Netmarble (251270.KS) MARKETPERFORM / TP KRW100,000

Game Choi Jin-sung +822-3787-2559 jschoi@hmsec.com

Share price (KRW, Aug 12)

Upside (%)

90,200

10.9

Market cap (KRW bn)

Shares outstanding (’000)

Paid-in capital (KRW bn)/ Face value (KRW )

7,731

85,713

8.5 /100

52-week high/low (KRW) 136,000 /88,100

60-day avg. daily T/O (KRW bn) 37

Foreign ownership (%)

Major shareholders (%)

23.97

Bang Joon-hyuk and 7

others 24.94

Price performance

Absolute (%)

Relative (%p)

1M

-6.4

0.5

3M

-31.1

-25.3

6M

-23.6

-13.8 K-IFRS, consolidated

(KRW) 19F EPS 20F EPS TP

Previous 2,623 4,822 135,000

Revised 2,612 3,920 100,000

Consensus 2,932 4,018 132,000

Difference (%) -10.9% -2.4% -24.2%

12-month price performance

Source: WiseFn, Hyundai Motor Securities

Earnings to improve in 2H19

Earnings forecasts and valuations

Sales OP NP EBITDA EPS Growth P/E P/B EV/EBITDA ROE Div. yield

(KRW bn) (KRW bn) (KRW bn) (KRW bn) (KRW) (%YoY) (x) (x) (x) (%) (%)

2017 2,425 510 310 574 3,898 43.3 48.4 3.7 24.2 11.2 0.2

2018 2,021 242 190 322 2,226 -42.9 50.1 2.2 24.1 4.4 0.0

2019F 2,295 246 223 404 2,612 17.3 34.5 1.7 14.3 5.0 0.0

2020F 2,764 362 336 501 3,920 50.1 23.0 1.6 10.6 7.0 0.0

2021F 2,789 355 329 641 3,833 -2.2 23.5 1.5 7.3 6.4 0.0

Note: K-IFRS, consolidated

0

20

40

60

80

100

120

18.08 18.11 19.02 19.05 19.08

NetmarbleKOSPI

1) Investment highlights - 2Q19 results missed consensus expectations. Revenue was in line, but operating profit was below

consensus on the early recognition of marketing costs for new games and a labor cost hike after acquiring a game studio based in North America.

- Helped by the box office success of Avengers: Endgame, the revenues from Marvel Contest of Champions and Marvel Future Fight rose 10% and 47% QoQ, respectively. The Seven Deadly Sins and the King of Fighters: All Star, both new games introduced in 2Q, are estimated to have generated KRW1.6bn and KRW300mn in daily average revenue, respectively.

- We expect earnings to improve in 2H19 over 1H19 on the full recognition of the Seven Deadly Sins in 3Q combined with the Japanese release of Blade & Soul Revolution and the global launch of King of Fighters: All Star. Also, 4Q19 will see the launch of Seven Knights 2 and A3: Still Alive.

- That said, we revise down our 2019 earnings forecasts in light of the lackluster performance of BTS World and the delayed launch of Seven Knights 2 and A3: Still Alive. While we believe margins will widen in 2H19, an earnings turnaround and the success of new games are more important factors for share price performance going forward.

2) Major issues and earnings outlook - NetMarvel reported 2Q19 consolidated revenue of KRW526.2bn (+5.1% YoY, +10% QoQ) and operating

profit of KRW33.2bn (-47% YoY, -2.2% QoQ). The earlier-than-usual recognition of marketing costs for new games and the M&A-related labor cost hike weighed on 2Q19 earnings.

- In 3Q19, we assume King of Fighters: All Star will generate daily average revenue of KRW400mn, the Seven Deadly Sins KRW1bn, and Blade & Soul Revolution KRW800mn from Japan. In 4Q, we estimate Seven Knights 2 and A3: Still Alive will each generate daily average revenue of KRW500mn.

3) Share price outlook and valuation - While we expect profitability to improve in 2H19, we cut our target price to KRW100,000 to reflect our

downward earnings revisions as BTS World has not lived up to the hype and the launch dates for some of the new games have been delayed.

Company Note August 13, 2019

2

COMPANY NOTE

Fig 1. 2Q19 review Quarterly earnings Change HMS estimates Consensus (KRW bn) 2Q18 1Q18 2Q19P (%YoY) (%QoQ) 2Q19P %diff 2Q19P %diff Revenue 501 478 526 5.10 10.2 542 -2.9 533 -1.3

Operating profit 62.2 33.9 33.2 -46.70 -2.2 46.4 -28.4 44.2 -24.8

Pretax profit 87.7 58.6 39.4 -55.10 -32.8 68.1 -42.1 68.1 -42.1

Net profit 66.3 42.3 38 -42.70 -10.2 47.8 -20.5 46.8 -18.9

Note: K-IFRS, consolidated Source: Company data, WiseFn, Hyundai Motor Securities

Fig 2. Earnings revisions Revised Previous %change

(KRW bn) 19F 20F 19F 20F 19F 20F Revenue 2,295 2,764 2,385 2,668 -3.8 3.6

Operating profit 246 362 293 328 -15.9 10.3

Pretax profit 306 448 382 444 -20.0 1.0

Net profit 223 336 245 285 -8.8 18.1

Source: Company data, Hyundai Motor Securities

Fig 3. Quarterly earnings trends and forecasts

(KRW bn) 1Q18 2Q18 3Q18 4Q18 1Q19 2Q19P 3Q19F 4Q19F Revenue 507 501 526 487 478 526 636 655

Lineage 2 Revolution 178 140 121 102 72 74 68 62

Blade & Soul Revolution - - - 29 72 53 85 87

Others 315 346 390 325 319 385 468 491

Operating expenses 433 439 459 449 444 493 550 562

Commission 213 208 216 207 210 229 280 277

Labor 99 102 102 111 114 120 121 127

Marketing 75 79 85 73 63 84 80 85

Others 47 51 56 58 57 61 70 72

Operating profit 74 62 67 38 34 33 86 94

Operating margin (%) 14.6 12.4 12.8 7.8 7.1 6.3 13.5 14.3

Pretax profit 105 88 72 26 59 39 100 108

Pretax margin (%) 20.7 17.5 13.7 5.3 12.3 7.5 15.7 16.5

Net profit 79 66 55 15 42 38 77 83

Net margin (%) 15.6 13.2 10.5 3.0 8.9 7.2 12.1 12.7

Controlling interest 74 58 44 14 39 35 72 77

Non-controlling interest 5 8 11 1 3 3 5 6

Note: K-IFRS, consolidated Source: Company data, Hyundai Motor Securities

3

Game Choi Jin-sung +822-3787-2559 / jschoi@hmsec.com

Fig 4. Revenue and OP margin trends Fig 5. Revenue breakdown by game (2Q19)

0%

5%

10%

15%

20%

25%

30%

35%

-

100

200

300

400

500

600

700

800

1Q17 3Q17 1Q18 3Q18 1Q19 3Q19F

Revenue

OP margin (R)

(KRW bn)

Lineage 2

Revolution,

14% Marvel CoC,

15%

Seven

Knights, 3%

Modoo

Marble, 3%

Cookie Jam,

6%Others, 24%

Marvel

Future Fight,

8%

Harry Potter,

4%

B&S

Revolution,

10%

The Seven

Deadly Sins,

8%

KoF All Star,

5%

Source: FnGuide, Hyundai Motor Securities Source: Bloomberg, Hyundai Motor Securities

Fig 6. New game lineup

Company Title Region Genre Estimated release Netmarble B&S Revolution Japan MMORPG 3Q19

Yo-kai Watch Medal Wars Japan Casual 3Q19

KoF All Star Global Action RPG 3Q19

A3: Still Alive Korea MMORPG 4Q19

Seven Knights 2 Korea MMROPG 4Q19

Source: Hyundai Motor Securities

4

COMPANY NOTE

Income statement

Balance sheet (KRW bn) 2017 2018 2019F 2020F 2021F (KRW bn)

2017 2018 2019F 2020F 2021F

Sales 2,425 2,021 2,295 2,764 2,789 Current assets 2,918 2,591 3,227 3,752 4,402 Change (%) 61.6 -16.6 13.5 20.4 0.9 Cash and cash equivalents 1,908 1,549 1,938 2,425 3,004

Cost of goods sold 0 0 0 0 0 Short-term investment assets 644 501 605 621 677 % of sales 0.0 0.0 0.0 0.0 0.0 Accounts receivable 291 182 276 290 299

Gross profit 2,425 2,021 2,295 2,764 2,789 Inventory assets 2 3 5 5 6 Gross margin (%) 100.0 100.0 100.0 100.0 100.0 Other current assets 73 97 147 154 159 Change (%) 223.9 -16.6 13.5 20.4 0.9 Non-current assets 2,429 2,842 3,056 2,954 2,700

SG&A expenses 1,915 1,780 2,049 2,402 2,435 Tangible assets 145 174 130 85 61 % of sales 79.0 88.0 89.3 86.9 87.3 Intangible assets 1,237 1,319 1,370 1,298 1,057 EBITDA 574 322 404 501 641 Investment assets 975 1,270 1,410 1,426 1,437

EBITDA margin (%) 23.7 15.9 17.6 18.1 23.0 Other non-current assets 72 79 145 145 145 Change (%) 76.6 -44.0 25.5 24.1 28.0 Other financial assets 0 0 0 0 0

Operating profit 510 242 246 362 355 Total assets 5,348 5,433 6,283 6,706 7,101 Operating margin (%) 21.0 12.0 10.7 13.1 12.7 Current liabilities 501 587 939 994 1,026 Change (%) 73.0 -52.6 2.0 47.0 -2.1 Short-term debt 4 8 10 10 10

Non-operating profit -33 49 61 87 85 Accounts payable 121 81 158 166 171 Interest income 55 96 91 101 101 Current portion of long-term debt 0 0 0 8 8 Interest expenses 43 20 44 39 41 Other current debt 377 497 771 810 837 Other non-operating income -44 -28 14 26 24 Non-current liabilities 381 295 532 539 549

Subsidiaries/affiliate income -6 0 -1 -1 -1 Bonds 0 0 0 0 0 Pretax profit from cont ops 471 290 306 448 439 Long-term debt 0 85 149 141 141

Pretax margin (%) 19.4 14.4 13.3 16.2 15.7 LT financial debt (incl. lease) 234 22 92 92 92 Change (%) 71.1 -38.4 5.3 46.6 -2.1 Other non-current debt 147 187 291 305 315

Income tax 111 76 65 87 86 Other financial liabilities 0 0 0 0 0 Profit from continuing ops 361 215 240 361 353 Total liabilities 882 882 1,471 1,533 1,575 Profit from discontinuing ops 0 0 0 0 0 Owners of parent equity 4,329 4,374 4,616 4,952 5,281 Net profit 361 215 240 361 353 Paid-in capital 9 9 9 9 9

Net margin (%) 14.9 10.6 10.5 13.1 12.7 Capital surplus 3,842 3,849 3,849 3,849 3,849 Change (%) 72.5 -40.4 11.8 50.4 -2.2 Capital adjustment, etc. -423 -617 -662 -662 -662

NP from controlling interest 310 190 223 336 329 Other accumul earnings and comp income 299 373 435 435 435 NP from non-controlling interest 51 25 17 25 25 Retained earnings 603 761 984 1,320 1,649 Other comprehensive income 208 77 64 0 0 Non-controlling interest 136 177 196 221 246 Total comprehensive income 569 292 304 361 353 Total equity 4,465 4,552 4,812 5,173 5,526 Cash flow Key financial data (KRW bn) 2017 2018 2019F 2020F 2021F (KRW, x, %) 2017 2018 2019F 2020F 2021F Operating cash flow 503 235 495 521 654 EPS (based on net profit) 4,541 2,524 2,808 4,216 4,121 Net profit 361 215 240 361 353 EPS (based on parent net profit) 3,898 2,226 2,612 3,920 3,833 Depreciation on tangible assets 11 15 83 67 46 BPS (based on total equity) 52,516 53,381 56,138 60,353 64,475 Amortization on intangible assets 53 65 75 73 241 BPS (based on owners of parent equity) 50,919 51,303 53,856 57,776 61,608 FX-related profit 10 -15 -10 0 0 DPS 360 0 0 0 0 Dec (inc) in working capital -19 -37 96 21 14 P/E (based on net profit) 41.5 44.2 32.1 21.4 21.9 Others 86 -7 12 0 0 P/E (based on parent net profit) 48.4 50.1 34.5 23.0 23.5 Investing cash flow -1,433 -505 -239 -53 -89 P/B (based on total equity) 3.6 2.1 1.6 1.5 1.4 Dec (inc) in investment assets -425 -295 -140 -16 -11 P/B (based on owners of parent equity) 3.7 2.2 1.7 1.6 1.5 Decrease in tangible assets 0 0 0 0 0 EV/EBITDA (reported) 24.2 24.1 14.3 10.6 7.3 Increase in tangible assets (capex)

-30 -23 -25 -21 -22 Dividend yield 0.2 0.0 0.0 0.0 0.0 Others -977 -187 -74 -16 -56 Growth (%) Financing cash flow 2,527 -99 116 20 13 EPS (based on net profit) 38.8 -44.4 11.3 50.1 -2.2 Increase (decrease) in debt -34 111 252 12 13 EPS (based on parent net profit) 43.3 -42.9 17.3 50.1 -2.2 Increase (decrease) in bond 0 0 0 0 0 Profitability (%) Increase in capital 2,644 7 0 0 0 ROE (based on net profit) 12.5 4.8 5.1 7.2 6.6 Dividend 0 -31 0 0 0 ROE (based on parent net profit) 11.2 4.4 5.0 7.0 6.4 Others -82 -187 -136 8 0 ROA 9.9 4.0 4.1 5.6 5.1 Other cash flow 37 10 18 0 0 Stability (%) Increase (decrease) in cash 1,635 -359 389 488 578 Total liabilities/equity 19.8 19.4 30.6 29.6 28.5 Beginning cash 273 1,908 1,549 1,938 2,425 Net debt/equity Net cash Net cash

Net cash

Net cash

Net cash

Ending cash 1,908 1,549 1,938 2,425 3,004 Interest coverage 37.8 417.0 26.8 33.5 32.6 Note: K-IFRS, consolidated

5

Game Choi Jin-sung +822-3787-2559 / jschoi@hmsec.com

Investment rating and target price history Two-year price chart

Date Rating TP Difference (%)

0

50

100

150

200

250

17.08 17.10 17.12 18.02 18.04 18.06 18.08 18.10 18.12 19.02 19.04 19.06 19.08

Netmarble

Target price

(KRW'000)

Average High/Low

17/08/14 BUY 160,000 -1.4 16.6 17/11/08 BUY 220,000 -26.3 -9.3 18/05/02 BUY 180,000 -17.1 -7.5 18/08/09 M.PERFORM 145,000 -20.0 -36.7 19/01/18 BUY 135,000 -17.5 -8.5 19/02/14 M.PERFORM 135,000 -10.8 -23.3 19/05/15 M.PERFORM 135,000 -15.4 -34.7 19/08/13 M.PERFORM 100,000 - -

Compliance note • The author(s) of this report does(do) not have any interests in the company(ies) covered herein. • Hyundai Motor Securities has not disclosed the material contained in this report to any institutional investor or third party prior to its publication. • The author(s) of this report does(do) not own more than 1% of the shares of the company(ies) covered in this report. • Hyundai Motor Securities has not taken part in securities issuance (DR, CB, IPO, and market making) of the company(ies) covered in this report as lead manager for

the past six months. • This report accurately reflects the author(s)’s professional views and was written without any undue external influence or interference.

Investment rating Hyundai Motor Securities offers three sector investment ratings based on six-month forward fundamentals and share price outlook.

• OVERWEIGHT: Sector-wide fundamentals and share prices are expected to turn up. • NEUTRAL: No meaningful fundamental improvement is expected. • UNDERWEIGHT: Sector-wide fundamentals and share prices are expected to turn down.

Hyundai Motor Securities offers three company investment ratings based on the relative return expected in the following six months, based on the closing price on the date of rating declaration.

• BUY: Excess return of +15%p or more • MARKETPERFORM (M.PERFORM): Excess return of between -15%p and +15%p • SELL: Excess return of -15%p or less

Stock ratings distribution (July 1 2018-June 30, 2019)

Rating Count % of rating category BUY

MARKETPERFORM SELL

148 18 0

89.16 10.84

0.0

• This report has been prepared for informational purposes only and thus may not be reproduced or distributed without the prior written consent of Hyundai Motor Securities. • The information and statistical data contained herein were taken from sources believed to be relia ble but in no way can be guaranteed and, therefore, final investment decisions should be

made based on each client’s own judgment. • This report cannot be used as evidence in any legal disputes related to the client’s investment de cisions.