 036570 KS W9,098 intact. If sales and servers for Aion continue to increase in Oct., we will likely Target Price (12M, W): 280,000 raise our earnings estimates and target price. Share Price (09/29/09, W): 166,000 Expected Return (%): 68.7 After visiting NCsoft West and game stores like Gamestop and Best Buy in US and Sector: Internet Software and Services Europe, we feel confident that sales of Aion in those regions in 3Q09 will exceed our Sector Rating: Overweight expectation of 520k boxes. EPS Growth (09F, %): 582.0 The commercial launch of Aion began in Europe (Germany, France, Britain) on Sep. 25. Market EPS Growth (09F, %): 53.0 However, the gameÊs launch has not gone smoothly as pre-sales of Aion boxes far P/E (X): 18.2 exceeded the companyÊs expectations and server capacity. In Germany, about 40,000 Market P/E (09/29/09F, X): 15.4 gamers were on the waiting list after Aion boxes were sold out. NCsoft is gradually Market Cap (Wbn): 3,601 deploying servers to address this issue, Shares Outstanding (mn): 22 Avg Trading Volume (60D, '000): 638 Aion was introduced through game websites, as well as through major press such as The Avg Trading Value (60D, Wbn): 90 New York Times in US and The Times of England. Aion is considered the most viable new Margin Balance ('000 sh): 470 MMORPG to overtake World of Warcraft which has 7mn users and W1tr in annual sales. Dividend Yield (09F, %): .6 Unlike Korea and China, robot programs are not a problem in the online game markets of Free Float (%): 64.0 the US and Europe. The issue of gamers cancelling their subscriptions after the first 52-Week Low/High: 24,400/193,000 month is also low because Aion has been available in Korea for almost a year, so there is Beta (12M, Daily Rate of Return): 0.9 a large library of game content that users can enjoy. Price Return Volatility (12M Daily, %,SD): 4.4 Foreign Ownership (%): 17.4 With the addition of game servers in the US and Europe, we expect the shares to rally. Major Shareholder(s): The successful launch of Aion in US and Europe could lead to a revaluation of NCsoft as a TJ Kim and et. al (26.57%) global online game firm. Mirae Asset and et. al (13.01%) Treasury Stock (9.41%) Price Performance (%) 1M 6M 12M Absolute 17.7 81.8 293.4 Relative 12.6 45.2 277.3 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) 520 KOSPI 420 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 474 231 48.7 197 9,098 246 198 37.7 18.2 5.7 13.0 120 12/10F 574 305 53.2 290 13,377 321 230 37.9 12.4 4.0 9.2 20 12/11F 683 394 57.7 397 18,326 410 302 36.5 9.1 2.8 6.3 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 Figure 1. Crowded Aion US/Europe server Source: Youtube Figure 2. The New York Times introduces Aion Source: NYTimes 2 NCsoft Table 1. Aion sales forecasts in US and Europe (W, Wbn) 3Q09F 4Q09F 1Q10F 2Q10F 3Q10F 4Q10F # of servers 22 30 38 38 38 38 Concurrent users 80,000 120,000 152,000 152,000 152,000 152,000 Personal account 520,000 777,593 984,952 984,952 984,952 984,952 ARPU 16,875 16,875 16,875 16,875 16,875 16,875 Monthly subscription sales - 13.1 16.6 16.6 16.6 16.6 Quarterly monthly subscription sales 3.3 39.4 49.9 49.9 49.9 49.9 Monthly fee royalty 1 11.8 15 15 15 15 CD sales (volume-terms) 520,000 257,593 207,358 CD sales 16.3 8 6.5 CD sales royalty 4.9 2.4 1.9 Subscription sales + CD sales 19.5 47.4 56.3 49.9 49.9 49.9 NCsoftÊs total royalty 5.9 14.2 16.9 15 15 15 Source: Daewoo Securities Research Figure 3. Weekly unique hits for Aion at MMORPG.com Figure 4. Monthly unique hits for Aion at MMORPG.com ('000) ('000) 200 weekly 600 monthly Sep 23 in US Aug 17 Commercialization 150 CBT ended 500 100 400 Sep 6 Sep 23 in Europe OBT Started Commercialization 50 300 0 200 Aug 14 Aug 24 Sep 3 Sep 13 Sep 23 Aug 14 Aug 24 Sep 3 Sep 13 Sep 23 Source: mmorpg.com, Daewoo Securities Research Source: mmorpg.com, Daewoo Securities Research Figure 5. Semi-annual unique hits for Aion at MMORPG.com Figure 6. Annual unique hits for Aion at MMORPG.com ('000) ('000) 2,000 semi-annually 2,500 annually Sep 25 2nd → 1st 1,750 2,250 in ranking 1,500 2,000 1,250 1,750 1,000 1,500 Aug 14 Aug 24 Sep 3 Sep 13 Sep 23 Aug 14 Aug 24 Sep 3 Sep 13 Sep 23 Source: mmorpg.com, Daewoo Securities Research Source: mmorpg.com, Daewoo Securities Research 3 NCsoft Table 2. Top 10 unique hits at MMORPG.com (unique hits) Rank In a week In a month In 6 months In a year 1 Aion 187,853 Aion 533,717 Aion 1,775,718 Aion 2,339,212 2 World of Warcraft 49,094 World of Warcraft 153,708 Warhammer Online 753,195 Warhammer Online 2,117,822 3 Darkfall 32,276 Champions Online 138,430 World of Warcraft 711,409 Darkfall 1,618,272 4 Fleen Earth 28,990 Darkfall 115,933 Star Wars: The Old Republic 693,472 World of Warcraft 1,289,563 5 Age of Conan 27,054 Star Wars: The Old Republic 107,069 Age of Conan 636,165 Lord of the Rings Online 1,186,608 6 Warhammer Online 26,313 Warhammer Online 104,063 Darkfall 618,892 Age of Conan 1,185,473 7 Lord of the Rings Online 25,991 EVE Online 96,961 EVE Online 544,844 Atlantica Online 1,153,653 8 Champions Online 25,013 Age of Conan 93,557 Lord of the Rings Online 513,918 Star Wars: The Old Republic 1,091,066 9 EVE Online 24,572 Guild Wars 2 87,018 Atlantica Online 510,227 EVE Online 1,039,562 10 Star Wars: The Old Republic 21,267 Lord of the Rings Online 83,944 Champions Online 479,761 The Chronicles of Spellborn 913,046 Note: Based on September 29, 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 Figure 7. Aion weekly ranking Jun 27 Jul 18 Aug 8 Aug 29 Sep 19 1 2 3 4 5 6 7 8 9 10 11 Steam (Collector's Edition, Download) 12 Direct2Drive (Collector's Edition, Download) 13 Steam (Standard Edition, Download) 14 Direct2Drive (Standard Edition, Download) 15 Amazon (Steelbook Edition, CD) (rank) Note: Steelbook Edition is same price with Standard Edition, the characteristic of each site is in Table 6. Source Steam, Direct2Drive, Shacknews, Amazon, Daewoo Securities Research Table 3. Top 10 weekly sales of PC games Steam Direct2Drive 1. Aion Collector's Edition 1. Aion Collector's Edition 2. Aion 2. Aion 3. Fallen Earth 3. Fallen Earth 4. Batman: Arkham Asylum 4. Neverwinter Nights 2 5. F.E.A.R. 2: Project Origin 5. Assassin's Creed Director's Cut 6. Left 4 Dead 6. Titan Quest Bundle 7. Resident Evil 5 7. Neverwinter Nights 2: Storm of Zehir 8. Counter-Strike 8. Champions Online 9. Star Wars Jedi Knight Collection 9. BioShock 10. Red Faction: Guerrilla 10. Star Wars: Knights of the Old Republic Note: Based on the sales result in September 20~ September 26, the ranking is calculated by revenue size Source: Shacknews, Steam, Direct2Drive, Daewoo Securities Research Table 4. 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 4 NCsoft Table 5. Type of Aion sales in US and Europe # Type Details 1 Pre-order The term means both types 2 and 3 When customer only buys a beta key for $5, customer can decide to pay the remainder when Aion is commercialized.