November 14, 2012 Company Report Gamevil (063080 KQ) Game Daewoo Securities Co., Ltd. Momentum expected from 4Q expansion into new platforms Chang-kwean Kim +822-768-4321 Expected to offer games via popular gaming platforms in 4Q [email protected] Gamevil released 30 new games at the G-Star trade show, including 20 games that had not been made public. The company recently rolled out Baseball Superstars 2013 via T Store. For 4Q, the company plans to commercially launch the next series of its flagship titles (e.g., Zenonia 5) and social-network games. Furthermore, Gamevil is scheduled to unveil a number of new titles in 4Q, including 15 games for the domestic market, as well as seven iOS-based games and 16 Android-based games for overseas markets. Most notably, Gamevil plans to provide its games via increasingly popular closed- Buy (Maintain) gaming platforms starting in 4Q, in addition to established open platforms (e.g., T Target Price (12M, W) 145,000 Store, the App Store, Google Play). These new platforms should include LINE (in Share Price (11/13/12, W) 126,000 Japan), KakaoTalk (in Korea), and Tencent Mobile (in China). Expected Return (%) 15.1 EPS Growth (12F, %) 42.7 3Q review: Smooth diversification into new genres Market EPS Growth (12F, %) 8.9 For 3Q, GamevilÊs revenues slightly exceeded our expectations, while operating profit P/E (12F, x) 30.3 missed our estimates. 3Q revenues jumped 65.9% YoY to W16.6bn, as domestic and Market P/E (12F, x) 10.1 overseas revenues expanded 43.2% YoY and 133.6% YoY, respectively. 3Q operating KOSDAQ 513.80 profit grew 25.0% YoY to W5.6bn. Market Cap (Wbn) 699 Shares Outstanding (mn) 6 It should be noted that 55% of the companyÊs 3Q revenues came from overseas. North Avg Trading Volume (60D, '000) 92 America accounted for 49% of overseas revenues, and the Asia-Pacific region made up Avg Trading Value (60D, Wbn) 10 41% of overseas revenues. By genre, the revenue contributions of sports games and Dividend Yield (12F, %) 0.0 role-playing games (RPG) increased to 43% and 28%, respectively, while the revenue Free Float (%) 65.8 contributions of action and arcade games contracted. 52-Week Low (W) 55,000 In 3Q, new games from new genres made a significant contribution to the 52-Week High (W) 132,900 companyÊs top-line growth. Monthly revenues of Fishing Master (a fishing game; Beta (12M, Daily Rate of Return) 0.45 released at the end of March) exceeded W1bn, while the monthly revenues of Price Return Volatility (12M Daily, %, SD) 3.2 Foreign Ownership (%) 20.4 Monster Warlord (RPG) also reached roughly W1bn. In addition, Punch Hero (a Major Shareholder(s) boxing game) made a 10% contribution to 3Q revenues. Song, Byung-joon et al. (33.22%) NPS (5.13%) Maintain Buy call with TP of W145,000 We maintain our Buy call on Gamevil with a target price of W145,000. Gamevil is Price Performance displaying healthy growth in the rapidly growing mobile-game market, in part (%) 1M 6M 12M thanks to its efforts to diversify game genres. Given the companyÊs Absolute 2.4 88.1 59.5 aforementioned plans to diversify its gaming platforms and roll out new games in Relative 4.6 89.5 58.1 4Q (including its next series of flagship titles, and games in new genres), we Key Business believe the companyÊs growth potential for 2013 could be re-confirmed during 4Q. Develops and publishes mobile games in several different genres (e.g., sports, RPG, and action). § Earnings & Valuation Metrics Share price FY Revenues OP OP Margin NP EPS EBITDAFCF ROE P/E P/B EV/EBITDA 180 KOSDAQ (Wbn) (Wbn) (%) (Wbn) (Won) (Wbn) (Wbn) (%) (x) (x) (x) 160 12/10 31 16 51.1 15 2,682 17 11 32.2 10.2 2.9 6.4 140 12/11 43 18 40.9 16 2,909 19 10 26.5 23.4 5.7 17.3 120 12/12F 71 27 37.4 23 4,153 30 -18 28.8 30.3 7.9 22.4 100 80 12/13F 123 52 41.9 42 7,530 57 42 37.2 16.7 5.4 10.9 60 12/14F 151 64 42.3 54 9,641 69 51 33.4 13.1 3.8 8.2 11/11 3/12 7/12 11/12 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. November 14, 2012 Gamevil Table 1. 3Q12 earnings results (Wbn, %) 3Q12P Growth 3Q11 2Q12 Actual KDB Daewoo Consensus YoY QoQ Revenues 10 15 17 16 16 65.8 8.9 Operating profit 46 6 6 6 25.0 -12.1 OP margin 44.9 41.9 33.8 39.3 36.6 -11.1 -8.1 Pretax profit 57 6 7 6 15.8 -14.4 Net profit 46 5 6 5 21.3 -17.2 Note: All figures are based on consolidated K-IFRS Sources: Company data, FnGuide, KDB Daewoo Securities Research Table 2. Quarterly earnings and forecasts (Wbn, %) 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12F 3Q12P 4Q12F 2010 2011 2012F Revenues 6 10 10 17 17 15 17 23 31 43 71 Domestic 5 6 7 13 10 9 11 14 25 32 43 Overseas 1 4 3 3 6 7 6 9 5 11 28 Revenue breakdown Domestic 80.8 60.9 74.9 80.1 60.8 56.3 64.7 59.8 82.9 74.6 60.4 Overseas 18.9 39.0 25.1 19.9 39.2 43.6 35.3 40.2 17.1 25.3 39.5 OP 3 4 4 6 6 6 6 8 16 18 27 OP margin 41.6 41.3 44.9 38.1 37.2 41.9 33.8 37.2 52.8 41.0 37.4 NP 3 4 4 6 5 6 5 7 15 16 23 NP margin 39.8 38.3 40.1 34.9 31.4 38.5 29.3 31.0 48.2 37.6 32.3 YoY Growth Revenues -4.7 34.4 40.2 74.8 159.0 55.1 65.9 37.2 39.7 66.3 Domestic -12.1 0.8 26.6 64.6 94.8 43.6 43.2 2.4 25.7 34.6 Overseas 45.4 179.6 108.0 132.9 437.4 73.4 133.6 177.8 107.0 159.5 OP -24.9 13.6 30.2 26.4 131.1 57.3 25.0 34.0 8.3 52.0 NP -23.8 8.7 26.1 21.1 104.8 56.1 21.3 21.8 9.1 42.8 QoQ Growth Revenue -32.6 53.6 1.9 65.6 0.0 -8.0 8.9 37.0 Domestic -35.9 15.7 25.4 77.1 -24.2 -14.7 25.0 26.6 Overseas -14.5 217.6 -34.6 31.1 97.2 2.5 -11.9 56.0 OP -46.7 52.2 10.7 40.7 -2.6 3.7 -12.1 50.9 NP -46.8 48.0 6.5 44.4 -10.1 12.8 -17.2 45.0 Note: Based on consolidated K-IFRS Sources: Gamevil, KDB Daewoo Securities Research Table 3. Earnings forecast revisions (Wbn, W, %) Previous Revised % Change Reason for change 2012F 2013F 2014F 2012F 2013F 2014F 2012F 2013F 2014F Revenue 74 118 145 71 123 151 -3.5 4.4 4.1 - Increased number of gaming platforms Operating profit 30 50 62 27 52 64 -10.7 3.4 3.2 should drive up 2013F revenues Pretax profit 32 50 64 29 51 66 -10.0 3.2 3.1 - Expected decline in new hires should Net profit 26 40 52 23 42 54 -11.5 3.5 3.1 boost OP in 2013 EPS (W) 4,688 7,285 9,354 4,153 7,530 9,641 -11.4 3.4 3.1 OP margin 40.4 42.2 42.7 37.4 41.9 42.3 -3.0 -0.3 -0.4 Net margin 35.3 34.2 35.7 32.4 33.9 35.4 -2.9 -0.3 -0.3 Note: All figures are based on consolidated K-IFRS Sources: Company data, KDB Daewoo Securities Research KDB Daewoo Securities Research 2 November 14, 2012 Gamevil Gamevil (063080 KQ/Buy/TP: W145,000) Comprehensive Income Statement (Summarized) Statement of Financial Condition (Summarized) (Wbn) 12/11 12/12F 12/13F 12/14F (Wbn) 12/11 12/12F 12/13F 12/14F Revenues 43 71 123 151 Current Assets 67 56 111 173 Cost of Sales 9 14 23 29 Cash and Cash Equivalents 17 5 48 104 Gross Profit 33 57 100 123 AR & Other Receivables 8 13 23 29 SG&A Expenses 16 30 48 59 Inventories 0 0 0 0 Operating Profit (Adj) 18 27 52 64 Other Current Assets 2 3 5 6 Operating Profit 18 27 52 64 Non-Current Assets 11 50 48 47 Non-Operating Profit 2 2 0 1 Investments in Associates 2 2 2 2 Net Financial Income -2 -2 -2 -4 Property, Plant and Equipment 5 42 41 40 Net Gain from Inv in Associates 0 0 0 0 Intangible Assets 3 5 4 4 Pretax Profit 20 29 51 66 Total Assets 78 106 159 220 Income Tax 4 6 9 12 Current Liabilities 8 13 22 27 Profit from Continuing Operations 16 23 42 54 AP & Other Payables 3 5 9 12 Profit from Discontinued Operations 0 0 0 0 Short-Term Financial Liabilities 0 0 0 0 Net Profit 16 23 42 54 Other Current Liabilities 4 7 13 16 Controlling Interests 16 23 42 54 Non-Current Liabilities 2 2 4 6 Non-Controlling Interests 0 0 0 0 Long-Term Financial Liabilities 1 1 1 1 Total Comprehensive Profit 16 23 42 54 Other Non-Current Liabilities 1 1 3 5 Controlling Interests 16 23 42 54 Total Liabilities 10 15 26 33 Non-Controlling Interests 0 0 0 0 Controlling Interests 68 91 133 187 EBITDA 19 30 57 69 Capital Stock 3 3 3 3 FCF (Free Cash Flow) 10 -18 42 51 Capital Surplus 15 15 15 15 EBITDA Margin (%) 43.4 41.5 46.0 45.5 Retained Earnings 52 75 117 170 Operating Profit Margin (%) 40.9 37.4 41.9 42.3 Non-Controlling Interests 0 0 0 0 Net Profit Margin (%) 37.7 32.4 33.9 35.4 Stockholders' Equity 68 91 133 187 Cash Flows (Summarized) Forecasts/Valuations (Summarized) (Wbn) 12/11 12/12F 12/13F 12/14F 12/11 12/12F 12/13F 12/14F Cash Flows from Op Activities 16 22 45 55 P/E (x) 23.4 30.3 16.7 13.1 Net Profit 16 23 42 54 P/CF (x) 22.0 27.0 14.9 12.0 Non-Cash Income and Expense 3 7 15 15 P/B (x) 5.7 7.9 5.4 3.8 Depreciation 0 1 2 2 EV/EBITDA (x) 17.3 22.4 10.9 8.2 Amortization 1 2 4 3 EPS (W) 2,909 4,153 7,530 9,641 Others 0 0 -2 -2 CFPS (W) 3,101 4,674 8,453 10,503 Chg in Working Capital 0 -1 -3 -1 BPS (W) 11,965 15,895 23,505 33,172 Chg in AR & Other Receivables -3 -5 -10 -5 DPS (W) 0 0 0 0 Chg in Inventories 0 0 0 0 Payout ratio (%) 0.0 0.0 0.0 0.0 Chg in AP & Other Payables 2 2 4 2 Dividend Yield (%) 0.0 0.0 0.0 0.0 Income Tax Paid -3 -6 -9 -12 Revenue Growth (%) 39.7 66.4 73.2 22.8 Cash Flows from Inv Activities 1 -34 -2 0 EBITDA Growth (%) 12.7 58.9 92.0 21.5 Chg in PP&E -2 -38 0 0 Operating Profit Growth (%) 11.9 52.2 93.6 24.2 Chg in Intangible Assets -3 -3 -3 -3 EPS Growth (%) 8.5 42.7 81.3 28.0 Chg in Financial Assets 6 5 0 0 Accounts Receivable Turnover (x) 6.5 6.6 6.7 5.8 Others 0 3 2 4 Inventory Turnover (x) Cash Flows from Fin Activities -2 0 0 0 Accounts Payable Turnover (x) Chg in Financial Liabilities 0 0 0