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1、KOREAJuly 15,2009,Online Game,Overweight(reinstate),After Long Knocking,Door Finally Opening,NCsoft(036570),BUY(reinstate),Neowiz Games(095660),BUY(initiate),CJ Internet(037150),BUY(initiate),Alex Kwon/Telecom,Internet(822)2014.1731,Yoochul Kim/(822)2014.1614,For explanations of equity research rati
2、ngs and disclosures,please refer to the compliance section at the end of this report.,4,5,9,12,15,19,2,Online GameCONTENTSAfter Long Knocking,Door Finally OpeningMomentum to Continue in 2H09 Fig 1:Online game industry outperformed market in 1H09Fig 2:High premium justifiable,given NCsofts excellent
3、EPS growthFig 3:Neowiz Games fair PER is at discount to that of NCsoftFig 4:Chinese publishers at below-market EPS growth rate;Comparison less meaningfulFig 5:Fair value of the three major online game companiesFig 6:Overseas peers major investment indicatorsFig 7:Major game companies 2009 PER vs.EPS
4、 growthFig 8:Major game companies 2009 PBR vs.ROE,Overseas Sales,the Long-termGrowth DriverNew Games,the Springboardfor DevelopersStakes Getting BiggerDomestic Game Market toContinue Growth,Fig 9:Domestic online game companies growth led by overseas salesFig 10:Online game market growing rapidlyFig
5、11:Overseas sales trend by companyFig 12:Overseas forays boosting 2009 resultsFig 13:Proportion of overseas sales at three majors rising in earnest in 2009Fig 14:Online game company typesFig 15:New games boost to OR at NCsoftFig 16:Difference in cost structure between game developer and publishing c
6、ompanyFig 17:Commission expenses rise as much as game service expands for publishingcompaniesFig 18:Publishers OP margin does not change as much as developersFig 19:Online game market on high growth trackFig 20:Chinese market growing the fastestFig 21:Chinas online game market growing to 26%of globa
7、l market in 2009 from 17%in2006Fig 22:Korean game companies Chinese market position strengthened from 2H08Fig 23:Temporary halt in Blizzards WoW service in ChinaFig 24:US and European online game market to grow at CAGR of 17%by 2010Fig 25:Domestic online game market to grow at 20%CAGR by 2010Fig 26:
8、Both household income and entertainment spending declined YoYFig 27:Proportion of entertainment spending in household expenditures recoveringFig 28:Travel industry sluggish,but online game market riding strong uptrendFig 29:Number of unique visitors to web board gamesFig 30:Number of Internet game p
9、layers 40 years of age or older more than doubledFig 31:Domestic online genre games concentrated in CJ InternetFig 32:Web board games proportion of unique visitors is similar to MMORPGFig 33:Combined web board game sales of three major companies to rise 21%YoY in2009,25,NCsoft(036570,BUY(reinstate),
10、Fig 34:NCsofts share price has followed its OP margin trendFig 35:NCsofts PER band chartFig 36:NCsofts EV/EBITDA band chartFig 37:AION to drive growth in consolidated OR through 2010Fig 38:NCsoft rapidly recovering investment for AION development;OP margin reaching50%Fig 39:NCsofts consolidated earn
11、ings trendFig 40:NCsofts parent-basis earnings trendFig 41:AIONs advancement into overseas marketsHYUNDAI Research,36,44,52,54,3,Online GameFig 42:User base to expand in regions outside of Korea and China from 2010Fig 43:AION-related sales growing rapidly in proportion at overseas subsidiariesFig 44
12、:Shanda increasing servers aggressively;Royalties to reach KRW57.3bn in 2009Fig 45:AION to account for 41%of 2010 OR at N.America subsidiaryFig 46:AION to account for 53%of 2010 OR at Europe subsidiaryFig 47:Existing games peak concurrent users in North America and Europe totaled70,000Fig 48:Guild W
13、ars ranks the second among MMORPGs in North AmericaFig 49:AION well received in US and EuropeFig 50:AION to account for 64%of OR at Taiwan subsidiary by end-2009Fig 51:AION to account for 32%of OR at Japan subsidiary by end-2009,Neowiz Games(095660,BUY(initiate)CJ Internet(037150,BUY(initiate)Append
14、ix 1:Online Game,Fig 52:Neowiz Games PER bandFig 53:Neowiz Games EV/EBITDA bandFig 54:Proportion of publishing to remain flat;Personnel expenses to declineFig 55:OP margin to improve gradually on drop in personnel expenses-to-OR ratioFig 56:No.of unique visitors increased even in off-peak season of
15、2Q09Fig 57:Average session duration also trending upFig 58:Quarterly and annual earnings trendFig 59:Proportion of overseas royalty income rising continuallyFig 60:Overseas sales growing the fastestFig 61:Royalty income displayed clear uptrend from 2H08Fig 62:Cross Fires Chinese market entry a succe
16、ssful caseFig 63:Number of titles entering overseas markets to more than double in 2009Fig 64:Sports games account for significant proportion of publishing salesFig 65:CJ Internets PER bandFig 66:CJ Internets EV/EBITDA bandFig 67:Solid growth of domestic publishing salesFig 68:Proportion of publishi
17、ng to rise to 67%in 2010Fig 69:Commercialization of new games in 2009 to slightly raise marketing cost ratioFig 70:Decreased unique visitors in 2Q09Fig 71:Decreased site duration timeFig 72:CJ Internets quarterly earningsFig 73:Portion of new game sales to grow rapidlyFig 74:CJ Internet to storm ove
18、rseas market from 2009 and reap overseas sales from2010Fig 75:Securing paying users key for growth potentialFig 76:Web board game sales to slow from 2009Fig 77:Operations in China and outlook by company,Companies Overseas Operation Fig 78:Operations in Taiwan and outlook by company,and OutlookAppend
19、ix 2:OwnershipStructure and Affiliates,Fig 79:Operations in US and outlook by companyFig 80:Operations in Europe and outlook by companyFig 81:Operations in Japan and outlook by companyFig 82:NCsofts ownership structureFig 83:Neowiz Games ownership structureFig 84:CJ Internets ownership structureFig
20、85:NCsofts affiliatesFig 86:Neowiz Games affiliatesFig 87:CJ Internets affiliates,HYUNDAI Research,4,Online Game,After Long Knocking,Door Finally Opening,Overweight on Online Game Industry;Top Pick is NCsoft,We reinstate our coverage of the online game industry with an Overweight rating.Korean onlin
21、e game companiessuccessfully advanced into China in 1H09 and will likely continue to chalk up solid results in 2H09 thanks to itsforay into other overseas markets.We present NCsoft as an industry top pick with a fair value of KRW220,000(2010F PER of 17x).The company will likely continue to enjoy sha
22、re price momentum by expanding thecommercial service area of AION in 2H09 from Asia to include North America and Europe.We present BUY onNeowiz Games with a fair value of KRW38,000,which corresponds to a 2009F PER of 17x and a 2010F PER of15x(10%discount to NCsofts 2009 and 2010 fair PER,respectivel
23、y).Neowiz Games successfully advanced intoChina in 1H09,which will likely continue to boost earnings in 2H09.CJ Internet is excessively undervalued andpresent BUY with a fair value of KRW20,000(Hyundai Universes average 2009 PER of 15x and 2010 PER of 10 x).,Overseas Markets to Propel Growth,We expe
24、ct the three major online game companies will aggressively advance into overseas markets,includingChina,North America,and Europe,through 2010.With NCsofts commercial launch of AION in overseasmarkets,the proportion of its overseas sales is expected to rise sharply from 25%of OR in 2008 to 35%in 2009
25、.Its OR is also expected to surge 99%YoY(parent-alone)in 2009.As for Neowiz Games,the proportion of overseassales is expected to increase from 6%in 2008 to 22%in 2009 on the successful launch of Crossfire in China,andits OR is projected to jump 46%YoY.CJ Internet focuses on the domestic publishing b
26、usiness,which will likelylead the companys overall growth(overseas sales to account for 4%of 2009 OR),and its OR is projected to climb18%YoY in 2009.,China Still Important;North America and Europe to be Second Growth Driver,The Chinese online game market is projected to grow 36%YoY in 2009 and 27%Yo
27、Y in 2010.Despite concernsover the operating environment in China(fiercer competition and the governments regulations on foreigncompanies).Korean online game companies have tightened their grip on the Chinese market by diversifying gamegenres.Accordingly,the Chinese online game market will likely co
28、ntinue to serve as a major growth catalyst forthem.We believe North America and Europe will offer another chance for Korean players to increase their pies.The size of combined North American and European markets totals USD4.2bn(based on 2009 earnings),whichis similar to the Korean market size,and wi
29、ll likely grow at a CAGR of 17%through 2010.The online gameindustrys customer base in North America and Europe has expanded rapidly with a rise in the demand foraffordable leisure activities amid the faltering economy.These markets will likely serve as the second growth driverfor the Korean players.
30、,Korean Market to Dispel Concerns over Recession and Sustain Solid Growth,The domestic online game industry will likely continue to expand,given:1)its relatively affordable pricescompared to other leisure activities,which is a huge merit in a recession;2)expansion of customer base for onlinegames;an
31、d 3)relaxed regulations following the establishment of voluntary guidelines designed to prevent illeffects of online games.The Korean online game industry is expected to expand 20%YoY in 2009 and 19%YoYin 2010.,HYUNDAI Research,5,Online Game:Momentum to Continue in 2H09Momentum to Continue in 2H09,O
32、verweight on onlinegame industryTop pick is NCsoft,We expect Korean online game companies will continue to enjoy share pricemomentum in 2H09,with foray into overseas markets bearing fruit.Effects of successfuladvancement into overseas markets in 1H09 were reflected in their share prices,but webeliev
33、e additional advancement into overseas markets and resultant sales growth willcontinue in 2H09.Accordingly,we present Overweight on the online game industry.We present BUY on NCsoft,Neowiz Games,and CJ Internet.Top pick is NCsoft.SinceAION is scheduled for commercial launch in Japan and Taiwan in 3Q
34、09 and in NorthAmerica and Europe in 4Q09,NCsoft is expected to show the strongest share pricemomentum in 2009.Fig 1:Online game industry outperformed market in 1H09,Jan 1,09=100400,KOSPICJ Internet,KOSDAQNeowiz Games,NCsoft,3002001000,1/09,2/09,3/09,4/09,5/09,6/09,7/09,Source:Quantiwise,Fair value
35、ofKRW220,000 for NCsoft,With AIONs success,NCsofts OR and EPS are projected to skyrocket 99%YoY and519%YoY,respectively,in 2009.In view of the games success in Asia,the company isexpected to fare well in North America and Europe in 2010,and its OR and EPS arelikely to jump 18%YoY and 33%YoY,respecti
36、vely,in 2010.To compute the fair valueof KRW220,000,we applied a fair PER of 16.5x to 2010F EPS of KRW13,519.Wepresent BUY on NCsoft.NCsofts share price momentum will likely be driven by expectations for sales in NorthAmerica and Europe where AIONs commercial launch is scheduled for Sep 2009.Accordi
37、ngly,revenues from AION will likely be fully reflected starting in 2010,and thatis why we applied 2010 EPS for the fair value computation.To compute the fair PER of 16.5x,we applied a 67%premium to the markets(HyundaiUniverse)average 2010F PER of 9.9x.To get an appropriate premium rate,wecompared NC
38、soft with Activision Blizzard,a U.S.developer of WoW(World ofWarcraft),which is competing against AION in major markets around the world.HYUNDAI Research,6,Online Game:Momentum to Continue in 2H09Activision Blizzards shares are trading at a 2010F PER of 16x,which is at a 24%premium to the NASDAQs 13
39、x.NCsofts 2010F PER of 14x is at a 40%premium to themarket(Hyundai Universe).We believe NCsofts higher premium is justifiable,sincethe premium of its EPS growth projection to the market is much higher than that ofActivision Blizzard.NCsofts annual average EPS growth projection of 102%during2009-2011
40、 is 262%higher than the markets EPS growth projection of 28%,whileActivision Blizzards EPS growth projection of 57%is 93%higher than the markets.In light of NCsofts strong EPS growth through 2011,we applied a 67%premium to the2010F market average of 9.9x.For the computation of the premium rate,we ap
41、plied anEPS growth multiple of 2.8x to Activision Blizzards premium of 24%to the market.Asa result,we arrived at the fair PER of 16.5x.Fig 2:High premium justifiable,given NCsofts excellent EPS growthPER(x),2009F,2010F,2009-2011F,NCsoftHyundai UniversePremium to the market(%)Activision BlizzardNASDA
42、QPremium to the market(%),18.214.823.018.717.66.0,13.79.938.416.213.123.8,101.628.156.529.3,Premium to the market in terms of EPS growth(%),NCsoft(%,a)Activision Blizzard(%,b)EPS growth multiple(a)/(b)NCsofts fair premium(%)2010F fair PER(x)Source:IBES,Hyundai Securities,261.692.82.867.016.5,Fair va
43、lue ofKRW38,000 for NeowizGames,To compute the fair value of KRW38,000,we applied a fair PER of 17x to 2009F EPSand a fair PER of 15x to 2010F EPS,and then averaged out the two values.We presentBUY on Neowiz Games.We computed the fair PER by applying a 10%discount to NCsofts 2009 and 2010 fairPER,re
44、spectively.Since overseas sales will likely account for 20%of Neowiz Games ORand lead overall growth from 2009(vs.25%of parent-basis OR of NCsoft),NeowizGames will likely enjoy momentum similar to NCsofts.However,we applied a 10%discount,since Neowiz Games 2009 and 2010 EPS growth(46%and 56%each)pro
45、jections are lower than those of NCsoft(99%and 187%each).In light of its overseas business,we compared Neowiz Games with Chinese gamepublishing companies,which have relatively similar business structures among overseaspeers.However,their average EPS growth underperformed the market,and their PERalso
46、 hovers below the market average.In contrast,Neowiz Games EPS growth(averageof 2009 and 2010)projection of 56%is approximately three times higher than HyundaiUniverse average EPS growth projection of 19%.On balance,comparison with Chinesepeers is not very meaningful.HYUNDAI Research,10,10,7,Online G
47、ame:Momentum to Continue in 2H09Fig 3:Neowiz Games fair PER is at discount to that of NCsoftPER(x),2009F,2010F,NCsofts fair PER(x)NCsofts fair PER(%)Neowiz Games fair PER(x)Neowiz Games EPS(KRW),18.716.82,114,16.514.92,762,Discount,considering growth in OR and EPS,Fair value(KRW),35,503,41,062,38,28
48、2,Source:Hyundai SecuritiesFig 4:Chinese publishers at below-market EPS growth rate;Comparison less meaningful,PER(x),EPS CAGR(%),2009F,2010F,2009-2010F,Neowiz GamesHyundai UniversePremium to the market(%)Chinese game companies averageShandaTencentPerfect WorldGiant Interactive GroupShanghai Composi
49、te IndexChinese game companies discount to the market(%),17.514.818.418.215.931.911.613.120.7(12.1),13.49.935.315.013.625.69.811.217.0(11.5),55.919.1192.625.925.739.535.23.431.6(17.9),Note:Tencent is listed on Hangseng IndexSource:IBES,Hyundai Securities,CJ Internets fair valueat KRW20,000,CJ Intern
50、et specializes in publishing and focuses on the domestic operation.We believeit deserves a market average PER for fair value calculation.Based on its growth potential,and major profitability indicators for 2009 and 2010,including OR growth rate and OPmargin,the shares should at least show a price pe
