August 18, 2011 NCsoft (036570 KS) Game Buy Chang-kwean Kim +822-768-4321 [email protected] Jee-hyun Moon +822-768-3615 [email protected] TP: W420,000/MktCap: W7,195bn The only game developer capable of launching a blockbuster every year Game development capabilities to regain traction; Maintain Buy call with TP of W420,000 We reiterate our Buy call on NCsoft with a target price of W420,000, as: 1) the companyÊs 2Q11 results exceeded our estimates, and 2) the second closed-beta testing (CBT) for Blade & Soul (a key determinant of our 2012 earnings estimates for the company) is imminent. NCsoft is scheduled to demonstrate the upgraded version of Guild Wars 2 and unveil a new game (developed by Carbine Studios, NCsoftÊs U.S.-based subsidiary) at global game shows, including Gamescom 2011 in Germany (August 17th) and PAX in the U.S. (August 23rd). Guild Wars 2 originally debuted at Gamescom 2010 and is slated to be commercialized in 1H12. Factoring in this time lag, we forecast that the new game developed by Carbine Studios will be commercially launched around 2013. NCsoftÊs game development capabilities are likely to regain traction. After all, the company is the only game developer in the world capable of releasing blockbusters every year. 2Q11 Review: Better-than-expected results on strong Lineage I sales NCsoftÊs 2Q11 revenues expanded 5.4% YoY. While sales of Lineage II and Aion and overseas royalty income declined, Lineage I sales jumped 31.9% YoY. This development confirms that micro-transaction sales related to Lineage I have now become a major source of the companyÊs profits. Second CBT for Blade & Soul to determine future share performance NCsoftÊs second closed-beta testing (CBT) for Blade & Soul is imminent. The announcement of an exact schedule should silence worries over possible CBT delays (the largest risk factor facing game share investors) and provide a boost to the companyÊs stock price. The second CBT for Blade & Soul is likely to determine the future performance of NCsoftÊs shares. Typically, the companyÊs games are tested by a few thousand (or even a few hundred) gamers. However, the second CBT for Blade & Soul will be much larger than the first one (which involved around 10,000 testers) and should provide a relatively reliable picture of the gameÊs prospects. As the open-beta testing for the game is also scheduled to take place this year, the content to be unveiled during the second CBT is unlikely to differ significantly from the content in the commercialized version. § Earnings & Valuation Metrics FY Revenues OP OP Margin NP EPS EBITDA FCF ROE P/E P/B EV/EBITDA (Wbn) (Wbn) (%) (Wbn) (Won) (Wbn) (Wbn) (%) (x) (x) (x) 12/09 453 200 44.1 183 8,560 213 213 34.8 17.5 5.1 13.3 12/10 515 251 48.7 174 7,985 265 200 24.1 26.1 5.7 15.1 12/11F 566 255 45.1 224 10,278 271 227 24.6 32.1 7.2 23.4 12/12F 820 448 54.6 391 17,901 460 409 32.2 18.4 5.1 12.8 12/13F 969 538 55.6 472 21,611 546 464 28.7 15.3 3.8 9.9 Notes: All figures are based on non-consolidated K-IFRS; NP refers to net profit attributable to controlling interests Source: Company data, Daewoo Securities Research estimates This document is a summary of a report prepared by Daewoo Securities Co., Ltd. („Daewoo‰) and published on our website. Please review the compliance notices contained in the original report. Information and opinions contained herein have been compiled in good faith from sources deemed to be reliable. However, the information has not been independently verified. Daewoo makes no guarantee, representation or warranty, express or implied, as to the fairness, accuracy or completeness of the information and opinions contained in this document. Daewoo accepts no responsibility or liability whatsoever for any loss arising from the use of this document or its contents or otherwise arising in connection therewith. Information and opinions contained herein are subject to change without notice. This document is for informational purposes only. It is not and should not be construed as an offer or solicitation of an offer to purchase or sell any securities or other financial instruments. This document may not be reproduced, further distributed or published in whole or in part for any purpose. .