Telecoms, Media & Technology abc Korea Internet Global ...doc.xueqiu.com/1450e9b134d2153fcce153de.pdf · Heroes, a mobile MMORPG, developed by Nexon, and Ark Sphere, another mobile

abcGlobal Research

Hardcore mobile games, a growing

opportunity amid market slowdown

We still prefer platform business; messenger apps, the way to tap into more smartphone users

NAVER (OW(V)) and NCSOFT (OW) remain preferred picks; upgrade Gamevil to OW(V) from N(V)

Hardcore mobile games – a growing opportunity: We have

been concerned over the slowdown in Korea’s mobile game

market due to limited growth in the number of users and fierce

competition. However, of late, we see hardcore mobile games

under the role playing game (RPG) genre as a growing

opportunity for developers. The advantages of hardcore games

over casual games are their 1) longer life cycle, 2) higher ARPU,

3) easier competitive environment, and 4) lower commission

expenses. We expect NCSOFT to be the biggest beneficiary.

Overseas expansion is still a key growth driver for mobile

game developers despite hardcore games increasing their

revenues, as smartphone penetration is almost saturated in

Korea. Korea’s mobile game developers have two different

strategies for their overseas business: 1) collaborating with

messenger apps and 2) building their own platforms. As

commissions need to be paid to messenger apps, we prefer

companies having their own platforms such as Gamevil, whose

overseas revenue rose 68% y-o-y in 2013; we expect 47%

growth in 2014 for Gamevil.

Continue to prefer platform business over content providers.

Messaging apps hold the key to growth in mobile games, as

they have the most users and text messaging remains a core

smartphone user habit. Smartphone users check their messaging

apps c23 times a day vs. just nine times for SMS, according to

venture capital firm KPCB. We value social networking

platform LINE at KRW22.4trn, derived from 2014e monthly

average users (MAU) of 294m and average value per MAU of

KRW76,054.

Picks are NAVER (OW V) and NCSOFT (OW): We

upgrade Gamevil to OW(V) from N(V), raising the target to

KRW80,000 from KRW57,000. We remain N(V) on Com2uS

and UW(V) on WeMade and NHN Entertainment.

Telecoms, Media & Technology Korea Internet

Korea Internet and Mobile Games

Summary of valuation and earnings changes

Company NAVER NCSOFT Gamevil Com2uS WeMade NHNE

Bbg code 035420 035670 063080 078340 112040 181710Rating OW(V) OW OW(V) N(V) UW(V) UW(V)New TP 1,100,000 260,000 80,000 27,000 42,000 75,000Price 797,000 219,000 65,500 24,750 49,800 95,600Pot'l return* 38.1% 19.1% 22.1% 9.1% -20.1% -21.5%Old rating OW(V) OW N(V) N(V) UW(V) UW(V)Old TP 1,100,000 260,000 57,000 27,000 39,000 75,00014e PE 36.5x 13.6x 17.8x 12.5x 33.4x 14.9x14e EPS 21,845 16,158 3,687 1,984 1,492 6,408% revision 0.0% 0.0% 6.8% 0.0% 0.0% 0.0%

Source: HSBC estimates. Pricing as of 26 March 2014 *Potential return equals the percentage difference between the current share price and the target price including the forecast dividend yield

Hardcore mobile games gain momentum but messaging still rules

28 March 2014 Hongsik Jo* Analyst The Hongkong and Shanghai Banking Corporation Limited, SeoulSecurities Branch +822 3706 8774 [email protected]

Tucker Grinnan* Regional Head of Telecoms Research The Hongkong and Shanghai Banking Corporation Limited +852 2822 4686 [email protected]

View HSBC Global Research at: http://www.research.hsbc.com

*Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/qualified pursuant to FINRA regulations

Issuer of report: The Hongkong and Shanghai Banking Corporation Limited, Seoul Securities Branch

Disclaimer & Disclosures This report must be read with the disclosures and the analyst certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it

http://www.research.hsbc.com/

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Telecoms, Media & Technology Korea Internet 28 March 2014

abc

Changing environment of the Korea mobile game market

We have discussed the possibility of growth in

hardcore games in previous reports. Of late, we

are seeing signs of hardcore games gaining

momentum. Unlike in 2012 when the smartphone

game market was booming led by casual genres

on the back of an expanding user base, today

many hardcore games (in the RPG genre) are

included in the highest revenue grossing 20 games

in Google Playstore. Compare this to a year ago

when only one game out of the top 10 was RPG.

Now, five games among the top 10 are RPG.

However, we do not expect the same exponential

market growth as seen in mobile games in 2012-

13 on the back of hardcore games, as smartphone

penetration is getting saturated at c80% in Korea.

That said, we believe that such changes have

implications for the mobile game developers.

Rise of hardcore mobile games

Hardcore mobile games (ex RPG) give 1) higher ARPU, 2) longer

lifecycle, 3) possibly lower commission, and 4) less competition

Overseas business still a growth driver where we believe Gamevil

is the best

NCSOFT (OW) is the biggest beneficiary of hardcore game trend;

we upgrade Gamevil to OW(V) from N(V)

Google Playstore: Top 20 grossing ranking trend by genre iOS: Top20 grossing ranking trend by genre

Source: App Annie, HSBC Research Source: App Annie, HSBC Research

0%10%20%30%40%50%60%70%80%90%

100%

Aug-

12

Oct

-12

Dec

-12

Feb-

13

Apr-1

3

Jun-

13

Aug-

13

Oct

-13

Dec

-13

Feb-

14

Others

Simulation

Adventure

Puzzle

Action

SNG

RPG

Sports 0%10%20%30%40%50%60%70%80%90%

100%

Aug-

12

Oct

-12

Dec

-12

Feb-

13

Apr-1

3

Jun-

13

Aug-

13

Oct

-13

Dec

-13

Feb-

14

Others

Puzzle

Simulation

Action

SNG

RPG

Sports

RTS

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Before we look at the impact of the hardcore

game trend on developers, we discuss our

concerns on the Korea mobile game market and

its changing dynamics.

Concerns over top-line growth

We have been worried about the Korean mobile

game industry on two fronts: 1) fierce competition

and 2) a slowdown in top-line growth as the

smartphone penetration ratio saturates. Even in

2012 and 2013 when the mobile game market

grew rapidly, existing mobile game developers,

such as Gamevil and Com2uS, did not benefit

given that the market growth was mostly captured

by Kakao and new entrants such as CJ E&M.

In 2H13, results were in line with our cautious

view on the mobile gaming sector. Aggregated

mobile game revenue under our coverage

(WeMade, Gamevil, Com2uS, NHN

Entertainment) actually decreased 7% in 2H13

compared to 1H13 while CJ E&M increased its

mobile game sales 87% during the same period.

Advantages of hardcore games for mobile game developers

The advantages of hardcore mobile games include

1) higher ARPU, 2) longer lifecycle, 3) possibly

lower commission expense, and 4) less

competition.

1) Higher ARPU

Hardcore gamers play longer hours than casual

players as they pay a higher royalty and this in

turn generates higher ARPU.

Mobile game revenue by company Domestic mobile game revenue by company

Source: Company data, HSBC Source: Company data, HSBC

Google Playstore: Top20 grossing ranking trend by publishers

iOS: Top20 grossing ranking trend by publishers

Source: App Annie, HSBC Research Source: App Annie, HSBC Research

0

20

40

60

80

100

120

3Q12 4Q12 1Q13 2Q13 3Q13 4Q13

CJ E&M Wemade NHNE

Gamevil Com2us

(KRWbn)

0

5

10

15

20

25

30

35

40

3Q12 4Q12 1Q13 2Q13 3Q13 4Q13

Wemade Gamevil Com2Us

(KRWbn)

0%10%20%30%40%50%60%70%80%90%

100%

Aug-

12

Oct

-12

Dec

-12

Feb-

13

Apr-1

3

Jun-

13

Aug-

13

Oct

-13

Dec

-13

Feb-

14

Others

Sundaytoz

PATI Games

GAMEVIL

Com2uS

NHN

WeMade

CJ E&M

0%10%20%30%40%50%60%70%80%90%

100%

Aug-

12

Oct

-12

Dec

-12

Feb-

13

Apr-1

3

Jun-

13

Aug-

13

Oct

-13

Dec

-13

Feb-

14

Others

Actoz Soft

RedAtoms

NEXON

SUNDAYTOZ

Koramgame

GAMEVIL

Com2uS

NHN

WeMade

CJ E&M

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Hardcore games’ ARPU is known to be

KRW25,000-30,000 vs. KRW200-300 for casual

games. We think that the lower number of daily

average users (DAU) for hardcore games on the

flip-side is also positive as these companies do not

have to do a lot of marketing activity to gain big user

traffic when they launch new games (reducing the

need for using the Kakao platform and thus

commissioning expenses).

2) Longer lifecycle

Generally, the higher royalty paid by hardcore

gamers lengthens the life cycle of hardcore games

compared with casual games. Stickiness is high

among hardcore game users as they spend a lot of

money and effort on these games. Looking at the

number of games maintaining the top 20 Google

Playstore ranking in terms of revenue since 2012,

eight have been RPG games vs. five puzzle games.

Such a long life cycle of the hardcore games is

seen in PC games too. Lineage 1, for example, has

maintained its revenue for almost 15 years.

3) Lower commission expense

As hardcore games’ DAU is much lower than that

of casual games, game developers do not have to

acquire heavy traffic during a new game launch,

unlike with casual games. As a result, mobile game

developers are able to launch games without the

Kakao game center. Kakao receives 21% of gross

revenue as commission. For example, Legion of

Heroes, a mobile MMORPG, developed by Nexon,

and Ark Sphere, another mobile MMORPG,

developed by WeMade, have ranked among the top

10 games in terms of revenue in Google Playstore

without Kakao. This implies a lower commission

expense burden for mobile game developers,

although hardcore mobile games are still being

launched through the Kakao game center.

Top 10 grossing ranking comparison between Mar 2013 and Mar 2014

Rank _______________________ Mar-13 ________________________ _____________________ Mar-14 ______________________ Game Publisher Genre Game Publisher Genre

1 Windrunner for Kakao WeMade Action Anypang 2 for Kakao Sundaytoz Puzzle 2 Chachacha for Kakao CJ E&M Racing Raising monsters for Kakao CJ E&M RPG 3 Fish friends for Kakao NHN Sports Seven knights for Kakao CJ E&M RPG 4 Hello hero for Kakao Fincon RPG Everyone's marvel for Kakao CJ E&M Board 5 Anipang for Kakao Sundaytoz Puzzle Dungeon king for Kakao CJ E&M RPG 6 Everytown for Kakao WeMade SNG Be the star for Kakao GAMEVIL RPG 7 Uparu Mountain for Kakao NHN SNG Ark Sphere WeMade RPG 8 PongPongPong for Kakao CJ E&M Puzzle Candi crush for Kakao King.com Puzzle 9 I love coffee for Kakao PATI Games Simulation Cookie run for Kakao Devsisters Action

10 Bow for Kakao 4:33 Action Convenience store for Kakao NHN SNG

Source: Appannie, HSBC Research

No of game titles lasting over six months in the top 20 Average resource required for development

Source: Appannie, HSBC Research Source: HSBC estimates

0123456789

RPG

Puzz

le

Spor

ts

SNG

Actio

n

Adve

ntur

e

Boar

d

Tyco

on

Sim

ulat

ion

Shoo

ting

Rac

ing

0

1

2

3

4

5

6

7

8

0

2

4

6

8

10

12

14

16

Casual Hardcore

# of developers (LHS) # of months (RHS)

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4) Less competition

When growth in the mobile game market was

exponential in 2012-13, we were concerned about

the fierce competition as many game developers had

entered the industry. Casual games led the market

growth during this period and many new mobile

game developers succeeded such as Sundaytoz and

PATI Games. Numerous small mobile game

developing studios were still potential threats for

existing game developers.

However, hardcore games are more difficult to

develop, requiring higher developing cost and

therefore higher capital. Also, to manage hardcore

games, companies need a certain level of experience.

Therefore, we believe the competitive environment

will be better for hardcore games of large companies

than for casual games.

Who benefits from the hardcore game trend?

NCSOFT is the biggest beneficiary

NCSOFT previously failed to provide a clear

roadmap for its mobile gaming business and missed

the opportunity to capture the growth in Korea’s

mobile gaming market in 2012 and 2013. However,

it set up a mobile game developing centre in 2013 at

its headquarters and is planning to launch 10 mobile

games this year.

We believe NCSOFT, as a quality name in PC

hardcore game development, is better positioned

than peers to capture the increasing demand for

hardcore games. We believe the rankings of Legion

of Heroes and Ark Sphere without Kakao in Google

Playstore are great examples of increasing demand

for quality hardcore mobile games.

NCSOFT’s mobile games could provide additional

momentum to its existing PC game revenue.

Lineage, a recently launched mobile MMORPG by

NCSOFT, enables existing Lineage PC players to

use their game characters in mobile devices. It may

enhance user traffic and therefore revenue.

Notably, several hit mobile games present around

10% upside risk to our and consensus sales

estimates. A mobile game is known to generate

around KRW100m revenue per day if it is in the

top 10 ranking (in terms of revenue) in Korea.

Two games could generate KRW70bn a year. The

top three games are known to generate over

KRW300m a day, or cKRW100bn annual revenue.

We also note that NCSOFT is unlikely to use the

Kakao platform, which collects 21% of gross

revenue as commission. That said, we do not

reflect this in our earnings changes for now, but

continue to see this as a potential upside risk,

given that the company has not disclosed its

specific launch schedules.

Gamevil and Com2uS

Traditional mobile game developers such as

Gamevil and Com2uS are also planning to launch

hardcore mobile MMORPGs soon. For Gamevil,

we think the company has been traditionally

strong in this genre. It has a flagship RPG, the

Zenonia series, and a new MMORPG, Be the star

for Kakao, which has ranked among the top 10

Korea Google Playstore games in terms of

revenues, although it is a third-party published

game and uses the Kakao platform. Dark Avenger

2 will be launched in 2H14, and Titan Warrier

and Summoners War will be launched in 1H14.

WeMade

WeMade Entertainment is originally a PC

hardcore MMORPG developing company, which

started to invest in mobile hardcore games in 2012.

Considering that the developing period for

hardcore games is about one year, this timing

should work out. Ark Sphere, the mobile

MMORPG which it developed in-house, was

recently launched. We think the company could

launch more mobile hardcore games in the

remainder of this year.

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NHN Entertainment

In our view, NHN Entertainment has not had enough

time to develop hardcore games in-house as it was

spun off in August 2013. In fact, the company does

not have any successful RPG titles yet. Given that

this genre requires experience to manage and

maintain monetization, the company is unlikely to

come up with a big hardcore game title compared

with peers. That said, NHN has abundant cash

(KRW200bn) to buy mobile game studios. Possible

acquisition of a mobile game studio may shorten the

time for NHN to enter the hardcore mobile game

market, in our view.

Overseas market still the key growth driver

In overseas markets, Korea’s mobile game

companies are largely targeting the Chinese,

Japanese and US markets. Given the bigger

market size and higher growth of the overseas

markets, we assume 35-45% growth in overseas

revenue in 2014. Below, we briefly examine each

company’s overseas strategy as it is likely to be a

key growth driver.

All in all, we think Gamevil is the most geared to

the overseas business because 1) it is using its

own platform, which provides higher margin

without commission expenses and 2) it is the most

diversified in terms of regions. Gamevil delivered

58% y-o-y growth in overseas revenue in 4Q13.

We upgrade Gamevil to OW(V) from N(V).

Gamevil and Com2uS

Since Gamevil acquired a 21% stake in Com2uS,

it has been trying to integrate its service platform.

It has been more focused on building its own

platform to publish games, rather than using SNS

platforms. This was the main reason that it did not

capture the strong growth in the domestic

smartphone game market led by Kakao in 2012

and 2013. However, we believe that Gamevil has

an advantage in the overseas business, which

grew 68% y-o-y to KRW46bn in 2013. It will be a

longer-term advantage for game publishers to

have their own successful platform as it gives

better margin, sustainability and experience.

Gamevil and Com2uS should expand their

overseas revenue further. We are assuming 47%

y-o-y growth in overseas revenue growth in

Gamevil to reflect its 1) growth momentum in the

overseas markets and 2) synergy effects.

Regional revenue breakdown by company in 2013 Gamevil’s diversified overseas revenue

Source: Company data, HSBC Research Source: Company data, HSBC Research

0%10%20%30%40%50%60%70%80%90%

100%

Gamevil NHNE Com2uS Wemade

Domestic Overseas

01,0002,0003,0004,0005,0006,0007,0008,0009,000

10,000

4Q12 1Q13 2Q13 3Q13 4Q13

LATAM EU APAC North America

(KRWmil)

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WeMade

WeMade seems to be following a two-pronged

strategy by: 1) using mobile SNS platforms such as

LINE and WeChat and 2) publishing by itself. The

company stated that it will launch Iron Slam and

Hero Square through LINE in Japan. Also, it will

launch Moon Wolf through WeChat. It already

finished closed beta testing in January 2014. At the

same time, the company is planning to launch Atlan

Story directly through its US office. We are

assuming 35% y-o-y growth in WeMade’s overseas

mobile game revenue this year.

NHN Entertainment

NHN’s strength in the overseas mobile game

business stems from LINE platform and outsourcing

of intellectual property, in our view. NHNE has

been successfully launching mobile games in Japan

through LINE. Recently, LINE Disney Tsum Tsum

and LINE Tsuri-tomo were ranked in the top 20

Japanese Google Playstore in terms of revenue. The

company seems to utilize intellectual property such

as Disney characters and LINE characters very well.

Given many games have been popular on the LINE

platform, we think LINE’s geographical expansion

will provide further opportunity to NHNE’s

overseas business.

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Messaging – the key mobile app

The messaging function accounts for a majority of

text-based communication; it is a core function on

the mobile platform in the same way that search is

a core function in desktop PCs. We believe

dominant messaging apps will become sustainable

businesses in the same way that search has.

According to venture capital firm KPCB, mobile

phone users check their smartphones 23 times a

day on average for messaging and 22 times a day

for voice calls. These figures are much higher

than that for gaming (12 times a day) and social

media (9 times a day). We believe that such high

frequency of usage and a large user base will

make messaging the key app on smartphones.

Monetization avenues

LINE has four main sources of revenue: 1) mobile

games; 2) advertisements; 3) e-commerce; and 4)

stickers and other mobile contents. We expect

strong revenue growth in 2014 at 72% y-o-y, led

mainly by mobile game revenue growth, which

we think is due mainly to the increase in mobile

game ARPU and the increasing number of

smartphone users in Japan. Our 2014 estimate of

mobile game ARPU in Japan stands at

USD0.7/month versus an average of

USD3.5/month for Japanese mobile users.

Smartphone penetration ratio in Japan is still

below 50%, which implies a consistent increase in

smartphone users.

Recent trend among competitors – Internet finance through messengers

Although LINE is not planning to provide an

Internet financial service in the near future, there

have been some expectations on its peer

messenger platforms to start financial services.

We look at Kakao and WeChat to gauge the future

scenario, because they are very similar to LINE.

Kakao – Kakao Bank Wallet and Payment System

According to various news reports, Kakao is

planning to commence Internet finance service in

cooperation with Bank Wallet. Bank Wallet is an

Internet finance service made by 18 banks in

Korea, which will consist of Mobile Cash Card

and Bank Money. Mobile Cash Card service

enables users to withdraw money from ATMs

while Bank Money is a pre-paid card service.

Still prefer platform business

Messenger to be the most important gateway in smartphones

Synergy between various services should bring better

monetization in the long term

New business under development such as Internet finance

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Kakao is known to be planning to connect the

Bank Money function to Kakao Talk. Kakao Talk

users can use Bank Wallet by subscribing to it

with their Kakao accounts and one-time

certification. As a result, Kakao Talk users can

send and receive small amounts of money through

the Kakao Talk messenger.

Kakao is also preparing to launch a payment

service, in cooperation with Payment Gate (PG)

according to ETNews. Currently, the company is

developing a module in the Kakao network and is

planning to commence this service after

technological integration. Bank Wallet Kakao is

used for sending cyber money to friends, but the

payment system enables credit transactions.

The mobile payment service is expected to give a

variety of business opportunities to messenger apps.

It will enable not only Internet transactions but also

new services such as targeted ads or coupon services

based on its big user data. The company denied any

specific plans on this business yet.

Wechat

The regulator is concerned that QR code payment

has gone beyond the traditional business model of

point-of-sale machines, which may have potential

security loopholes, leading to user information

leakage. Credit card applications without on-site

ID and signature verification may pose risks to

cardholders’ credit/fund safety.

Relevant payment processors (e.g., Alipay,

Tencent) have been asked to suspend QR code

payment services and virtual credit cards

immediately and submit documents covering

product, operation and risk control details. The

PBoC will undertake a comprehensive security

risk assessment and then release guidelines to

better regulate the new business models.

According to 21cbh.com, the PBoC released a

preliminary Guideline on Payment Processors’

Online Payment Operations on 11 March for

consultation. The guideline rules that, for

individual accounts, the transaction amount

cannot exceed RMB1k per transfer payment and

RMB5k per consumption payment. Accumulated

transfer payments cannot exceed RMB10k a year

and consumption payments cannot exceed

RMB10k a month.

Possible synergies between businesses

1) LINE Business Connect – could raise official

account pricing

LINE Business Connect is a service through

which corporates can send customized messages

to individual users, using LINE’s database. It also

enables two-way communications between the

corporation and the user. We think it could raise

the pricing of official accounts as advertisers

should be able to employ more targeted marketing

activities, which would improve ROI.

2) LINE Creators Market – synergy with

Webstore expected

LINE Creators Market is a platform through

which any LINE user can sell ‘stickers’ designed

by themselves through the LINE Webstore.

Stickers are cartoon character images that can be

used within the LINE messaging app. Revenue is

equally shared between the content provider (i.e.,

the user/designer) and LINE. We think this will

not only raise sticker revenue, but will also

improve the usage of LINE Webstore. LINE

Webstore is an online content market with various

payment methods such as credit card, prepaid card

and Paypal, and has been launched in Japan,

Taiwan, Thailand and Indonesia so far.

3) LINE Call – potential market on its own

LINE Call enables LINE users to call non-LINE

users in Japan, Thailand, Spain, Mexico, the US

and the Philippines through a LINE app at a lower

call rate no matter what country the receiver is in.

It provides a calling service at JPY3/min to fixed

lines and JPY14/min to mobile phones. If users

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select a fixed rate, they can choose between fixed-

line only and both fixed-line and mobile at

JPY2/min and JPY6.5/min, respectively. Given

that the current average mobile calling rate is very

high at JPY42/min, we think this service could

attract a high number of users on the back of price

competitiveness. It is available within the LINE

app, so users do not have to download a separate

app. There is a limited-period promotion offering

users free calls of up to 10 minutes in around

1.3m stores in Japan. LINE coins are also

available to pay for calls.

If 10% of Japanese LINE users were to take up

LINE Call at a flat-rate for one hour per month,

then total revenue could rise to around KRW250bn

annually, or c33% of our 2014e LINE revenue

forecast. That said, we do not reflect this in our

earnings estimates given: 1) already highly

fragmented payment schemes in Japan and 2)

difficulties in forecasting user behaviour. This

service will commence in March 2014.

Existing businesses

1) Advertising

LINE’s ad revenue is derived from three

platforms: 1) the official account, 2) LINE@ and

3) sponsored stickers.

Companies can register users as their “friends” if

users accept a request from the company.

Companies can then send promotional or

marketing messages for a specified fee. They are

charged a JPY2m registration fee for six months

and another JPY1.5m per month for sending

messages. They pay JPY1.5 per text if the number

of texts sent exceeds the contracted amount. LINE

currently has 173 paying accounts (96 in Japan,

36 in Taiwan, 26 in Thailand, and 15 in

Indonesia).

LINE@ is more of a local marketing platform for

small- to medium-sized stores. The stores can

register at LINE@ for a monthly fee of JPY5,000

and pay an additional fee for sending messages.

Over 20,000 stores were registered under LINE@

as of February 2014 versus 1,000 stores as of

January 2013 in Japan. Companies can also

produce sponsor stamps with a corporate image at

JPY10m and let users use them for free as a

means of promoting their brands.

LINE Corp launched LINE Free Coin, a rewards-

based advertising programme in June 2013. LINE

Coin is a virtual currency that users can earn in

return for downloading apps promoted by LINE.

LINE coins can be exchanged for content, such as

stamps, available over LINE apps. Users can also

use LINE Free Coin to purchase and download

applications. We think LINE Free Coin is a key

application that could be used to develop spending

habits among mobile users who are reluctant to

Japan advertising market trends Japanese mobile content and commerce market trends

Source: Company data, HSBC Source: Ministry of Internal Affairs and Communications, HSBC

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

2005

2006

2007

2008

2009

2010

2011

2012

Promotional Internet Satellite Media Traditional

(JPYbn)

0

200

400

600

800

1,000

1,200

1,400

1,600

2005 2006 2007 2008 2009 2010 2011 2012

Mobile Contents market Mobile commerce market

(JPYbn)

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spend money on mobile devices. Once they get

used to buying content or goods with their LINE

Free Coins, the company hopes they will start to

spend real money through LINE Coin.

LINE generates revenue by charging advertisers

fees in return for promoting their apps. Revenue

can also be generated by users purchasing LINE

Coins using either their credit card or cash.

2) E-commerce

Aside from mobile games and mobile advertising,

LINE has the potential to penetrate the mobile

commerce space. The company launched LINE

Shopping in Indonesia and Malaysia in November

2013 and in Thailand in December 2013. The

service has adopted a business model that offers

users attractive deals for a limited period of time.

LINE Mall was also launched in Japan in

December 2013. The service focuses on

smartphone commerce in terms of its transaction

procedure and user interface. It currently provides

a C2C transaction service only, recognising a 10%

commission on the transaction value as its top line.

The company plans to launch a B2C transaction

service in 1H14.

3) Mobile games

LINE has launched a total of 55 mobile games

since it started its mobile game service in 4Q12

and seven games in 4Q13 alone. Notably, LINE

Dozer and LINE Fish Island are ranked No 25 and

No 43 in Japan Google Playstore as of 4 March

2014. The company also has 17 localized mobile

game titles in ex-Japan regions including China,

Thailand, Indonesia and Spain. In 1Q14, the

company is planning to launch games such as

LINE Everyone’s Marvel and LINE Rainbow

Chaser. Launched in 1Q14, LINE Disney Tsum

Tsum is currently ranked No 4 in Google

Playstore and No 2 in iOS in Japan. LINE is

targeting the launch of c50 new mobile games in

2014, of which eight have been launched ytd.

4) Stickers and other mobile contents

LINE offers stickers that are cartoon character

images that can be used within the LINE

messaging app at a price of USD1.99. Sticker

sales account for 18% of LINE’s gross revenue in

2014, on our estimate. LINE also has other mobile

content such as cartoons, fortune telling, news,

and weather. Given cultural differences, we think

such variety in content services provides LINE

with a greater chance of monetization in the

global market.

Digital music market size by countries as of 2012 LINE: Number of users

Source: Kocca, HSBC Source: Company data, HSBC estimates

0

500

1,000

1,500

2,000

2,500

3,000

3,500

US Japan UK Korea German

(USDbn)

0

100

200

300

400

500

600

700

800

2013 2014e 2015e

Others

China

US

LATAM

Spain

SE Asia

Japan

(mil)

12


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Growth in the number of LINE users intact

The total number of users had already reached

370m as of end-February 2014, according to the

company. Our estimate of 516m implies fewer

than 500,000 new users per day, which we think is

achievable. The company guided for 500m total

subscribers by end-2014.

By countries, LINE dominates messaging in Japan

with 50m users, in Thailand with 22m users and

in Taiwan with 17m users. In other major

countries, it has over 10m users in Indonesia,

Spain, India, Mexico, the US and Malaysia.

While Facebook recently acquired WhatsApp, we

do not think the competitive landscape in

messaging has changed significantly. WhatsApp,

LINE and WeChat continue to be the three main

messaging apps globally. Facebook has said that

WhatsApp will be operated independently for the

time being. Additionally, the major geographical

markets of each of the three big messaging apps

do not overlap much.

We think the key factors in competition are

marketing and technology infrastructure stability.

We note that LINE’s marketing has become more

effective of late. It recently started promoting its

services through a popular Korean TV drama, and

gained many users as a result.

Management acknowledges the importance of

marketing and this supported our positive

arguments for NAVER in 2013. Also, system

stability is increasing in importance as the number

of messenger users grows. We note LINE gained

2m users on 25 February 2014, a day that

WhatsApp suffered a server outage. In our view,

NAVER has strong experience and expertise in

backend server management.

NAVER: Quarterly earnings estimates

(KRWbn) 1Q14e 2Q14e 3Q14e 4Q14e 2013e 2014e 2015e

Operating revenue 640.2 705.4 737.9 802.4 2,314.5 2,886.0 3,568.7 Search advertising 352.9 378.9 380.8 404.8 1,352.1 1,517.5 1,687.9 Display advertising 82.9 86.2 83.0 90.8 327.6 342.9 352.0 LINE (net revenue) 145.6 175.5 211.5 233.4 446.2 766.0 1,258.2 (Gross revenue) 244.5 292.0 344.6 383.1 573.4 1,264.3 1,962.7 -Advertisement 28.8 33.9 45.8 59.8 69.2 168.3 422.4 -Games 53.3 62.8 71.7 80.6 191.2 268.3 379.3 -Stamp 46.4 53.2 60.8 69.7 133.4 230.1 324.9 -Others 17.1 25.6 33.3 23.3 42.5 99.3 131.6 Others 58.8 64.8 62.6 73.4 188.7 259.6 270.6 Operating expense 477.7 493.1 506.2 548.6 1,787.8 2,025.6 2,280.2 Operating profit 162.5 212.4 231.7 253.8 526.7 860.4 1,288.6 OP margin 25.4% 30.1% 31.4% 31.6% 22.8% 29.8% 36.1% Net profit 128.0 166.0 170.8 186.1 401.7 650.9 970.8 NP margin 20.0% 23.5% 24.5% 21.9% 17.4% 22.6% 27.2%

Source: HSBC estimates

13


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Share price trend

NAVER and NCSOFT outperformed

Over the past six months, NAVER, NCSOFT, and

Gamevil stocks have outperformed peers in our

coverage. NAVER and NCSOFT stocks rose 66%

and 33%, respectively, while Gamevil rose 19%

vs. +3% for KOSPI.

In terms of valuation, we note that globally

investors have been increasingly preferring

platform operators over developers during the past

year (see chart below). Platform operators such as

Facebook, NAVER and Tencent have traded at a

one-year forward PE of over 30x, while game

developers have traded below 20x. We think this

global theme is likely to cap valuation upside of

Korea mobile game developers.

Korea game developers are trading at 2014e PE of

13-17x, except WeMade. WeMade, which owns a

5.6% stake in Kakao, trades at a 2014e PE of 34x.

Excluding Kakao’s share, it is still trading at a

2014e PE of 27x, which is the main reason for our

UW(V) on WeMade. NHN Entertainment is

trading at a 2014e PE of 15x, similar to other

Valuation and risks

NAVER and NCSOFT have outperformed peers in the past six

months

Valuation premium to the mobile platform companies should

sustain due to less risk and better growth prospects

We reiterate OW(V) on NAVER, OW on NCSOFT and upgrade

Gamevil to OW(V) from N(V)

Relative share price since September 2013 PE trend of global platform operators vs. developers

Source: Bloomberg, HSBC Research Source: Bloomberg, HSBC Research

50

70

90

110

130

150

170

190

Aug-13 Nov-13 Feb-14

NAVER

NCSOFT

Gamevil

Wemade

Com2uS

Daum

NHNE05

1015202530354045

Jan-

13

Mar

-13

May

-13

Jul-1

3

Sep-

13

Nov

-13

Jan-

14

Mar

-14

Facebook

NAVER

Tencent

Activision

Netease

Com2Us

Gamevil

Wemade

NCSOFT

(X)

14


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mobile game developers. However, we estimate

most of its profits are from the web-board game

business, which does not warrant this valuation, in

our view.

NAVER

We reiterate our OW(V) rating. Our target price

of KRW1.1m (unchanged) is based on a sum-of-

the-parts methodology to capture the value of

NAVER and LINE. We value NAVER’s portal at

KRW10.4trn based on a target 2014e PE of 19x

(unchanged), in line with the peer group average.

We estimate LINE’s value at KRW22.4trn,

applying a per-MAU value of KRW76,054 to our

2014 estimated MAU of 294m. Combined, this

gives a total market value of KRW32.7trn for the

company, with 30m outstanding shares (excluding

treasury shares).

The KRW76,054 estimate for the value per MAU

for LINE is based on 13x individual spending, in

line with Facebook’s price-to-sales ratio. We

think that using average value per MAU is

justifiable given LINE is at the monetization stage.

It is still far lower that of Facebook and Twitter

(at USD140 and USD122, respectively) but higher

than the acquisition price of WhatsApp at USD42.

NAVER is currently trading at 39x 2014e PE,

which is close to its all-time high PE, but lower

than Facebook’s 53x PE.

Under our research model, for stocks with a

volatility indicator, the Neutral band is 10ppt above

and below the hurdle rate for Korean stocks of 10%.

Our target price of KRW1.1m implies a potential

return of 38.1%, including the forecast dividend

yield of 0.13%, above the Neutral band; therefore,

we maintain our OW(V) rating. Potential return

equals the percentage difference between the current

share price and the target price, including the

forecast dividend yield when indicated.

Valuation summary

Code Rating TP Price Mkt cap % diff to TP PE (x) PB (x) (KRW) (KRW) (KRWbn) 2014e 2015e 2014e 2015e

Naver 035420 KS OW(V) 1,100,000 797,000 15,822 38.1% 36.5 24.5 13.6 10.0 Daum 035720 KS N 80,000 77,800 1,192 4.1% 13.8 12.5 1.8 1.6 NCSOFT 036570 KS OW 260,000 219,000 3,605 19.1% 13.6 12.5 3.7 3.0 Gamevil 063080 KS OW(V) 80,000 65,500 359 22.1% 17.8 14.9 2.5 2.2 Com2Us 078340 KS N(V) 27,000 24,750 268 9.1% 12.5 9.7 2.2 1.9 Wemade 112040 KS UW(V) 39,000 49,800 852 -20.1% 33.4 21.6 2.9 2.7 NHNE 181710 KS UW(V) 75,000 95,600 1,934 -21.5% 14.9 14.6 1.4 1.3


LINE’s estimated value

Total users Feb-14

Total users end-2014

% MAU assumption

MAU (m) Value per MAU (KRW)

Value (KRWbn)

Japan 50 67 80% 54 259,215 13,868 Taiwan 17 21 80% 17 82,769 1,389 Thailand 22 33 80% 27 56,830 1,514 Other countries 281 395 50% 197 27,000 5,326 Total 370 516 57% 294 76,054 22,373

Source: Company data, HSBC estimates

NAVER: Summary of SOTP valuation

(KRWbn) 2014e sales 2014e OP 2014e NP Estimated value

NAVER ex-LINE 2,120 700 546 10,368 2014e

subscribers% MAU

assumptionValue per

MAU Estimated

value LINE 516 57% 76,054 22,373

NAVER - target market cap 32,741 # of shares (million, ex-treasury) 29.8 Target price (KRW) 1,100,000


15


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Downside risks include intensifying competition

from WhatsApp and WeChat, low barriers to

entry in the gaming and social networking

markets and a weaker Japanese yen. There are

also operational risks given the company’s short

track record in execution outside Korea.

NCSOFT We reiterate our OW rating and target price of

KRW260,000. Our target price is derived from

our 2014e EPS estimate of KRW16,158 and a

2014 target PE of 16x. Our target multiple is

equal to the company’s average one-year forward

PE in 2009 when Aion was launched overseas.

We use the 2009 average, as the abnormally high

valuation after 2010 has been due to the

continuous delay in launching Blade & Soul

(B&S) in Korea. We expect strong EPS growth of

74% y-o-y in 2014, as we expect NCSOFT to see

strong overseas revenue growth on the back of

B&S in China and Wildstar in the US and Europe,

while domestic sales remain resilient. Downside risks include regulatory pressure on the

Korean gaming industry from the government;

disappointing B&S performance in China due to a

maturing MMO market; and execution risks due to

a lack of experience in the Chinese games market.

Under our research model, for stocks without a


and below the hurdle rate for Korean stocks of

10%. Our target price for NCSOFT implies a

potential return of 19.1%, including the forecast

dividend yield, which is above the Neutral band of

our model; therefore, we reiterate our Overweight

stock rating. Potential return equals the percentage

difference between the current share price and the

target price, including the forecast dividend yield.

NCSOFT: Historical 1-yr forward PE trend NCSOFT: Historical 1-yr forward PB trend


Gamevil: Historical 1-yr forward PE trend Gamevil: Historical 1-yr forward PB trend


24.6x

35.9x

13.4x

0

10

20

30

40

50

60

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

PER 5yr Avg +1SD -1SD(x)

3.8x

5.5x

2.2x

0.5

1.5

2.5

3.5

4.5

5.5

6.5

7.5

8.5

2008 2009 2010 2011 2012 2013 2014

P/BV 5yr Avg +1SD -1SD(x)

21.5x

32.3x

10.8x

05

101520253035404550

2011 2012 2013 2014

PER 5yr Avg +1SD -1SD(x)(x)

3.2x

4.3x

2.1x

0.5

1.5

2.5

3.5

4.5

5.5

6.5

2011 2012 2013 2014


16


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Gamevil We raise our 2014 EPS estimate by 6% to reflect

a better revenue outlook for 2014 due to the

company’s strong performance in the overseas

market. Accordingly, we raise our target price to

KRW80,000 from KRW57,000. Our target price

is based on a new target 2014e PE of 21.5x (from

16.5x), which is its historical average PE (2011-

12 to exclude expectations on smartphone game

growth). We upgrade Gamevil to Overweight (V)

from Neutral (V) to reflect the company’s strength

in overseas business with its own platform.



and below the hurdle rate for Korea stocks of 10%.

Our target price implies a potential return of 22.1%

(including a forecast dividend yield of 0%) above

the Neutral band; therefore, we upgrade Gamevil to

OW(V) rating. Potential return equals the percentage

difference between the current share price and the

target price, including the forecast dividend yield

when indicated.

Downside risks include more severe competition

in the domestic market, reducing the company’s

market share.

Com2Us We reiterate our Neutral (V) rating on Com2uS

with an unchanged target price of KRW27,000.

Our target price is based on an unchanged target

2014e PE of 13.8x, which is its historical average

PE except for the period of mid-2012 to mid-2013

when the multiple was abnormally high due to

elevated expectations on mobile game market

growth. We remain N(V) as we think the recent

share price rise of 36% from the trough in

November 2013 fairly reflects expectations of

synergy effects with Gamevil.


volatility indicator, the Neutral band is 10ppt

above and below the hurdle rate for Korea stocks

of 10%. Our target price implies a potential return

of 9.1% (including a forecast dividend yield of

0%), within the Neutral band; therefore, we

reiterate our N(V) rating. Potential return equals

the percentage difference between the current



Upside risks: Possible success in overseas

markets. We estimate 38% of the company’s 2014

revenue will come from overseas. Downside risks:

More severe competition in the domestic market,

reducing the company’s market share.

Com2uS: historical 1-yr forward PE trend Com2uS: historical 1-yr forward PB trend


Gamevil: Summary of earnings changes

(KRWbn) ____ New ____ ___ Old _____ _ % change ___ 2014e 2015e 2014e 2015e 2014e 2015e

Sales 109.8 136.0 104.7 129.7 4.8% 4.9% OP 21.4 26.2 19.5 23.9 9.4% 9.7% OPM 19.5% 19.3% 18.7% 18.4% 0.8ppt 0.8ppt NP 23.8 29.8 22.3 27.9 6.8% 6.8% NPM 21.7% 21.9% 21.3% 21.5% 0.4ppt 0.4ppt


17.3x

24.8x

9.9x

05

10152025303540

2011 2012 2013 2014

PER 5yr Avg +1SD -1SD(x)

2.9x

4.3x

1.5x

0.5

1.5

2.5

3.5

4.5

5.5

6.5

7.5

2011 2012 2013 2014


17


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WeMade

We reiterate our UW(V) rating on WeMade and

raise our target price to KRW42,000 from

KRW39,000 to reflect the increase in Kakao’s

share price in the OTC market to KRW116,150

from KRW90,000. Although our target multiple

of 21x 2014e PE is unchanged, we now include

the value of a 5.6% stake in Kakao. We maintain

our UW(V) on WeMade mainly due to its

demanding valuation of 31x 2014e PE vs.

Com2uS (13x) and Gamevil (17x).





of -20.1% (including a forecast dividend yield of

1.6%) below the Neutral band; therefore, we

reiterate our UW(V) rating. Potential return equals

the percentage difference between the current



Upside risks include better-than-expected growth

especially in the overseas market, possible

commission rate cut by the platform operators,

and a rerating in Kakao’s valuation.

NHN Entertainment

We reiterate our UW(V) rating on NHN

Entertainment, with an unchanged target price of

KRW75,000. Our target price is based on our

2014 EPS estimate of KRW6,408 and 2014e

target PE of 12x, which is the peer average 2014e

PE, including global mobile (15x), online PC (12x)

and web-board game (9x) companies. We think

regulatory pressure on the web-board games

business will squeeze margins, although the top

line could be supported by the growing mobile

games business.





of -21.5% (including zero forecast dividend yield),

which is below the Neutral band; therefore we

reiterate our Underweight (V) rating. Potential

return equals the percentage difference between

the current share price and the target price,

including the forecast dividend yield when

indicated.

Upside risks include a surprising mobile game hit

and a less severe-than-expected impact from

the regulations.

18


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Financials & valuation: NAVER Overweight (V) Financial statements

Year to 12/2012a 12/2013e 12/2014e 12/2015e

Profit & loss summary (KRWb)

Revenue NA 2,315 2,886 3,569EBITDA NA 589 957 1,399Depreciation & amortisation NA -62 -97 -110Operating profit/EBIT NA 527 860 1,289Net interest NA 0 -5 -11PBT NA 536 868 1,294HSBC PBT NA 536 868 1,294Taxation NA -134 -217 -324Net profit NA 402 651 971HSBC net profit NA 402 651 971

Cash flow summary (KRWb)

Cash flow from operations NA NA NA NACapex NA NA NA NACash flow from investment NA NA NA NADividends NA NA NA NAChange in net debt NA NA NA NAFCF equity NA NA NA NA

Balance sheet summary (KRWb)

Intangible fixed assets 39 39 39 39Tangible fixed assets 359 576 678 767Current assets 716 841 1,284 2,035Cash & others 32 64 315 836Total assets 1,959 2,429 3,072 4,018Operating liabilities 232 315 337 342Gross debt 368 368 368 368Net debt 336 304 53 -469Shareholders’ funds 1,359 1,746 2,367 3,308Invested capital 850 1,077 1,350 1,662

Ratio, growth and per share analysis

Year to 12/2012a 12/2013e 12/2014e 12/2015e

Y-o-y % change

Revenue NA NA 24.7 23.7EBITDA NA NA 62.5 46.1Operating profit NA NA 63.4 49.8PBT NA NA 62.1 49.1HSBC EPS NA NA 62.1 49.1

Ratios (%)

Revenue/IC (x) NA 2.4 2.4 2.4ROIC NA 41.2 53.3 64.3ROE NA 25.9 31.6 34.2ROA NA 19.3 24.6 28.2EBITDA margin NA 25.4 33.2 39.2Operating profit margin NA 22.8 29.8 36.1EBITDA/net interest (x) NA 3913.1 191.3 129.5Net debt/equity NA 17.4 2.2 -14.2Net debt/EBITDA (x) NA 0.5 0.1 -0.3CF from operations/net debt NA NA NA NA

Per share data (KRW)

EPS Rep (fully diluted) NA 13480.53 21845.24 32579.90HSBC EPS (fully diluted) NA 13480.53 21845.24 32579.90DPS NA 500.00 1000.00 1000.00Book value 45592.19 58605.99 79451.23 111031.13

Valuation data

Year to 12/2012a 12/2013e 12/2014e 12/2015e

EV/sales NA 11.1 8.8 6.9EV/EBITDA NA 43.5 26.4 17.6EV/IC NA 23.8 18.7 14.8PE* NA 59.1 36.5 24.5P/Book value NA 13.6 10.0 7.2FCF yield (%) NA NA NA NADividend yield (%) NA 0.1 0.1 0.1

Note: * = Based on HSBC EPS (fully diluted)

Issuer information

Share price (KRW) 797000 Target price (KRW) 1100000 3

8.0

Reuters (Equity) 035420.KS Bloomberg (Equity) 035420 KSMarket cap (USDm) 24,419 Market cap (KRWb) 26,271Free float (%) 58 Enterprise value (KRWb) 25602Country Korea Sector InternetAnalyst Hongsik Jo Contact +822 37068774

Price relative

Source: HSBC Note: price at close of 26 Mar 2014

159018

259018

359018

459018

559018

659018

759018

859018

159018

259018

359018

459018

559018

659018

759018

859018

2012 2013 2014 2015Naver Rel to KOSPI INDEX

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Financials & valuation: NCSOFT Overweight Financial statements

Year to 12/2012a 12/2013e 12/2014e 12/2015e


Revenue 754 757 979 1,026EBITDA 190 244 417 447Depreciation & amortisation -38 -39 -39 -38Operating profit/EBIT 151 205 378 409Net interest 17 19 17 19PBT 183 232 403 435HSBC PBT 183 232 403 435Taxation -29 -46 -81 -87Net profit 156 185 322 348HSBC net profit 156 185 322 348


Cash flow from operations 230 266 400 428Capex -90 -90 -70 -70Cash flow from investment -146 -110 -219 -117Dividends -12 -12 -18 -20Change in net debt -53 -123 -150 -272FCF equity 88 127 285 309


Intangible fixed assets 133 133 133 133Tangible fixed assets 464 524 584 626Current assets 674 799 1,112 1,418Cash & others 123 246 396 668Total assets 1,316 1,506 1,884 2,237Operating liabilities 271 287 361 385Gross debt 24 24 24 24Net debt -99 -222 -373 -644Shareholders’ funds 1,001 1,174 1,478 1,806Invested capital 877 923 1,072 1,124


Year to 12/2012a 12/2013e 12/2014e 12/2015e

Y-o-y % change

Revenue 23.8 0.4 29.4 4.8EBITDA 18.1 28.7 70.8 7.3Operating profit 12.0 35.7 84.2 8.2PBT 16.8 26.7 73.7 8.2HSBC EPS 29.1 19.0 73.7 8.2

Ratios (%)

Revenue/IC (x) 0.9 0.8 1.0 0.9ROIC 16.3 19.1 31.1 30.5ROE 16.8 17.0 24.3 21.2ROA 12.7 13.2 19.0 16.9EBITDA margin 25.2 32.2 42.6 43.6Operating profit margin 20.1 27.1 38.6 39.9EBITDA/net interest (x) Net debt/equity -9.7 -18.6 -24.9 -35.3Net debt/EBITDA (x) -0.5 -0.9 -0.9 -1.4CF from operations/net debt


EPS Rep (fully diluted) 7818.15 9300.77 16158.39 17478.27HSBC EPS (fully diluted) 7818.15 9300.77 16158.39 17478.27DPS 600.00 600.00 900.00 1000.00Book value 50209.28 58910.06 74168.44 90646.71

Valuation data

Year to 12/2012a 12/2013e 12/2014e 12/2015e

EV/sales 6.2 6.0 4.5 4.0EV/EBITDA 24.6 18.6 10.5 9.2EV/IC 5.3 4.9 4.1 3.6PE* 28.0 23.5 13.6 12.5P/Book value 4.4 3.7 3.0 2.4FCF yield (%) 1.8 2.7 6.0 6.5Dividend yield (%) 0.3 0.3 0.4 0.5


Issuer information


8.7

Reuters (Equity) 036570.KS Bloomberg (Equity) 036570 KSMarket cap (USDm) 4,464 Market cap (KRWb) 4,802Free float (%) 65 Enterprise value (KRWb) 4530Country Korea Sector INTERNETAnalyst Hongsik Jo Contact +822 37068774

Price relative


95519

145519

195519

245519

295519

345519

95519

145519

195519

245519

295519

345519

2012 2013 2014 2015NCSOFT Rel to KOSPI INDEX

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Financials & valuation: Gamevil Overweight (V) Financial statements

Year to 12/2012a 12/2013e 12/2014e 12/2015e


Revenue 70 81 110 136EBITDA 26 13 23 28Depreciation & amortisation -1 -1 -2 -2Operating profit/EBIT 24 12 21 26Net interest 1 2 3 4PBT 27 14 27 33HSBC PBT 27 14 27 33Taxation -5 -1 -4 -5Net profit 22 13 24 28HSBC net profit 22 13 24 28


Cash flow from operations 22 17 28 36Capex -14 -14 -14 -14Cash flow from investment -24 -11 -25 -24Dividends 0 0 0 0Change in net debt 4 -66 0 -7FCF equity 6 -2 4 10


Intangible fixed assets 3 3 3 3Tangible fixed assets 24 34 44 54Current assets 65 134 153 178Cash & others 12 78 79 86Total assets 99 179 210 246Operating liabilities 7 11 18 26Gross debt 1 1 1 1Net debt -11 -78 -78 -85Shareholders’ funds 91 166 190 219Invested capital 73 82 104 124


Year to 12/2012a 12/2013e 12/2014e 12/2015e

Y-o-y % change

Revenue 64.3 15.6 35.1 23.9EBITDA 38.0 -47.5 70.9 22.0Operating profit 37.8 -49.8 76.4 22.6PBT 36.5 -47.6 93.6 22.1HSBC EPS 39.0 -51.1 84.9 19.2

Ratios (%)




Valuation data

Year to 12/2012a 12/2013e 12/2014e 12/2015e

EV/sales 5.8 4.2 3.1 2.4EV/EBITDA 16.0 25.4 14.8 11.8EV/IC 5.6 4.2 3.3 2.7PE* 16.1 32.9 17.8 14.9P/Book value 4.0 2.5 2.2 1.9FCF yield (%) 1.3 -0.4 1.1 2.3Dividend yield (%) 0.0 0.0 0.0 0.0


Issuer information


2.1

Reuters (Equity) 063080.KQ Bloomberg (Equity) 063080 KSMarket cap (USDm) 397 Market cap (KRWb) 427Free float (%) 58 Enterprise value (KRWb) 342Country Korea Sector INTERNETAnalyst Hongsik Jo Contact +822 37068774

Price relative


21199

41199

61199

81199

101199

121199

141199

161199

21199

41199

61199

81199

101199

121199

141199

161199

2012 2013 2014 2015Gamevil Rel to KOSPI INDEX

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Financials & valuation: Com2uS Neutral (V) Financial statements

Year to 12/2012a 12/2013e 12/2014e 12/2015e


Revenue 77 81 100 117EBITDA 18 10 19 26Depreciation & amortisation -2 -2 -2 -3Operating profit/EBIT 16 8 17 24Net interest 1 1 1 1PBT 24 23 23 30HSBC PBT 24 23 23 30Taxation -3 -4 -4 -5Net profit 20 19 19 25HSBC net profit 20 19 19 25


Cash flow from operations 35 39 29 36Capex -3 -5 -5 -5Cash flow from investment -21 -5 -12 -12Dividends 0 0 0 0Change in net debt -5 -25 -12 -19FCF equity 15 1 8 15




Year to 12/2012a 12/2013e 12/2014e 12/2015e

Y-o-y % change

Revenue 112.4 5.8 22.9 17.4EBITDA 306.1 -48.3 100.4 37.7Operating profit 412.8 -51.9 121.0 39.0PBT 426.8 -2.7 1.3 29.1HSBC EPS 390.2 -7.2 1.3 29.1

Ratios (%)




Valuation data

Year to 12/2012a 12/2013e 12/2014e 12/2015e

EV/sales 3.0 2.5 1.9 1.5EV/EBITDA 12.7 21.7 10.1 6.5EV/IC 3.1 3.1 2.7 2.2PE* 11.7 12.6 12.5 9.7P/Book value 2.6 2.2 1.9 1.6FCF yield (%) 6.2 0.4 3.5 6.2Dividend yield (%) 0.0 0.0 0.0 0.0


Issuer information

Share price (KRW) 24750 Target price (KRW) 27000 9.

1


Price relative


9395

19395

29395

39395

49395

59395

69395

79395

9395

19395

29395

39395

49395

59395

69395

79395

2012 2013 2014 2015Com2uS Rel to KOSPI INDEX

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Financials & valuation: WeMade Underweight (V) Financial statements

Year to 12/2012a 12/2013e 12/2014e 12/2015e


Revenue 120 227 272 314EBITDA 6 24 57 84Depreciation & amortisation -8 -11 -18 -20Operating profit/EBIT -2 12 39 64Net interest -1 6 6 6PBT -5 19 46 71HSBC PBT -5 19 46 71Taxation -3 -6 -10 -16Net profit -4 7 25 38HSBC net profit -4 7 25 38


Cash flow from operations 11 35 64 86Capex -51 -25 -25 -25Cash flow from investment -4 -33 -47 -47Dividends 0 -3 -13 -17Change in net debt -13 6 -6 -17FCF equity -52 -8 21 43




Year to 12/2012a 12/2013e 12/2014e 12/2015e

Y-o-y % change

Revenue 3.5 89.7 19.7 15.4EBITDA -77.6 290.6 141.5 46.8Operating profit -109.7 217.4 63.6PBT -117.9 141.9 54.4HSBC EPS -108.9 261.9 54.4

Ratios (%)

Revenue/IC (x) 0.5 0.9 1.1 1.2ROIC 1.7 5.5 14.4 21.2ROE -1.6 2.4 8.4 11.8ROA 0.6 3.6 8.6 11.7EBITDA margin 5.1 10.5 21.1 26.9Operating profit margin -1.6 5.4 14.4 20.4EBITDA/net interest (x) 5.9 Net debt/equity -16.9 -14.7 -15.5 -18.2Net debt/EBITDA (x) -9.4 -2.2 -1.0 -0.9CF from operations/net debt


EPS Rep (fully diluted) -257.35 412.35 1492.45 2304.82HSBC EPS (fully diluted) -257.35 412.35 1492.45 2304.82DPS 0.00 200.00 800.00 1000.00Book value 16572.05 17120.32 18452.39 20744.99

Valuation data

Year to 12/2012a 12/2013e 12/2014e 12/2015e

EV/sales 6.1 3.2 2.7 2.2EV/EBITDA 121.1 31.0 12.6 8.3EV/IC 3.1 3.0 2.8 2.6PE* 120.8 33.4 21.6P/Book value 3.0 2.9 2.7 2.4FCF yield (%) -6.6 -1.0 2.7 5.6Dividend yield (%) 0.0 0.4 1.6 2.0


Issuer information

Share price (KRW) 49800 Target price (KRW) 42000 -

15.7


Price relative


24261292613426139261442614926154261592616426169261

24261292613426139261442614926154261592616426169261

2012 2013 2014 2015WeMade Rel to KOSPI INDEX

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Financials & valuation: NHN Entertainment Underweight (V) Financial statements

Year to 12/2012a 12/2013e 12/2014e 12/2015e


Revenue NA 642 674 716EBITDA NA 179 127 133Depreciation & amortisation NA 0 -6 -10Operating profit/EBIT NA 179 121 124Net interest NA -1 -1 -1PBT NA 155 128 131HSBC PBT NA 155 128 131Taxation NA -37 -31 -31Net profit NA 118 97 99HSBC net profit NA 118 97 99


Cash flow from operations NA NA NA NACapex NA NA NA NACash flow from investment NA NA NA NADividends NA NA NA NAChange in net debt NA NA NA NAFCF equity NA NA NA NA


Intangible fixed assets 5 5 5 5Tangible fixed assets 2 52 96 137Current assets 442 434 429 445Cash & others 102 104 82 76Total assets 974 1,094 1,194 1,316Operating liabilities 49 52 54 77Gross debt 7 7 7 7Net debt -95 -96 -75 -69Shareholders’ funds 917 1,035 1,132 1,232Invested capital 298 336 394 433


Year to 12/2012a 12/2013e 12/2014e 12/2015e

Y-o-y % change

Revenue NA NA 5.0 6.3EBITDA NA NA -29.1 5.1Operating profit NA NA -32.2 2.0PBT NA NA -17.6 2.2HSBC EPS NA NA -17.6 2.2

Ratios (%)

Revenue/IC (x) NA 2.0 1.8 1.7ROIC NA 42.9 25.2 22.7ROE NA 12.1 9.0 8.4ROA NA 11.6 8.7 8.1EBITDA margin NA 27.9 18.8 18.6Operating profit margin NA 27.8 18.0 17.2EBITDA/net interest (x) NA 179.1 127.0 133.4Net debt/equity NA -9.3 -6.6 -5.6Net debt/EBITDA (x) NA -0.5 -0.6 -0.5CF from operations/net debt NA NA NA NA


EPS Rep (fully diluted) NA 7774.18 6407.85 6550.26HSBC EPS (fully diluted) NA 7774.18 6407.85 6550.26DPS NA 0.00 0.00 0.00Book value 66855.20 68250.29 74658.14 81208.40

Valuation data

Year to 12/2012a 12/2013e 12/2014e 12/2015e

EV/sales NA 1.2 1.1 0.9EV/EBITDA NA 4.2 5.6 4.9EV/IC NA 2.2 1.8 1.5PE* NA 12.3 14.9 14.6P/Book value NA 1.4 1.3 1.2FCF yield (%) NA NA NA NADividend yield (%) NA 0.0 0.0 0.0


Issuer information

Share price (KRW) 95600 Target price (KRW) 75000 -

21.5

Reuters (Equity) 181710.KS Bloomberg (Equity) 181710 KSMarket cap (USDm) 1,348 Market cap (KRWb) 1,450Free float (%) 58 Enterprise value (KRWb) 751Country Korea Sector INTERNETAnalyst Hongsik Jo Contact +822 37068774

Price relative


65738757388573895738105738115738125738135738145738155738

65738757388573895738

105738115738125738135738145738155738

2012 2013 2014 2015NHN Entertainment Rel to KOSPI INDEX

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Disclosure appendix Analyst Certification The following analyst(s), economist(s), and/or strategist(s) who is(are) primarily responsible for this report, certifies(y) that the opinion(s) on the subject security(ies) or issuer(s) and/or any other views or forecasts expressed herein accurately reflect their personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views contained in this research report: Hongsik Jo and Tucker Grinnan

Important disclosures

Equities: Stock ratings and basis for financial analysis

HSBC believes that investors utilise various disciplines and investment horizons when making investment decisions, which depend largely on individual circumstances such as the investor's existing holdings, risk tolerance and other considerations. Given these differences, HSBC has two principal aims in its equity research: 1) to identify long-term investment opportunities based on particular themes or ideas that may affect the future earnings or cash flows of companies on a 12 month time horizon; and 2) from time to time to identify short-term investment opportunities that are derived from fundamental, quantitative, technical or event-driven techniques on a 0-3 month time horizon and which may differ from our long-term investment rating. HSBC has assigned ratings for its long-term investment opportunities as described below.

This report addresses only the long-term investment opportunities of the companies referred to in the report. As and when HSBC publishes a short-term trading idea the stocks to which these relate are identified on the website at www.hsbcnet.com/research. Details of these short-term investment opportunities can be found under the Reports section of this website.

HSBC believes an investor's decision to buy or sell a stock should depend on individual circumstances such as the investor's existing holdings and other considerations. Different securities firms use a variety of ratings terms as well as different rating systems to describe their recommendations. Investors should carefully read the definitions of the ratings used in each research report. In addition, because research reports contain more complete information concerning the analysts' views, investors should carefully read the entire research report and should not infer its contents from the rating. In any case, ratings should not be used or relied on in isolation as investment advice.

Rating definitions for long-term investment opportunities

Stock ratings HSBC assigns ratings to its stocks in this sector on the following basis:

For each stock we set a required rate of return calculated from the cost of equity for that stock’s domestic or, as appropriate, regional market established by our strategy team. The price target for a stock represents the value the analyst expects the stock to reach over our performance horizon. The performance horizon is 12 months. For a stock to be classified as Overweight, the potential return, which equals the percentage difference between the current share price and the target price, including the forecast dividend yield when indicated, must exceed the required return by at least 5 percentage points over the next 12 months (or 10 percentage points for a stock classified as Volatile*). For a stock to be classified as Underweight, the stock must be expected to underperform its required return by at least 5 percentage points over the next 12 months (or 10 percentage points for a stock classified as Volatile*). Stocks between these bands are classified as Neutral.

Our ratings are re-calibrated against these bands at the time of any 'material change' (initiation of coverage, change of volatility status or change in price target). Notwithstanding this, and although ratings are subject to ongoing management review, expected returns will be permitted to move outside the bands as a result of normal share price fluctuations without necessarily triggering a rating change.

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*A stock will be classified as volatile if its historical volatility has exceeded 40%, if the stock has been listed for less than 12 months (unless it is in an industry or sector where volatility is low) or if the analyst expects significant volatility. However, stocks which we do not consider volatile may in fact also behave in such a way. Historical volatility is defined as the past month's average of the daily 365-day moving average volatilities. In order to avoid misleadingly frequent changes in rating, however, volatility has to move 2.5 percentage points past the 40% benchmark in either direction for a stock's status to change.

Rating distribution for long-term investment opportunities

As of 27 March 2014, the distribution of all ratings published is as follows: Overweight (Buy) 44% (33% of these provided with Investment Banking Services)

Neutral (Hold) 38% (30% of these provided with Investment Banking Services)

Underweight (Sell) 18% (30% of these provided with Investment Banking Services)

Information regarding company share price performance and history of HSBC ratings and price targets in respect of its long-term investment opportunities for the companies the subject of this report,is available from www.hsbcnet.com/research.

HSBC & Analyst disclosures

None of the below disclosures applies to any of the stocks featured in this report.

1 HSBC has managed or co-managed a public offering of securities for this company within the past 12 months. 2 HSBC expects to receive or intends to seek compensation for investment banking services from this company in the next

3 months. 3 At the time of publication of this report, HSBC Securities (USA) Inc. is a Market Maker in securities issued by this

company. 4 As of 28 February 2014 HSBC beneficially owned 1% or more of a class of common equity securities of this company. 5 As of 31 January 2014, this company was a client of HSBC or had during the preceding 12 month period been a client of

and/or paid compensation to HSBC in respect of investment banking services. 6 As of 31 January 2014, this company was a client of HSBC or had during the preceding 12 month period been a client of

and/or paid compensation to HSBC in respect of non-investment banking securities-related services. 7 As of 31 January 2014, this company was a client of HSBC or had during the preceding 12 month period been a client of

and/or paid compensation to HSBC in respect of non-securities services. 8 A covering analyst/s has received compensation from this company in the past 12 months. 9 A covering analyst/s or a member of his/her household has a financial interest in the securities of this company, as

detailed below. 10 A covering analyst/s or a member of his/her household is an officer, director or supervisory board member of this

company, as detailed below. 11 At the time of publication of this report, HSBC is a non-US Market Maker in securities issued by this company and/or in

securities in respect of this company HSBC and its affiliates will from time to time sell to and buy from customers the securities/instruments (including derivatives) of companies covered in HSBC Research on a principal or agency basis.

Analysts, economists, and strategists are paid in part by reference to the profitability of HSBC which includes investment banking revenues.

For disclosures in respect of any company mentioned in this report, please see the most recently published report on that company available at www.hsbcnet.com/research.

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Additional disclosures 1 This report is dated as at 28 March 2014. 2 All market data included in this report are dated as at close 26 March 2014, unless otherwise indicated in the report. 3 HSBC has procedures in place to identify and manage any potential conflicts of interest that arise in connection with its

Research business. HSBC's analysts and its other staff who are involved in the preparation and dissemination of Research operate and have a management reporting line independent of HSBC's Investment Banking business. Information Barrier procedures are in place between the Investment Banking and Research businesses to ensure that any confidential and/or price sensitive information is handled in an appropriate manner.

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Disclaimer * Legal entities as at 8 August 2012 ‘UAE’ HSBC Bank Middle East Limited, Dubai; ‘HK’ The Hongkong and Shanghai Banking Corporation Limited, Hong Kong; ‘TW’ HSBC Securities (Taiwan) Corporation Limited; 'CA' HSBC Bank Canada, Toronto; HSBC Bank, Paris Branch; HSBC France; ‘DE’ HSBC Trinkaus & Burkhardt AG, Düsseldorf; 000 HSBC Bank (RR), Moscow; ‘IN’ HSBC Securities and Capital Markets (India) Private Limited, Mumbai; ‘JP’ HSBC Securities (Japan) Limited, Tokyo; ‘EG’ HSBC Securities Egypt SAE, Cairo; ‘CN’ HSBC Investment Bank Asia Limited, Beijing Representative Office; The Hongkong and Shanghai Banking Corporation Limited, Singapore Branch; The Hongkong and Shanghai Banking Corporation Limited, Seoul Securities Branch; The Hongkong and Shanghai Banking Corporation Limited, Seoul Branch; HSBC Securities (South Africa) (Pty) Ltd, Johannesburg; HSBC Bank plc, London, Madrid, Milan, Stockholm, Tel Aviv; ‘US’ HSBC Securities (USA) Inc, New York; HSBC Yatirim Menkul Degerler AS, Istanbul; HSBC México, SA, Institución de Banca Múltiple, Grupo Financiero HSBC; HSBC Bank Brasil SA – Banco Múltiplo; HSBC Bank Australia Limited; HSBC Bank Argentina SA; HSBC Saudi Arabia Limited; The Hongkong and Shanghai Banking Corporation Limited, New Zealand Branch incorporated in Hong Kong SAR

Issuer of report

The Hongkong and Shanghai Banking Corporation Limited, Seoul Securities Branch 7th Floor, HSBC Building

25, 1-ka, Bongrae-dong

Chung-ku, Seoul 100-161, Korea

Telephone: +822 3706 8700/3

Fax: +822 3706 8797

Website: www.research.hsbc.com

This document has been issued by The Hongkong and Shanghai Banking Corporation Limited, Seoul Securities Branch ("HSBC") for the information of its institutional and professional customers; it is not intended for and should not be distributed to retail customers. If it is received by a customer of an affiliate of HSBC, its provision to the recipient is subject to the terms of business in place between the recipient and such affiliate. This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. HSBC has based this document on information obtained from sources it believes to be reliable but which it has not independently verified; HSBC makes no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of the Research Division of HSBC only and are subject to change without notice. HSBC and its affiliates and/or their officers, directors and employees may have positions in any securities mentioned in this document (or in any related investment) and may from time to time add to or dispose of any such securities (or investment). HSBC and its affiliates may act as market maker or have assumed an underwriting commitment in the securities of companies discussed in this document (or in related investments), may sell them to or buy them from customers on a principal basis and may also perform or seek to perform investment banking or underwriting services for or relating to those companies. HSBC Securities (USA) Inc. accepts responsibility for the content of this research report prepared by its non-US foreign affiliate. All U.S. persons receiving and/or accessing this report and wishing to effect transactions in any security discussed herein should do so with HSBC Securities (USA) Inc. in the United States and not with its non-US foreign affiliate, the issuer of this report. In the UK this report may only be distributed to persons of a kind described in Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005. The protections afforded by the UK regulatory regime are available only to those dealing with a representative of HSBC Bank plc in the UK. In Singapore, this publication is distributed by The Hongkong and Shanghai Banking Corporation Limited, Singapore Branch for the general information of institutional investors or other persons specified in Sections 274 and 304 of the Securities and Futures Act (Chapter 289) (“SFA”) and accredited investors and other persons in accordance with the conditions specified in Sections 275 and 305 of the SFA. This publication is not a prospectus as defined in the SFA. It may not be further distributed in whole or in part for any purpose. The Hongkong and Shanghai Banking Corporation Limited Singapore Branch is regulated by the Monetary Authority of Singapore. Recipients in Singapore should contact a "Hongkong and Shanghai Banking Corporation Limited, Singapore Branch" representative in respect of any matters arising from, or in connection with this report. In Australia, this publication has been distributed by The Hongkong and Shanghai Banking Corporation Limited (ABN 65 117 925 970, AFSL 301737) for the general information of its “wholesale” customers (as defined in the Corporations Act 2001). Where distributed to retail customers, this research is distributed by HSBC Bank Australia Limited (AFSL No. 232595). These respective entities make no representations that the products or services mentioned in this document are available to persons in Australia or are necessarily suitable for any particular person or appropriate in accordance with local law. No consideration has been given to the particular investment objectives, financial situation or particular needs of any recipient. This publication is distributed in New Zealand by The Hongkong and Shanghai Banking Corporation Limited, New Zealand Branch incorporated in Hong Kong SAR. In Japan, this publication has been distributed by HSBC Securities (Japan) Limited. In Korea, this publication is distributed by The Hongkong and Shanghai Banking Corporation Limited, Seoul Securities Branch ("HBAP SLS") for the general information of professional investors specified in Article 9 of the Financial Investment Services and Capital Markets Act (“FSCMA”). This publication is not a prospectus as defined in the FSCMA. 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Global Stephen Howard Analyst, Global Sector Head +44 20 7991 6820 [email protected]

Europe Nicolas Cote-Colisson Analyst +44 20 7991 6826 [email protected]

Antonin Baudry Analyst +33 1 56 52 43 25 [email protected]

Dan Graham Analyst +44 20 7991 6326 [email protected]

Christopher Johnen Analyst +49 211 910 2852 [email protected]

Dominik Klarmann, CFA Analyst +49 211 910 2769 [email protected]

Christian Rath +49 211 910 3049 [email protected]

Luigi Minerva Analyst +44 20 7991 6928 [email protected]

Olivier Moral Analyst +33 1 5652 4322 [email protected]

Adam Rumley Analyst +44 20 7991 6819 [email protected]

Dhiraj Saraf, CFA Analyst +91 80 3001 3773 [email protected]

Americas Richard Dineen Analyst +1 212 525 6707 [email protected]

Global Emerging Markets (GEMs) Hervé Drouet Analyst +44 20 7991 6827 [email protected]

Martin Mabbutt Analyst +44 20 7991 6457 [email protected]

Emerging Europe, Middle East & Africa (EMEA) Franca Di Silvestro Head of Research, SA +27 11 676 4223 [email protected]

Bülent Yurdagül Analyst +90 212 376 46 12 [email protected]

Asia Tucker Grinnan Analyst +852 2822 4686 [email protected]

Yogesh Aggarwal Analyst +91 22 2268 1246 [email protected]

Neale Anderson Analyst +852 2996 6716 [email protected]

Joyce Chen Analyst +8862 6631 2862 [email protected]

Luis Hilado Analyst +65 6658 0607 [email protected]

Hongsik Jo Analyst +822 3706 8774 [email protected]

Jenny Lai Head of Research, Taiwan +8862 6631 2860 [email protected]

Carrie Liu Analyst +8862 6631 2864 [email protected]

Steven C Pelayo Analyst +852 2822 4391 [email protected]

Ricky Seo Analyst +822 37068777 [email protected]

Rajiv Sharma Analyst +91 22 2268 1239 [email protected]

Brian Sohn Analyst +822 3706 8765 [email protected]

Jerry Tsai Analyst +8862 6631 2863 [email protected]

Chi Tsang Analyst +852 2822 2590 [email protected]

Rajesh Raman Analyst +65 6658 0608 [email protected]

Yolanda Wang Analyst +8862 6631 2867 [email protected]

Tse-yong Yao Analyst +8862 6631 2861 [email protected]

Joyce Ju Associate +852 2822 4392 [email protected]

Specialist Sales Tim Maunder-Taylor +44 20 7991 5006 [email protected]

Gareth Hollis +44 20 7991 5124 [email protected]

Kubilay Yalcin +49 211 9104880 [email protected]

Myles McMahon +852 2822 4676 [email protected]

Global Telecoms, Media & Technology Research Team

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