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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
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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-
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Oct
-13
Dec
-13
Feb-
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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.
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)
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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
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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
NAVER
Tencent
Activision
Netease
Com2Us
Gamevil
Wemade
NCSOFT
(X)
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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
Source: HSBC estimates
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
Source: HSBC estimates
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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
volatility indicator, the Neutral band is 5ppt above
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
Source: Bloomberg, HSBC Research Source: Bloomberg, HSBC Research
Gamevil: Historical 1-yr forward PE trend Gamevil: Historical 1-yr forward PB trend
Source: Bloomberg, HSBC Research Source: Bloomberg, HSBC Research
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
P/BV 5yr Avg +1SD -1SD(x)
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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.
Under our research model, for stocks with a
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 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.
Under our research model, for stocks with a
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
share price and the target price, including the
forecast dividend yield when indicated.
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
Source: Bloomberg, HSBC Research Source: Bloomberg, HSBC Research
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
Source: HSBC estimates
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
P/BV 5yr Avg +1SD -1SD(x)
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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).
Under our research model, for stocks with a
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 -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
share price and the target price, including the
forecast dividend yield when indicated.
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.
Under our research model, for stocks with a
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 -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.
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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
Profit & loss summary (KRWb)
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 summary (KRWb)
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
Balance sheet summary (KRWb)
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
Ratio, growth and per share analysis
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
Per share data (KRW)
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
Note: * = Based on HSBC EPS (fully diluted)
Issuer information
Share price (KRW) 219000 Target price (KRW) 260000 1
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
Source: HSBC Note: price at close of 26 Mar 2014
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
Profit & loss summary (KRWb)
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 summary (KRWb)
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
Balance sheet summary (KRWb)
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
Ratio, growth and per share analysis
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 (%)
Revenue/IC (x) 1.1 1.0 1.2 1.2ROIC 34.1 15.1 20.7 20.2ROE 28.2 10.0 13.4 13.9ROA 25.9 9.5 12.4 12.6EBITDA margin 36.5 16.6 20.9 20.6Operating profit margin 34.3 14.9 19.5 19.3EBITDA/net interest (x) Net debt/equity -12.5 -46.7 -40.9 -38.9Net debt/EBITDA (x) -0.4 -5.8 -3.4 -3.0CF from operations/net debt
Per share data (KRW)
EPS Rep (fully diluted) 4078.23 1993.47 3686.81 4396.46HSBC EPS (fully diluted) 4078.23 1993.47 3686.81 4396.46DPS 0.00 0.00 0.00 0.00Book value 16514.02 25707.91 29394.73 33791.18
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
Note: * = Based on HSBC EPS (fully diluted)
Issuer information
Share price (KRW) 65500 Target price (KRW) 80000 2
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
Source: HSBC Note: price at close of 26 Mar 2014
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
Profit & loss summary (KRWb)
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 summary (KRWb)
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
Balance sheet summary (KRWb)
Intangible fixed assets 2 2 2 2Tangible fixed assets 44 45 47 49Current assets 46 71 92 118Cash & others 8 33 45 64Total assets 100 127 152 183Operating liabilities 9 17 23 29Gross debt 0 0 0 0Net debt -8 -33 -45 -64Shareholders’ funds 91 110 129 154Invested capital 75 67 72 76
Ratio, growth and per share analysis
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 (%)
Revenue/IC (x) 1.3 1.1 1.4 1.6ROIC 23.8 9.8 21.0 27.0ROE 25.4 18.9 16.1 17.5ROA 23.5 16.7 13.8 14.8EBITDA margin 24.0 11.7 19.1 22.4Operating profit margin 20.9 9.5 17.1 20.2EBITDA/net interest (x) Net debt/equity -8.6 -30.0 -35.1 -41.5Net debt/EBITDA (x) -0.4 -3.5 -2.4 -2.4CF from operations/net debt
Per share data (KRW)
EPS Rep (fully diluted) 2111.76 1959.48 1984.25 2562.01HSBC EPS (fully diluted) 2111.76 1959.48 1984.25 2562.01DPS 0.00 0.00 0.00 0.00Book value 9407.60 11357.19 13341.44 15903.45
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
Note: * = Based on HSBC EPS (fully diluted)
Issuer information
Share price (KRW) 24750 Target price (KRW) 27000 9.
1
Reuters (Equity) 078340.KQ Bloomberg (Equity) 078340 KSMarket cap (USDm) 232 Market cap (KRWb) 250Free float (%) 58 Enterprise value (KRWb) 207Country Korea Sector INTERNETAnalyst Hongsik Jo Contact +822 37068774
Price relative
Source: HSBC Note: price at close of 26 Mar 2014
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
Profit & loss summary (KRWb)
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 summary (KRWb)
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
Balance sheet summary (KRWb)
Intangible fixed assets 100 100 100 100Tangible fixed assets 44 91 106 118Current assets 175 165 193 232Cash & others 57 51 57 74Total assets 360 404 454 513Operating liabilities 22 56 84 105Gross debt 0 0 0 0Net debt -57 -51 -57 -74Shareholders’ funds 276 285 307 345Invested capital 239 249 258 270
Ratio, growth and per share analysis
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
Per share data (KRW)
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
Note: * = Based on HSBC EPS (fully diluted)
Issuer information
Share price (KRW) 49800 Target price (KRW) 42000 -
15.7
Reuters (Equity) 112040.KQ Bloomberg (Equity) 112040 KSMarket cap (USDm) 778 Market cap (KRWb) 837Free float (%) 58 Enterprise value (KRWb) 737Country Korea Sector INTERNETAnalyst Hongsik Jo Contact +822 37068774
Price relative
Source: HSBC Note: price at close of 26 Mar 2014
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
Profit & loss summary (KRWb)
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 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 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
Ratio, growth and per share analysis
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
Per share data (KRW)
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
Note: * = Based on HSBC EPS (fully diluted)
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
Source: HSBC Note: price at close of 26 Mar 2014
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
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Chung-ku, Seoul 100-161, Korea
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Global Stephen Howard Analyst, Global Sector Head +44 20 7991 6820 [email protected]
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Global Telecoms, Media & Technology Research Team