(3657 KS) Game Results Comment (Maintain) Buy Target Price (12M, W) 5, Share Price (5/1/18, W) 347, Expected Return 44% OP (18F, Wbn) 696 Consensus OP (18F, Wbn) 786 EPS Growth (18F, %) 14.5 Market EPS Growth (18F, %) 16.2 P/E (18F, x) 15.1 Market P/E (18F, x) 9.4 KOSPI 2,464.16 Market Cap (Wbn) 7,613 Shares Outstanding (mn) 22 Free Float (%) 84.8 Foreign Ownership (%) 48.1 Beta (12M).69 52-Week Low 342, 52-Week High 488, (%) 1M 6M 12M Absolute -12.8-17.4-4.3 Relative -13.3-14.7-11.8 14 13 12 11 1 9 NCSOFT Mirae Asset Daewoo Co., Ltd. [Internet/Game/Advertising] Jee-hyun Moon +822-3774-164 jeehyun.moon@miraeasset.com KOSPI 8 4.17 8.17 12.17 4.18 New title releases pushed back, but existing IP remains popular 1Q18 review: OP tops consensus on strong royalties reported 1Q18 operating profit that topped the consensus and an OP margin of over 4%. Positives: Margin expansion was driven by strong royalties, which grew 33% YoY and 41% QoQ to a record W84.2bn thanks to Lineage M revenue in Taiwan (launched on December 11, 217). Six months into its release, Lineage M remains the top-grossing game on both Android and ios in Taiwan, where Lineage intellectual property (IP) enjoys huge popularity. Among PC titles, Aion was a standout performer, boosted by increased usage following the conversion of the title s business model from subscription-based to microtransaction-based on January 17 th. Despite the launch of a major rival title, marketing spend actually fell QoQ and YoY. Negatives: Revenue from Lineage M (the company s flagship mobile title) declined QoQ. We estimate daily average revenue slipped from W3.6bn in 4Q17 to W2.9bn in 1Q18. In addition, revenue fell more than expected for PC titles Lineage, Lineage II, and Guild Wars 2. Major new releases pushed back to 219; Performance of current games will be key near-term variable New release schedule pushed back: said it had pushed back the release of its highly anticipated new title Blade & Soul II (B&S II) from 218 to 219. B&S II is a mobile MMORPG with a follow-up storyline to the original PC title Blade & Soul. We believe the company recently overhauled its team to further enhance the game s quality amid increasing competition in the domestic market. The launch of Lineage II M, which was originally scheduled for this year, has also been moved to next year. We expect Lineage II M to come out in 1H19, followed by B&S II in 2H19. Lineage M plans: Next month will mark the one-year anniversary of the release of Lineage M, which has become s new cash cow. The company will unveil massive content updates and other plans for the mobile title at an upcoming press event on May 15 th. We believe such moves could help invigorate Lineage M s ecosystem. 2H18 plans: Aion Legions, a mobile strategy RPG, is set to be launched in North America and Europe this year. For Project TL (The Lineage), which is currently under development for PCs/consoles, the company plans to conduct closed beta testing (CBT) in 2H18 and unveil its development status. Maintain Buy, but lower TP to W5, in light of new release schedule We revised down our 218-19 earnings estimates due to the delays to new title releases. As such, we lower our target price to W5, (from W6,). We maintain our Buy rating on the stock. We anticipate Lineage M and royalties to support earnings stability. Valuation also looks inexpensive. In 2H18, we expect to gain further clarity on the new title release schedule. FY (Dec.) 12/15 12/16 12/17 12/18F 12/19F 12/2F Revenue (Wbn) 838 984 1,759 1,82 2,728 2,864 OP (Wbn) 237 329 585 696 1,184 1,245 OP margin (%) 28.3 33.4 33.3 38.2 43.4 43.5 NP (Wbn) 165 272 441 55 86 95 EPS (W) 7,542 12,416 2,1 23,5 39,18 41,231 ROE (%) 1.6 14.9 19.1 17.2 24.6 21.9 P/E (x) 28.2 19.9 22.3 15.1 8.9 8.4 P/B (x) 2.6 2.7 3.4 2.3 1.9 1.7 Dividend yield (%) 1.3 1.5 1.6 2.4 4. 4.3 Note: All figures are based on consolidated K-IFRS; NP refers to net profit attributable to controlling interests Source: Company data, Mirae Asset Daewoo Research estimates
Earnings and forecasts Table 1. 1Q18 review (Wbn, %) 1Q18P Growth 1Q17 4Q17 Mirae Asset Preliminary Daewoo Consensus YoY QoQ Revenue 24 533 475 511 474 98.3-1.9 Operating profit 3 189 24 192 177 569.1 7.6 OP margin 12.7 35.5 42.9 37.6 37.3 Net profit 17 121 119 142 135 584.9-1.3 Notes: All figures are based on consolidated K-IFRS; net profit is attributable to controlling and non-controlling interests Source: Company data, FnGuide, Mirae Asset Daewoo Research estimates Table 2. Quarterly and annual earnings (Wbn, %) 1Q17 2Q17 3Q17 4Q17 1Q18P 2Q18F 3Q18F 4Q18F 217 218F 219F Revenue 24 259 727 533 475 447 446 452 1,759 1,82 2,728 Lineage 51 34 35 34 28 28 26 26 154 18 17 Lineage II 18 17 16 15 14 14 14 13 66 56 55 Aion 13 11 1 13 19 18 17 17 47 7 67 Blade & Soul 45 39 38 4 34 32 31 32 161 129 116 Guild Wars 2 14 14 2 35 24 18 16 17 83 75 67 Mobile games 23 94 551 327 264 261 259 254 995 1,38 1,879 Other 11 15 13 11 8 8 8 8 5 32 63 Royalties 64 36 44 6 84 67 75 85 23 312 374 Operating profit 3 38 328 189 24 172 172 148 585 696 1,184 OP margin 12.7 14.5 45.1 35.5 42.9 38.5 38.4 32.9 33.3 38.2 43.4 Net profit 17 31 275 121 119 126 125 136 444 56 861 Net margin 7.3 11.9 37.8 22.6 25.1 28.1 28.1 3.2 25.2 27.8 31.6 YoY Revenue -.6 7.5 234.3 87.4 98.3 72.7-38.6-15.3 78.8 3.5 49.9 Lineage -34.8-64.2-57.8-71.5-45.1-18.1-25.6-23.5-58.9-3. -1. Lineage II 7.7-12.6-24.1-26. -22.8-14.8-9.2-11.8-14.7-15. -2. Aion -33.9-38.5-36.8-29.6 41.1 64.6 66.7 33.4-34.6 5. -5. Blade & Soul -17.5-2.2-5.2.5-23.9-17.4-19.5-18.5-11.6-2. -1. Guild Wars 2-53.4-14.7 31.5 134.8 66.2 33.8-19.3-52.7 8.1-1. -1. Mobile 51,113.1 11,771.6 1,613.2 1,28.2 178.9-53. -22.4 4,935. 4.3 81. Other -1.5-14.9-22.2-17.4-24.8-46.3-39.7-23.6-15.1-35. 94.4 Royalties 116.1 33.8 8.2 43.2 32.5 86.3 72.9 42.7 66. 53.8 2. Operating profit -59.8-56.4 43.4 86. 569.1 358.4-47.6-21.5 77.8 19. 7.1 Net profit -73.7-65.9 474.3 8.7 584.9 37.7-54.5 12.9 63.6 14. 7.1 Notes: All figures are based on consolidated K-IFRS; revenue from Lineage M, which was released on June 21, 217, is included in mobile game revenue; Lineage M s daily average revenue is estimated at W2.7bn in 218; new releases, including B&S II, Lineage II M and Project TL are reflected in 219; Lineage II: Revolution (Netmarble) and Lineage M (Taiwan) are included in royalties revenue; net profit is attributable to controlling and non-controlling interests Source: Company data, Mirae Asset Daewoo Research estimates Table 3. Earnings forecast revisions Previous Revised % chg. 18F 19F 18F 19F 18F 19F Revenue 2,29 3,55 1,82 2,728-2.5 - Revised mobile game revenue estimates, -1.7 factoring in timing of new game releases Operating profit 95 1238 696 1,184-23.1-4.4 - Revised down marketing spend Net profit 666 98 56 861-24. -5.1 EPS (W) 3,142 41,158 23,5 39,18-23.7-4.8 OP margin 39.5 4.5 38.2 43.4 Net margin 29.1 29.7 27.8 31.6 Notes: All figures are based on consolidated K-IFRS; EPS is based on net profit attributable to controlling interests Source: Mirae Asset Daewoo Research estimates Notes (Wbn, W, %) Mirae Asset Daewoo Research 2
Figure 1. Lineage M (Taiwan) is the top-grossing game on Google Play Figure 2. Lineage M (Taiwan) publisher Gamania s monthly revenue (NT$mn) 2, 218 217 1,5 1, 5 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Notes: Based on May 1 th chart Source: AppAnnie, Mirae Asset Daewoo Research Note: Lineage M (Taiwan) was released on December 11, 217 Source: Gamania, Mirae Asset Daewoo Research Figure 3. s mobile gaming revenue to double in 219 Figure 4. Royalties to remain strong, bolstering profitability (Wbn) 2, 1,5 1, PC online game revenue Mobile game revenue Lineage II M B&S II Aion Legions Lineage M (Wbn) 4 3 2 Royalties revenue (L) OP margin (R) Lineage II: Revolution Lineage M in Taiwan B&S Revolution (%) 5 4 3 5 1 2 12 13 14 15 16 17 18F 19F 12 13 14 15 16 17 18F 19F 1 Source: Company data, Mirae Asset Daewoo Research Source: Company data, Mirae Asset Daewoo Research Figure 5. Aion Legions is set for launch in North America and Europe in 2H18 Figure 6. CBT for Project TL (PC/console) is slated for 2H18 Source: Company materials, Mirae Asset Daewoo Research Source: Company materials, Mirae Asset Daewoo Research Mirae Asset Daewoo Research 3
(3657 KS/Buy/TP: W5,) Comprehensive Income Statement (Summarized) Statement of Financial Condition (Summarized) (Wbn) 12/17 12/18F 12/19F 12/2F (Wbn) 12/17 12/18F 12/19F 12/2F Revenue 1,759 1,82 2,728 2,864 Current Assets 1,773 2,862 3,299 3,99 Cost of Sales 212 182 273 286 Cash and Cash Equivalents 187 59 415 494 Gross Profit 1,547 1,638 2,455 2,578 AR & Other Receivables 198 172 259 271 SG&A Expenses 962 942 1,271 1,333 Inventories 1 1 1 Operating Profit (Adj) 585 696 1,184 1,245 Other Current Assets 1,387 2,181 2,624 3,143 Operating Profit 585 696 1,184 1,245 Non-Current Assets 1,754 1,99 1,427 1,475 Non-Operating Profit 25 1 Investments in Associates 34 34 34 34 Net Financial Income 16 16 16 16 Property, Plant and Equipment 229 228 232 231 Net Gain from Inv in Associates -2 Intangible Assets 52 5 5 5 Pretax Profit 61 696 1,184 1,246 Total Assets 3,527 3,96 4,726 5,384 Income Tax 166 19 323 34 Current Liabilities 456 445 482 56 Profit from Continuing Operations 444 56 861 96 AP & Other Payables 43 32 48 51 Profit from Discontinued Operations Short-Term Financial Liabilities Net Profit 444 56 861 96 Other Current Liabilities 413 413 434 455 Controlling Interests 441 55 86 95 Non-Current Liabilities 342 361 43 428 Non-Controlling Interests 3 2 1 2 Long-Term Financial Liabilities 15 Total Comprehensive Profit 919 56 861 96 Other Non-Current Liabilities 192 361 43 428 Controlling Interests 916 52 853 898 Total Liabilities 797 86 885 934 Non-Controlling Interests 3 4 8 8 Controlling Interests 2,721 3,144 3,83 4,437 EBITDA 615 725 1,213 1,274 Capital Stock 11 11 11 11 FCF (Free Cash Flow) 566 544 837 942 Capital Surplus 433 433 433 433 EBITDA Margin (%) 35. 39.8 44.5 44.5 Retained Earnings 1,96 2,329 3,15 3,622 Operating Profit Margin (%) 33.3 38.2 43.4 43.5 Non-Controlling Interests 8 1 11 13 Net Profit Margin (%) 25.1 27.7 31.5 31.6 Stockholders' Equity 2,729 3,154 3,841 4,45 Cash Flows (Summarized) Forecasts/Valuations (Summarized) (Wbn) 12/17 12/18F 12/19F 12/2F 12/17 12/18F 12/19F 12/2F Cash Flows from Op Activities 595 569 867 967 P/E (x) 22.3 15.1 8.9 8.4 Net Profit 444 56 861 96 P/CF (x) 15.6 1.8 6.4 6. Non-Cash Income and Expense 185 22 336 352 P/B (x) 3.4 2.3 1.9 1.7 Depreciation 27 26 26 26 EV/EBITDA (x) 13.7 7.1 3.9 3.3 Amortization 3 2 2 2 EPS (W) 2,1 23,5 39,18 41,231 Others 155 174 38 324 CFPS (W) 28,685 32,273 54,54 57,366 Chg in Working Capital 11 34-23 32 BPS (W) 131,144 15,451 181,688 29,358 Chg in AR & Other Receivables -42 23-85 -13 DPS (W) 7,28 8,2 14, 15, Chg in Inventories Payout ratio (%) 34.8 34.4 34.6 35.2 Chg in AP & Other Payables -4 1 2 Dividend Yield (%) 1.6 2.4 4. 4.3 Income Tax Paid -63-19 -323-34 Revenue Growth (%) 78.8 3.5 49.9 5. Cash Flows from Inv Activities -46-166 -787-593 EBITDA Growth (%) 7.4 17.9 67.3 5. Chg in PP&E -28-25 -3-25 Operating Profit Growth (%) 77.8 19. 7.1 5.2 Chg in Intangible Assets -4-2 -3 EPS Growth (%) 61.9 14.5 7.3 5.2 Chg in Financial Assets -1,263-141 -755-565 Accounts Receivable Turnover (x) 1. 1. 12.9 11. Others 835 Inventory Turnover (x) 2,983.9 3,677.1 4,58. 3,91.6 Cash Flows from Fin Activities -8-81 -174-298 Accounts Payable Turnover (x) 48.4 65.7 63.3 54. Chg in Financial Liabilities - - - - ROA (%) 15.1 13.5 19.8 17.9 Chg in Equity 1 ROE (%) 19.1 17.2 24.6 21.9 Dividends Paid -81-81 -174-298 ROIC (%) 13.5 28.8 419.5 385.9 Others - - - - Liability to Equity Ratio (%) 29.2 25.6 23. 21. Increase (Decrease) in Cash 42 322-94 79 Current Ratio (%) 388.9 642.5 684.2 772.1 Beginning Balance 145 187 59 415 Net Debt to Equity Ratio (%) -51.1-79.5-74.1-77.3 Ending Balance 187 59 415 494 Interest Coverage Ratio (x) 179.6 24.8 348.4 366.3 Source: Company data, Mirae Asset Daewoo Research estimates Mirae Asset Daewoo Research 4
APPENDIX 1 Important Disclosures & Disclaimers 2-Year Rating and Target Price History Company (Code) Date Rating Target Price NCSOFT(3657) 5/1/218 Buy 5, 4/16/218 Buy 6, 9/26/217 Buy 64, 7/9/217 Buy 6, 5/1/217 Buy 5, 1/2/217 No Coverage 3/11/216 Buy 42, (W) 8, 6, 4, 2, NCSOFT May 16 May 17 May 18 Stock Ratings Equity Ratings Distribution & Investment Banking Services Buy Trading Buy Hold Sell Equity Ratings Distribution 75.% 11.11% 13.89%.% Investment Banking Services 7.73% 19.51% 9.76%.% * Based on recommendations in the last 12-months (as of March 31, 218) Industry Ratings Buy : Relative performance of 2% or greater Overweight : Fundamentals are favorable or improving Trading Buy : Relative performance of 1% or greater, but with volatility Neutral : Fundamentals are steady without any material changes Hold : Relative performance of -1% and 1% Underweight : Fundamentals are unfavorable or worsening Sell : Relative performance of -1% Ratings and Target Price History (Share price ( ), Target price ( ), Not covered ( ), Buy ( ), Trading Buy ( ), Hold ( ), Sell ( )) * Our investment rating is a guide to the relative return of the stock versus the market over the next 12 months. * Although it is not part of the official ratings at Mirae Asset Daewoo Co., Ltd., we may call a trading opportunity in case there is a technical or short-term material development. * The target price was determined by the research analyst through valuation methods discussed in this report, in part based on the analyst s estimate of future earnings. * The achievement of the target price may be impeded by risks related to the subject securities and companies, as well as general market and economic conditions. Disclosures As of the publication date, Mirae Asset Daewoo Co., Ltd. has acted as a liquidity provider for equity-linked warrants backed by shares of NCSOFT as an underlying asset, and other than this, Mirae Asset Daewoo has no other special interests in the covered companies. Analyst Certification The research analysts who prepared this report (the Analysts ) are registered with the Korea Financial Investment Association and are subject to Korean securities regulations. They are neither registered as research analysts in any other jurisdiction nor subject to the laws or regulations thereof. Each Analyst responsible for the preparation of this report certifies that (i) all views expressed in this report accurately reflect the personal views of the Analyst about any and all of the issuers and securities named in this report and (ii) no part of the compensation of the Analyst was, is, or will be directly or indirectly related to the specific recommendations or views contained in this report. Mirae Asset Daewoo Co., Ltd. ( Mirae Asset Daewoo ) policy prohibits its Analysts and members of their households from owning securities of any company in the Analyst s area of coverage, and the Analysts do not serve as an officer, director or advisory board member of the subject companies. Except as otherwise specified herein, the Analysts have not received any compensation or any other benefits from the subject companies in the past 12 months and have not been promised the same in connection with this report. Like all employees of Mirae Asset Daewoo, the Analysts receive compensation that is determined by overall firm profitability, which includes revenues from, among other business units, the institutional equities, investment banking, proprietary trading and private client division. At the time of publication of this report, the Analysts do not know or have reason to know of any actual, material conflict of interest of the Analyst or Mirae Asset Daewoo except as otherwise stated herein. Disclaimers This report was prepared by Mirae Asset Daewoo, a broker-dealer registered in the Republic of Korea and a member of the Korea Exchange. Information and opinions contained herein have been compiled in good faith and from sources believed to be reliable, but such information has not been independently verified and Mirae Asset Daewoo makes no guarantee, representation or warranty, express or implied, as to the fairness, accuracy, completeness or correctness of the information and opinions contained herein or of any translation into English from the Korean language. In case of an English translation of a report prepared in the Korean language, the original Korean language report may have been made available to investors in advance of this report. 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