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Daiwa - Pushing the right buttons

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					                                                                                                         Software / Korea & Japan
                                                                                                                       4 April 2012




Pushing the right buttons
• New ways to play Korea and Japan’s game sectors — industry
  convergence, smartphones/social gaming and overseas expansion
• We believe companies with loyal users, strong franchises and
  differentiated content publishing warrant premium valuations
• Favour content developers over platform operators; NCsoft is our
  top Pan-Asia pick; we also like Nexon and Square Enix




Thomas Y. Kwon                                                                                                         Koki Shiraishi
(82) 2 787 9181                                                                                                              (81) 3 5555 7083
yskwon@kr.daiwacm.com                                                                                      koki.shiraishi.rc@jp.daiwacm.com




Important disclosures, including any required research certifications, are provided on the last two pages of this report.
                                                                                                                        Trading Places
                                                                                                                                    4 April 2012




Table of contents


Pushing the right buttons .................................................................................................. 3
Executive summary............................................................................................................... 4
About Trading Places ........................................................................................................... 7
Thomas and Shiraishi’s pre-job-swap views ........................................................ 10
   Our pre-job-swap views of Korea’s games industry................................................................... 10
   Our pre-job-swap views of Japan’s games industry .................................................................. 12
   Our pre-job-swap views of Korea’s major game developers ...................................................... 14
   Our pre-job-swap views of Japan’s major game developers ..................................................... 16
   Financial and valuation summary ..............................................................................................20

On the ground in Japan and Korea ............................................................................ 24
   How Thomas spent his time in Japan ........................................................................................ 24
   How Shraishi spent his time in Korea ........................................................................................ 28
   Heard on the street ..................................................................................................................... 30

Post-job-swap view .............................................................................................................. 34
   Key highlights in Japan and Korea ............................................................................................ 34
   Finding value in the similarities and differences ....................................................................... 39
   Food for thought ......................................................................................................................... 43
   Reassessing our views on the companies we cover .................................................................... 46
   Revisions to Daiwa forecasts ...................................................................................................... 50
   Implications for the Pan-Asia game sector ................................................................................ 52

Company Section

NCsoft (036570 KS) ....................................................................................................................... 57

Neowiz Games (095660 KS) ..........................................................................................................60

Gamevil (063080 KS) .................................................................................................................... 63

Nexon (3659 JP) ............................................................................................................................. 66

Gree (3632 JP)................................................................................................................................ 69

Capcom (9697 JP) ...........................................................................................................................71

Square Enix (9684 JP) ................................................................................................................... 74



                                                                      -2-
                                                                                                              Software / Korea & Japan
                                                                                                                            4 April 2012




Pushing the right buttons
• New ways to play Korea and Japan’s game sectors — industry
  convergence, smartphones/social gaming and overseas expansion
• We believe companies with loyal users, strong franchises and
  differentiated content publishing warrant premium valuations
• Favour content developers over platform operators; NCsoft is our
  top Pan-Asia pick; we also like Nexon and Square Enix



                                              regulatory intervention is intensifying,       as we are less upbeat on its long-term
                                              3) there is a surprisingly healthy             earnings in view of competition and
                                              market for feature-phone games, and            its lack of social and non-casual role-
                                              large legacy game and non-game item            playing games.
                                              markets, and 4) mobile-game apps
                                                                                               Pan-Asia: how to play
Thomas Y. Kwon                                and online-game infrastructure are
(82) 2 787 9181                               weaker than I expected, reflecting the         Our top Pan-Asia pick is NCsoft, for
yskwon@kr.daiwacm.com
                                              sound functionality of feature phones,         which we raise our earnings forecasts
                                              together with conservative marketing           and target price. Regional demand
                                              by wireless operators.                         for quality massively multiplayer
                                                                                             online games is robust, and we look
                                              Console/social game expert                     for NCsoft to capture new market
                                              Shiraishi in Korea: 1) Korean                  opportunities through Blade & Soul,
                                              companies’ loyal user bases and                Guild Wars 2 and Lineage Eternal in
Koki Shiraishi
(81) 3 5555 7083                              market leadership were even stronger           the medium term. In the Japan game
koki.shiraishi.rc@jp.daiwacm.com              than I expected, 2) companies are              space, we like Nexon and Square
                                              planning aggressive forays overseas            Enix, as their major new games
                                              (the US, Japan and Europe) and                 should lead to a strong earnings-
  Game on                                     quickly diversifying platforms, and 3)         growth cycle from 2013.
As part of Daiwa’s Trading Places             the mobile-game market is smaller              Key stock calls
project, we swapped jobs and took a           than I expected, with foreign players                                               New         Prev.
deep dive into the other’s game               having just a foothold.                        NCsoft (036570 KS)
markets. We visited content
                                                                                             Rating                            Buy            Buy
developers and platform operators in            What’s changed                               Target price                  W390,000      W370,000
Tokyo, Seoul, Kyoto and Osaka, and            We are more positive on: 1) leading            Up/downside                     24.4%
toured the game arcades, Internet             companies’ sequels and blockbuster             Neowiz Games (095660 KS)
cafés and shop floors of Akihabara            titles, 2) the outlook for rising ARPU         Rating                    Hold              Outperform
and Kangnam. Then we revisited our            and growth in paid gamers, and 3)              Target price           W37,500               W49,000
assumptions and stock calls.                  demand for non-game product sales              Up/downside              5.6%
                                              (publications, merchandise). We are            Gamevil Inc (063080 KS)
  What we learned                             more cautious on: 1) social game sites         Rating                Outperform                  Buy
While Korea and Japan have similar            in Japan given a regulatory overhang,          Target price            W77,500               W79,000
service infrastructures, they have                                                           Up/downside                 5.2%
                                              2) smartphone game developers in
tended to differ greatly in preferred         Korea amid rising competition, and             Nexon (3659 JP)
genres and platforms. We are now              3) slow user migration to PC online            Rating                              Buy           Buy
seeing signs of convergence among                                                            Target price                      ¥1,650       ¥1,400
                                              games in Japan.                                Up/downside                       14.7%
developers, operators and end-users,
with competition and collaboration in         Square Enix goes to Outperform (2),            Capcom (9697 JP)
                                              from Hold (3); we expect big-name              Rating                      Outperform      Outperform
the cross-platform game market.
                                                                                             Target price                    ¥2,200          ¥2,000
                                              titles to drive its FY12 earnings and          Up/downside                      13.8%
PC online expert Thomas in                    note the possibility of record
                                                                                             Square Enix Holdings (9684 JP)
Japan: 1) Japan’s paid gamer base is          earnings in FY13. But we downgrade             Rating                Outperform                 Hold
much bigger than I expected, with             Neowiz Games to Hold (3), as we are            Target price               ¥1,900              ¥1,650
high profitability and a rising ARPU          more cautious on its growth prospects          Up/downside                 10.6%
trend, 2) cross-platform publishing is        in Japan via its Gameon platform.              Source: Daiwa forecasts
accelerating faster than I expected and       Gamevil is lowered to Outperform (2),          Note: Please refer to page 3 for details.




Important disclosures, including any required research certifications, are provided on the last two pages of this report.
                                                                                                                                                             Trading Places
                                                                                                                                                                              4 April 2012




Executive summary

Pushing the right buttons
Games on mobile devices and games with social features are growing much faster than
console games. Japanese and Korean companies are increasingly pushing into each
other’s markets. Content developers are better placed than platform owners.



  The view from the other side
After a week in each other’s shoes, meeting the major companies, touring the game arcades, Internet cafés and retail
stores, sampling the latest mobile, social and console games, and talking to clients in both markets, our Japan and
Korea game experts are looking at their covered companies with fresh eyes. Thomas and Shiraishi’s job swap has
paved the way for the revised assumptions, target prices and recommendations presented in this report.

We have split the report into three: one section discussing the analysts’ pre-job-swap views, one on their findings on
the ground, and one on what those findings mean for their view of covered stocks and for Daiwa’s Pan-Asian view.

  What surprised us positively and negatively
While he was in Japan, Thomas found that demand for games on feature phones exceeded his expectations, the
profitability of social games is high, and ARPU for free-to-play (F2P) services is rising solidly. Also, the markets for
console games and in-game items are bigger than he expected. But Thomas is concerned about a potentially faster-
than-expected slowdown in social game revenue and earlier-than-expected regulatory intervention into in-game
item commerce.

  Highlights of Thomas’ job swap in Japan
                      Findings in line with our view                                              Findings running counter to our view
PC online games       - User base for PC online games is narrow and concentrated                  - More focused on storylines than graphics and content updates
                      - PC cafés are not a hub to market and distribute online games              - Favourable market for F2P services by leveraging in-game community
                      - Premium gamers are increasing game spending on items                      - Becoming more casual and social
Mobile/social games   - Benefiting from strong platform on feature phones                         - Slower-than-expected migration to smartphone services
                      - Social features remain key to acquire and retain gamers                   - Limited diversification of game genres
                      - Users are effectively monetised by in-game item promotions                - Higher-than-expected ARPU and paying user ratio
Console/handheld      - Offline distribution is well established and accessible                   - Rapid moves to adopt online connectivity functions
                      - Major players’ core titles have strong brand equity                       - Rapid steps to leverage core game IP for new games platforms
                      - Increasingly prolonged cycle for new software releases                    - Conservative in capitalising on emerging PC online-game markets
Other aspects         - No regulatory intervention on game addiction and item sales               - Tightening of regulations on transactions of counterfeit virtual items
                      - Some leading game companies remain cautious on overseas expansion         - Game companies generally are struggling to apply local monetisation model to global markets
Source: Daiwa


In Korea, Shiraishi applauds the industry leaders’ capability to develop competitive content and proprietary
revenue models. He notes in particular that Korean game companies are taking agile steps to capitalise on game
demand from smart devices. Still, he is concerned about the Korean players’ aggressive overseas-expansion
strategies and mounting competition on all fronts globally.

  Highlights of Shiraishi’s job swap in Korea
                          Findings in line with our view                                                    Findings running counter to our view
PC online game            - Korean game firms are focused mostly on China and their domestic market.        It is likely to take longer than we expected for Korean companies to penetrate the
                          - PC online is still the leading game platform in the Korea market.               US and European markets.
Mobile/social game        Fleshed-out infrastructure, including high smartphone penetration.                The mobile/social game market is small, despite its strong infrastructure.
Console/handheld          As expected, consoles/handhelds have a very limited presence in Korea.            More than we realised, Korean firms are considering releasing console games as a
                                                                                                            way of entering the US/European markets.
Other aspects             In Korea, we gained the impression that it is difficult to introduce game content Korean game companies are studying closely trends in Japan’s expanding
(regulation, etc.)        featuring gambling and lottery-boxed items.                                       social game market. However, they view Japan’s social game market as unique
                                                                                                            (including user preferences), and as such mostly do not see Japanese game
                                                                                                            companies’ entry into Korea as a significant risk factor.
Source: Daiwa




                                                                                         -4-
                                                                                                                                                                 Trading Places
                                                                                                                                                                                 4 April 2012




  Finding value among the similarities and differences in Japan and Korea…
The game industries in Japan and Korea have evolved very differently over the years. But both are increasingly
heading in the same direction as their technologies and infrastructure advance. Both have vast loyal user bases and
sizeable paid game bases. This allows the leaders to increase revenue by offering high-priced in-game items and
rolling out sequels to popular titles. We believe the game companies can capitalise on their proven revenue models
in each market and monetise users without incurring significant additional costs.

At the same time, we believe the Korean and Japanese game companies can leverage their expertise to capitalise on
untapped markets or niche segments. We think the Korean companies could benefit from social game services,
non-game product sales, and traction in lottery-box items in Korea and possibly Japan. And we believe Japanese
game companies may replicate their success with mobile-game portal services in Korea and probably generate
revenue using cross-platform games, based on their strong game IP libraries.

  ... what these mean for our views on Korea and Japan game stocks…
Our Trading Places exercise strengthened our conviction that Korea and Japan’s leading game-content developers are
best placed to benefit from strong operating leverage and capture market opportunities globally, especially in
emerging markets. We believe they are better placed than platform operators in terms of monetising user bases
through the launch of sequels and the sale of non-game products. Still, intense competition globally calls for a
targeted approach — leveraging the right content in the right markets.

   Daiwa view of game coverage following Trading Places
                                                                      Target price              Upside
Company                                 Daiwa rating                  (local curr.)                (%)      Daiwa comment
NCsoft                                  Buy                               390,000                 24.4     More positive — should benefit considerably from increased spending on digital
(036570 KS)                                                                                                content and loyal user base.
Neowiz Games                            Hold                                37,500                   5.6   Less positive — needs more in-house game IP to protect business model and
(095660 KS)                                                                                                leverage game publishing platform globally
Gamevil                             Outperform                              77,500                   5.2   Less positive — with newcomers entering from all sides, Gamevil must increase R&D
(063080 KS)                                                                                                and marketing expenses
Nexon                                   Buy                                   1,650                14.7    More positive — highly scalable revenue model and visible earnings should lead to
(3659 JP)                                                                                                  higher multiples
Gree                                    Hold                                  2,600                25.8    Unchanged — lifting earnings forecasts, but regulatory overhang could limit valuation
(3632 JP)                                                                                                  multiple expansion
Capcom                              Outperform                                2,200                13.8    More positive — bullish on medium-term outlook. We cut our FY11 earnings
(9697 JP)                                                                                                  forecasts following weak 3Q FY11 results due only to delay in launch; still expecting
                                                                                                           record profit for FY12
Square Enix Holdings                Outperform                                1,900                10.6    More positive — we see potential for record profit in FY13, when the company should
(9684 JP)                                                                                                  see meaningful contributions from recurring revenue streams
Source: Daiwa
Note: upside potential based on 2 April 2012 closing prices


  ... and for the Pan-Asian game sector
We conclude that: 1) social game services in the Pan-Asia region, including Korea and Greater China, are set to
boom in the future, and 2) demand in the region for advanced RPGs with strong franchise value will remain robust.
We think Nexon and Tencent could benefit from an escalation in the valuation of their affiliates offering leading
social games and AOS-genre games.

  Pan-Asia game sector: top themes/services to prosper
Key themes/services               What we learned from job-swap in Japan and Korea                                            Related companies
Social game service               Smart device users will spend more dollars and more time playing mobile games with          Gree, DeNA, and Nexon (JC Entertainment)
                                  social features
Aeon of Strife or MOBA            This genre will gain a lion’s share and prevail due to continuous character updates and a   Nexon (Neople) and Tencent (Riot Games)
                                  high degree of freedom in battle mode and party system
In-app purchase                   Effective acquisition of free mobile gamer will ramp up in-game item commerce and           Gamevil and Com2uS
                                  possibly in-app ads
Advanced MMOs                     By leveraging loyal user bases, blockbusters will lure premium gamers and boost sales       NCsoft (Blade & Soul) and Square Enix (FF14 and Dragon Quest 10)
                                  with subscriptions as well as item sales
Source: Daiwa
Note: MMO – massively multiplayer online game, MOBA – multiplayer online battle arena; Tencent (700 HK, HK$217, Buy [1])




                                                                                               -5-
                                                                                                                                                             Trading Places
                                                                                                                                                                          4 April 2012




  Three ways to play
NCsoft (Buy). We are raising our six-month target price to W390,000 from W370,000, based on our DCF/peer-
multiple comparison using our new 2013 EPS forecast. We believe NCsoft will benefit considerably from an increase
in spending on digital entertainment content and loyal premium users over the long term.

Our visit to Japan also yielded potential share-price catalysts, including a high chance of the company selling more
in-game items in Japan than 2011, it benefitting from the strong franchise value of Lineage, and the chance for it to
penetrate the cross-platform game market globally. Ntreev (Not listed) recently acquired a casual sports game
developer in Korea, which could help the company to respond to solid demand from young and female gamers.

Nexon (Buy). We raise our six-month target price to ¥1,650 from ¥1,400, based on a revised target PER of 17.5x
on our revised 2012 EPS forecast. In our view, investors have yet to fully appreciate Nexon’s highly scalable revenue
model and visible earnings, which should lead to higher multiples. Following our meetings with the company’s
Japanese peers, and based on our market research in Japan, we believe Nexon is enhancing its brand equity significantly
and gearing up for new game launches.

By leveraging on its internal R&D expertise to develop diverse games, the company could benefit from strong casual game
demand on a range of game platforms. It plans to roll out more than 30 new games for smart devices and three medium-
sized RPGs in 2012.

In our view, investors should note the recent escalation in the share prices of Neople and JCE in Korea, as these affiliates
have successfully commercialised new games (Cyphers and Rule The Sky, respectively) in Korea and are likely to publish
them in China and other markets. We forecast revenue from these affiliates to account for 29% of 2012 revenue (up from
28% in 2011), due to the growing number of paid gamers and service-region expansion.

Square Enix (Outperform). Square Enix shares do not look particularly undervalued based on our FY12
earnings forecast, but we see potential for record earnings in FY13, when the company should see meaningful
contributions from the recurring revenue streams. We note potential for further earnings upside based on its initial
FY12 earnings guidance (due out in May) and the possibility of new titles being announced at the E3 Expo in June
2012.

We have a six-month target price of ¥1,900 (up from ¥1,650), based on a PER of 14x on our FY13 EPS forecast. FY12
earnings should be driven largely by big-name titles in multiple genres, including packaged software (Hitman, Tomb
Raider games), MMORPGs (Final Fantasy 14, Dragon Quest 10), and browser games (Monster Dragon).

We highlight in each area the potential emergence of sustained revenue streams different from the one-off income
seen with traditional packaged software, including monthly subscriptions and digital-item sales.

  Daiwa stock calls upon conclusion of Trading Places
                                                                                                                                                    EPS (local curr.)
                                                                         Rating                 Target price (local curr.)                  FY1                         FY2
 Company Name                                  Stock code              New             Prev.      New          Prev.   % chg        New     Prev.   % chg      New       Prev.   % chg
 NCsoft                                       036570 KS                Buy              Buy    390,000      370,000           5.4   9,506   9,889    (3.9)    17,776    16,867     5.4

 Neowiz Games                                 095660 KS                Hold       Outperform    37,500       49,000     (23.5)      4,073   4,441    (8.3)     4,861     5,599   (13.2)
 Gamevil                                      063080 KS          Outperform             Buy     77,500       79,000      (1.9)      3,874   3,948    (1.9)     5,085     5,184    (1.9)
 Nexon                                        3659 JP                  Buy              Buy      1,650         1,400         17.9    93.2    81.3    14.7      105.0      95.2    10.2
 Gree                                         3632 JP                  Hold            Hold      2,600         2,600          0.0   227.6   194.4    17.1      300.6     224.6    33.9
 Capcom                                       9697 JP            Outperform       Outperform     2,200         2,000         10.0   116.4   133.7   (12.9)     191.0     164.2    16.3
 Square Enix Holdings                         9684 JP            Outperform            Hold      1,900         1,650         15.2    54.7    60.0    (8.8)     115.6     112.1     3.1
Source: Daiwa forecasts
Note: financial year-ends: FY11 = year ending 31 March 2012 for the Japan companies (except for Gree- 30 June 2012), FY11 = year ended 31 December 2011 for the non-Japan companies;
additional information is contained in our Game Entertainment Sector Investment Opinion published on 14 March 2012




                                                                                         -6-
                                                                                                                                                             Trading Places
                                                                                                                                                                           4 April 2012




About Trading Places
The concept is simple: two Daiwa analysts swap markets and responsibilities for a short period, and then apply to Daiwa’s
coverage what they learned while away from their home market. The goal is to present a genuinely cross-country analysis of a
sector as our analysts gain first-hand experience of covering companies they may previously have viewed only from afar.

In this report, Thomas Kwon and Koki Shiraishi visit the other’s companies, get a feel for the other’s market first-hand, and
speak to the other’s clients. And then each returns home and revisits his own assumptions.


                                                         Thomas                                                  Shiraishi


                                                                                  Trading Places


                                                                              Pre- job-swap view
                                                                                                           Sector

                                                                                                           Company

                                                                                                           Issues

                                                                            On-the ground research

                                                                                                           Key highlights

                                                                              Post- job-swap view

                                                                                                           Sector

                                                                                                           Company

                                                                                                           Issues

                                                                                  Reassessment


                                        Shiraishi’s input on Korea stocks                                 Thomas’ input on Japan stocks
                                    Thomas incorporates his findings from Japan                    Shiraishi incorporates his findings from Korea




                                                         Thomas’ new view                           Shiraishi’s new view



Please also see Daiwa’s first Trading Places report on Korea and Japan’s auto segment:
                                                                            5 January 2012

      Trading Places 1:                       Trading Places 2:                                     Trading Places 3:                                   Trading Places 4:
   Job swap: in Hakomori’s                 Job swap: in SY’s shoes                                 Bringing our Japan                                  Bringing our Korea
           shoes                                                                                    experience home                                     experience home
   Sung Yop Chung (82) 2 787 9157           Eiji Hakomori (81) 3 5555 7072                   Sung Yop Chung (82) 2 787 9157                           Eiji Hakomori (81) 3 5555 7072
     (sychung@kr.daiwacm.com)             (eiji.hakomori.rc@jp.daiwacm.com)                    (sychung@kr.daiwacm.com)                             (eiji.hakomori.rc@jp.daiwacm.com)




                                                                                     -7-
      Trading Places
             4 April 2012




-8-
      Trading Places
             4 April 2012




-9-
                                                                                                                                           Trading Places
                                                                                                                                                          4 April 2012




Thomas and Shiraishi’s pre-job-swap views
Game content reflects a unique entertainment culture

Our pre-job-swap views of Korea’s games industry
  Korea games industry
                    Thomas’ view                                                                Shiraishi’s view
PC online games     - New games will drive the industry’s revenue growth                        - Largest segment of the Korea game industry
                    - Effective monetisation will help the leaders to improve profitability     - Covers a wide spectrum, including both hardcore and casual games
                    - Overseas expansion will offer new earnings growth opportunities           - Firms appear to be moving aggressively into China and other regions
Mobile/social games - Smartphones are unlikely to change the competitive environment            - Korea has advanced mobile networks
                    - In-app purchases and in-app ads will prosper                              - It has a very large population of mobile gamers and seems to have a
                    - Casual and sport games will dominate the market                             large number of titles
Consoles/handheld - Likely to remain a niche segment                                            - Pirated copies are an issue
devices             - Smartphones might take market share from these devices                    - Hardware makers are seemingly not concentrating on this market,
                    - There is still a lack of localised content                                  making it a niche segment
Other issues        - Recent regulatory initiatives have had a limited impact on game sales     - Youth game addiction is a serious social problem
                    - China and Japan are the primary target markets for the Korea players      - The government seems to be clamping down with increasingly tighter
                                                                                                  regulations
Source: Daiwa


Thomas’ pre-job-swap view of the Korea                                                for 2010-13. Meanwhile, I forecast the number of
industry                                                                              mobile gamers in Korea to expand by 20% YoY to 18m
                                                                                      for 2013, accounting for 60% of total smartphone
Going through a major transition                                                      subscribers.
In my view, new games will provide a big lift to
industry revenue from 2012, on the back of the                                          Korea: online-game market outlook
addition of advanced game content and the successful                                    (Wtn)
launch of sequel titles. With effective monetisation                                    10                                                                             30%
through free-to-play (F2P) services, I also expect the
                                                                                         8                                                                             25%
diversification of game platform and revenue models to
                                                                                                                                                                       20%
be catalysts for a return to revenue growth. I have seen                                 6
                                                                                                                                                                       15%
two gamer trends emerging: 1) a shift to casual and                                      4
social games, and 2) a migration to smart-device                                                                                                                       10%
                                                                                         2
platforms.                                                                                                                                                             5%
                                                                                         0                                                                             0%
I forecast Korea’s online-game revenue to increase by                                           2006       2007   2008   2009     2010    2011E   2012E    2013E

18% YoY to W6.4tn for 2012, making it the second-                                                 Online                     Mobile                    Video console
largest online-game market in Asia. In 2011, I estimate                                           Arcade game                PC package                Growth rate (RHS)
desktop online games accounted for 87% of Korea’s                                     Source: KOCCA (Whitepaper, 2011), Daiwa forecasts
game industry, followed by mobile (6%), and consoles
(6%).                                                                                 In my opinion, video consoles and portable games will
                                                                                      continue to be less popular due to their limited gamer
Although mobile games make up a small proportion of                                   base, piracy, expensive game packaged software, and a
the total online game market globally, at around 11%, I                               lack of localised content. I estimate Korea’s console-
believe these service offerings will gain popularity                                  game revenue fell by 15% YoY to W363bn for 2011.
eventually. I estimate that Korea’s mobile-game                                       Recently, I have seen a rise in imported game titles,
revenue expanded by 11% YoY for 2011 and forecast                                     especially from China, which feature web games and
22% YoY growth for 2012, representing a CAGR of 15%                                   light role-playing content.

                                                                               - 10 -
                                                                                                                       Trading Places
                                                                                                                                       4 April 2012




The Korea Government has been keen to reduce the                 to have a lot to do with their success today. In other
social costs associated with online-game addiction,              words, the Korea players appeared to have exported
violence, and illegal-item transactions by limiting              successfully their business models to China.
playing times and service operations. In Korea, I expect
regulations to become more specific, customer-                       Japan game sector: revenue breakdown by region (FY10)
oriented, and relevant to game play. The leading
players, such as NCsoft and Nexon, should be able to
mitigate regulators’ initiatives by diversifying their
service regions and game platforms. Overseas revenue
                                                                                                            North America
accounted for 34% of NCsoft’s overall revenue in 2011,                                           Japan
                                                                                                               29.6%
                                                                                                 44.7%
and royalty revenue accounted for 51% of Nexon
Korea’s overall revenue in 2010.
                                                                                                              Europe
Shiraishi’s pre-job-swap view of the Korea                                                                    21.4%
industry
                                                                                            Asia, other
PC online games                                                                                4.5%
Before my job swap in Korea, I had the impression that           Source: Various materials; compiled by Daiwa Securities CM.
Korea was a global Mecca for PC online games, with               Note: Aggregate of Nintendo, Square Enix Holdings, Capcom, Konami, Namco Bandai
                                                                 Holdings. Two major social game firms (Gree, DeNA) generate almost 100% of revenue
home-grown Korea companies accounting for most of                domestically.
the market. As such, I viewed the market as either
unprofitable or difficult to enter for foreign companies.        Before I went to Korea, I believed the country was
This view was based on the Japanese majors’ regional             home to a world-class mobile infrastructure. Indeed,
earnings mixes and our day-to-day discussions with               I expected the mobile-game market to be quite large,
company officials about their overseas strategies.               considering the high number of Korean PC-game
                                                                 makers.
Piracy has long been a challenge to game-content firms
looking to operate in Asia outside of Japan. One major           Overall, my pre-trip impression was that the markets
solution has been to offer games on the PC. However,             in which the Korean game makers are active (Korea
most Japanese companies (as with their US and                    and China) had daunting barriers to entry for
European counterparts) have been latecomers on this              Japanese, US, and European firms, given the
front, as they were used to the console-centric structure        somewhat different game cultures and the fact that
of their home markets.                                           Korean firms are leading in all market segments, from
                                                                 hardcore to casual games.
My pre-trip impression was that Korea firms had a
sizeable presence in the China market. The two
countries are close both geographically and culturally,
and Korea firms were among the leaders as China’s PC
online-game market emerged. These factors are likely




                                                            - 11 -
                                                                                                                                               Trading Places
                                                                                                                                                             4 April 2012




Our pre-job-swap views of Japan’s games industry

 Japan games industry
                Shiraishi’s view                                                               Thomas’ view
PC online games - Consoles are the major game platform                                         - Solid growth in online gamers on the back of a rapid migration to desktop
                - PC online games remain a niche market, but they target dedicated,              game platforms
                  hardcore gamers; earnings are stable                                         - F2P game services will become mainstream with a growing number of casual
                - Virtually no correlation with economic conditions                              gamers
                                                                                               - Strong demand for Korean-made games due to ongoing content updates
Mobile/social games - Japan’s mobile games market has grown since the release of NTT           - Feature-phone gamers will move rapidly to the smartphone platform
                      DoCoMo’s i-mode mobile web platform                                      - Board games and casual games will gain popularity as they have in Korea
                    - Recently, strides by two major social game services (Gree and            - Modest rise in ARPU due to user migration to smartphone platform
                      DeNA’s Mobage) have led to remarkable and sustained earnings
                      growth
Consoles/handhelds - Long a mainstay of the Japanese game market                               - Slowdown in the cycle of new game launches
                    - Handhelds are led by Japanese majors Nintendo and Sony                   - Increasing competition with smart devices, with limited hardware upgrades
                    - Sales fluctuate based on the hardware cycle                              - Quick strategic changes to penetrate emerging markets and new platforms
Other issues        - Regulatory environment is stable for consoles as industry                - The industry is far from having illegal item transactions and regulatory
                      association self-regulates                                                 intervention as problems
                    - For social games, debate has swirled over high user bills and            - Hard to find new revenue models, other than subscription and game services
                      platforms’ potential for online dating
                    - Government may issue administrative guidance
Source: Daiwa


Shiraishi’s pre-job-swap view of the Japan                                                 Recently, social-game firms have led sales growth in
industry                                                                                   this area. Both of the major players, DeNA and Gree,
                                                                                           have experienced remarkable revenue growth over the
Rapidly going mobile and social                                                            past few years. Indeed, in 2010, revenue from social
The Japanese Online Game Sector, like its counterparts                                     games exceeded that of conventional mobile-phone
in the US and Europe, has been console-centric since                                       games. The Japanese mobile games market got its start
the debut of Nintendo’s Famicom (Nintendo                                                  in February 1999 with the launch of NTT DoCoMo’s i-
Entertainment System) in the 1980s. Consoles have                                          mode service. This mobile web platform enabled firms
maintained their leading position in the market for a                                      to offer games on feature phones on the DoCoMo
few reasons. One is that two of the three makers of the                                    network through a browser with access through a
current generation of consoles (Nintendo, Sony, and                                        proprietary portal site. This kicked off a business model
Microsoft) are Japanese. And a good many Japanese                                          whereby game companies could sell officially approved
third-party game makers develop these consoles and                                         content on the portal.
offer a wide line-up of games for hardcore users and
casual gamers alike.                                                                       Then in February 2006, DeNA launched its Mobage
                                                                                           Town service, and saw usage grow rapidly. In July, the
  Japan: game revenue by platform                                                          number of registered users amounted to 1m, and by
  (¥bn)                                                                                    April 2008 had risen to 10m. In May 2007, Gree began
   700
                                                                                           offering game apps on its existing, eponymous
   600                                                                                     mobile/PC social networking service. Mobage and Gree
   500                                                                                     have three common strengths that have helped fuel their
   400                                                                                     rapid growth. First, the games are social. That is, they
   300                                                                                     incorporate player-to-player communication as a core
   200                                                                                     game element. Second, they focus on first-party titles in
   100
                                                                                           order to refine and accumulate expertise continually.
                                                                                           Finally, the two have released their application
     0
                                                                                           programming interfaces (though perhaps not at first) to
           CY02      03      04       05       06      07       08      09       10
                                                                                           encourage third-party developers to write games for
                          Consoles    SNS     Mobile     PC, other
                                                                                           their services and attract a diverse line-up of titles.
Source: Enterbrain, MCF materials; compiled by Daiwa.
Note: Mobile refers to feature-phone app games on platforms such as i-mode. Console
figures do not include hardware.                                                           It is generally believed that the social aspects of the
                                                                                           games have the most to do with their success. The
                                                                                           games have many in-game social features, such as item

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                                                                                                                                                                    Trading Places
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trading, player competition, and combat. This allows                                                        Japan: subscribers for broadband and mobile phones
players to enjoy the games with real-life friends or                                                        (m)                                                                              (m)
users that they have met on the service. Such elements                                                     140                                                                                40
were largely absent from earlier mobile games.                                                             120                                                                                35

                                                                                                           100                                                                                30
In recent years, the firms have shared this data with                                                       80
                                                                                                                                                                                              25
third-party developers, resulting in the rise of popular                                                    60
                                                                                                                                                                                              20
titles in addition to the first-party line-up. Indeed,                                                                                                                                        15
                                                                                                            40                                                                                10
third-party games have attracted users away from the
                                                                                                            20                                                                                5
authorised titles that were previously the mainstays of
                                                                                                             0                                                                                0
the services. Many content providers shifted to these                                                             2003   2004     2005     2006       2007   2008    2009    2010     2011
social games, forming alliances with DeNA and Gree
                                                                                                                         Wireless susbcribers (LHS)            Broadband subscribers (RHS)
and developing social-game content. This describes the
current situation.                                                                                     Source: Information and Communications in Japan 2011
                                                                                                       Note: 2011 broadband subscriber number is as at 30 September 2011

Social games, meanwhile, charge nothing to sign up to
the platform and log in to individual games. That is, it                                               My view was that Japanese online gamers would
is possible to play for free, save for mobile data charges.                                            continue to migrate from consoles to PC-based online
However, as the player progresses, the game                                                            platforms, due to the enhanced ability to integrate
encourages players to pay for various in-game features.                                                game play with other online services and advanced
For instance, in a fishing game one may wish to                                                        game features. I also believed that online-game sales in
purchase a better-performing rod and reel.                                                             Japan would expand on the back of digitised-item sales
                                                                                                       and diverse game offerings.
  Japan: social game market opportunity
  (¥m)                                                                               (¥m/title)        Prior to my job swap, I had expected the industry leaders
  80,000                                                                                  20           to attract new gamers and have higher ARPU than
                                                                                                       subscription-only services. I also had expected the
  60,000                                                                                  15
                                                                                                       emergence of leading game portals to offer visibility on
  40,000                                                                                  10           the evolution of Japan’s online-game industry.
  20,000                                                                                  5            I had believed Japan’s console-game revenue would
       0                                                                                  0
                                                                                                       continue to decelerate due to the emergence of
              3Q      4Q       1Q      2Q         3Q   4Q       1Q      2Q      3Q
                                                                                                       alternative game devices and a declining number of
             FY09              10                               11                                     gamers as a result of the continuing ageing population
            Gree gross fee revenue                          Mobage gross fee revenue                   and low birth rate in Japan. Despite ongoing efforts to
            Revenue per third-party title (RHS)                                                        release sequels and cross-platform games using
Source: Company materials; compiled by Daiwa                                                           existing game IP, I had expected the industry to see
Note: Revenue per third-party title = [(total fee revenue generated on Mobage and Gree) –              soft demand in Japan and look to overseas markets to
total fee revenue generated by Gree and DeNA first-party and co-developed titles)] / total
number of third-party titles.                                                                          boost revenue and earnings.

Thomas’ pre-job-swap view of the Japan                                                                 My understanding was that the mobile and social-game
industry                                                                                               segments had continued to benefit from gamer
                                                                                                       migration to PCs and feature-phone sites, and F2P
Good infrastructure offers promise                                                                     services from one-off download offerings. The market
My understanding prior to my job swap was that the                                                     leaders, such as Gree and DeNA, had successfully
Japan online-game market had evolved gradually and                                                     created new markets, where they offered unique games
had entered the next stage of online-game services. In                                                 for free and were opening platforms to third-party
this phase, my pre-job-swap view was that there would                                                  developers, including legacy console-game developers
be widespread deployment of integrated services with                                                   such as Konami. I had expected these market leaders to
virtual communities and digitised-item commerce.                                                       continue to leverage on their powerful platforms and
Coupled with the rising penetration rate of high-speed                                                 monetisation expertise by enhancing their game
Internet services, I had believed PC cafés and Internet                                                portfolios from in-house studios and social-game
users had played a key role in driving Japan’s online-                                                 application providers.
game industry growth. Japan had 36m broadband
subscribers as at September 2011 and wireless users
amounted to 122m as of the end of 2011, accounting for
28% and 96% of total population, respectively.

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Our pre-job-swap views of Korea’s major game developers
  Korea: key game developers/publishers
                     Thomas’ view                                                                                  Shiraishi’s view
NCsoft               (Positive)                                                                                    (Positive)
- Growth strategy    With blockbuster RPGs, the company will focus on desktop game platforms and                   Has many titles with a very loyal fan base. It plans to use these titles to expand into
                     capitalise in the major markets, such as China and the EU/US.                                 other regions and create new IP.
- Earnings outlook   Strong earnings growth cycle likely to emerge from 2012 as a result of Blade & Soul           Earnings little affected by economic conditions due to a core user base. Stable
                     and Guild Wars 2, with a meaningful improvement in profitability.                             earnings growth therefore likely.
- Valuation          Investors should appreciate the new revenue stream (new game launches), justifying            Shares look attractive over the medium term in light of the stable earnings-growth
                     the valuation premium over its peers in the region.                                           prospects, even taking into account regulatory risks in main markets such as China
                                                                                                                   and Korea.
Neowiz Games         (Positive)                                                                                    (Mixed)
- Growth strategy    In-house developed games will drive top-line growth. Online shooting and sport                Strong in casual games; set to benefit from market growth, particularly in China and
                     games will continue to boost revenue growth momentum.                                         Korea.
- Earnings outlook   Solid royalties from China and Japan will generate stable game sales and operating            Earnings growth likely to continue, in line with expanding markets in China and Korea.
                     profit. Rising costs will remain a key hurdle for earnings growth.                            Meanwhile, we see a low chance of success for its attempts to enter markets where
                                                                                                                   packaged games dominate (Japan, North America, Europe), as the firm has little brand
                                                                                                                   recognition in these markets.
- Valuation          Valuation discount to domestic peers is unjustified, given visible and stable earnings        Competition is becoming fiercer in the casual-game market than in massively multi-
                     on the back of robust revenue from publishing titles.                                         player online role-playing games (MMORPG), so at this point the shares do not
                                                                                                                   deserve to trade above the sector average, in my opinion. Better visibility on earnings
                                                                                                                   contributions from Japan, the US, and Europe could justify a premium.
Gamevil              (Positive)                                                                                    (Cautious)
- Growth strategy    It will roll out more third-party titles and diversify its revenue model into in-app          The early mover in the Korea mobile games market; plans to leverage on its financial
                     purchases and in-app ads.                                                                     advantages as a first-mover to release follow-up titles continually and maintain its top
                                                                                                                   position.
- Earnings outlook   For 2012, I forecast revenue to rise by 57% YoY and an operating-profit margin of             Many firms are entering the mobile game space, and competition is set to heat up in
                     37%, driven by new sequels and smartphone games.                                              the future. Therefore, the earnings picture is not necessarily all that bright, in my view.
- Valuation          Attractive valuation on good earnings momentum, high profitability, and scalable              Although the market continues to expand, increased competition may justify Gamevil
                     revenue model leveraging on open application stores.                                          trading at something of a discount to stocks in the PC online-game space, where the
                                                                                                                   consolidating into just a few major players.
Source: Daiwa


Thomas’ pre-job-swap view of Korea games                                                                      Korea: game exports by region (2010)
companies                                                                                                                                Europe
                                                                                                                                                     Others
                                                                                                                                                     2.9%
                                                                                                                                         8.6%
Leaders looking to penetrate overseas markets
                                                                                                                         North America
Prior to my job swap in Japan, I believed there were                                                                         9.2%                                               China
likely to be several revenue-growth drivers for the                                                                                                                             37.1%
industry leaders: 1) increasing revenue from new game
franchises, 2) the diversification of service regions, 3)
                                                                                                                             SE Asia
the expansion of game platforms into mobile and smart                                                                        15.1%
devices, 4) the penetration of the social-game segment,
and 5) the acquisition of talented small game
developers.
                                                                                                                                                      Japan
                                                                                                                                                      27.1%
I believed the market leaders were capable of                                                               Source: KOCCA
benefitting from potential overseas opportunities and
user migration from offline to desktops and mobiles. In                                                     • NCsoft: the company has plans to add new revenue
addition to rising ARPUs, I had expected Korea’s                                                              streams and I had expected these to boost earnings
online-game companies to record strong royalty growth                                                         and operating profit margins from 2012, on the back
from overseas and revenue from the commercial                                                                 of the launches of Blade & Soul and Guild Wars 2. I
launch of new blockbuster games from 2012.                                                                    had expected the company’s operating-profit margin
                                                                                                              to improve substantially in 2013, helped by revenue
I estimate overseas royalties for Korea’s online-game                                                         from new commercial titles and further
companies increased by 35% YoY in 2011, driven by a                                                           monetisation of its existing game titles. Prior to my
combination of a rise in the number of titles published                                                       job swap, I forecast NCsoft’s operating-profit margin
and an expansion of their service regions. By region,                                                         to improve to 43% in 2013 from 33% for 2012.
China and Japan accounted for 30% and 20% of total
game sales in overseas in 2010, respectively.                                                               • Neowiz Games: prior to my job swap, I had expected
                                                                                                              game publishing to continue to be the revenue- and
                                                                                                              earnings-growth drivers for the company for 2012-13.
                                                                                                 - 14 -
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   As the game publisher plans to expand its services                            Shiraishi’s pre-job-swap view of Korea
   for Crossfire and AVA to other countries in Asia, I                           games companies
   had forecast game-publishing revenue to rise by 17%
   YoY and account for 82% of total sales for 2012.                              No head-on competition with Japan players
                                                                                 The Korea and Japan game firms have little overlap in
• Gamevil: I had expected the company to benefit                                 terms of the platforms they specialise in and the regions
  from emerging demand for mobile-game content                                   in which they operate. Indeed, Korea and Japan are
  and in-app transactions. In addition, I believed there                         neighbours but have very different games markets. In
  would strong earnings-growth momentum from                                     the past I have compared Japanese games firms with
  2012 on the back of increasing overseas royalties                              their Korean counterparts as an illustration of the clear
  from third-party titles and revenue from in-game                               differences in profitability, depending on which market
  item commerce. Prior to my job swap, I forecast                                segment a company focuses on.
  Gamevil’s revenue to increase by 57% YoY and
  earnings by 36% YoY in 2012, with an operating-                                One objective of our job swap was to confirm the
  profit margin of 37%.                                                          general direction of the Korean game firms. I was
                                                                                 interested to see whether Korean firms intended to
  Korea: overseas royalties by key players                                       maintain their plans to expand from their traditionally
 (Wbn)                                                                           strong regions of China and Korea into the US, Europe,
 800                                                                  60%        and Japan — areas that have not been the main
 600
                                                                                 markets for PC online games.
                                                                      40%
 400                                                                                 Korea and Japan: profitability outlook for key players
                                                                      20%            OP margin (% )
 200
                                                                                     60
                                                                                                                                              Activison
   0                                                                  0%                                                                       Blizzard
                                                                                                           Gree (3632)
             2008                2009        2010              2011                  50                                                     (online game)
                                                                                                                     NHN
           NCsoft                                   Neowiz Games
                                                                                                NCsoft                       DeNA (2432)
           Webzen                                   WeMade
                                                                                     40                    Nex on (3659)
           Gamevil                                  Com2uS
           Overseas to total revenue (RHS)
                                                                                     30               Neowiz Games
Source: Companies, Daiwa
                                                                                                                  Capcom (9697)                               Nintendo (7974)
                                                                                     20                              (game*)                                    (software*)
Meanwhile, I had expected the leading players in Korea
                                                                                          Gungho
to find ways to reignite their revenue-growth                                              (3765) SquareEnix
                                                                                     10              (9684)
momentum in 2012. I believed their profitability would                                              (game*)
improve in the future, as they leveraged on their
                                                                                      0
expertise in game development, commercial launches,                                       0              50                100              150             200            250
and user monetisation.
                                                                                                                            Revenue (¥bn)
                                                                                 Source: Company materials, compiled by Daiwa Securities CM
                                                                                 Note: Figures for Square Enix, Capcom, and Nintendo only reflect game software sales;
                                                                                 data as of FY10 (Japanese companies) and 2010 (Korean companies); we have excluded
                                                                                 Gamevil as it is a mobile-game company




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Our pre-job-swap views of Japan’s major game developers

  Japan: leading game companies
                     Shiraishi’s view                                                                          Thomas’ view
Capcom               (Positive)                                                                                (Cautious)
- Growth strategy    Plans broad-based earnings expansion in game entertainment by leveraging on IP            The company is still focused on packaged game software for consoles and sequels
                     from its main packaged titles in social/mobile games, browser games,                      to its flagship titles, but remains cautious about overseas expansion.
                     pachinko/pachislot machines, and arcade machines.
- Earnings outlook   At first glance, earnings growth for FY11 looks lacklustre as the firm is currently       Rising costs related to R&D and platform conversion will drag down its profitability.
                     developing major titles. However, with product launches across various platforms          There is limited visibility on the new game pipeline.
                     planned for FY12, the business environment looks quite promising.
- Valuation          Although affected by the low valuations of domestic social-game players, Capcom has       Unlikely to see a near-term valuation rerating due to a lack of strong earnings-
                     ample potential for multiple-expansion on the back of its earnings-growth prospects in    growth drivers and slow execution in diversification in platforms and service
                     several regions and market segments backed by its sizeable, strong IP portfolio.          regions.
Square Enix          (Hold)                                                                                    (Positive)
- Growth strategy    Monetising IP (mainly blockbuster franchises Dragon Quest, Final Fantasy, Tomb            High dependence on Final Fantasy franchise and gradual migration to non-PC
                     Raider) across various game platforms, including packaged software, MMORPGs,              platform and non-subscription revenue.
                     browser games, and smartphone games.
- Earnings outlook   Due to a decline in development efficiency, including quality control, earnings           Strong operating leverage likely due to potential launches of big titles from 2012
                     stagnated somewhat from FY10-11 as the firm revamped its development apparatus.           and remarkable improvement in profitability on the back of strong top-line growth.
                     From FY12, however, it expects to restart title launches in earnest, suggesting that
                     earnings should regain significant momentum.
- Valuation          At first glance the valuation metrics do not suggest undervaluation, but with the         It needs to diversify its revenue mix and service regions to capitalise on the back of
                     upcoming boost in earnings momentum, as well as the contributions from titles in areas    growing demand globally and justify its premium valuation.
                     with stable revenue, such as MMORPGs and browser games, now might be an
                     attractive entry point for those with a medium-term investment horizon.
Gree                 (Hold)                                                                                    (Positive)
- Growth strategy    This Japanese social-game pioneer plans to seek market expansion in Japan with            It could leverage on its strong mobile platform for social-game content, but it will
                     continued new title releases, and establish a presence overseas with Japanese-style       take a long time to see revenue from overseas.
                     social games.
- Earnings outlook   With steady releases of new first- and third-party titles, domestic earnings growth has   It can source competitive games at low costs through an open platform strategy.
                     slowed due to difficult YoY comparisons. Even so, we expect growth to continue.
                     Meanwhile, visibility is somewhat clouded in overseas markets amid likely competition
                     from established players.
- Valuation          Investors are concerned about possible government regulation on in-game random            Premium valuation is justified, given its dominant position in Japan and visible
                     prize purchases, a feature unique to Japan. This may justify a discount. Multiples may    earnings trend, and potential to gain share globally.
                     remain low until there is greater visibility on overseas revenue.
Source: Daiwa


Shiraishi’s pre-job-swap view on Japan                                                          Indeed, with console sales losing momentum of late,
companies                                                                                       these firms have diverted their resources to developing
                                                                                                expanding platforms, such as smartphone games,
Some winners, some losers                                                                       social games, and browser games.
There are a large and varied number of companies
operating in the Japan Games Sector, including console                                          Meanwhile, Gree and DeNA, the two leading social-
makers, social-game platforms (including social games                                           game makers, have experienced strong growth of late
for feature phones and PCs), third-party social-game                                            and look likely to continue expanding domestic
developers, packaged-software developers, PC online                                             earnings. In addition, they are attempting to repeat
games, and pachinko/pachislot (a type of electronic                                             their success in overseas markets. However, the
slot-machine game) machines. Naturally, business                                                prospects for earnings contributions from overseas
conditions are different for each market segment. For                                           operations are difficult to ascertain at present, given
further information, please refer to our recent Game                                            that there already exist established players in many of
Entertainment Sector Investment Opinion, Favor                                                  these markets, and each market has a different game
stocks with strong growth prospects over SNS game                                               culture from Japan’s.
firms, published on 14 March.
                                                                                                From our analysis, earnings in just about all market
Increasingly, having great entertainment content has                                            segments have next to no correlation with economic
become a critical driver of hardware sales around the                                           activity. Importantly, this is a lack of correlation, not a
world, particularly for consoles. Therefore, firms with                                         negative correlation. Even in the current murky
considerable IP holdings, especially the major                                                  economic climate, many Japanese game firms are
packaged-software firms, have the ability to generate                                           generating strong results.
earnings in whatever platform happens to be popular at
the time, even in a diversified market.

                                                                                        - 16 -
                                                                                                                                                                     Trading Places
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  Japan packaged games: revenues and earnings by key players
  (¥bn)                                                                                   (¥bn)
 1,200                                                                                        160
 1,000                                                                                        140
                                                                                              120
   800                                                                                        100
   600                                                                                        80
   400                                                                                        60
                                                                                              40
   200                                                                                        20
       0                                                                                      0
           FY00 01       02   03    04   05   06   07   08   09     10   11 E 12 E 13 E

                 Game operating profit                            Non-game operating profit
                 Consolidated sales (LHS)
Source: Various materials, compiled by Daiwa
Note: Includes Square Enix, Namco Bandai Holdings, Capcom, and Konami. E: Daiwa
forecasts.


  Japan: game sector outlook by sub-segment
                              Three-month                          Earnings outlook                                                                                           Players
Sub-segment                   investment opinion   2Q FY11        3Q FY11 4Q FY11         1Q FY12 Comment                                                        Heavy exposure Some exposure
                                                                                                  We typically see increased news flow for the stocks ahead
                                                                                                  of the June E3 game expo, but the sales boost from the
                                                                                                  spring break in Japan and Easter holiday overseas is                           Sony
Dedicated game consoles Neutral                                                                                                                                  Nintendo
                                                                                                  unlikely to be large. Home consoles, in particular, are at                     Microsoft
                                                                                                  the end of their lifecycles, suggesting continued 10-20%
                                                                                                  YoY declines in the market overall in 1H FY12.
                                                                                                  Major developers are more or less done with shifting to
                                                                                                  portfolios focused on big-name franchises; starting to see
                                                                                                  benefits from dispersing excess resources to social games,     Capcom
                                                                                                                                                                                 Sega Sammy
Packaged-game software Positive                                                                   smartphones, and browser games. Packaged software              Square Enix
                                                                                                                                                                                 Namco Bandai
                                                                                                  sales are likely to be flat in FY11, but many firms should     Konami
                                                                                                  see strong growth in content operations on a consolidated
                                                                                                  basis.
                                                                                                  Independent firms, the traditional major players in this       KLab
                                                                                                  space, could see sales growth slow as packaged-software                        Capcom
                                                                                                                                                                 Drecom
                                                                                                  developers make deeper forays into the social game                             Square Enix
Social games                  Positive                                                                                                                           Cave
                                                                                                  market with their robust IP libraries. We expect the market                    Konami
                                                                                                                                                                 Adways
                                                                                                  overall to keep growing, but two tiers are likely to emerge                    Sega Sammy
                                                                                                  with the exit of some players.                                 CROOZ
                                                                                                  Market shifting from earnings growth driven by in-house
                                                                                                  games of the two major platform providers (Gree, DeNA) to
                                                                                                  a stable growth period with an increasing contribution from
                                                                                                                                                                 GREE
Social game platforms         Neutral                                                             titles of the major packaged-software developers. That may                     -
                                                                                                                                                                 DeNA
                                                                                                  not seem negative given that the market should keep
                                                                                                  expanding, but increased contributions from third-party
                                                                                                  developers raises the risk of users switching platforms.
                                                                                                  Earnings drivers include an ongoing recovery in the online-
                                                                                                  ad market, monetisation efforts from the launch of new
Social-networking site                                                                            games and avatars, and increased content from external         CyberAgent
                              Positive                                                                                                                                           -
platforms                                                                                         social-game providers. Earnings stable from FY11 to FY12,      mixi
                                                                                                  but growth likely to trail that of social-game providers as
                                                                                                  sub-segment players do not specialise in games.
                                                                                                  Boost from rise in staycations (indoor leisure is also                         Square Enix
                                                                                                  gaining traction due to concerns about radiation) more or
Arcade                                                                                                                                                           Aeon Fantasy    Namco Bandai
                              Neutral                                                             less played out for amusement facilities. Earnings likely to
facilities/machines                                                                                                                                              ADORES          Konami
                                                                                                  be flat or down in FY12 as operators resume machine
                                                                                                  purchases halted during the economic downturn.                                 Capcom
                                                                                                  Earthquake negatives limited; pachislot machine sales          Sega Sammy
                                                                                                  continue to improve as makers add more game features to
                                                                                                                                                                 Sankyo
Pachinko/pachislot                                                                                models following regulatory changes in 2007. Parlour                           Capcom
                              Neutral                                                                                                                            Universal
machines                                                                                          earnings flat overall, with strength in pachislot machines                     Konami
                                                                                                                                                                 Entertainment
                                                                                                  offset by weakness in pachinko machines. Stocks in the
                                                                                                  pachislot space are likely to keep doing well in FY12.         Heiwa
                                                                                                  Namco Bandai’s Kamen Rider and Power Ranger toys had
                                                                                                  ruled the roost in the domestic market, with the production
                                                                                                  of Tomy’s standby products affected by the Thailand
                                                                                                  floods. However, the market should return to normal with       Namco Bandai
Toys                          Neutral                                                                                                                                            Sega Sammy
                                                                                                  the two majors competing, given the negative effects from      Tomy
                                                                                                  the Thailand floods are subsiding and Tomy’s aggressive
                                                                                                  efforts to develop new offerings. Market earnings overall
                                                                                                  likely to trend flat in FY12.
Source: Company materials, interviews, compiled by Daiwa


                                                                                                    - 17 -
                                                                                                                                                                    Trading Places
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Thomas’ pre-job-swap view on Japan                                                                         believed Capcom needed to focus on a shift in
companies                                                                                                  revenue mix that would have a positive impact on its
                                                                                                           profitability and the bottom line.
Moving in line with the global game industry
Before I went to Japan, I believed Japan games                                                        • Square Enix: prior to my job swap, I understood that
companies were gearing up to respond to the growing                                                     this developer had great game IP, such as Final
gamer demand for smartphone and feature-phone                                                           Fantasy, and was likely to continue to pursue a
platforms. They had started to capitalise on huge social                                                business-growth strategy focused on its main game
networking sites and game portals, benefitting from                                                     platform. I believed the game developer was still in
vast gamer bases and digitised-item transactions in                                                     the midst of shifting its served market mix away
open markets. Meanwhile, it was my understanding                                                        from consoles to smart devices and had increased
that the companies were still struggling to generate                                                    exposure to the game service market, eg, paid
revenue overseas.                                                                                       downloadable content (PLDC). Due to the growing
                                                                                                        demand for item collection, I expected the company
 Capcom, Square Enix and Gree: revenue breakdown by                                                     to develop with popular F2P services by offering its
business type                                                                                           franchise games and new big titles. Meanwhile, I had
 (¥bn)                                                                                                  expected it to be cautious about offering games
 350                                                                                                    elsewhere in Asia, while focusing on the Western
 300                                                                                                    market due to its strong distribution channels there.
 250                                                                                                  • Gree: prior to my job swap, I was confident about
 200                                                                                                    the company’s ability to acquire and monetise
 150                                                                                                    mobile gamers, especially for social-game players.
 100                                                                                                    Before I went to Japan, my view was that Gree would
  50                                                                                                    not experience any negative impact on revenue from
   0                                                                                                    potential regulations to crack down on illegal trading
            2006      2007           2008          2009            2010        2011                     in lottery-boxed in-game items. It has been able to
                             Games      Amusements        Others                                        sustain a solid rise in ARPU and number of paid
Source: Companies, Daiwa; note: 2011 = FY10
                                                                                                        gamers for its mobile game offerings for the past
                                                                                                        several years. I believed there was solid demand for
                                                                                                        the company’s social-game services. I thought Gree
• Capcom: prior to my job swap in Japan, I thought                                                      was likely to gain share with more unique games
  the leading packaged-game software developer could                                                    from third-party developers on its platforms, rather
  gain momentum in package sales for consoles and                                                       than its peers.
  portable game devices, as it had rolled out sequels of
  some of its flagship games, such as Monster Hunter.
  With its game pipeline as full as ever I thought it was
  likely to ramp up R&D costs for new game
  development and marketing costs. Meanwhile, I

  Nexon: leveraging different game expertise on the same stock
                      Thomas: PC online-game expert                                                              Shiraishi: console/social-game expert
Growth strategy       The key revenue-growth drivers are a strong increase in royalties from the core titles     Strong game pipeline from in-house game-development studios and acquired
                      and diversification in service regions and game platforms. Also, it will pursue business   companies. Good localisation efforts for different target markets globally.
                      growth inorganically.
Earnings outlook      Its key games in China and Korea will continue to support top-line growth for 2012-13.     Based on the healthy business outlook in its major markets of Korea and China, there
                      Effective cost control and favorable foreign-exchange trends will help it to improve       is strong medium-term earnings visibility. The wildcards for earnings are foreign-
                      profitability.                                                                             exchange rates and regulatory changes.
Valuation             Investors should appreciate Nexon’s powerful and strong user and service-platform          The stock might be affected by its Japanese peers having lower PERs, given there is
                      globally.                                                                                  no direct comparable in Japan.
Source: Daiwa




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Nexon: Thomas (PC online-game expert)                            Given the uncertain economic environment, I believed
This leading online-game developer has a scalable and            investors would appreciate Nexon’s highly visible
highly profitable revenue model, based on its F2P                earnings and were likely to value the stock at the levels
online-game service. Prior to my job swap in Japan, I            of the leading global players.
believed Nexon had numerous opportunities for
revenue upside in 2012-15, as its efforts to utilise its         Nexon: Shiraishi (console/social-game
existing game IP for smart devices and social platforms          expert)
should have started to pay off from 2012.                        As a console and social-game expert, I believed the
                                                                 company had a strategy that was likely to be highly
Prior to our job swaps, we forecast Nexon’s revenue to           effective. This major PC online-game maker has a deep
increase by 18% YoY for 2012 and 15.9% YoY for 2013,             catalogue of major titles produced over a long period
driven by sequels to Nexon’s flagship games and the              that are popular in the company’s major markets of
publishing of existing titles globally. We had forecast          Korea and China. The plan is to tweak these franchises
wholly-owned subsidiary Nexon Korea’s overseas                   for the US, European, and Japanese markets to expand
royalties to increase by 21% YoY to W517bn for 2012,             earnings in these regions.
on the back of a solid rise in paid gamers and ARPU as
a result of effective monetisation initiatives.                  Also, I had a positive impression of the firm’s lengthy
                                                                 track record of achieving revenue growth both
  Nexon: geographical game-user revenue breakdown (2011)         organically and through acquisitions. For instance, the
                                  Others                         company had acquired several mid-tier firms with titles
                                  7.8%
                  North America                                  in a genre in which Nexon lacked a presence, and
                      7.2%
                                                Korea            proceeded to smoothly integrate the games into its
                                                32.7%            proprietary platform to maximise revenue.

                                                                 Nexon’s listing on the Tokyo Stock Exchange in
                                                                 December 2011 in Japan, where PC online games are
                                                                 less popular than in Korea, means that the share-price
                     China                                       performance has been disappointingly little affected by
                     37.4%
                                                                 trends at its peers (listed Korea and China firms);
                                            Japan
                                            14.9%
                                                                 rather, it has been affected by the valuations of the
                                                                 Japan games makers. However, as time passes
Source: Company                                                  following the listing, I had expected investors to come
                                                                 to appreciate the differences in business models
By leveraging on its strong publishing platform and              between PC online games and the console market.
large number of loyal gamers globally, prior to our job
swaps, we forecast Nexon’s operating-profit margin to
improve to 44.9% and its revenue from outside Japan
to rise by 18.8% YoY for 2012. We had forecast its EPS
to expand by 34% YoY for 2012, and at a CAGR of 25%
for 2011-13.

  Nexon: global product mix by game genre (3Q11)




                     Others
                     33.3%




                                                    RPGs
                                                    56.2%



                     FPS game
                      10.5%


Source: Company
Note: FPS stands for first-person shooter


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Financial and valuation summary
  Korea: financial summary
                                                                                                        EPS                                                                 Shareholder’s           BVPS
(Wbn)             Revenue      Operating profit     EBITDA          Net profit                          (W)                          Total assets      Total liabilities       equity                (W)
             2011 2012E 2013E 2011 2012E 2013E 2011 2012E 2013E 2011 2012E 2013E              2011    2012E    2013E             2011 2012E 2013E 2011 2012E 2013E 2011 2012E 2013E 2011 2012E 2013E
NCsoft        609 793 1,039 135 260 451 163 293 485 120 216 368                               5,491    9,889   16,867            1,121 1,384 1,825 255 306 377 853 1,057 1,414 39,089 48,434 64,756
Neowiz Games 668 754      855 108 144 174 130 172 206 76                 97 123               3,458    4,441    5,599              569 681        820 282 295 309 220 318                440 10,029 14,470 20,069
Gamevil        43     67   85   17     25     32 18     26   34   16     22    29             2,912    3,948    5,184               81 105        138 12        15       19 68    90     119 12,356 16,304 21,488
Source: companies, Daiwa forecasts

  Korea: valuation summary
                 Share price     Market cap                                                                                                                    Rev. growth                              EPS growth
                 (local curr.)     (US$bn)             PER (x)               EV/EBITDA (x)                     PBR (x)                                          (%, YoY)                                 (%, YoY)                                      ROE (%)                                  OPM (%)
                    2 Apr ‘12                  2011     2012E    2013E    2011 2012E 2013E             2011     2012E                     2013E               2011E 2012E                              2011E 2012E                                   2011E 2012E                              2011E 2012E
NCsoft               313,500             6.1    57.1      31.7     18.6    38.7    21.0    12.1          8.0       6.5                       4.8               -31.2     80.1                           -31.3     73.2                                 14.4    22.6                             22.1    32.9
Neowiz Games          35,500             0.7   10.3        8.0      6.3     6.4     4.2     2.8          3.5       2.5                       1.8                56.5     12.9                           296.0     28.4                                 33.0    36.4                             16.2    19.1
Gamevil               73,700             0.4    25.3      18.7     14.2    18.7    12.8     9.2          6.0       4.5                       3.4                49.4     56.6                             8.8     35.6                                 26.4    27.6                             41.0    36.8
Source: Companies, Daiwa forecasts


Korea/Thomas: still too early to expect                                                                The sector has been undergoing a derating since 2011
saturation                                                                                             due to a slowdown in revenue growth for core game
                                                                                                       services, increased competition, and the re-emergence
Prior to my job swap, I regarded the key industry
                                                                                                       of regulatory risks. However, I thought the market
metrics as being positive, and that they were likely to
                                                                                                       leaders deserved to trade at higher valuation multiples
contribute to the market leaders’ strong earnings
                                                                                                       going forward, given that I expected them to record
growth for 2011-13. I had forecast an average 2011-13
                                                                                                       solid earnings growth over the 2011-13 period, fuelled
CAGR of 45% for the three key players. I also believed
                                                                                                       by earnings from new game launches, overseas
their overseas-expansion strategies would continue to
                                                                                                       operations, and the migration to mobile platforms.
pay off in 2012, and provide a boost for their medium-
term revenue-growth rates.                                                                                Korea Software Sector: performance relative to KOSPI
                                                                                                         180                                                                                                                                                                                                20%
For 2012, I had forecast revenue for the companies I                                                     160                                                                                                                                                                                                15%
cover to rise by 22% YoY to W1.6tn and their average                                                     140                                                                                                                                                                                                10%
                                                                                                                                                                                                                                                                                                            5%
operating-profit margin to improve to 30%, up from                                                       120                                                                                                                                                                                                0%
                                                                                                         100                                                                                                                                                                                                (5% )
26% for 2011. I expected the main revenue-growth                                                          80                                                                                                                                                                                                (10% )
drivers to include a solid rise in overseas royalties and                                                 60                                                                                                                                                                                                (15% )
                                                                                                                                                                                                                                                                                                            (20% )
ARPU for the core titles, and the revenue contribution                                                    40                                                                                                                                                                                                (25% )
of new big titles.                                                                                        20                                                                                                                                                                                                (30% )
                                                                                                           0                                                                                                                                                                                                (35% )
                                                                                                                2010-01-04

                                                                                                                             2010-03-04

                                                                                                                                           2010-05-04

                                                                                                                                                         2010-07-04

                                                                                                                                                                      2010-09-04

                                                                                                                                                                                   2010-11-04

                                                                                                                                                                                                2011-01-04

                                                                                                                                                                                                             2011-03-04

                                                                                                                                                                                                                          2011-05-04

                                                                                                                                                                                                                                        2011-07-04

                                                                                                                                                                                                                                                       2011-09-04

                                                                                                                                                                                                                                                                    2011-11-04

                                                                                                                                                                                                                                                                                 2012-01-04

                                                                                                                                                                                                                                                                                               2012-03-04




  Korea Software Sector: revenue and earnings trend (2008-13E)
 (Wtn)
 2.5                                                                                    70%                                                             Software Index (LHS)                                                           Relative performance (LHS)
                                                                                        60%
 2.0                                                                                                   Source: FnGuide, Daiwa
                                                                                        50%
 1.5                                                                                    40%

 1.0                                                                                    30%
                                                                                        20%
 0.5
                                                                                        10%
 0.0                                                                                    0%
          2008           2009         2010         2011          2012E      2013E

                 Revenue            OP            NP             Revenue growth (RHS)
Source: Companies, Daiwa forecasts




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  Financial summary: Japan
(¥bn)                 Revenue               Operating profit                  EBITDA              Net profit         EPS (¥)             Total assets         Total liabilities   Shareholders’ equity      BVPS (¥)
             2011      2012E     2013E     2011    2012E    2013E     2011    2012E    2013E 2011 2012E 2013E 2011 2012E 2013E 2011 2012E 2013E 2011 2012E 2013E 2011 2012E 2013E 2011 2012E 2013E
Nexon          87.6     103.4     119.8     38.2     46.5     54.0     49.6     57.8     64.9     25.8 35.2 40.9 60.5 81.3 95.2 235.8 264.7 302.4 57.9 52.6 50.3 174.4 209.0 249.5 410 490 586
Square Enix 125,271   130,000   150,000    7,325   14,500   23,000   13,933   21,000   29,500 (12,043) 6,900 12,900 (104.7) 60.0 112.1 206,336 N.A. N.A. 71,192 N.A. N.A. 133,558 N.A. N.A. 1,161 N.A. N.A.
Capcom       97,716    91,000   100,000   14,295   13,600   16,600   17,610   16,800   19,700 7,750 7,900 9,700 131.2 133.7 164.2 90,408       N.A. N.A. 32,400 N.A. N.A. 58,007 N.A. N.A. 982 N.A. N.A.
Gree         64,178   148,000   179,000   31,135   78,000   90,000   31,315   78,200   90,250 18,239 45,000 52,000 79.9 194.4 224.6 62,855     N.A. N.A. 25,393 N.A. N.A. 37,398 N.A. N.A. 163 N.A. N.A.
Source: Companies, Daiwa forecasts
Note: fiscal years are the end of March for Capcom and Square Enix, the end of June for Gree, and the end of December for Nexon


  Valuation summary: Japan
                  Share price Market cap                                                                                                         Rev. growth        EPS growth
                  (local curr.) (¥bn)                               PER (x)                    EV/EBITDA (x)                 PBR (x)              (%, YoY)           (%, YoY)            ROE (%)            OPM (%)
                     2 Apr. ‘12                             2011     2012E      2013E       2011 2012E 2013E         2011     2012E    2013E    2012E 2013E        2012E 2013E         2012E 2013E        2012E 2013E
Nexon                     1,438     615.9                    23.8      17.7       15.1       10.2     8.5    7.3       3.5       2.9      2.5     18.0     15.9      34.4     17.1       18.1    17.7       44.9    45.0
Square Enix               1,718     197.6                       -      28.7       15.3        8.8     8.7    6.2       1.5      N.A.     N.A.      3.8     15.4      T.B.     87.0       N.A.    N.A.       11.2    15.3
Capcom                    1,933     111.3                    14.7      14.5       11.8        4.8     6.1    5.2       2.0      N.A.     N.A.     -6.9      9.9       1.9     22.8       N.A.    N.A.       14.9    16.6
Gree                      2,067     481.3                    25.9      10.6        9.2       16.1     7.4    6.4      12.7      N.A.     N.A.    130.6     20.9     143.2     15.6       N.A.    N.A.       52.7    50.3
Source: Companies, Daiwa forecasts; note:* Square Enix was loss-making in FY10; except for Nexon, 2011 = FY10, 2012E = FY11E, and 2013E = FY12E


Japan/Shiraishi: transition in a tough                                                                                       the operation of arcades), which is sensitive to
environment                                                                                                                  economic trends. While this segment has high sales,
                                                                                                                             it carries relatively low margins, meaning only a
• Capcom: 1-3Q FY11 sales amounted to ¥50.2bn                                                                                modest impact on consolidated profit. The main
  (down 29% YoY) for an operating profit of ¥6.7bn                                                                           digital-entertainment operation drove profit growth
  (down 47% YoY). Those were sharp declines, but the                                                                         during the period.
  main reason was a lack of strong (sales of over 3m
  copies) titles in the main packaged-software                                                                               I expect consolidated sales and profit to remain on
  business (part of the consumer/online game                                                                                 an uptrend, backed by an improvement in the main
  segment). The company warned this would be the                                                                             digital-entertainment segment. However, the easy
  case with FY11 from the outset, and I do not see the                                                                       YoY comparison should be noted. Following a record
  results as negative.                                                                                                       operating profit for FY09, the firm suffered losses in
                                                                                                                             FY10 due to disruptions in the development system,
    Looking at individual segments, trends seen over the                                                                     which triggered a lull in new content launches as the
    first two quarters were unchanged in 3Q FY11. The                                                                        firm restructured in that area. As such, Square Enix
    packaged software operation shipped 9.4m units for                                                                       has been one step behind its rivals, which moved
    1-3Q FY11 (down 39% YoY), so that sales and                                                                              swiftly into online content and are likely to beat their
    operating profit in the mainstay consumer/online                                                                         profit records in FY11-12.
    game segment fell by 41% YoY and 54% YoY,
    respectively. Much of the decline was due to the
    absence of the boost from last year’s Monster Hunter                                                             • Gree: the 2Q FY11 (year-ending June 2012) results
    Portable 3rd, which sold 4.1m units for 1-3Q FY10.                                                                 showed balanced growth driven by both in-house
    Meanwhile, the mobile content division, which has                                                                  and third-party titles. Consolidated operating profit
    been moving aggressively into overseas social-                                                                     rose by 226% YoY to ¥22.5bn on a 190% revenue
    networking site (SNS) operations, continued to                                                                     gain to ¥41.5bn (comparisons are with the year-
    perform well, and the arcade operation segment                                                                     earlier non-consolidated figures as the firm started
    made further improvements in its margins by                                                                        releasing consolidated results only in 3Q FY10). On a
    closing unprofitable locations.                                                                                    QoQ basis, operating profit increased by 35% on a
                                                                                                                       36% increase in the top line.
• Square Enix: the 1-3Q FY11 results overshot the                                                                            Growth in revenue from paid services (chiefly social
  company’s FY11 projections, but management kept                                                                            games) outpaced the consolidated showing, rising
  its guidance intact, citing prospects for up-front                                                                         221% YoY and 39% QoQ. ARPU, which rose by a
  costs relating to content development in 4Q FY11.                                                                          still strong ¥100 QoQ for 1Q FY11, increased by
  The firm views FY11 as a year to revamp its earnings                                                                       ¥112 QoQ in 2Q FY11. Revenue contributions still
  structure to support growth from FY12.                                                                                     break down to roughly 80/20 between in-house
                                                                                                                             and third-party titles, underscoring the
    For 1-3Q FY11, Square Enix reported ¥95.7bn in                                                                           collaboration with third-party developers that is
    sales (down 3% YoY) and ¥11.2bn in operating profit                                                                      behind the strong growth.
    (up 25% YoY). Consolidated sales dropped due to a
    top-line setback in the amusement segment (mainly

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On the ground in Japan and Korea
Our analysts swapped jobs, and companies, to get a real feel for the different games
cultures

How Thomas spent his time in Japan
  Thomas: the companies he spoke to in Japan
Date             Company                       Key issues discussed
                                               - Key game services driving revenue growth and potential regulation impact
20 Feb 2012                                    - Strategy for smartphone platform and effective monetisation
                                               - Overseas expansion, especially for Korea market through Daum Communications
                                               - Cloud game and new game-market opportunities in Japan
                                               - Key difference in online-game market between Japan and Korea
                                               - New games in the pipeline for cross-platform and overseas
                                               - Migration strategy to smartphone game platform
22 Feb 2012                                    - Management views on game software packages cycle
                                               - Wii U: Will it be a breakthrough to reignite revenue and earnings growth?
                                               - Recent initiatives to diversify the game platform into a non-console platform
                                               - Overseas expansion through strategic partnership in Asia
                                               - Upcoming blockbuster titles like Dragon Dogma
                                               - Recent trends in key operating metrics for different game platforms
23 Feb 2012                                    - Possible traffic cannibalisation between desktops and mobile
                                               - Effective monetisation strategy for smartphones and social games
                                               - 1Q12 update on game operations in core markets
                                               - 2012 business targets and earnings outlook, based on performance for Jan-Feb
                                               - Reality checks on regulation, FX, and new game development
                                               - Key reasons for slower-than-expected smartphone adoption in Japan
                                               - Recent trends in mobile data traffic and network neutrality
                                               - Business impact by mobile-messenger service like LINE by NHN
                                               - Key success factors for social-game services on the Ameba platform
                                               - Monetisation strategy for smartphone users and low ARPU users
                                               - Key features of new Ameba services for smartphones
                                               - Core game services and key features behind strong popularity of smart devices
27 Feb 2012                                    - Revenue impact from platform migration and regulations on item transactions
                                               - Update on its social game strategies in Korea and overseas
Source: Daiwa


What did the leading players in Japan have                         companies were the biggest supporters of the current
to say?                                                            mobile-game opportunities, while most of their PC-
                                                                   based competitors favoured a more diversified genre of
From 20-27 February, I spent some time with two
                                                                   games and business exposure to overseas markets. For
mobile-game portal companies, two SNS site
                                                                   the social-game providers, the common theme was the
companies, four game development studios, and a
                                                                   move from traditional game developers to new game
leading wireless operator. Although no-one said the
                                                                   platforms in an effort to enhance the reach for their
demand environment for online games was improving
                                                                   gamers. In general, the console-related companies
rapidly, I did not sense that the environment had
                                                                   appeared to experience soft demand globally, while the
deteriorated since 2010. In addition, none of the
                                                                   Japanese market continued to be resilient.
companies appeared to be rushing into developing
packaged game software for traditional game devices
                                                                   In addition, demand for quality games remained
such as feature phones or game consoles.
                                                                   healthy in Japan, which could be a leading indicator of
                                                                   future demand for sequels, assuming there are sequels
I spoke to the companies about their business growth
                                                                   to the new games. During my talks with these
strategies, key game services, and monetisation plans.
                                                                   companies, several showed signs that they were
Of all the companies I spoke to, the social-game site

                                                            - 24 -
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improving their game portfolios, but most                                   Thomas and Sharaishi look at what Square Enix, which
acknowledged that a return to the strong pipelines of                     focuses on core-game franchises, has to offer
the past would not happen for a few quarters yet.

On a positive note, I learned that some promising
industry themes had emerged in Japan since 2008.
Some of the companies said that they had fully
monetised their social games and that their popular IPs
were being converted into mobile and online games.
However, with more opportunities and less access to
the social game markets, I believed the Japanese
consol-game companies were focusing more on their
cross-platform services and global operations.

 Thomas checks out what Capcom offers in terms of game
content across different platforms



                                                                          Source: Daiwa




Source: Daiwa


  Thomas: doing the research in Japan
Date              Visited                              Key highlights
21 Feb 2012       Game S/W retail shops in Akihabara   Check offline distribution channels and the showcases for new game packaged titles
                  Arcade game centres                  Identify arcade gamers’ characteristics in Japan
                  PC cafés                             Compare Japan’s online-game service infrastructure with Korea’s
                  Digitised character stores           Understand the market opportunities globally for one-source-multi-use
Source: Daiwa


Thomas hits the streets                                                   surprised to see how crowded it was, suggesting to me
I believe that I gained a real hands-on feel for the                      that demand for consoles and handheld game titles
Japan industry, and thus I now have a clearer picture                     remained healthy. At the store, visitors appeared to
of end-user demand and the Japanese industry’s                            find new, but discounted, game titles and hardware
underlying dynamics.                                                      consoles, while I noticed shoppers walking around with
                                                                          new products and discounted packaged software games.
To enhance my knowledge, I spent a whole day (22
February) at the Mecca of Japan’s game industry. I
drove to Akihabara in downtown Tokyo, an area
dedicated to game-console and software-distribution
channels, to get a better feel for Japanese gamers. I
walked around the sales racks and the display tables to
check out the new consoles and game titles. Even
though it was a weekday, the stores were crowded.
When I arrived at the landmark shopping mall for
game software and game devices in Akihabara, I was
                                                                  - 25 -
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  Thomas looking at Capcom’s sales racks                               Thomas playing on a game simulator in the arcade




Source: Daiwa                                                      Source: Daiwa


  Thomas comparing the new PS Vista with the Nintendo DS/3D        During the arcade visit, I sat down to play some
                                                                   popular arcade games with Shiraishi, and competed for
                                                                   high game points. Neither of us had played against
                                                                   each other before. My arcade experience reinforced my
                                                                   view that Japan’s game industry is unique when it
                                                                   comes to gamers and game accessibility. The Korean
                                                                   games analyst failed to beat Japanese games analyst,
                                                                   who was much more familiar with advanced game
                                                                   versions and had a powerful skill set. Game expertise
                                                                   on different platforms provided no discernable
                                                                   advantages.

                                                                       Thomas and Shiraishi go head-to-head




Source: Daiwa


It was good to see firsthand how gamers accessed the
available game services and consumed entertainment
content. My day out was a success, because I saw the
different environments for the game supply chain, as
well as consumer attitudes. Further, my outing to an
arcade-game centre was encouraging; most of the
visitors I saw there during the day appeared to be
familiar with the games they were playing. In Korea, it
is unusual to see game players during the day time.

                                                                   Source: Daiwa




                                                              - 26 -
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From what I saw in the arcade centres, I sensed that
Japan had robust distribution channels for games,
supported by a vast user base and loyal gamers. Japan
has a much longer history in terms of its game industry
than other countries in Asia, as the Japanese industry
has a strong value chain consisting of a large number of
developers, distributors, and customers. More
importantly, Japan’s long game history has resulted in
a lot of game IP, strong brand equity, and powerful
game franchises, in my view.

 Thomas tries his hand at the crane game, popular in Japan,
but not in Korea




Source: Daiwa




                                                              - 27 -
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How Shraishi spent his time in Korea
  Shiraishi: the companies he spoke to in Korea
Date                 Company                               Key issues discussed
                                                           Korea’s mobile games sector; recent trends in competitive environment after smartphone boom
28 Feb 2012
                                                           Trends in Korea’s mobile-game market; changes since the shift to smartphones, etc

                                                           Trends in Korea’s mobile/social-game market; challenges to expand overseas, etc

                                                           Market trends, features of Korea’s social-game market; competitive conditions in the US and European
                                                           services
                                                           Trends in Korean, Chinese MMORPG market; expansion strategy into other regions, into consoles and
29 Feb 2012
                                                           other platforms
                                                           Trends in the PC casual game market; strategy to expand outside Korea

                                                           Trends in Korea’s mobile social-game market and business synergies with Nexon, its parent company

                                                           Trends in Korea’s PC online game market; firm’s strategy to expand into other genres

Source: Daiwa


Meeting the online-game leaders in Korea                                               Shiraishi at Gamevil, which is diversifying its content into
                                                                                     casual games
As part of this job swap, I met several Korean
companies in late February. Just about all the major
sector firms have their headquarters in Seoul, so even
during my brief time in the country, I was able to visit
companies, PC cafés, arcades, and console-game
software stores.

  Shiraishi at NCsoft, which hopes to generate non-game
revenue




                                                                                     Source: Daiwa




Source: Daiwa


  Shiraishi: doing the research in Korea
Date            Visited              Key highlights
28 Feb, 2012    PC cafés             Even in Korea, a relatively high-income market in Asia, many young people were playing games in PC cafés. They tend to play with friends,
                                     making the experience less like Japan’s manga cafés and more like a traditional arcade.
                Package game shop    Very low customer traffic, but the time of my visit may have been a factor. Games were offered at low prices (in Yen terms), but only a few major
                                     titles were localised for the Korean market (making for less variety than in Japan, the US, or Europe). Confirmed that packaged games are not
                                     mainstream in the Korean market.
                Arcade game centre   The arcade apparently imported used machines from Japan that were two or three generations old. Like Japan, the arcade appeared to be a
                                     meeting place for young people, except for a few customers and one or two employees. All in all, the place did not look profitable.
Source: Daiwa




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 Korea’s PC cafés: the best place to play online games globally         Nintendo is still struggling to position itself in Korea
due to high-performance PCs, large monitors, and broadband




                                                                    Source: Daiwa
Source: Daiwa

                                                                      Korean gamers do not have much choice when it comes to
  Korea’s arcade-game market still a long way behind Japan’s        localised console game titles




                                                                    Source: Daiwa
Source: Daiwa




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 Heard on the street
  Thomas in Japan
Date                      People I met                       Main discussion topic
24 Feb 2012               Gamers                             Gamers we met highlighted the importance of storylines and in-game community features
                          Publishers                         What is the most effective monetisation strategy
                          Developers                         Which game genre and platform will be the mainstream in the future
                          Investors                          Appealing investment opportunities emerging from the entertainment space
Source: Daiwa


Thomas gets to the heart of Japanese game                         However, Daiwa prefers the Japan/Korea game-
culture                                                           content developers to the SNG-platform companies
                                                                  due to their strong operating leverage and potential to
On 24 February, I spoke to people from various game
                                                                  expand globally. Meanwhile, investors are still
fields in Japan. The key questions we asked gamers
                                                                  concerned about competition and regulation in each
were: ‘What do you spend the majority of your spare
                                                                  target market that might have a negative impact on the
time doing and what entertainment content do you pay
                                                                  F2P-based revenue model and gamer acquisition in
for?’ and, ‘What are the most important factors when
                                                                  Japan and Korea.
you choose and decide to pay for a game?’ Some of the
users we spoke to said that they spent most of their
                                                                  On a positive note, they are cautiously optimistic about
spare time playing games and communicating with
                                                                  the market opportunities that might emerge globally
others on their PCs and mobile phones. As we had seen
                                                                  from new game platforms, different service regions,
in other regions, Japanese gamers were following
                                                                  and new revenue models.
trends similar to those globally, in terms of the game
platforms used and game-play style.

The Japan gamers said they were familiar with most of
the game characters and that they felt comfortable in a
virtual reality, playing games either on their own or in a
team. But, they appear to prefer games with storylines
and in-game quests, rather than those with content
updates and large-scale warfare. I also felt that the
Japanese gamers expected all commercial titles to be
perfect on all levels.

I also spoke with Daiwa sales people in Japan to get an
insight on Japanese equity investors’ perspective.
Investors were keen to find investment ideas by cross-
analysing the industry evolution cycle in the two
countries, especially given the smartphone boom, and
the increasing popularity of F2P services, and social-
networking game (SNG) platforms.

While in Japan, I made time to talk to investors about
the games industry and company-specific issues. Most
investors’ buying lists are focused on the key
emerging themes and the market leaders, such as
Nexon, NCsoft, and Gree. I talked to them about the
importance of the industry value chain in identifying
better investment opportunities in each market. We
discussed my view that SNGs would become popular
in the Pan-Asia market due to their easy-to-play
content and game modes, and the platform operators’
efforts to monetise them.




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  Shiraishi in Korea
Date                     People I met                       Main discussion topics
28 Feb 2012              Publishers                         Potential for Japanese firms in the Korean market
                         Developers                         Korean firms’ overseas expansion strategies
                         Investors                          Potential for Korean firms to expand overseas
Source: Daiwa



Shiraishi feels the Korea companies are
seeking signs of their overseas growth
In my discussions with publishers and developers, I
found that a higher-than-expected number of firms
were interested in teaming up with Japanese game
companies, either to help them expand abroad or to tap
niche markets within Korea. Korean firms entered the
China market early, but it was widely accepted by the
Korean game firms that Japanese companies were
quicker to enter the US and European markets and, as
a result, had gained significant brand recognition in the
console segment. Therefore, the Korean firms were
apparently considering collaborating with other firms,
including Japanese players, as a means to speed up
their overseas growth.

However, most of the firms I spoke to thought a fully
fledged entry into the Korean market by the Japanese
game firms would not succeed. Many argued that there
were already a sizable number of established local
firms in the market, and consumers tended to prefer
different game genres and platforms. The same reasons
helped explain why there were few success stories of
Korean game companies operating in Japan.

On the other hand, investors seemed to be most
interested in Korean companies’ overseas growth
potential and the risk of overseas firms taking on the
Korean market. In discussions, many asked me why
PC online games were not taking off in Japan, and
others wanted to hear more about the Japanese
social-game market.

The more I talked to Korean game industry insiders,
the more I got the impression that concerns about the
Korean online-game market being saturated were the
driving force behind the domestic companies’ desire
to expand overseas. In addition, the companies’
managements seemed worried about their chances of
succeeding.




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Post-job-swap view
New games and global expansion should drive a fresh wave of industry growth

Key highlights in Japan and Korea
  Highlights of Thomas’ job swap in Japan
                      Findings in line with our view                                          Findings running counter to our view
PC online games       - User base for PC online games is narrow and concentrated              - More focused on storylines than graphics and content updates
                      - PC cafés are not a hub to market and distribute online games          - Favourable market for F2P services by leveraging in-game community
                      - Premium gamers are increasing game spending on items                  - Becoming more casual and social
Mobile/social games   - Benefiting from strong platform on feature phones                     - Slower-than-expected migration to smartphone services
                      - Social features remain key to acquire and retain gamers               - Limited diversification of game genres
                      - Users are effectively monetised by in-game item promotions            - Higher-than-expected ARPU and paying user ratio
Console/handheld      - Offline distribution is well established and accessible               - Rapid moves to adopt online connectivity functions
                      - Major players’ core titles have strong brand equity                   - Rapid steps to leverage core game IP for new games platforms
                      - Increasingly prolonged cycle for new software releases                - Conservative in capitalising on emerging PC online-game markets
Other aspects         - No regulatory intervention on game addiction and item sales           - Tightening of regulations on transactions of counterfeit virtual items
                      - Some leading game companies remain cautious on overseas expansion     - Game companies generally are struggling to apply local monetisation model to global markets
Source: Daiwa


Thomas: key highlights in Japan                                                                DeNA and Gree: trend in operating-profit margins (2008-11)
                                                                                                                                 FY08              FY09              FY10            FY11
1) Better than expected: paying gamers and                                                  DeNA                                  43%               42%               44%             50%
profitability of SNG operators                                                              Gree                                  36%               60%               56%             49%
During my time in Shiraishi’s shoes in Japan, I found                                       Source: Companies, Daiwa
that the country’s game industry has a much bigger
paid gamer base than I expected, high profitability, and                                    The two leading SNG platforms, with active users of 3-
a rising ARPU trend in Japan.                                                               5m, recorded ARPU of around US$40 per active user for
                                                                                            2011. This compares with Korean peers such as Neowiz
I noted that the gamer base in Japan is vast, with                                          Games and CJ E&M, which had an ARPU of over US$30
strong loyalty to the market leaders’ flagship games                                        for 2011, based on monthly unique visitors of 2.5-4.0m.
over the past decades. In my view, this could help game
companies to continue to roll out sequels and market                                           Comparison of ARPU and % of paying users (2011)
                                                                                              45
other digitised items related to their game content. The
                                                                                              40
leading players surprised me with their strong
                                                                                              35
capability to monetise users and create new business
                                                                                              30
opportunities. Contrary to my expectations, I got the
                                                                                              25
impression that Japanese SNG portals recorded ratios
                                                                                              20
of paying gamers to total active users of around 10-15%
                                                                                              15
for 2011, similar to Korean peers.                                                            10
                                                                                                5
Gree and DeNA have successfully transformed their                                               0
businesses from mobile game portals into social-game                                                               ARPU (US$)                             Paying user ratio (% )
platforms. SNG operators in Japan enjoy higher                                                                  Neowiz Games         CJ E&M        Nex on        DeNA        Gree
operating-profit margins than other companies                                               Source: Companies, Daiwa estimates
offering different genre games in Japan and also
online-game developers in Korea. For their fiscal 2011                                      In addition, I found that Cyber Agent has demonstrated
years (FY11), Gree and DeNA generated operating-                                            impressive revenue growth with its Ameba service,
profit margins of 49% and 50%, respectively, compared                                       driven by strong sales of virtual content. Sales of its
with 44% for Nexon and 22% for NCsoft.                                                      Ameba service rose by 74% YoY for 1Q FY12, on the back
                                                                                            of thriving transactions of virtual items (up 119% YoY).

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2) Faster than expected: cross-platform game                                       total game revenue from feature phones for Gamevil
publishing and regulatory intervention                                             and Com2uS in Korea fell by 52% YoY and 37.1% YoY,
Key console-game players have been moving into the                                 respectively, for 2011 due to the rapid adoption of
online-game space rapidly over the past few years with                             smartphones (43% of total wireless subscribers in
enhanced network/online connectivity. They are                                     Korea as at the end of December 2011).
leveraging their popular game IP aggressively.
However, some legacy game companies are still                                      On game platforms, I believe consoles are the most
hesitating to adapt to the recent demand for social                                popular device, and Daiwa estimates that consoles
networking features from their loyal gamers.                                       accounted for 60% of total game market revenue in
                                                                                   Japan for 2011.
Some of the companies we met with seemed very
interested to incorporate in-game ecosystems and                                   According to a survey by the Computer Entertainment
community activities to offer users an enhanced                                    Suppliers’ Association (CESA) conducted in February
experience with entertainment content. They appeared                               2011, most Japanese gamers surveyed preferred portal
to remain cautiously optimistic about social game                                  game devices and consoles, followed by arcade, mobile,
platforms due to rising competition among SNG                                      and other desktop-based games. Despite a rising
platforms, the potential risk of overmonetisation by                               number of smartphone users, following my job swap, I
offering frequent item sales, and regulatory initiatives.                          believe it is likely to take time for application-based
                                                                                   games to become mainstream in Japan’s game market
  Cross-platform titles based on console games in Japan                            due to slower-than-expected migration from feature
Game titles               Game genre   Console developer   Online developer        phone gamers and platform operators’ cautious steps
Winning Eleven Online     Sports       Konami              NHN
Battlefield Online        Shooting     Electronic Arts     Neowiz Games
                                                                                   to boost mobile application transactions at open-
FIFA Online               Sports       Electronic Arts     Neowiz Games            application stores.
Dragon Ball Online        MMORPG       Namco Bandai        Bandai Korea
Monster Hunter Frontier   MMORPG       Capcom              Capcom                      Japan: user distribution by game platform (Feb-11)
Dynasty Warriors          Action       Koei                Koei/CJ E&M
Source: Companies, Daiwa                                                                                     Online game Others
                                                                                                                4.6%     5.7%
                                                                                                     Smartphone
Surprisingly, I heard that the SNG market has recently                                                 game                                Handheld game
slowed down. My Japanese counterpart, Shiraishi,                                                       5.2%                                    35.1%
forecasts DeNA’s revenue growth to decelerate to 2%                                             Mobile game
YoY by FY14 (from 134% YoY for FY11) and Gree’s to                                                16.5%
slow to 6% YoY (from 82% YoY for FY11). He expects
the pace of growth in number of users for Japan’s
                                                                                                      PC game
major SNG operators to moderate to around 10% YoY                                                      8.8%
by 4Q13, compared with over 20% YoY until FY12.                                                          Arcade game              Video game
                                                                                                             5.7%                    18.4%
I think the SNG market in Japan has been sheltered                                 Source: CESA (February 2011), Daiwa
from regulation so far due to its shorter history than
the console and online game markets. Hitherto, local                                   Korea: user distribution by game platform (2010)
governments have stayed on the sidelines and given the
companies greater responsibility over controlling                                                                 Video game Arcade game
illegal-item transactions on social platforms. However,                                               Handheld game 3.4%         1.1%
                                                                                                          4.4%
I believe SNG operators might face tough regulatory                                                  PC game
pressure on cash-item trading and gambling-featured                                                   8.6%
item sales in the future due to rising social costs.
                                                                                               Mobile game
3) Bigger than expected: legacy games and non-                                                   15.3%
game item markets
Surprisingly, I discovered that Japan’s game market for                                                                                    Online game
                                                                                                                                             67.2%
feature phones remains healthy. According to Famitsu
Game Hakusho (2011), this market was 4.4 times larger
than those for smartphone and tablet PCs in terms of                               Source: KOCCA
revenue. I attribute this to a strong social gamer base
and fairly low penetration of smartphones of 17.5% at
the end of 3Q11. Famitsu forecasts feature phone
revenue in Japan to decline by 7% YoY for 2011. The

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Daiwa forecasts revenue growth for Japan’s console                                               Japan: wireless users and mobile-game revenue
game market of 9.5% YoY for 2011 to ¥891bn. During                                               (m)                                                                      (¥bn)
my job swap in Japan, I found that the market size and                                           140                                                                           100
gamer base of console games was larger than I                                                    120
                                                                                                                                                                               80
expected, and that console games are likely to remain                                            100
                                                                                                                                                                               60
the mainstream game device. I also noticed the                                                    80
popularity of handheld game devices, such as PSP and                                              60                                                                           40
Nintendo 3DS.                                                                                     40
                                                                                                                                                                               20
                                                                                                  20

Square Enix generated over 10% of its FY11 revenue                                                 0                                                                           0

from non-game services like collective item sales. I                                                     2008          2009              2010   2011E         2012E
attribute this to Japan’s huge social game market,                                                     Feature phone subscribers (LHS)          Smartphone subscribers (LHS)
which recorded revenue of ¥281bn for 2011, according                                                   Feature phone market (RHS)               Smartphone/tablet market (RHS)
to our house estimates. I believe vast and loyal gamers                                      Source: Famitsu Game Hakusho 2011, companies, Daiwa
contributed to the strong non-game revenue. Square
Enix generated 10.4% of its total FY11 revenue from the                                      Korea has experienced a sharp decline in mobile-game
publication of comic books, game strategy books and                                          revenue for feature phones since 2010. Daiwa
magazines. Merchandise such as character goods and                                           estimates that revenue from feature phones accounted
soundtracks also contributed to 2.4% of its total                                            for 30% of Korea’s mobile-game market in 2011.
revenue for FY11.                                                                            Interestingly, I found that feature phones remain the
                                                                                             principal game platform for Japanese mobile gamers,
Although I did not meet many third-party developers                                          as the number of social games for smartphones on
in Japan, I believe Japan has a bigger game                                                  DeNA’s mobage platform is less than 300, compared to
development studio pool than other countries in Asia.                                        over 1,000 social games for feature phones. I attribute
In my opinion, this results from a well-established                                          this strong feature-phone market in Japan to well-
infrastructure for the country’s entertainment                                               prepared service offerings, weak open markets for
industry, which has strong partnerships and                                                  mobile-game applications, and strong social use of
relationships with operators, hardware makers,                                               game portals. Along with gradual migration to
content providers, distribution channels, retail shops,                                      smartphones, I believe feature-phone game services are
and importantly end users.                                                                   likely to remain the key games segment in Japan.

  Korea: wireless users and mobile-game revenue                                              4) Weaker than expected: mobile-game apps
 (m)                                                                           (Wbn)         and online-game infrastructure
  60                                                                               25        Japan had 21.3m smartphone users (18% of total
  50                                                                               20
                                                                                             wireless subscribers) as at the end of 2011, compared
  40                                                                                         with 6.2m at the end of 2010 and 22.6m (43% of total
                                                                                   15        wireless subscribers) in Korea at the end of 2011.
  30
                                                                                   10        Japanese gamers attribute their slower-than-expected
  20
                                                                                             adoption of smartphones to excellent feature phone
  10                                                                               5
                                                                                             functions and conservative marketing strategies of
   0                                                                               0         local wireless operators like NTT Docomo. I think this
         1Q10     2Q10     3Q10       4Q10   1Q11   2Q11      3Q11     4Q11                  might give mobile-game companies and social portals
           Feature phone subscribers (LHS)          Smartphone subscribers (LHS)             more time to adapt to emerging demand for
           Smartphone revenue (RHS)                 Feature phone revenue (RHS)              smartphone games.
Source: Companies, Daiwa
Note: mobile-game revenue is based on Gamevil and Com2uS                                     Reflecting this industry landscape, revenue for Japan’s
                                                                                             smartphone and tablet PC game market is expected to
                                                                                             be only ¥18.1bn for 2011, according to Famitsu Game
                                                                                             Hakusho, compared with ¥79.6bn for the feature
                                                                                             phone game market. This comes as a negative surprise
                                                                                             to us, as mobile-game companies’ smartphone game
                                                                                             revenue proportions exceeded 60% of their total
                                                                                             revenue for 2011.




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In addition, I found that Japan has fewer PC cafés and          Online-game infrastructure: a PC café in Tokyo
weaker-than-expected other online-game service
infrastructure. Unlike in Korea and China, people tend
to visit PC cafés in Japan not only for online games but
also for other purposes, such as web surfing, cartoon
reading, and even to sleep. With their small spaces,
low-end PCs and small monitors, these PC cafés are not
the best places to play online games.

I heard that many Japanese gamers tend to play online
games at home. This indicates that Japan has no offline
hub or channel through which to promote online game
services nationwide. The Japan Complex Café
Association reported that Japan had 2,481 Internet
cafés as of June 2011. The Internet PC Culture
Association in Korea estimates there were 15,140 PC
cafés as at the end of 2010.
                                                            Source: Daiwa
  Online-game infrastructure: a PC café in Seoul
                                                            During my time working as an analyst in Japan, I
                                                            learned that Square Enix and Capcom had strong
                                                            pipelines for new games in the medium term. Many
                                                            companies reiterated that they would continue to
                                                            focus on developing sequels and leveraging their loyal
                                                            gamer bases for service-region expansion. I attribute
                                                            this to the cycle of new game package developments
                                                            becoming more prolonged in Japan. Due to rising
                                                            competition from new game platforms like desktops
                                                            and smart devices, I think Japanese game companies
                                                            will need more time to roll out new competitive titles
                                                            than the past.

                                                            Aside from Nintendo (which derived 83% of its total
                                                            revenue from overseas in FY11), Japanese game
                                                            software companies saw small revenue contributions
Source: Daiwa
                                                            from overseas. Square Enix generated 83.5% of its total
                                                            revenue from the domestic market for FY11. DeNA and
  Online-game infrastructure: a PC café in Shanghai
                                                            Gree have been striving to penetrate the overseas
                                                            markets through their aggressive acquisitions of
                                                            Ngmoco (by DeNA in October 2010) and Openfeint (by
                                                            Gree in April 2011) in the US. However, Gree has
                                                            guided for limited revenue from its overseas operations
                                                            for FY12. For NCsoft and Neowiz Games, overseas
                                                            revenue accounted for 34% and 54% of their total
                                                            revenue for 2011, respectively.




Source: Daiwa




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  The highlights of Shiraishi’s job swap in Korea
                     Findings in line with our view                                                       Findings running counter to our view
PC online game       - Korean game firms are focused mostly on China and their domestic market.           It is likely to take longer than we expected for Korean companies to penetrate the
                     - PC online games are still the leading gaming platforms in Korea.                   US and European markets.
Mobile/social game   Fleshed-out infrastructure, including high smartphone penetration.                   The mobile/social game market is small, despite its strong infrastructure.
Console/handheld     As expected, consoles/handhelds have a very limited presence in Korea.               More than we realised, Korean firms are considering releasing games for consoles to
                                                                                                          enter the US/European markets.
Other aspects        In Korea, we gained the impression that it is difficult to introduce game content    Korean game companies are studying closely trends in Japan’s expanding
(regulation, etc.)   featuring gambling and lottery-boxed items.                                          social game market.
                                                                                                          However, they view Japan’s social game market as unique (including
                                                                                                          user preferences), and as such mostly do not see Japanese game companies’ entry
                                                                                                          into Korea as a significant risk factor.
Source: Daiwa


Shiraishi: key highlights in Korea                                                                   Online PC game developers appear to have many
1) Better than expected: rich loyal user base                                                        strategies for gaining a share of the US, Japanese, and
and strong market leadership                                                                         European game markets, including online PC titles for
I did not find much in the Korea game market overall                                                 frequent gamers as well as console games based on in-
that diverged significantly from my pre-job swap                                                     house franchises. However, many mobile game
assumptions, including the mainstay and niche profiles                                               developers are exploring the option of making their
of the online PC game and game console markets,                                                      games available on smartphone content distribution
respectively. That said, my job swap provided some                                                   platforms such as the App Store and Google Play, or on
fascinating insights into the strategies of game                                                     social game platforms such as Facebook, Gree or
developers and other aspects of the Korean game                                                      DeNA’s Mobage.
industry, such as its smaller-than-expected mobile
game market.                                                                                         3) Weaker-and-slower than expected: markets
                                                                                                     for mobile/social games and foreign-made title
As I expected, Korea’s game market is driven by online                                               I was somewhat surprised to learn that the mobile
PC games, with a wide spectrum of titles available for                                               game market was not as large as could be expected
both frequent and casual gamers, focusing on a                                                       from the country’s fleshed-out telecom infrastructure
Freemium business model (ie, free-to-play with                                                       and high smartphone penetration. It was also very
charges for items and other advanced features). Game                                                 interesting that the frontrunners in mobile games did
rankings were much more concentrated than we                                                         not seem as clear as in the online PC game market, due
expected among a few industry players, with market-                                                  in part to a bevy of market entrants in the mobile arena.
share gains typically seen more often at companies
with strong brand names. In this way, I witnessed some                                               I must also note the extremely weak presence of foreign
similarities to the dedicated game console market.                                                   companies (including Japanese ones) in the Korean
                                                                                                     market. There are a few exceptions cropping up higher
                                                                                                     up in the rankings, including predictable appearances
The market remains driven largely by domestic players,
                                                                                                     by Electronic Arts (Not rated) (FIFA soccer game) and
probably due mostly to: 1) a competitive landscape
                                                                                                     the global online PC leader Blizzard.
already crowded with Korean companies (similar to the
situation in the Japanese console market, where hardly
any foreign companies have made meaningful inroads),                                                 Strictly based on the several games I played, it seems
and 2) differences in user interface and finer game                                                  that many hit titles are in genres popular in Europe
controls between console games and online PC games.                                                  and the US, including shooting and action games.
                                                                                                     However, there are already a large number of Korean-
2) Faster than expected: overseas expansion                                                          made games in those genres, which make it difficult
and platform diversification                                                                         for foreign game companies to position themselves in
My interviews with Korean game companies also                                                        the market.
revealed an increasing trend toward planning
aggressive forays into the US, Japanese and European                                                 On the flipside, the strategic moves into the US,
markets. It is unclear whether this is related to sluggish                                           Japanese, and European markets planned by many
growth in Korea’s mobile game market. This was a                                                     Korean game companies do not seem to be much of a
slight eye-opener given that I had expected Korean                                                   threat to the domestic players in those markets given
firms still to be focused on making deeper inroads into                                              the relative lack of originality of many Korean games,
the China market.                                                                                    compared with World of Warcraft and Electronic Arts’
                                                                                                     sports console games.



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Finding value in the similarities and differences
  Korea and Japan games sectors: key similarities and differences (Thomas)
                    Similarities                                                Differences
Users               - Strong loyalty to high-quality games                      - The focus is on game episodes in Japan; but in Korea it’s about going up the levels and rankings
                    - Depend on in-game community activities                     - Spend on collecting exclusive items in Japan, but on game play in Korea
                    - Familiar with Western fantasy characters                  - Lottery-box items: largely acceptable in Japan, but only for a few games in Korea
Infrastructure      - High broadband and PC penetration rates                   - Strong offline distribution for consoles in Japan, but online games are more popular in Korea
                    - Rising entertainment spending                             - Powerful feature-phone game services in Japan, but feature-phone game services are rapidly
                    - Well-established payment gateways                         contracting in Korea
                                                                                - There is a big third-party developer pool in Japan, while only a few players dominate in Korea
Service offerings   - Balanced game offerings in terms of genres                - There are more casual fantasy games in Japan, while shooting and sport are more popular in Korea
                    - Fragmented gamer profiles in terms of age and gender      - There are ongoing launches of sequels in Japan, but different titles are usually launched in Korea
Source: Daiwa


Thomas believes the industries had                                                    Japan: milestones in the games industry
                                                                                   Year     Industry/corporate       Event
different starting points                                                          1983     Nintendo                 Nintendo Entertainment System
The games industry has a long history in Japan. It has                             1988     Sega                     Mega Drive
benefited considerably from a huge loyal user base,                                1989     Nintendo                 Gameboy
                                                                                   1994     Sony                     PlayStation
strong demand for game-related services, global                                    1996     Nintendo                 NINTENDO64
distribution networks, and a strong industry value                                 1996     Nintendo                 Gameboy Pocket
chain, where hardware devices and software packages                                1998     Sega                     Dreamcast
are effectively integrated. From mobile game devices                               1999     Bandai                   WonderSwan
                                                                                   2000     Sony                     PlayStation2
for mass gamers to heavy users with consoles and even
                                                                                   2000     Sony                     PS one
desktop PCs, I believe Japan has powerful industry                                 2001     Nintendo                 Game Cube
assets to create new game markets and penetrate                                    2001     Nintendo                 Gameboy Advance
markets overseas.                                                                  2002     Microsoft                Xbox
                                                                                   2002     Bandai                   SwanCrystal
                                                                                   2003     Sony                     PSX
                                                                                   2004     Nintendo                 Nintendo DS
                                                                                   2004     Sony                     PlayStation Portable
                                                                                   2004     Gree                     Gree is launched
                                                                                   2004     Mixi                     Mixi is launched
                                                                                   2005     Microsoft                Xbox360
                                                                                   2006     Sony                     PlayStation3
                                                                                   2006     Nintendo                 Wii
                                                                                   2006     DeNA                     Mobage Town is launched
                                                                                   2007     Mixi                     Mixi membership surpasses 10m
                                                                                   2007     Gree                     Tsuri_Suta (Fishing Star), the first mobile SNG
                                                                                   2008     DeNA                     Mobage Town membership surpasses 10m
                                                                                   2009     Sony                     PSP debuted in the market
                                                                                   2009     DeNA                     ‘Kaito Royale’ social game is launched
                                                                                   2010     DeNA                     Platform is opened to third-party games
                                                                                   2010     Mixi                     Mixi membership surpasses 20m
                                                                                   2010     DeNA                     Mobage Town membership surpasses 20m
                                                                                   2010     Gree                     Membership for Gree portal surpasses 20m
                                                                                   2010     Gree                     Gree platform opened to third-party developers
                                                                                   2010     DeNA                     Ngmoco becomes a subsidiary
                                                                                   2011     Gree                     Acquires Openfeint
                                                                                   2011     Nintendo                 Nintendo 3DS
                                                                                   2011     Sony                     PlayStation Vita
                                                                                   2011     DeNA                     Launches Mobage in China and the US
                                                                                   Source: Daiwa




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Korea’s games industry has a shorter history than                                   I believe NCsoft and Square Enix are talented and
Japan’s. NCsoft and Nexon were the pioneers in the                                  competitive content developers with strong
industry, launching commercial services of Lineage and                              development capabilities. As mentioned, these
Kingdom of Winds in the late 1990s. However, the                                    companies have built strong and huge loyal user bases
market is focused on desktop platforms and role-                                    for their content in the respective markets. I expect
playing game content. Since the mid-2000s, key game                                 these companies to have an advantage over the
portals such as NHN’s Hangame and Neowiz Games’                                     platform operators in terms of monetising their user
Pmang have diversified their game offerings into web                                bases through the launch of sequels and the sale of
board games and casual games featuring shooting and                                 non-game products.
sport. Korean companies moved quickly to capitalise
on the huge opportunity in China from 2003, and have                                  Japan, Korea, and China: game-platform revenue comparison
                                                                                    (2010)
benefitted strongly from the growing number of gamers
                                                                                    (US$bn)                             Japan                  Korea              China
and rising entertainment spending. With the rapid                                   Console                               11.2                   0.3                5.7
adoption of smartphones in Korea, we have seen                                      Online                                 1.1                   4.9                6.4
increasing moves toward providing games for smart                                   Mobile                                 2.2                   0.3                0.6
devices and social platforms in Korea.                                              Source: KOCCA, Famitsu, EnfoDesk, iResearch, Daiwa
                                                                                    Note: For Japan, online and mobile game markets are based on 2010 figures

  Korea: milestones in the games industry
Year     Industry/corporate   Event                                                 In both Korea and Japan, I believe gamers are eager to
1996     Nexon                Kingdom of the Winds game launches                    win exclusive and rare in-game items, and often
1998     NCsoft               Lineage 1 game launches                               exchange lottery-box items for rare in-game items.
1998     Blizzard             Starcraft game launches
1999     NHN                  Hangame game portal opens
                                                                                    Despite their different game genres, this provides
2000     CJ E&M               Netmarble game portal opens                           companies with an opportunity to sell more in-game
2001     NCsoft               Lineage 1 records 300,000 concurrent users            items to both paying and inactive gamers and increase
2002     Sony, Microsoft      PlayStation 2 and Xbox console game launch            their ARPU and proportion of paid gamers to total
2003     Nexon                MapleStory game launches
                                                                                    users. In addition to subscription and packaged-box
2003     NCsoft               Lineage 2 game launches
2003     Neowiz Games         Pmang game portal opens                               sales, the companies could generate additional revenue
2008     NCsoft               Aion game launches                                    with lower operating and marketing costs than through
2008     Neowiz Games         Crossfire game launches in China                      new services.
2008     Neople               Dungeon and Fighters game launches in China
2009     Neowiz Games         Crossfire records 1m concurrent users in China
                                                                                    Meanwhile, the online-game market in Korea and the
Source: Daiwa
                                                                                    console-game market in Japan look close to being
1) Similarities offer better opportunities                                          saturated. The markets appear to concentrate on a few
Both countries have huge gamer bases with strong                                    titles, and loyalty for these games is increasing as
loyalty to flagship titles. Whenever companies release                              companies spend more on gamer retention and game-
new titles and sequels, these gamers spend time on                                  content update. It has become more challenging to
playing games and building up an in-game community,                                 have a hit with a new game in these markets. For
which leads to an active virtual economy around the                                 example, PC cafés’ market share of NHN’s Tera game,
games. In my view, the industry leaders in Korea and                                one of the biggest launches in 2011, fell from 13.1% in
Japan benefit from these premium users by monetising                                February 2011 to 2.6% in December 2011.
existing games and new game titles.
                                                                                    2) Differences limit the near-term payoff
In addition, the two countries’ stable gamer bases                                  The leading game companies focus on RPGs in Korea,
should help the leading companies expand publishing                                 while in Japan the game companies’ focus is on social
overseas, with their proven game quality and                                        games. I expect the leaders in both countries to find
increased brand equity in both markets; they would                                  new ways to capitalize on smart devices and developing
be able to achieve this by testing game content and                                 countries.
offering new game updates. The leaders in Korea and
Japan will generate additional revenue from selling                                 During my job swap, I identified several niche markets
game characters and other related products. Finally, I                              for traditional board games and feature-phone games,
expect rapid transition to cross-platform games in                                  which highlight the differences in the industry between
Korea and Japan. In my view, the key players in the                                 Korea and Japan. I understand that these markets are
two markets are keen to monetise gamers by                                          very crowded and likely to become saturated over the
increasing the number of gamers on different                                        medium term. However, I believe the market leaders in
platforms and in emerging countries.                                                Japan and Korea will generate additional revenue from
                                                                                    overseas by publishing one game source for different
                                                                                    regions directly or through local operators.
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  Three main Korean players: comparison by game genre                                                    Popular sequels from the main players in Korea and Japan
                 Nexon                          NCsoft                  Neowiz Games                                         Korea                                Japan
RPG              Maple Story                    Aion                    Raiderz                        Desktop               Lineage                              Final Fantasy
                 Dungeon and Fighter            Lineage                 Age of Conan                   Console               Pro Evolution Soccer                 Mario Bros.
                 Mabinogi                       Lineage 2                                              Mobile                Pro baseball                         Tanken Doriland
FPS              Sudden Attack                                          Special Force                  Source: Daiwa
                                                                        AVA
                                                                        Dizzel
Sport            Freestyle                                              FIFA Online
                                                                                                       In my opinion, the differences in the games platform in
                 Freestyle football                                     Slugger                        the two countries offer good opportunities for the
Source: Daiwa                                                                                          sector leaders to penetrate niche areas in each market.
                                                                                                       I expect Nexon and NCsoft to continue to benefit from
In my view, the companies in Japan and Korea should                                                    increasing demand from Japanese online gamers.
work with local third-party developers and publishers                                                  Japan’s SNG operators, such as Gree and DeNA, are
to gain a lion’s share in other markets. Given that                                                    striving to increase their market presence in Korea,
gamer characteristics and the operating environments                                                   where there are only a few titles in this genre. DeNA is
are different in each market, I think these strategic                                                  working with Daum, Korea’s second-largest search
partnerships could help Japanese companies find good                                                   portal, to offer its Mobage service, while we believe
market opportunities in the two countries and globally.                                                Gree might work jointly with Mobicle (Not listed), a
                                                                                                       mobile-game developer in Korea.
Meanwhile, the Korean players need to enhance the
brand awareness of their flagship titles, such as                                                      I believe the companies in Korea and Japan are able to
Lineage by NCsoft and Maplestory by Nexon, to                                                          replicate the unique revenue models of the other. In
leverage on the value of the sequels and other related                                                 Japan, SNG service providers generate revenue from
business in Japan. In order to achieve such awareness,                                                 selling collectable cards and lottery-box items.
they could in future introduce a new revenue model for                                                 Meanwhile, the Korean companies sell in-game items
royalties and extend the lifecycles of their core titles.                                              relating to game play and the user experience. Also,
                                                                                                       web-based slot-machine games are gaining popularity
  NHN: comparison of Hangame service in Korea and Japan                                                in Japan, but Korea has a large card-game market. This
                    Korea                                       Japan                                  suggests to me that companies will be able to monetise
Title                  Genre                 Title                        Genre
                                                                                                       the target markets in Japan and Korea effectively by
TERA                   MMORPG                Dragon Nest                  MMORPG
C9                     MORPG                 Elsword                      MMORPG
                                                                                                       borrowing the proven revenue models from the other.
Hangame Poker          Web board             Monster Hunter Frontier      Action RPG
Hangame Matgo          Web board
Source: NHN, Daiwa


  Korea and Japan games sectors: key similarities and differences (Shiraishi)
                         Similarities                                                                      Differences
Users                    Diverse range of gamers: video games have become standard entertainment           Rather than the co-operative games popular in Japan, Korean gamers tend to prefer titles
                                                                                                           that require single-player mastery and possibly give a higher weighting to hardcore gamers
Infrastructure           World-class robust infrastructure for networked content business, including       PC games dominate the Korean market, whereas there is a range of popular platforms in
                         broadband Internet and smartphone adoption                                        Japan, including TV consoles, PCs, mobile phones, social networks, arcades, and web
                                                                                                           browsers
Service offerings        Increasing number of freemium games, transitioning from one-time payment and      In Japan, game marketing centres on mass media such as TV commercials, because of
                         monthly subscription business models                                              the diverse set of platforms. Meanwhile, most promotion takes place through online ads or
                                                                                                           in-platform inducements or in-game ads in Korea
Source: Daiwa


Shiraishi expects the industries to follow                                                             freemium content (free-to-play basic games with
similar growth paths in the future                                                                     charges for items and other advanced features).
1) Similarities come from the business
                                                                                                       Both Korea and Japan are among the leading countries
environment
                                                                                                       in terms of fixed and mobile broadband penetration
One similarity I noticed was that games have gained
                                                                                                       levels and the sophistication of their network
traction in both countries as a standard form of
                                                                                                       infrastructure. In addition, consumers in both
entertainment.
                                                                                                       countries have access to not just PCs and dedicated
                                                                                                       game consoles but also increasingly feature-rich mobile
One likely driver of this trend is the release of games in
                                                                                                       phones. In my view, these factors have planted the
a wide range of genres that better meet the needs of a
                                                                                                       seeds for game content to flourish.
diverse user base. However, it seems that a bigger
factor is likely to be the increased availability of

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Put simply, favourable content and infrastructure                   Japan: average work/school commute in major countries
environments appear to be helping games spread to the                          Canada                     22
general population.                                                                 US                     23
                                                                                 Spain                       26
                                                                              Australia                       27
2) Differences create unique game cultures                                 Netherlands                         28
One noticeable difference between the countries is a                       South Africa                        28
                                                                                    UK                          30
more diverse (and thus more complex) market in Japan                            France                           31
in terms of game genres and platforms.                                          Mexico                           31
                                                                             Germany                              33
                                                                           South Korea                            33
Before the integration of network functions, games                             Belgium                                 37
tended to focus on genres that pitted the player against                          India                                 39
the game itself. The addition of network functionality                           China                                    42
                                                                                 Japan                                                       76       (min)
has allowed a broader range of game styles, including
player versus player (so-called online PVP) and co-             Source: Ministry of Internal Affairs and Communications, Korea National Statistical
                                                                Office, The Economist; compiled by Daiwa
operative game play (multiple players versus game).
                                                                This data suggests Japanese have more time to spend
Co-operative games, in particular, have gained                  with their mobile handsets during commutes, and are
popularity in Japan, with Capcom’s Monster Hunter               thus more likely to seek paid mobile services.
series kicking off the trend, and many Gree and DeNA
social games catching on with users due to their co-
operative play structures (including titles with online
communication).

In an interesting contrast to Japan, interviews with
companies and gamers in Korea confirmed that gamers
there still favour content-extensive and single-player
games. While there are of course titles in Korea with
chat features such as MMORPGs, co-operative game
play seems less popular. Cultural reasons may be
behind this difference, but it is hard to say.
Nevertheless, I find the different game preferences
fascinating.

Another major difference between Japan and Korea is
the weighting of mobile games (for dedicated handheld
consoles and mobile phones) in the overall game
market. The mobile space accounts for a noticeably
larger part of the overall market in Japan, even
compared with other overseas markets.

I think this is likely due to the length of work and
school commutes. Based on data from Japan’s Ministry
of Internal Affairs and Communications, Korea’s
National Statistical Office, and the UK magazine The
Economist, work/school commutes average out at 76
minutes in Japan, 42 minutes in China, 33 minutes in
Korea, 33 minutes in Germany, 30 minutes in the UK,
23 minutes in the US, and 22 minutes in Canada. A
noteworthy difference in this context is that mass
transit accounts for about 90% of the means of
transport in Japan, compared with 20-40% elsewhere.




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Food for thought
  Thomas’ thoughts as a Korea games expert
                                What surprised Thomas positively                                               What surprised Thomas negatively
About Japan                     - Bigger-than-expected paid gamer base                                         - Smaller-than-expected game revenue from new game platforms
                Sector          - Higher-than-expected ARPU, and it is still rising                            - Highly dependent on social games and lottery-boxed in-game items
                                - Strong game IP database and experienced developers                           - Potential regulatory intervention
                                - Effective cost control from user acquisition and retention                   - Lack of strong drivers for revenue and earnings growth for 2012-15
                Companies       - Leveraging loyal user bases with valuable assets                             - Rising R&D costs for new game development
                                - Have the capability to introduce new monetisation models                     - Conservative about overseas expansion
For Korea                       - Rapidly moving to new game platforms such as smart devices                   - Rising competition in attracting users with SNS and console makers
                Sector          - Emerging opportunity for social-game platforms                               - High costs for gamer acquisition and game publishing in Japan
                                - Strategic partnerships for game publishing in overseas markets               - Weak accessibility to PC online games and feature-phone gamers
                                - Strong demand for in-game items in online desktop games                      - Weak brand equity and localised content
                Companies       - Growing market opportunity for third-party developers                        - Difficulties in building social platforms
                                - Increasing mobile-game traction in marketplace                               - Lack of flagship game IP and partnerships with third-party partners
Source: Daiwa


What impressed Thomas                                                                              I also learned that Japan’s game companies have
On the positive side, Japan has a large games market,                                              strong game IP. They can take advantage of this to
where paid gamers and ARPU are still rising. I think                                               move into different platforms and different revenue
this will be positive for the leading companies due to                                             models.
ongoing monetisation from unique and advanced game
features. In addition, I noted the well-established F2P                                            What disappointed Thomas
service market in Japan, where most of the domestic                                                My impression was that Japanese social platform
social platforms have succeeded in selling in-game                                                 depended largely on a few SNG titles, which generated
items resulting in stable revenue streams. More                                                    revenue by selling in-game items and other related
importantly, Japanese SNG platforms are gearing up to                                              virtual products. I believe Japan’s online-game services
sell other digitised items through selling different game                                          focus on specific genres and monetisation models.
offerings on the same site.                                                                        Growth in social gamers and paid users is likely to
                                                                                                   decelerate eventually, and this would have a negative
  Profitability outlook (OPM) for key players                                                      impact on the companies’ revenue-growth profiles in
  60%                                                                                              the long term. In my view, it is time for the companies
  50%                                                                                              to enhance their game pipelines and diversify their
  40%
                                                                                                   genre games and user bases.
  30%                                                                                               Korea: proportion of overseas royalties in revenue for major
  20%
                                                                                                   companies
                                                                                                     100%
  10%

   0%                                                                                                 80%

                 2010                 2011                 2012E            2013E                     60%
              Nexon                          NCsoft                       Neowiz Games
              Gamevil                        Square Enix                  Capcom                      40%
              Gree
Source: Companies, Daiwa forecasts                                                                    20%
Note: operating profit margin (OPM)
                                                                                                       0%

I expect Japan to continue to improve its service                                                                  2008                 2009                 2010                 2011

infrastructure for smart devices, which should help                                                            NCsoft                          Neowiz Games                   Webzen
companies broaden their gamer bases to include old                                                             WeMade                          Gamevil                        Com2uS
and female gamers with casual plays and those with                                                 Source: Companies, Daiwa

shorter times to play. Game-content distribution is
increasingly open to third-party developers and mass                                               Contrary to my expectations, I sensed that regulatory
consumers. This could help niche and talented small                                                pressure was intensifying in Japan, especially for in-
game developers benefit from better access to vast                                                 game item transactions. As item commerce has become
game users in Japan and globally, providing more                                                   popular among F2P services, local regulators are
opportunities to penetrate markets overseas.                                                       concerned about illegal transactions with counterfeit
                                                                                                   items as a result of hacking. Although this should not

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decrease overall demand for item sales in the near term,                                       and game development. I think the Korean companies
the potential introduction of tighter regulations would                                        will capitalise on the increasing opportunity in Japan
lead to a rise in operating costs and turn the game                                            by offering more localised game content and unique
companies more conservative in their monetisation                                              game-play modes.
strategies.
                                                                                               Meanwhile, the Japanese game companies can leverage
Thomas sees the promise of market                                                              on their abilities to monetise their huge gamer bases
leadership                                                                                     through cross-platform initiatives. I believe the market
                                                                                               leaders, such as NCsoft, Square Enix, and Nexon, will
I remain positive about the long-term business growth
                                                                                               enjoy continued success on the back of increased gamer
potential of the leading Japanese and Korean
                                                                                               activity and game-item transactions.
companies’ core game services, given that they have a
competitive advantage in terms of commercialisation

  Shiraishi’s thoughts as a console/social-game expert
                            What surprised Shiraishi positively                                                What surprised Shiraishi negatively
About Korea     Sector      Strong ability to monetise loyal user bases with different game genres and         Many firms are eager to expand abroad and are aware that cultural differences
                            expand service regions outside Korea. Better-than-expected service                 could pose a challenge. Despite this, not many have set up development offices
                            infrastructure for desktops and smartphones.                                       overseas or even plan to do so.
                Companies   Companies have a strong interest in teaming up with partners with attractive       Arcades contained many used machines (from Sega, Namco, etc.). Also, console
                            game IP. Example: Neowiz pairing with Capcom to make a Rockman-based PC            game stores selling Nintendo and Sony products were not very popular. This
                            online game (MegaMan in North America/Europe).                                     strengthened our impression that Japanese firms may have a hard time gaining a
                                                                                                               foothold in areas other than PC online games.
For Japan       Sector      We had expected the market to be led by PC online games, specifically first-party We confirmed that despite one of the highest smartphone penetration levels in
                            titles made by Korean firms. However, we saw that it was possible for foreign      the world, Korea’s mobile games market is not all that large in terms of revenue
                            firms to achieve success with strong global IP by teaming with domestic            as most of the content is free.
                            companies with sizable user bases. For instance, Electronic Arts’s FIFA Online
                            has gained some traction.
                Companies   Korean firms appreciate the importance of IP in their prospects for expanding into Most Korean firms were sceptical about Japanese social-game companies (Gree,
                            the US and Europe. To that end, there is a chance they will attempt to acquire     DeNA) being able to enter the Korean market successfully given the differences
                            Japanese companies with just such assets. More concrete prospects on this front in user bases.
                            could drive an expansion in multiples from the current low levels globally.
Source: Daiwa


What impressed Shiraishi                                                                       I doubt they will make complete breakthroughs ahead
In terms of implications for the overall sector, there                                         given the dominance of the major players in China
were two major points I took away from my job swap.                                            and Korea. However, US company Blizzard and a
First, the existing games content market should not be                                         number of other firms have had success through
seen as one package. I saw different mixes in terms of                                         business tie-ups. Indeed, I think the China and Korea
game offerings of major companies and business                                                 markets offer potential for those Japanese, US, and
models falling into in two general groups, one being                                           European companies willing to accept the markets as
those operating in China and Korea and the other those                                         secondary revenue streams supporting consolidated
operating in Japan, the US, and Europe. Second, I                                              earnings growth.
think market growth seems likely in emerging
                                                                                                 China: shares in online game market
economies (beyond China and Korea), but there is no
clear market direction at present – the focus is on                                              100%
which of the two above groups will take the initiative
                                                                                                  80%
initiative to expand their business.
                                                                                                  60%
As I mentioned, the prevailing game genres and game
designs in the online PC game markets in Korea and                                                40%
China have many similarities to titles popular in the
more established markets of Japan, the US, and                                                    20%

Europe. However, the Korean market is dominated by                                                  0%
a few domestic players, and Chinese regulations place
                                                                                                                  CY07                    08                   09                   10
restrictions on foreign ownership. Taking these factors
                                                                                                     Tencent       NetEase       Shanda        Perfect World        Sohu Changyou        Other
into account, as well as general corporate hesitancy in
the face of piracy, Japanese, US, and European firms                                           Source: iResearch materials; compiled by Daiwa

have failed to make much headway in the China and
Korea markets.


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Shiraishi on the future of digital
entertainment in emerging markets
I think the second point – the potential frontrunners in
emerging countries – warrants special attention. Past
examples of similar situations include Korean firms
moving quickly into the China online-game market as it
began taking off.

At this time, it is unclear what shape the nascent game
industries in emerging economies will take. In this
environment, early movers have the opportunity to
establish their business models as the natural first
choice in the market.

That said, unlike developed regions, such as Japan, the
US, and Europe, emerging economies have relatively
low income levels, raising the bar for the spread of
hardware dedicated to games, such as consoles. With
that in mind, it is likely better to target platforms that
are more essential in daily lives, namely, mobile
phones or PCs.

Also worth noting are the cultural barriers that many
Japanese game developers face when looking at
overseas markets. Although these hurdles to the spread
of content are likely to be a less of a concern in Asian
countries close to Japan and Korea, strategies should
take account of Latin America, eastern Europe, and the
Middle East, areas where cultural preferences are likely
to be closer to those in the US and Europe.

Relatively high income levels and strong market growth
rates (and thus the greater likelihood of immediate
revenue gains) have prompted many industry players
to map out plans for forays into China, the US, and
Europe, regions with established game-content
industries. However, given revenue growth potential,
the strategies companies take in emerging economies
beyond China are likely to be a bigger factor
determining industry positions over the medium term,
in my view.




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Reassessing our views on the companies we cover
  Our experts’ views on Korea stocks
                   Thomas’ view                                                    Shiraishi’s view
NCsoft
                   1) Positives: better chance to monetise RPG users in Japan   1) Positives: prospects for earnings expansion in China and Korea markets look good. Given aggressive
                      using F2P services.                                          expansion into casual games and new regions, progress in US/European operations could be key to
                   2) Negatives: slow execution on emerging smart devices. They    achieving growth beyond the consensus forecasts for 2012-13.
                      are less familiar with the RPG content of Blade & Soul.   2) Negatives: it will not be easy for the company to expand into the US and Europe, given slight differences in
                                                                                   user preferences.
Neowiz Games
                   1) Positives: potential to benefit from Gameon’s platform and   1) Positives: additional prospects for contributions from MMORPGs or US/European operations could spur
                      publish new Korea-made games.                                   faster earnings growth.
                   2) Negatives: weak pipeline of social and mobile game titles,   2) Negatives: strong catalysts on the horizon somewhat lacking, especially given concerns of competition
                      and lack of brand recognition.                                  heating up in casual game space and lack of visibility in overseas earnings.
Gamevil
                   1) Positives: growing mobile-game app stores and taking         1) Positives: shifting to provide content for smartphones and offering a wider selection of genres on its mobile
                       advantage of premium mobile gamers in Japan.                   online game platform by increasing offerings from third-party developers. This, plus fulfilling demand
                    2) Negatives: hard to penetrate mobile-game portal segment,       overseas, forms the basis of the company’s growth strategy.
                       and weak SNG line-up.                                       2) Negatives: there could be a deterioration in the earnings mix compared with the feature-phone era due to
                                                                                      royalty payments for content distribution platforms such as Google Play and app stores. In addition, other
                                                                                      companies are adopting the same strategy of becoming games platforms.
Source: Daiwa


What makes Thomas remain positive on                                                                  and simulation games. In Japan, I think that the
the Korean online-game stocks?                                                                        revenue models will become increasingly important, as
                                                                                                      the companies move to in-game items or non-play item
In my view, the Korean online-game companies will
                                                                                                      commerce that boosts game sales and spans the entire
benefit from rising spending on digital entertainment
                                                                                                      lifecycle of a game.
content, such as games. Given the high ARPU levels
and huge paying user bases, I think the Japan market
could offer good business opportunities for the Korean                                                What has led to Thomas becoming cautious
companies if they provide attractive social features and                                              about the prospects for the Korean online-
unique game content to attract Japanese gamers. In                                                    game stocks?
addition, the Korean companies could find new                                                         Although Japan is one of the most promising markets
opportunities in Japan and Korea, with converged                                                      for online-game services in Asia, after my job swap in
game content, as they have expertise in online-game                                                   Japan, I realise that it has a small gamer base for
services and in monetising casual-game services.                                                      desktop online games, a weak PC café infrastructure,
                                                                                                      high marketing costs for new game titles, and
  NCsoft: revenue contribution from overseas                                                          increasing competition between mobile, console, and
  (Wtn)                                                                                               even portable game devices.
   0.8                                                                               40%

  0.6                                                                                30%              The companies we met with spoke about the slower-
                                                                                                      than-expected channel shift, to PC-based online games
  0.4                                                                                20%
                                                                                                      from console and portable-game devices, in Japan.
  0.2                                                                                10%              Compared with other online services, such as online
                                                                                                      shopping and SNS, they stressed that online games
  0.0                                                                                0%
                                                                                                      were unlikely to see strong acceptance in Japan’s
                2008              2009              2010               2011                           games market unless they explore new game-service
            Korea                                          Japan                                      markets with appealing game features and a strong
            US                                             Europe
            Taiwan                                         Others                                     community base.
           Japan revenue portion (RHS)                     OPM (RHS)
Source: Company, Daiwa


I believe Korean companies need to capitalise on the
increasing market opportunity being created by a
combination of good service infrastructure and a solid
gamer base. I see most of their future revenue
prospects in the smartphone segment, where they
would be able to attract an increasing number of
gamers through light RPGs, casual and board games,
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  Neowiz Games: revenue and profitability of Gameon                                                Shiraishi begs to differ …
 (¥bn)
  8                                                                                 40%
                                                                                                   I believe the Japanese online gamers have different
  7                                                                                 35%
                                                                                                   characteristics in terms of game-play styles and game
  6                                                                                 30%
                                                                                                   genres. I also think Japanese users prefer to play single
  5                                                                                 25%
                                                                                                   mode rather than multiplayer mode, and purchase
  4                                                                                 20%            digital items not for game battles, but just to collect
  3                                                                                 15%            rare items. On a similar note, Japanese gamers appear
  2                                                                                 10%            to put more weight on virtual communities and online
  1                                                                                 5%             communication than those in Korea.
  0                                                                                 0%
         2006      2007          2008         2009         2010        1-3Q11                      Basically, both of us agree that the different
                 Revenue                OP            Net profit           OPM
                                                                                                   characteristics of Japanese gamers have led to a
Source: Company, Daiwa
                                                                                                   slower-than-expected shift to PC-based online
                                                                                                   platforms from other standalone games platforms,
Over the medium term, I believe online-game sales will                                             such as consoles and portable-game devices. We
continue to expand on the back of digitised item sales                                             understand that Japanese gamers also want to focus on
and the diversification of game offerings. I expect these                                          in-game quests, rather than the acquisition of game
efforts to assist the companies in enhancing their                                                 points and the game experience. However, we expect
games services, attracting new gamers, and result in                                               Japanese online gamers to migrate gradually to PC-
higher ARPU than that for subscription-only services.                                              based online platforms, due to the enhanced functions
                                                                                                   that allow games to be integrated with other online
                                                                                                   services and advanced game features.

  Our experts’ views on Japanese stocks
                          Shiraishi’s view                                                                     Thomas’ view
Capcom
                          1) Positives: despite modest earnings growth for the year ended March 2012, the 1) Positives: solid game portfolio for 2012 and coherent strategy for cross-platform
                             business environment looks quite promising for the company on the back of            migration. Should see revenue contribution from new game content from diverse
                             strong new products planned to be launched on various platforms planned in           consoles on a range of platforms.
                             2012. With its formidable portfolio of game IP, it could see significant earnings 2) Negatives: weak leverage on valuable game IP and limited diversification
                             growth going forward, as long as it makes the right platform choices.                overseas. Slow improvement in revenue mix into highly profitable services such
                          3) Negatives: it is jointly developing a Rockman online game for the Korean market,     as mobile.
                             but progress seems to have been delayed. Therefore, we have not factored in
                             the earnings contribution from this into our forecasts.
Square Enix
                          1) Positives: it expects to restart title launches in earnest, suggesting that earnings 1) Positives: growing revenue from non-packaged sales and downloads.
                             should regain momentum from FY12.                                                       Aggressive in attracting loyal users for smartphone platforms in Japan and
                          2) Negatives: due to a decline in development efficiency, including quality control,       globally.
                             earnings stagnated somewhat from FY10-11 as the firm revamped its                    2) Negatives: narrow gamer base and weak scalable business model, based on
                             development apparatus. We are still conservative in terms of revenue for the            packaged game software sales and local consumers.
                             China market as only the most popular IP title has been surviving with the
                             alliance with Shanda in the market.
Gree
                          1) Positives: this social game pioneer plans to seek market expansion in Japan with 1) Positives: solid gamer base with strong loyalty. Experienced in monetising users
                             continued new title releases, and establish a presence overseas with Japanese-       through unique game content. Solid trend in core operating metrics.
                             style social games.                                                               2) Negatives: potentially conservative monetisation as a result of regulation
                          2) Negatives: with the steady release of new first- and third-party titles, domestic    pressure on item trading. It is a long way from generating revenue and earnings
                             earnings growth has slowed from the July-September 2011 quarter due to               from overseas.
                             difficult YoY comparisons. Even so, we expect growth to continue. Meanwhile,
                             visibility is somewhat cloudy on overseas markets amid likely competition with
                             established players.
Source: Daiwa




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                                                                                                                                                              Trading Places
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Shiraishi presents a complete picture of                                                      As it stands, a direct comparison of the Korea and
the industry evolution globally                                                               Japan stocks based on valuation multiples seems
                                                                                              unjustified to me due to their different business models.
My job swap reinforced my view that regardless of
                                                                                              The Korean companies tend to concentrate on F2P
national differences, companies that control game
                                                                                              online PC games, whereas their Japanese rivals
content with widely known game IP and/or superior
                                                                                              generally sell games for an upfront fee. Therefore, I
technologies have a good chance of succeeding on
                                                                                              plan to continue comparing Japanese stocks with each
various platforms, such as PCs, consoles, and
                                                                                              other when calculating my target prices.
smartphones.
                                                                                              Also, Japanese companies’ attempts at cracking the
In particular, many Japanese firms have moved early
                                                                                              Korean market are only just starting. For instance,
into a wide range of platforms, partly because their
                                                                                              Capcom is planning a co-developed Rockman game in
home market has a more diverse set of popular
                                                                                              the country, while Gree is creating a global version of
platforms than in Korea. In my opinion, this gives the
                                                                                              its Japanese-style social games that will also be
Japanese companies an advantage when expanding
                                                                                              available in Korea. As such, it is too early to factor
overseas.
                                                                                              potential earnings contributions into my forecasts.
This is especially true in the US and European markets,
                                                                                              However, as noted above, companies with the right in-
where, like Japan, consoles have long been the main
                                                                                              house content have the potential to generate earnings
games tool. The Japanese game makers have a record
                                                                                              in various countries if they tailor the games to account
of producing well-known titles, and this gives them an
                                                                                              for cultural differences. Progress on this front could
advantage over the Korean firms that are just now
                                                                                              lead to upside potential to our current forecasts.
attempting to gain a foothold.

  Nexon: different views of the same stock
                    Thomas’ view as a console/social game specialist                                      Shiraishi’s view as a online-game specialist
Growth strategy     1) Positives: leveraging on strong game pipeline from in-house game studios and       1) Positives: benefiting from leadership in the expanding F2P market and
                       enhancing brand value as a result of IPO in Japan.                                    opportunities for PC online-game markets globally.
                    2) Negatives: weak position in mobile-game market for feature phones and social       2) Negatives: likely to face difficulties in penetrating the EU/US markets, where a
                       games. Needs to increase localised game content .                                     different game culture exists, especially among console users.
Earnings outlook    1) Positives: rising trend in ARPU and number of paying users. Benefiting from        1) Positives: huge opportunities for its PC-based online-game services in Asia
                       lower R&D costs due to game outsourcing outside Japan.                                developing countries, including China.
                    2) Negatives: rising operating expenses for staff and marketing.                      2) Negatives: earnings likely to be volatile due to unfavourable foreign-exchange
                                                                                                             rates and regulatory intervention.
Valuation           1) Positives: being valued as a regional play from its positioning in the online-game 1) Positives: still attractive compared with its peers in Asia.
                       market in Japan.                                                                   2) Negatives: valuation concerns might result from lower PERs of Japan SNS
                    2) Negatives: concerned about low revenue growth profile for social platforms and        game-related companies.
                       emerging smart devices.
Source: Daiwa


Thomas is confident about Nexon’s ability                                                        Nexon: revenue/earnings contribution by location and OPM
to monetise casual gamers …                                                                      (¥bn)
                                                                                                 100                                                                                    50%
I believe Japanese gamers are following the global
                                                                                                   80                                                                                   40%
trend of playing session-based games and non-
hardcore games. In my view, Nexon could introduce                                                  60                                                                                   30%

more localised content and revenue models to attract                                               40                                                                                   20%
Japanese console and social gamers. By leveraging its                                              20                                                                                   10%
strong game-development capability in Korea and                                                     0                                                                                   0%
globally, I expect Nexon to lead its competitors in                                                             2008               2009               2010               2011
sourcing advanced casual games and smartphone                                                                Korea                                           Japan
games.                                                                                                       China                                           North America
                                                                                                             Others                                          Japan revenue portion (RHS)
                                                                                                             OPM (RHS)
                                                                                              Source: Company, Daiwa




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                                                                                                                                                                                                       Trading Places
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As the first Korean games company in Japan, Nexon                                                                                                                  Both have faith in Nexon’s growth strategies
could accelerate its revenue growth strategy in Japan
and overseas by sharing game IP and publishing game                                                                                                                Following our job-swap project, we both maintain our
titles in other target markets. I expect the company to                                                                                                            positive view on Nexon, given what we regard as its
benefit considerably from the ongoing introduction of                                                                                                              leading position and unique and scalable revenue
advanced games for casual users and smartphones, and                                                                                                               model in Japan. We are encouraged by the company’s
an improvement in user perception of online games in                                                                                                               strong revenue growth in Japan’s casual game market
Japan. Nexon should gain share in the Japan online-                                                                                                                through its diverse game offerings. As at the end of
game market by adding new board games and casual                                                                                                                   4Q11, it had 12m concurrent users of its game service in
games, such as online shooting and sport.                                                                                                                          Japan, with its game offerings expanding to 160 titles
                                                                                                                                                                   in 2011.
… but Shiraishi believes Nexon needs to
enhance its platform power and brand value                                                                                                                         We believe Nexon’s ability to commercialise online-
                                                                                                                                                                   game services will help it capitalise on the increasing
In my opinion, Nexon needs to demonstrate a more
                                                                                                                                                                   opportunities in the integrated game-portal market in
coherent growth strategy in Japan’s social and mobile
                                                                                                                                                                   Japan. The company’s expansion strategy in terms of
game market. I believe the company has demonstrated
                                                                                                                                                                   smartphone services provides us with greater visibility
solid execution in its cross-platform initiatives, as
                                                                                                                                                                   about its future revenue growth in the Japan market.
gamers migrate into smart devices. Meanwhile, I
                                                                                                                                                                   We believe these opportunities in Japan will be the
expect the company to increase overall marketing costs
                                                                                                                                                                   basis for Nexon trading at a valuation premium to
to enhance its brand value and user base, given its
                                                                                                                                                                   regional peers in Asia.
weak platform power for game service and slow
transition to PC-based online games.
                                                                                                                                                                   In addition, the company seems to be taking steps to
                                                                                                                                                                   ensure future business growth, such as investing in
In my view, optimism does not seem warranted about
                                                                                                                                                                   mobile social-game maker JC Entertainment. In our
Nexon’s prospects for expansion into the market for
                                                                                                                                                                   view, Nexon is on its way to becoming the global leader
online PC games (Europe/US) and packaged games
                                                                                                                                                                   in casual online games, much as US-based Blizzard is
(mainly Japan).
                                                                                                                                                                   the top maker of hardcore online PC games.
  Nexon: key operating statistics in Japan
 (m)                                                                                                                                                    (m)
  60                                                                                                                                                    1.2
  50                                                                                                                                                    1.0
  40                                                                                                                                                    0.8
  30                                                                                                                                                    0.6
  20                                                                                                                                                    0.4
  10                                                                                                                                                    0.2
   0                                                                                                                                                    0.0
                                            Feb-11
                 Nov-10
                          Dec-10




                                                                                                                             Nov-11
                                                                                                                                      Dec-11
                                                                                                  Aug-11
                                                                                                           Sep-11
        Oct-10




                                                                                         Jul-11




                                                                                                                    Oct-11
                                                              Apr-11
                                   Jan-11




                                                                                Jun-11




                                                                                                                                               Jan-12
                                                                       May-11
                                                     Mar-11




                                                Pageview (LHS)                                       Visitor (RHS)
Source: Netrating


On my job swap, I found that Korean online-game
companies such as Nexon are struggling to cope with
unauthorised access to game items and game points
and real money trades. Although these issues are
recognised by the market and the companies, I think
the company will be forced to spend more to eliminate
potential operational risks. I also believe the Korean
game companies will work more on developing
effective monetisation strategies due to the recent
changes in regulations for social-game sites.




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Revisions to Daiwa forecasts
  Earnings-forecasts revisions: Korea
                                                 Revenue (Wbn)                                     Operating profit (Wbn)                     EPS (W)
                                             2012E                     2013E                      2012E                     2013E   2012E                      2013E
NCsoft
Previous                                      792.6                   1,038.7                     260.4                     450.5   9,888.7                  16,866.7
New                                           789.1                   1,098.1                     251.5                     489.0   9,506.4                  17,776.0
Neowiz Games
Previous                                      753.6                     855.4                     143.7                     174.1   4,441.0                   5,599.3
New                                           748.0                     832.4                     134.9                     153.9   4,073.5                   4,861.2
Gamevil
Previous                                       66.8                      85.2                      24.6                      32.2   3,948.1                   5,184.2
New                                            66.8                      85.2                      24.2                      31.8   3,874.4                   5,085.4
Source: Daiwa forecasts


Korea: Thomas has factored in rising                                                          I am revising down my 2012 and 2013 EPS forecasts for
competition in mobile game and overseas                                                       Neowiz by 8.3% and 13.2% to reflect a weaker-than-
                                                                                              expected earnings contribution from Gameon and new
Some analysts appear to doubt the positive earnings-
                                                                                              game titles. For Gamevil, I am lowering my 2012 EPS
growth outlook for Korea’s online-game companies.
                                                                                              forecast by 1.9% due to rising commissions to third
However, I believe that from 2Q12 the consensus
                                                                                              party developers.
forecasts will start to reflect the recent positive
developments in new game launches in Korea and Asia.
                                                                                              Meanwhile, I am revising up my 2013 earnings
                                                                                              forecasts for NCsoft to incorporate more revenue from
I expect upward earnings-forecast revisions in the
                                                                                              new big games as a result of the earlier-than-expected
consensus forecasts as the companies succeed in
                                                                                              launches overseas.
diversifying their revenue streams and service regions.
This would support my assumptions of strong revenue
                                                                                              The sector has outperformed the KOSPI by 0.2% YTD.
growth in the core titles and revenue contribution from
                                                                                              The software stocks that we cover are trading currently
new titles. I have reflected the recent developments in
                                                                                              at average PERs of 19.5x and 14.1x on our 2012 and
key variables: recent trends in concurrent users and
                                                                                              2013 EPS forecasts, respectively, compared with their
marketing spending, competition, capex for new
                                                                                              2005-11 PER range of 7-56x. In my view, the sector’s
gaming platforms, and adjustments to service launch
                                                                                              valuation should return to the low end of this historical
schedule.
                                                                                              range, as I forecast earnings for the companies that we
                                                                                              cover to rise at a CAGR of 20% over the 2010-13 period.



  Earnings-forecasts revisions: Japan
                                                      Revenue                                        Operating profit                         EPS (¥)
(¥bn)                                        2012E                     2013E                      2012E                     2013E   2012E                      2013E
Nexon
 Previous                                     103.4                     119.8                      46.5                      54.0     81.3                       95.2
 New                                          113.0                     129.8                      53.2                      61.0     93.2                      105.0
Gree
 Previous                                     148.0                     179.0                      78.0                      90.0    194.4                      224.6
 New                                          171.0                     224.0                      94.0                     117.0    227.6                      300.6
Capcom
 Previous                                      91.0                     100.0                      13.6                      16.6    133.7                      164.2
 New                                           84.0                     105.0                      12.3                      18.5    116.4                      191.0
Square Enix Holdings
 Previous                                     130.0                     150.0                      14.5                      23.0     60.0                      112.1
 New                                          128.0                     151.0                      13.0                      23.5     54.7                      115.6
Source: Daiwa forecasts
Note 1: We have revised earnings for Gree and Capcom on 7 March 2012, and Square Enix on 1 March 2012
Note 2: fiscal years for Capcom and Square Enix Holdings are the end of March, June for Gree, and December for Nexon




                                                                                       - 50 -
                                                                                                 Trading Places
                                                                                                          4 April 2012




Japan: Shiraishi has factored in a revenue                      I am raising my target prices for Capcom and Square
contribution from new game titles                               Enix as follows: for Capcom, I am raising my target
                                                                price to ¥2,200 (from ¥2,000) due to upward
Based on the October-December 2011 results and my
                                                                revisions to my FY12 earnings forecasts, and for
recent discussions with company officials, I am
                                                                Square Enix, I am raising my target price to ¥1,900
upgrading my overall earnings forecasts for Capcom,
                                                                (from ¥1,650) due to upward revisions to my FY13
Square Enix and Gree from my previous forecasts. For
                                                                earnings forecasts.
FY11, I am cutting my earnings forecasts for some firms
based on delays of titles that were slated for release
around the fiscal year end. However, this does not
reflect the companies’ fundamentals. On the contrary, I
am raising my FY12 forecasts for Capcom, Square Enix
and Gree mainly to reflect their formidable pipelines of
upcoming titles. I put together my FY13 earnings
forecasts following the October-December 2011
earnings, and by my assessment, all three should either
post record profits or at least come close.

I expect Nexon’s core titles in Asia to see stronger-
than-expected demand, following game-content
updates. We have modelled management’s revised
business targets for FY12 into our earnings forecasts.
See below for my comments on individual companies.

For Capcom, I am revising down my FY11 earnings
forecast to reflect the delayed release of Dragon’s
Dogma, which was put off until the next fiscal year.
However, I am raising my forecasts from FY12 based
on: 1) upcoming releases of instalments in major
franchises (Resident Evil, Onimusha, Lost Planet) in
packaged, social, and browser formats, and 2) the
company’s steady strides in social games overseas.

I am trimming my FY11 earnings forecast modestly for
Square Enix in light of management’s plan to increase
upfront spending on titles to be released in FY12
(online content incl. social games). Meanwhile, a host
of entries in major franchises is due out in FY12,
including Tomb Raider and Hitman in packaged
software and Final Fantasy and Dragon Quest in
MMORPGs. I am only slightly modifying my forecast
for FY12. In FY13, however, I expect operating profit to
exceed the consensus forecast of ¥25.2bn thanks to
full-fledged contributions from the above-mentioned
MMORPGs.

I expect Gree’s mainstay domestic social game
operations to continue driving earnings. The 3Q FY11
subscriber numbers and ARPU both exceeded my
pre-release forecasts. In addition to Gree’s first-party
titles, earnings growth also had much to do with
benefits from major packaged software makers
releasing games on Gree’s platform (ie, expanded
contributions from third-party titles). These majors
plan to continue developing social games going
forward, leading me to forecast earnings growth faster
than the consensus estimate.

                                                           - 51 -
                                                                                                                                                                     Trading Places
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Implications for the Pan-Asia game sector
  Pan-Asia game sector: similarities and differences
                         Korea                                                          Japan                                               China
Users                    PC online/casual/web board                                     Console/social/mobile                               PC online/casual/web game
Infrastructure           Well established on online distribution and payment            More favourable for offline and mobile              Rising penetration in broadband, desktop, PC café
Service offerings        RPGs/FPS/sports/card games                                     Simulation/action/social game                       RPG/FPS/RTS
Business model           Subscription and F2P                                           Packaged S/W sales/F2P                              F2P
Niche segments           Web board game                                                 Card trading/item collection                        Web-based games
Source: Daiwa



Gaining scale in the region                                                                           take all the pie without competition. We consider the
Although each country has a different service                                                         publishing partnership of Blade & Soul in China as this
environment and game culture, all markets in the                                                      combination, where we will see strong operating
Pan-Asia region are heading in the same direction in                                                  leverage as a result of the vast user base. The second
terms of game offerings and revenue models. We might                                                  best combination would emerge between the leading
see a time gap for new service launches and                                                           mobile portal and social game developers due to the
monetisation strategies within the region, but we                                                     effective monetisation of surging paid gamers.
believe Asia’s game industry will start to move in the
same value chain among developers, operators and end                                                  Finally, we also see attractive cross-platform
users. This indicates that the leading companies in each                                              opportunities being created by console and desktop
market can benefit from growing their scale in gamers                                                 game companies, and especially smart devices. We
and game spending due to strong service leverage as a                                                 have witnessed the success story from the following
result of one-source-multi-region strategy.                                                           cases: Electronic Arts and Neowiz Games for FIFA
                                                                                                      Online, and Konami and DeNA/Gree/Zynga for Metal
We strongly believe the most powerful combination in                                                  Gear. Due to the limited cost for platform conversion,
the industry value chain is between a leading platform                                                this combination would strongly contribute to the
and leading content developer. If this partnership takes                                              companies’ earnings if they hit the market.
place in the emerging markets, these companies could


  Pan-Asia game sector: top themes/services to prosper
Key themes/services                   What we learned from job-swap in Japan and Korea                                           Related companies
Social game service                   Smart device users will spend more dollars and longer time to play mobile game with        Gree, DeNA, and Nexon (JC Entertainment)
                                      social features
Aeon of Strife or MOBA                This game genre will gain a lion share and prevail due to ongoing character update and     Nexon (Neople) and Tencent (Riot Games)
                                      high degree of freedom in battle mode and party system
In-app purchase                       Effective acquisition of free mobile gamer will ramp up in-game item commerce and          Gamevil and Com2uS
                                      possibly in-app ads
Advanced MMOs                         By leveraging loyal user base, the blockbusters will lure premium gamers and boost         NCsoft (Blade & Soul) and Square Enix (FF14 and Dragon Quest 10)
                                      sales with subscription as well as item sales
Source: Daiwa
Note: MMO – massively multiplayer online game, MOBA – multiplayer online battle arena




                                                                                              - 52 -
                                                                  Trading Places
                                                                         4 April 2012




Going from strength to strength
From our job-swap experience, we identified four
promising markets in the region: SNGs, Aeon of Strife,
in-app commerce, and advanced MMOs.

Although we have not yet seen a dominant SNG
platform or developer emerge in Korea and China, we
expect strong demand for social game features to
result in a leader in the SNG market emerging in each
local market.

JC Entertainment (Not rated) is leading Korea’s social
game market with the Rule The Sky game. It is gearing
up for enhancing Nest, its social game platform, in
order to leverage the user base for upselling
promotions of its other casual game titles.

Due to the high degree of freedom in game character
play and battle mode, we believe the Aeon of Strife
genre could gain more popularity in the region. In
addition to League of Legend by Riot Games, an
unlisted affiliate of Tencent, we believe Cyphers of
Neople (Not rated) has rapidly gained market share in
Korea’s PC cafés due to its appealing game actions and
advanced battle modes with personalised ‘hero’
characters. Going forward we could see game users
spending real-life cash to purchase new game
characters to throw into their competition, as well as
new skins for pre-existing characters, temporary boosts
for gaming sessions, and runes that allow a gamer to
further customize their character amongst other
purchasable wares.

In the region, we are increasingly seeing strong traction
in mobile in-app purchases for casual smartphone
games. Mobile game companies like Gamevil are
strongly benefiting from a solid rise of in-game items in
the mobile-application marketplace globally.

Contrary to market expectations, we reaffirmed there is
still robust demand for high quality MMOs in the
region, given the recent positive feedback on Blade &
Soul and Diablo 3 during closed beta testing. We
believe NCsoft will successfully capture greater market
opportunities in the region through advanced MMOs
such as Guild Wars 2, Wild Stars and Lineage Eternal
over the medium term.




                                                         - 53 -
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  Global Internet companies: valuation data (as of 2 Apr 2012)
                                                          Market                                                        Rev. growth                   EPS growth
                            Ticker       Share price         cap      PER (x)         EV/EBITDA (x)       PBR (x)        (%, YoY)                      (%, YoY)    ROE (%)     OPM (%)
                                         (local curr.)   (US$bn) 2011E 2012E 2013E 2011E 2012E 2013E 2011E 2012E 2013E 2011E 2012E                   2011E 2012E 2011E 2012E 2011E 2012E
Search/portal companies
NHN*                        035420 KS       259,000        11.1   27.5    21.5    17.4 16.1       13.1    10.3     7.8     6.3   4.9 63.6     14.7    (8.4)     28.3   30.6    32.4    28.9    30.8
Daum*                       035720 KS       118,900         1.4   15.8    13.6    11.4   9.7       7.7     6.0     3.5     2.9   2.4 21.9     22.0   (11.0)     16.7   25.0    23.3    27.1    26.7
SK Communications*          066270 KS        12,950         0.5   66.7    22.0    18.5 15.8        9.5     7.7     2.4     2.2   1.9 12.1     11.3   713.1    203.8      3.7   10.3     4.9     9.7
Average (Korea)                                             4.3   36.7    19.0    15.8 13.9       10.1     8.0     4.6     3.8   3.1 32.5     16.0   231.2      82.9   19.8    22.0    20.3    22.4
Baidu                       BIDU US            145.8       50.9   48.5    31.1    22.0 37.0       23.9    16.1    21.3    12.5   8.0 81.7     57.0     86.7     56.0   56.3    49.8    52.8    51.2
Sohu                        SOHU US             55.2        2.1   12.0    15.6    11.7   4.5       4.5     2.9     2.1     1.8   1.6 38.7     22.5     17.6   (23.4)   21.5    14.6    33.8    24.5
Sina Corp                   SINA US             65.0        4.3   69.7    86.1    36.2 118.7      62.9    29.1     4.0     3.9   3.6 16.6     20.7     T.B.   (19.0)    n.a.    3.4     0.1     3.5
Average (China)                                            19.1   43.4    44.3    23.3 53.4       30.4    16.0     9.1     6.0   4.4 45.6     33.4     52.1      4.5   38.9    22.6    28.9    26.4
Google                      GOOG US            641.2      207.7   17.4    15.1    12.9 10.3        9.1     6.7     3.5     2.9   2.4    0.2   20.4     38.4     15.1   21.1    19.5    41.2    44.1
Yahoo                       YHOO US             15.2       18.5   18.2    17.9    16.1   9.9      10.8    10.1     1.5     1.4   1.3 (30.4)    6.1    (8.4)      1.8     8.1    6.8    18.1    15.9
Average (US)                                              113.1   17.8    16.5    14.5 10.1        9.9     8.4     2.5     2.1   1.8 (15.1)   13.2     15.0      8.5   14.6    13.1    29.7    30.0
Yahoo Japan                 4689 JP         118,900         1.4   15.8    13.6    11.4   9.7       7.7     6.0     3.5     2.9   2.4 21.9     22.0   (11.0)     16.7   25.0    23.3    27.1    26.7
Search/portal average                                      35.0   32.4    26.4    18.3 25.5       16.5    11.1     5.8     4.2   3.3 23.0     19.8   104.3      31.4   23.8    20.0    29.1    29.0

Online/console game companies
NCsoft*                      036570 KS      313,500         6.1   57.1    33.0    17.6    38.7    21.9    11.3     8.0    6.5    4.8 (7.2) 29.6 (18.6)         73.2    14.4    21.8    22.1    31.9
Neowiz Games*                095660 KS       35,500         0.7   10.6     8.7     7.3      6.6     4.8     3.8    3.1    2.3    1.8 55.1 12.0 261.2           21.7    30.0    30.4    16.0    18.0
Webzen                       069080 KS       13,400         0.4    n.a.    n.a.    n.a.    n.a.    n.a.    n.a.    n.a.   n.a.   n.a. n.a. n.a.       T.B.      n.a.    n.a.    n.a.    n.a.    n.a.
JCE                          067000 KS       35,500         0.4   49.4    15.6    10.9    39.8    12.2     7.0     6.0    4.4    3.1 55.8 85.2 183.8          218.0    14.8    34.9    22.9    43.4
GameHi                       041140 KS        8,270         0.3   24.0     n.a.    n.a.   16.8     n.a.    n.a.    4.6    n.a.   n.a. 14.9 n.a.       T.B.      n.a.   21.2     n.a.   35.9     n.a.
Wemade                       112040 KS       89,500         0.7   29.5    17.3    12.3    24.2    11.3     7.4     2.7    2.2    1.7 13.9 41.3        32.2     70.4      9.3   13.4    21.8    36.7
Average (Korea)                                             1.4   34.1    18.6    12.0    25.2    12.5     7.4     4.9    3.9    2.8 26.5 42.0 114.6           95.8    18.0    25.2    23.8    32.5
Tencent*                     700 HK            216.6       51.3   31.3    23.8    18.6    22.4    15.9    11.8    11.4    7.9    5.7 45.0 34.3        26.5     31.4    40.6    39.2    43.0    45.6
Netease                      NTES US            58.1        7.6   15.3    13.1    11.7    11.3      8.7    6.9     3.8    2.9    2.4 36.9 21.9        45.3     16.8    28.7    25.7    46.2    46.2
Giant Interactive (NYSE)     GA US               4.9        1.2     7.6     6.4     6.0     4.8     3.9     2.8     2.3    2.0    1.6 38.9 21.1       19.1     19.3    20.5    37.5    58.7    56.7
Perfect World                PWRD US            16.2        0.8     6.4     5.8     5.4     2.5     2.2     1.2     1.5    1.2    1.0 18.5     8.2 (5.0)         8.9   26.5    22.1    34.6    29.8
Changyou                     CYOU US            27.2        1.4     6.5     5.7     5.1     3.6     2.7     1.5     2.4    1.7    1.3 25.8 27.3       10.7     14.7    40.5    34.5    56.4    51.4
Shanda Games                 GAME US             5.2        1.5     7.3     6.2     5.6     3.8     3.3     2.4     1.8    1.6    1.3 16.2 13.3 (0.9)          17.6    29.4    33.1    28.1    28.3
Average (China)                                            10.6   12.4    10.2      8.7     8.1     6.1     4.4     3.8    2.9    2.2 30.2 21.0       16.0     18.1    31.0    32.0    44.5    43.0
Nexon*                       3659 JP           1,438        7.5   23.8    15.4    13.7    10.2      7.5     6.3     3.5    2.9   2.4 25.6 28.9 (1.4)           54.3    21.7    20.5    43.7    47.1
Konami Corp*                 9766 JP           2,382        4.1   13.8    11.5    11.3      5.3     4.5     4.5    n.a    n.a    n.a     4.7   8.9    78.7     20.1     n.a.    n.a.   15.9    17.2
Capcom*                      9697 JP           1,933        1.6   16.6    10.1      9.7     6.7     4.8     4.6    n.a    n.a    n.a (14.0) 25.0 (11.3)        64.2     n.a.    n.a.   14.6    17.6
Namco Bandai*                7832 JP           1,200        3.2   13.4    11.1    10.4      3.8     3.5     3.3    n.a    n.a    n.a 11.6      4.5 1,065.6     20.0     n.a.    n.a.     7.5     8.3
Square Enix*                 9684 JP           1,718        2.4   31.4    14.9    13.2      6.6     4.3     3.9    n.a    n.a    n.a     2.2 18.0     T.B.    111.1     n.a.    n.a.   10.2    15.6
Average (Japan)                                             3.8   19.8    12.6    11.7      6.5     4.9     4.5     3.5    2.9    2.4    6.0 17.1 282.9        53.9    21.7    20.5    18.4    21.1
Electronic Arts              EA US              16.5        5.5   19.3    14.0    10.9      6.1     4.7     3.4     2.0    2.1    1.8 14.2     8.4    T.B.     38.0      9.5   13.7      9.7   12.2
Activision Blizzard          ATVI US            12.8       14.4   14.8    13.2    11.9      6.9     5.4     4.3     1.4    1.3    1.2 (3.7)    6.5 154.1       12.3      9.6   10.4    31.7    32.7
Take Two                     TTWO US            15.4        1.4    n.a.     5.5   12.9     n.a.     2.2     3.9     2.1    1.9    1.6 (29.2) 122.0    T.R.     T.B.     n.a.   34.4     n.a.   17.4
Zynga                        ZNGA US            13.2        9.5   69.2    50.0    35.5    25.9    17.8    12.7     6.1    5.2    5.2 90.0 23.2 216.7           38.4    11.0    12.1    14.3    19.1
Average (US)                                                7.7   34.4    20.7    17.8    13.0      7.6    6.1     2.9    2.6    2.5 17.8 40.0 185.4           29.6    10.0    17.6    18.6    20.3
Online/console game average                                         5.8   23.5    14.8    12.1    13.0      7.5     5.4    3.9    3.1    2.5 20.8     28.4    128.5    47.2    21.9    25.6    28.1

Mobile games
Gamevil*                    063080 KS         73,700        0.4   25.4    19.0    14.5    18.9    12.8     9.1     6.0    4.6    3.5 49.4     56.6      8.6    33.3    26.4    27.4    41.0    36.2
Com2uS*                     078340 KS         18,800        0.2   42.6    19.0    11.7    32.2    12.2     6.5     2.8    2.5    2.0 29.3     50.0    10.5    124.3     6.9    13.8     8.6    17.7
Average (Korea)                                             0.3   34.0    19.0    13.1    25.5    12.5     7.8     4.4    3.5    2.8 39.4     53.3     9.5     78.8    16.6    20.6    24.8    27.0
Gree*                       3632 JP           2,067         5.8     9.1     6.9    6.6      4.8     3.8    3.7    n.a     n.a    n.a 166.4    31.0   184.9     32.1     n.a.    n.a.   55.0    52.2
DeNA*                       2432 JP           2,371         4.3   10.5      8.2    8.1      4.6     4.0    3.9    n.a     n.a    n.a 28.1     24.4      3.1    27.8     n.a.    n.a.   42.7    39.6
Cyberagent*                 4751 JP         222,900         1.8   14.0    11.0     9.1      5.5     4.8    4.0    n.a     n.a    n.a 15.6      8.9    41.1     27.2     n.a.    n.a.   14.5    15.6
Average (Japan)                                             4.0   11.2      8.7    7.9      5.0     4.2    3.9    n.a.    n.a.   n.a. 70.0    21.4    76.3     29.0     n.a.    n.a.   37.4    35.8
Glu                         GLUU US               4.9       0.3    n.a.    n.a.   30.3     n.a.    n.a.   14.6     5.8     9.7   n.a.  6.4    26.3     n.a.     n.a.    n.a.    n.a.    n.a.    n.a.
Mobile game average                                         2.1   20.3    12.8    13.4    13.2      7.5    7.0     4.9     5.6    2.8 49.2    32.9    49.6     48.9    16.6    20.6    32.4    32.3

Internet services
Megastudy*                  072870 KS       115,000         0.6   10.7     9.7     8.6     6.1     5.2     4.4     2.2     2.0   1.7   38.9   14.8     11.8    10.6    22.0    21.4    23.6    23.2
Mixi*                       2121 JP         219,000         0.4   27.7    13.7    11.8     7.3     4.7     4.5     n.a     n.a   n.a    4.3   32.6   (11.4)   101.7     n.a.    n.a.   18.1    23.5
Rakuten*                    4755 JP          87,600        14.0   24.5    21.3     n.a     7.7     6.8     n.a     n.a     n.a   n.a    3.8    6.1     T.B.    15.1     n.a.    n.a.   21.6    23.2
Ebay                        EBAY US            36.9        47.5   18.5    16.1    13.8    11.6     9.7     7.6     2.6     2.3   2.0   26.6   19.4     44.7    14.9    14.7    13.3    27.1    26.7
Ctrip                       CTRP US            21.6         3.1   19.4    21.1    17.0    12.3    12.5     9.1     2.7     2.4   2.1   28.0   22.0    (0.3)    (8.0)   17.1    14.1    32.1    23.2
Alibaba.com                 1688 HK            13.3         8.5   29.6    26.1    24.4    23.2    19.8    18.2     8.1     6.9   5.9   16.5    9.6     24.0    14.1    29.2    28.4    29.1    30.6
Internet services average                                  12.4   21.7    18.0    15.1    11.4     9.8     8.8     3.9     3.4   2.9   19.7   17.4     13.8    24.7    20.7    19.3    25.3    25.1

Total average                                              12.5   24.9    17.7    14.0    15.6     9.9     7.3     4.5     3.7   2.8   25.3   25.5    94.3     40.2    21.8    22.8    28.4    29.4
Source: Bloomberg, *Daiwa forecasts




                                                                                          - 54 -
                                                                                                                                                                                                             Trading Places
                                                                                                                                                                                                                                                      4 April 2012




                                      How Thomas justifies his Positive view of the Korea
                                      Games Sector




 Growth outlook                                                    Korea: online-game market opportunity

I forecast Korea’s online-game revenue to expand by             (Wtn)
18% YoY to W6.4tn for 2012, and by 16% YoY to W7.5tn           10                                                                                                                                                                                                   30%
for 2013, on the back of a rising number of paid gamers                                                                                                                                                                                                             25%
                                                                   8
and ARPU, and the launch of blockbuster games. I also                                                                                                                                                                                                               20%
expect Korea’s online-game companies to see a rise in              6
                                                                                                                                                                                                                                                                    15%
royalties from overseas as a result of offering unique             4
                                                                                                                                                                                                                                                                    10%
game features for various game platforms globally. In              2                                                                                                                                                                                                5%
my view, the industry will continue to benefit from
emerging game platforms, based on smart devices.                   0                                                                                                                                                                                                0%
                                                                                 2006                 2007                   2008                      2009                  2010                2011E                    2012E                   2013E

                                                                                       Online                                                                   Mobile                                                                  Video console
                                                                                       Arcade game                                                              PC package                                                              Growth rate (RHS)
                                                              Source: KOCCA, Daiwa forecasts




 Valuation                                                         Korea Software Sector: performance relative to KOSPI

The Software Sector has moved in-line with the KOSPI,          180                                                                                                                                                                                                  20%
outperforming the index by 0.2% YTD. There were                160                                                                                                                                                                                                  15%
                                                                                                                                                                                                                                                                    10%
                                                               140
rising concerns about competition, regulatory                  120
                                                                                                                                                                                                                                                                    5%
                                                                                                                                                                                                                                                                    0%
initiatives, and a potential slowdown in overseas              100                                                                                                                                                                                                  (5% )
royalties, especially from China. On the other hand,            80                                                                                                                                                                                                  (10% )
                                                                60                                                                                                                                                                                                  (15% )
positive developments in revenues from mobile and                                                                                                                                                                                                                   (20% )
                                                                40
smart devices supported the sector performance. The             20
                                                                                                                                                                                                                                                                    (25% )
                                                                                                                                                                                                                                                                    (30% )
software stocks that I cover are trading currently at            0                                                                                                                                                                                                  (35% )
average PERs of 19.5x and 14.1x on my respective 2012
                                                                        2010-01-04

                                                                                     2010-03-04

                                                                                                  2010-05-04

                                                                                                                2010-07-04

                                                                                                                             2010-09-04

                                                                                                                                          2010-11-04

                                                                                                                                                        2011-01-04

                                                                                                                                                                     2011-03-04

                                                                                                                                                                                  2011-05-04

                                                                                                                                                                                                2011-07-04

                                                                                                                                                                                                             2011-09-04

                                                                                                                                                                                                                           2011-11-04

                                                                                                                                                                                                                                         2012-01-04

                                                                                                                                                                                                                                                       2012-03-04
and 2013 EPS forecasts, compared with their 2006-11
PER range of 7-56x.
                                                                                                               Software Index (LHS)                                                            Relative performance (LHS)

                                                              Source: FnGuide
                                                              Note: Online game index comprises all the listed game companies



 Earnings revisions                                                Korea Software Sector: earnings revision momentum

In my view, most analysts remain cautiously optimistic         Jan '10=100                                                                                                                                                                                            (x )
about the earnings-growth momentum of Korea’s                  170                                                                                                                                                                                                     3.5
online-game companies, given rising competition and            150                                                                                                                                                                                                     3.0
soft growth in the gamer base. However, I think the            130
                                                                                                                                                                                                                                                                       2.5
FnGuide-consensus forecasts will start to reflect the          110
                                                                                                                                                                                                                                                                       2.0
recent positive developments in the new-game pipeline              90
                                                                                                                                                                                                                                                                       1.5
                                                                                                                                                                                                                                                                       1.0
and the strong demand from gamers for in-game item                 70                                                                                                                                                                                                  0.5
transactions. I expect further upward earnings-forecast
                                                                   50                                                                                                                                                                                                  0.0
revisions if the companies succeed in monetising their
                                                                        Feb-10




                                                                        Feb-11
                                                                        Aug-10
                                                                        Sep-10

                                                                        Nov-10
                                                                        Dec-10




                                                                        Aug-11
                                                                        Sep-11

                                                                        Nov-11
                                                                         Jul-10




                                                                         Jul-11
                                                                        Oct-10




                                                                        Oct-11
                                                                         Apr-10




                                                                         Apr-11
                                                                        Jan-10




                                                                        Jun-10




                                                                        Jan-11




                                                                        Jun-11
                                                                        May-10




                                                                        May-11
                                                                        Mar-10




                                                                        Mar-11




loyal gamer bases.
                                                                                                                EPS upward revision/downward revision within 3 months (RHS)
                                                                                                                Sector performance (LHS)
                                                              Source: FnGuide




                                                          - 55 -
                                                                                                                                               Trading Places
                                                                                                                                                               4 April 2012




                                        How Shiraishi justifies his Neutral view of the Japan
                                        Games Sector




                                                              Correlation between home video-game machine market and
  Growth outlook                                             macro economics

Many companies have bright earnings outlooks.                 (¥bn)                                                                                                        (%)
Increasingly, entertainment content, especially games,         80                                                                                                           6
is driving hardware sales. Given a range of hardware                                                                                                                       4
                                                                  60
platforms, companies with strong intellectual property
                                                                                                                                                                           2
(IP) portfolios, particularly the major packaged-                 40
software makers, are able to generate earnings on                                                                                                                          0
whatever platform happens to be popular at the time.              20
                                                                                                                                                                           (2)

One thing almost all segments of the game sector have              0                                                                                                       (4)
in common is that earnings do not have a correlation                       CY87   89     91    93    95    97              99     01    03      05     07    09
with economic conditions. Indeed, even amid the                                     Total game market (LHS)                      Change in discretionary income (RHS)

economic uncertainty of the past few years, this resilient             Correlation coefficient between game market size and real disposable income, 0.12
demand is the biggest reason many firms in the sector                  Correlation coefficient between durable goods and real disposable income, 0.78
have continued to post strong earnings.                      Source: MIC, Enterbrain compiled by Daiwa



  Valuation                                                       Valuation metrics of game-related names

                                                                                                                                   PER           EV/EBITDA               PBR
I have a Neutral rating on the Japan Games Sector.           Company                    Bloomberg Share price
                                                                                            code    2 Apr ‘12
                                                                                                                      Market
                                                                                                                        cap Mar 12 E Mar 13 E Mar 12 E Mar 13 E        End-Mar 11
First, social games, which have recently had the most        Game/AM
                                                                                                           (¥)         (¥m)       (x)     (x)      (x)       (x)               (x)

momentum among subsectors, are entering a phase of           Fields                          2767 JP        139,300    46,225       7.7         5.1      3.2     1.8              1.0
                                                             SANKYO                          6417 JP          4,025 376,119        20.9        13.4      3.5     2.9              0.9
slower earnings growth amid difficult YoY comparisons.       Glory                           6457 JP          1,819 119,486        21.0        16.1      4.6     4.4              0.8
                                                             Sega Sammy Holdings             6460 JP          1,758 441,408        22.1        10.3      4.3     3.3              1.6
Second, firms in other sectors, especially                   Namco Bandai Holdings           7832 JP          1,200 254,033        13.4        11.1      3.8     3.5              1.3
manufacturing, are experiencing a sharp earnings             Tomy
                                                             Nintendo
                                                                                             7867 JP
                                                                                             7974 JP
                                                                                                                597    56,200
                                                                                                             12,600 1,611,264
                                                                                                                                   17.6
                                                                                                                                   N.A.
                                                                                                                                                8.0
                                                                                                                                               57.5
                                                                                                                                                         7.2
                                                                                                                                                        N.A.
                                                                                                                                                                 5.9
                                                                                                                                                                14.2
                                                                                                                                                                                  1.2
                                                                                                                                                                                  1.3
recovery following events in 2011, such as the Great East    Square Enix Holdings
                                                             Capcom
                                                                                             9684 JP
                                                                                             9697 JP
                                                                                                              1,718 197,690
                                                                                                              1,933 111,311
                                                                                                                                   31.4
                                                                                                                                   16.6
                                                                                                                                               14.9
                                                                                                                                               10.1
                                                                                                                                                         6.6
                                                                                                                                                         6.7
                                                                                                                                                                 4.3
                                                                                                                                                                 4.8
                                                                                                                                                                                  1.5
                                                                                                                                                                                  2.0
Japan Earthquake and the floods in Thailand. As such,        Konami                          9766 JP          2,382 330,198        13.8        11.5      5.3     4.5              1.7

earnings growth among these economically-sensitive           SNS
                                                             mixi                            2121 JP        219,000    32,654      27.7        13.7      7.3     4.7              2.1
firms is likely to be faster than at game firms.             DeNA                            2432 JP          2,371   348,166      10.5         8.2      4.6     4.0              4.6
                                                             Gree                            3632 JP          2,067   481,028       9.1         6.9      4.8     3.8             12.7
                                                             CyberAgent                      4751 JP        222,900   144,267      14.0        11.0      5.5     4.8              3.9
While stocks in the sector are trading at historically low   Klab
                                                             Nexon
                                                                                             3656 JP
                                                                                             3659 JP
                                                                                                                760
                                                                                                              1,438
                                                                                                                       19,716
                                                                                                                      615,920
                                                                                                                                    7.5
                                                                                                                                   17.5
                                                                                                                                                6.4
                                                                                                                                               15.1
                                                                                                                                                         4.1
                                                                                                                                                         8.2
                                                                                                                                                                 3.5
                                                                                                                                                                 7.1
                                                                                                                                                                                 13.6
                                                                                                                                                                                  3.5
PERs, multiples are likely to languish at current levels     Source: Bloomberg, companies; compiled by Daiwa
as earnings growth is likely to lag that of other sectors.   Notes: 1) CyberAgent, Fiscal years ending is September.
                                                                   2) KLab, Fiscal years ending is August. 3) Gree, Fiscal years ending is June.




  Earnings revisions                                              Japanese big-4 packaged software names: earnings  

Japanese Games Sector firms are on track to expand            (¥bn)                                                                                                    (¥bn)
earnings backed by two major factors: 1) many                 1,200                                                                                                        160
companies in the sector are planning major packaged-          1,000                                                                                                        140
software releases in FY12-13, and 2) Japanese game                800
                                                                                                                                                                           120
companies are starting to enter aggressively the growing                                                                                                                   100
                                                                  600                                                                                                      80
social game market (including overseas), as well as the                                                                                                                    60
                                                                  400
relatively new area of browser games. Both I and the                                                                                                                       40
Bloomberg-consensus are cautious about the earnings               200                                                                                                      20
contributions from offerings in social and browser                     0                                                                                                   0
games, given a lack of visibility on the potential rate of                  FY00 01     02     03      04     05      06    07     08     09     10   11 E 12 E 13 E

growth. Should quarterly earnings announcements                                   Game operating profit                                        Non-game operating profit
provide more visibility on this front, there may be                               Consolidated sales (LHS)
upside to my earnings forecasts.                             Source: Companies compiled by Daiwa, Daiwa forecasts




                                                         - 56 -
                                                                                                                                     Trading Places
                                                                                                                                                  4 April 2012




                                                                Management confirmed it would start commercial
                                                                services of Blade & Soul by June 2012 in Korea, and
                                                                then begin rolling it out globally. It said all game
                                                                content was ready to be planned to step up its
                                                                marketing efforts for the Blade & Soul launch and
NCsoft (036570 KS)                                              commercialisation, following a very short beta testing
                                                                period in May-June before the summer holiday period.
Rating: Buy                                                     We forecast Blade & Soul to account for 18% of the
Target price: W370,000 →W390,000                                company’s total revenue for 2012 and 33% for 2013.
(+24.4%)                                                        We forecast NCsoft’s overseas royalties to rise by 88%
                                                                YoY for 2013 on the back of global launches of two
Thomas Y. Kwon                                                  blockbuster titles. We expect Blade & Soul to be
(82) 2 787 9181                                                 commercialised in the China market in 1H13.
yskwon@kr.daiwacm.com

                                                                Valuation
                                                                The stock is trading currently at PERs of 33x and 17.6x
Staying ahead of the                                            on our respective 2012 and 2013 EPS forecasts. We
earnings-growth curve                                           believe it will trade at high valuation multiples ahead of
                                                                its big game launches, due to a strong earnings-growth
                                                                cycle from 2013. The key risks include weaker-than-
What we recommend
                                                                expected demand for new games and rises in labour
We reiterate our Buy (1) rating for NCsoft, but are
                                                                and marketing costs.
raising our six-month target price to W390,000 from
W370,000, based on our DCF/peer-multiple                        Forecast revisions (%)
comparison using our new 2013 EPS forecast. We have             Year to 31 Dec                                                 12E          13E             14E
become more positive about the company’s prospects,             Revenue change                                                (0.4)          5.7            n.a.
given that we believe it will benefit considerably from         Net-profit change                                             (3.8)          5.5            n.a.
an increase in spending on digital entertainment                EPS change                                                    (3.9)          5.4            n.a.
                                                                Source: Daiwa forecasts
content and loyal premium users over the long term.
                                                                Share price performance
Key share-price catalysts
                                                                      (W)                                                   (%)
Our visit to Japan yielded a few potential share-price              420,000                                                   200
catalysts, namely, a high chance of the company selling             370,000                                                   170
more in-game items in Japan than 2011, it benefitting               320,000                                                   140
from the strong franchise value of Lineage, and the                 270,000                                                   110
chance for it to penetrate the game market on                       220,000                                                    80
cross-platform globally.                                                  Apr-11      Jul-11      Oct-11    Dec-11       Mar-12
                                                                                   NCsoft (LHS)            Relative to KOSPI (RHS)

We came away from our job swap with a positive
impression of NCsoft, believing this leading RPG                12-month range                                                                  252,000-380,500
                                                                Market cap (US$bn)                                                                          6.05
developer could capitalise on growing demand for casual
                                                                Average daily turnover (US$m)                                                              47.91
games in Japan and other Asia markets. Ntreev (Not              Shares outstanding (m)                                                                        22
listed) recently acquired a casual sports game developer        Major shareholder                                                          Kim, Taek Jin (24.8%)
in Korea, which could help the company to respond to
solid demand from young and female gamers.                      Financial summary (W)
                                                                Year to 31 Dec                                              12E            13E              14E
In 2011, NCsoft generated W85bn worth of revenue (13%           Revenue (bn)                                                789          1,098            1,250
                                                                Operating profit (bn)                                       251            489              572
of total revenue) from Japan, mostly from the Lineage
                                                                Net profit (bn)                                             208            389              460
franchise. We believe Lineage has strong brand value,           Core EPS                                                  9,506         17,776           21,035
implying this RPG could generate more in-game item              EPS change (%)                                             73.2           87.0             18.3
sales in Japan than the past. The company said recently         Daiwa vs Cons. EPS (%)                                     (5.8)          (7.9)            (1.3)
that it was considering developing a console version of         PER (x)                                                    33.0           17.6             14.9
                                                                Dividend yield (%)                                           0.2            0.2              0.2
Guild Wars 2, which would be its first cross-platform title,
                                                                DPS                                                         600            600              600
following the commercial launch of PC-based Guild Wars          PBR (x)                                                      6.5            4.8              3.7
2, due for late-2012. NCsoft has announced it will start        EV/EBITDA (x)                                              21.9           11.3               9.1
pre-order shipments from April 2012.                            ROE (%)                                                    21.8           31.4             27.9
                                                                Source: Bloomberg, Daiwa forecasts


                                                           - 57 -
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  Key assumptions
Year to 31 Dec                       2007      2008     2009     2010     2011    2012E     2013E     2014E
PC café market share (%)            12.9%     14.6%    16.0%    17.0%    21.0%    24.0%     25.0%     25.0%
No. of servicing in-house games         4         5        4        5        5        7         8         9




  Profit and loss (Wbn)
Year to 31 Dec                       2007     2008     2009     2010     2011     2012E     2013E     2014E
Lineage I&II                           220      225      248      283      296       278       265       260
Aion                                      0       10     197      221      223       207       190       185
Others                                    2        6        7       10       89      305       642       804
Total revenue                          223      240      453      515      609       789     1,098     1,250
Other income                              0        0        0        0       16         0         0         0
COGS                                   (31)     (63)     (89)     (79)        0         0         0         0
SG&A                                 (145)    (131)    (163)    (185)    (473)     (538)     (609)     (677)
Other op. expenses                        0        0        0        0     (17)         0         0         0
Operating profit                         47       46     200      251      135       251       489       572
Net-interest inc./(exp.)                 13       12       14       22       22        25        33        45
Assoc/forex/extraord./others            (2)     (21)       14     (47)        0         8        10        12
Pre-tax profit                           58       37     227      225      157       285       532       630
Tax                                    (13)     (10)     (45)     (51)     (40)      (69)    (130)     (154)
Min. int./pref. div./others               0        0        0        0        3       (7)      (14)      (16)
Net profit (reported)                    45       27     183      174      120       208       389       460
Net profit (adjusted)                    45       27     183      174      120       208       389       460
EPS (reported) (W)                   2,206    1,334    8,563    7,986    5,489     9,506    17,776    21,035
EPS (adjusted) (W)                   2,206    1,334    8,563    7,986    5,489     9,506    17,776    21,035
EPS (adjusted fully-diluted) (W)     2,206    1,334    8,563    7,986    6,054    10,481    19,599    23,192
DPS (W)                              0.000      931      500      600      600       600       600       600
EBIT                                     47       46     200      251      135       251       489       572
EBITDA                                   56       57     213      265      163       284       523       608



  Cash flow (Wbn)
Year to 31 Dec                       2007     2008     2009     2010     2011     2012E     2013E     2014E
Profit before tax                       58       37      227      225      157      285        532       630
Depreciation and amortisation            9       11       13       14       29        33        34        35
Tax paid                              (13)     (10)     (45)     (51)     (36)      (69)     (130)     (154)
Change in working capital              (5)      (4)     (21)     (13)       (9)     (32)        (7)     (15)
Other operational CF items              16       21       69       48       (3)     (24)        (5)     (10)
Cash flow from operations               66       56      244      223      138      192        425       486
Capex                                 (48)     (48)     (13)     (30)     (40)      (37)      (26)      (26)
Net (acquisitions)/disposals           (6)      (7)     (63)     (50)       95      (20)      (31)        (5)
Other investing CF items                11       62    (198)    (147)    (157)      (22)      (22)      (22)
Cash flow from investing              (43)        6    (274)    (228)    (102)      (79)      (78)      (53)
Change in debt                           0     (20)         0        0      (4)        0          0         0
Net share issues/(repurchases)        (26)     (56)         1        0        0        0          0         0
Dividends paid                           0     (19)       (9)    (10)     (12)      (12)      (12)      (12)
Other financing CF items                 3       21       46         5        0        0          0         0
Cash flow from financing              (23)     (74)       38       (5)    (15)      (12)      (12)      (12)
Forex effect/others                      0        0         0        0    (25)         0          0         0
Change in cash                           0     (12)         7    (10)       (4)     101        334       421
Free cash flow                          18        7      231      193       97      155        399       460

Source: Company, Daiwa forecasts




                                   - 58 -
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  Balance sheet (Wbn)
As at 31 Dec                          2007         2008        2009        2010         2011      2012E       2013E        2014E
Cash & short-term investment           258          188         425         565          535         637         924        1,345
Inventory                                0            0           0           0            1           2           3            3
Accounts receivable                     26           29          47          59           72         103         143          163
Other current assets                    26           18          22          38           43          58          72           74
Total current assets                   309          234         493         662          651         799       1,142        1,585
Fixed assets                           116          155         157         175          367         387         395          402
Goodwill & intangibles                   4            5           3           4           32          37          42           47
Other non-current assets                74           80         128         165           72         117         200          215
Total assets                           503          474         781       1,006        1,121       1,340       1,779        2,250
Short-term debt                          0            0           0           0            0           0           0            0
Accounts payable                         0            0           0           0            9           8           8            9
Other current liabilities               52           48         130         143          180         196         245          251
Total current liabilities               52           48         130         143          189         204         253          260
Long-term debt                           0            0           0           0            0           0           0            0
Other non-current liabilities            7           10          16          58           66          66          66           66
Total liabilities                       59           58         146         201          255         270         319          326
Share capital                           10           10          11          11           13          13          13           13
Reserves/R.E./others                   434          405         624         794          840       1,036       1,413        1,861
Shareholders' equity                   444          416         635         805          853       1,049       1,426        1,874
Minority interests                       0            0           0           0           13          20          34           50
Total equity & liabilities             503          474         781       1,006        1,121       1,340       1,779        2,250
EV                                   6,047        6,118       6,262       6,152        6,197       6,095       5,810        5,391
Net debt/(cash)                      (258)        (188)       (425)       (565)        (535)       (637)       (924)      (1,345)
BVPS (W)                            21,709       20,297      29,233      36,930       39,059      48,006      65,238      85,728

  Key ratios (%)
Year to 31 Dec                         2007         2008        2009        2010         2011      2012E       2013E       2014E
Sales (YoY)                            (2.2)          7.9        88.4        13.7        (7.2)       29.6        39.2        13.8
EBITDA (YoY)                         (12.0)           1.2      274.0         24.6      (18.1)        74.1        84.1        16.1
Operating profit (YoY)                 (9.6)        (2.8)      337.8         25.6      (23.8)        86.7        94.5        17.1
Net profit (YoY)                        18.4      (39.4)       568.2        (4.8)      (18.4)        73.4        87.0        18.3
EPS (YoY)                               18.1      (39.5)       541.9        (6.7)      (18.6)        73.2        87.0        18.3
Gross-profit margin                     86.0         73.6        80.2        84.6         n.m.       n.m.        n.m.        n.m.
EBITDA margin                           25.2         23.7        47.0        51.5         26.8       36.0        47.7        48.6
Operating-profit margin                 21.1         19.0        44.1        48.7         22.1       31.9        44.5        45.8
ROAE                                    10.4          6.4        34.8        24.1         14.4       21.8        31.4        27.9
ROAA                                      9.3         5.6        29.1        19.5         11.3       16.9        24.9        22.8
ROCE                                    10.9         10.6        38.0        34.8         16.1       26.0        38.7        33.8
ROIC                                    21.5         16.1        73.3        86.1         35.2       49.7        76.3        77.5
Net debt to equity                 net cash     net cash    net cash    net cash     net cash    net cash    net cash    net cash
Effective tax rate                      22.8         26.8        19.7        22.7         25.2       24.4        24.4        24.4
Accounts receivable (days)             39.6          41.2        30.4        37.3         39.1       40.5        41.0        44.8
Payables (days)                          0.0          0.0         0.0         0.0          2.8         4.0         2.7         2.5
Net interest cover (x)                   n.a.        n.a.        n.a.        n.a.         n.a.        n.a.        n.a.        n.a.
Net dividend payout                      0.0         69.8         5.8         7.5         10.9         6.3         3.4         2.9
Source: Company, Daiwa forecasts




                                                                                    - 59 -
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                                                              2011. During a recent visit we made to the company, the
                                                              CEO told us the contract renewals for FIFA Online 2 with
                                                              Electronic Arts and Crossfire with Smilegate (Not listed)
                                                              were ongoing, but could not provide a clear indication of
                                                              when they might be concluded. In our view, management
Neowiz Games                                                  needs to address investors’ concerns about uncertainty
                                                              related to its contract renewals, as well as which affiliate
(095660 KS)                                                   within the group will lead its mobile-game strategy.

Rating: Outperform → Hold                                     Valuation
Target price: W49,000 →W37,500                                The stock is trading currently at PERs of 8.7x and 7.3x on
                                                              our respective new 2012 and 2013 EPS forecasts. We are
(+5.6%)                                                       lowering our target PER due to lingering concerns about
Thomas Y. Kwon                                                the contract renewal of FIFA Online 2 and Crossfire,
(82) 2 787 9181                                               increasing regulation and investment risks, and the low
yskwon@kr.daiwacm.com                                         visibility on new games in 2012. The key risks to our
                                                              target price would be negative outcomes from the contract
                                                              renewals with the third-party developers of the company’s
Down, but not out                                             core games. Key upside risks to our target price would be
                                                              a successful contract renewal for publishing core titles
What we recommend                                             and a rise in paid gamers for new games.
We are downgrading our rating to Hold (3) from
Outperform (2) and lowering our six-month target              Forecast revisions (%)
price to W37,500 (from W49,000), based on our                 Year to 31 Dec                                              12E          13E             14E
                                                              Revenue change                                             (0.8)        (2.7)            n.a.
revised 2012 earnings forecast and a new target PER of        Net-profit change                                          (8.3)       (13.2)            n.a.
8x (9x previously) and an unchanged EV/EBITDA                 EPS change                                                 (8.3)       (13.2)            n.a.
multiple of 5x. We believe our new PER valuation is           Source: Daiwa forecasts
justified given the uncertainties related to contract
renewals and the game portal service (Pmang). In our          Share price performance
view, a platform operator such as Neowiz Games needs              (W)                                                   (%)
more in-house game IP to protect its business model           79,000                                                      180

and leverage on its game publishing platform globally.        67,000                                                      150
                                                              55,000                                                      120

Following our job-swap, we have become cautious on            43,000                                                      90

the company’s business-growth potential in Japan              31,000                                                      60
                                                                   Apr-11         Jul-11     Oct-11       Dec-11     Mar-12
through its Gameon platform, due to its relatively weak                                    Neowiz Games (LHS)
                                                                                           Relative to KOSPI (RHS)
market presence and narrow gamer base. More
importantly, it has limited game offerings for social         12-month range                                                                  34,300-72,400
gamers and feature-phone users. We believe it will take       Market cap (US$m)                                                                     686.60
time to boost revenue and for this to contribute to           Average daily turnover (US$m)                                                          12.76
consolidated earnings, given the slower-than-expected         Shares outstanding (m)                                                                    22
migration to PC online-game markets and rising                Major shareholder                                                    Neowiz Holdings (21.9%)
competition with domestic players.
                                                              Financial summary (W)
Key share-price catalysts                                     Year to 31 Dec                                           12E           13E               14E
We expect Neowiz Games to see modest revenue growth           Revenue (bn)                                             748           832               939
over the next two quarters from core casual games such        Operating profit (bn)                                    135           154               171
                                                              Net profit (bn)                                           89           107               121
as FIFA Online and Slugger. We believe the company
                                                              Core EPS                                                4,073         4,861            5,511
might become more conservative in monetising gamers
                                                              EPS change (%)                                           21.7          19.3             13.4
on its web board game sites due to recent regulatory          Daiwa vs Cons. EPS (%)                                   (12)           (6)               (9)
initiatives. We forecast revenue from the web board-          PER (x)                                                   8.7           7.3               6.4
game service to decline by 6% YoY for 2012.                   Dividend yield (%)                                        0.0           0.0              0.0
                                                              DPS                                                     0.000         0.000            0.000
Crossfire, Neowiz Games’ flagship publishing title in         PBR (x)                                                   2.3           1.8               1.4
China, scored a record number of concurrent users in          EV/EBITDA (x)                                             4.8           3.8               2.9
mid-March this year of 3.5m, up from 2.3m in January          ROE (%)                                                  30.4          27.2              23.9
                                                              Source: Bloomberg, Daiwa forecasts

                                                         - 60 -
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  Key assumptions
Year to 31 Dec                        2007      2008      2009      2010      2011    2012E     2013E     2014E
Number of unique visitors ('000)     5,740     5,551     5,538     4,699     3,942     4,142     4,225     4,014
Number of paying users ('000)          413       539       617       615       629       654       693       662
ARPU (Local currency)               26,049    28,422    33,050    37,274    39,770    39,770    39,372    38,979




  Profit and loss (Wbn)
Year to 31 Dec                       2007      2008      2009      2010      2011     2012E     2013E     2014E
Web games                                37        62        81      118       141       133       134       135
Game publishing                          50      106       196       309       527       615       698       804
Others                                    0         0         0         0         0         0         0         0
Total revenue                            88      168       277       427       668       748       832       939
Other income                              0         0         0         0        25         6         6         7
COGS                                   (47)      (98)    (160)     (254)          0         0         0         0
SG&A                                   (20)      (34)      (41)      (62)    (534)     (613)     (678)     (767)
Other op. expenses                        0         0         0         0      (53)       (6)       (6)       (7)
Operating profit                         21        36        77      111       107       135       154       171
Net-interest inc./(exp.)                  1         1         3         3       (2)       (6)       (4)       (1)
Assoc/forex/extraord./others              0       (7)      (19)      (94)       (4)       (7)       (7)       (8)
Pre-tax profit                           22        29        60        20      101       122       143       162
Tax                                     (6)       (8)      (15)       (1)      (28)      (31)      (34)      (39)
Min. int./pref. div./others               0         0         0         0         1       (2)       (2)       (2)
Net profit (reported)                    16        21        45        19        73        89      107       121
Net profit (adjusted)                    16        21        45        19        73        89      107       121
EPS (reported) (W)                     943     1,088     2,107       873     3,346     4,073     4,861     5,511
EPS (adjusted) (W)                     943     1,088     2,107       873     3,346     4,073     4,861     5,511
EPS (adjusted fully-diluted) (W)       943     1,088     2,107       873     3,438     4,304     5,136     5,823
DPS (W)                              0.000     0.000     0.000     0.000     0.000     0.000     0.000     0.000
EBIT                                     21        36        77      111       107       135       154       171
EBITDA                                   26        47        83      121       129       164       188       211



  Cash flow (Wbn)
Year to 31 Dec                       2007      2008      2009      2010      2011     2012E     2013E     2014E
Profit before tax                       22        29        60        20       101      122       143       162
Depreciation and amortisation            5        11         6        10        22        29        34        40
Tax paid                               (6)       (8)      (15)       (1)      (36)      (29)      (34)      (39)
Change in working capital                4       (5)         1         6      (94)       (8)       (9)      (12)
Other operational CF items               4        13        17        59          6      (2)       (3)       (4)
Cash flow from operations               28        41        70        94        (2)     112       130       148
Capex                                  (2)       (3)      (20)      (10)     (161)      (44)      (41)      (41)
Net (acquisitions)/disposals          (59)      (18)      (28)     (114)        47      (21)      (18)      (17)
Other investing CF items              (24)        11      (81)        70        12         1         1         1
Cash flow from investing              (85)      (10)     (128)      (54)     (102)      (65)      (59)      (57)
Change in debt                          29      (30)         0         0       193         0         4         4
Net share issues/(repurchases)           4         0         6      (10)      (51)         0         0         0
Dividends paid                           0         0         0         0          0        0         0         0
Other financing CF items                28        15        50         0      (13)         0         0         0
Cash flow from financing                62      (14)        55      (10)       128         0         4         4
Forex effect/others                      0         0         0         0          0        0         0         0
Change in cash                           5        16       (3)        31        25        47        75        94
Free cash flow                          27        38        50        84     (163)        68        89      107

Source: Company, Daiwa forecasts




                                   - 61 -
                                                                                                                          Trading Places
                                                                                                                                 4 April 2012




  Balance sheet (Wbn)
As at 31 Dec                       2007        2008        2009        2010         2011   2012E     2013E      2014E
Cash & short-term investment           7           24         21          51          79      127       202        296
Inventory                              0            0          0           0           0        0          0          0
Accounts receivable                   20           29         40          53         117      112       117        131
Other current assets                  33           16       112           59          41       48        56          66
Total current assets                  60           69       172         163          238      286       374        493
Fixed assets                           2            3         20          21         117      117       114        110
Goodwill & intangibles                23           22         13          54          94      109       118        123
Other non-current assets              58           89         97        174          177      201       222        243
Total assets                         143         183        302         412          626      713       828        969
Short-term debt                       30            0          0           0          45       45        46          47
Accounts payable                       9           17         27          47          95       84        84          93
Other current liabilities             21           32         45        122           58       62        65          70
Total current liabilities             60           48         72        168          197      191       195        210
Long-term debt                         0            0          0           0         147      147       150        153
Other non-current liabilities          1            1          2           4           9       11        11          11
Total liabilities                     61           49         74        172          353      349       356        374
Share capital                          5            5         11          11          11       11        11          11
Reserves/R.E./others                  78         128        217         229          238      327       434        554
Shareholders' equity                  82         133        228         240          249      338       445        565
Minority interests                     0            0          0           0          24       26        28          30
Total equity & liabilities           143         183        302         412          626      713       828        969
EV                                   680         677        745         715          841      781       699        603
Net debt/(cash)                       23         (24)       (21)        (51)         112       65        (7)       (97)
BVPS (W)                           4,385       6,666     10,414      10,958       11,349   15,422    20,283     25,795

  Key ratios (%)
Year to 31 Dec                     2007         2008        2009        2010       2011    2012E      2013E      2014E
Sales (YoY)                         n.a.         91.1        65.4        54.0       55.1     12.0       11.3       12.8
EBITDA (YoY)                        n.a.         83.1        75.8        46.4      273.9     27.5       14.4       12.7
Operating profit (YoY)              n.a.         73.3      114.1         44.8      352.4     26.1       14.0       11.3
Net profit (YoY)                    n.a.         35.9      110.3      (57.7)       250.1     21.8       19.3       13.4
EPS (YoY)                           n.a.         15.3        93.7     (58.6)       261.2     21.7       19.3       13.4
Gross-profit margin                 45.9         41.7        42.4        40.6       n.m.     n.m.       n.m.       n.m.
EBITDA margin                       29.4         28.2        29.9        28.5       19.3     21.9       22.5       22.5
Operating-profit margin             23.6         21.4        27.7        26.0       16.0     18.0       18.5       18.2
ROAE                                38.4         19.9        25.0         8.2       30.0     30.4       27.2       23.9
ROAA                                22.1         13.2        18.7         5.4       14.1     13.3       13.8       13.4
ROCE                                36.9         29.2        42.4        47.5       30.4     26.5       25.2       23.4
ROIC                                28.7         24.6        36.6        52.8       26.9     24.6       26.2       27.0
Net debt to equity                  27.4    net cash    net cash    net cash        45.1     19.2   net cash   net cash
Effective tax rate                  27.1         26.2        24.4         6.1       28.0     25.7       24.0       24.0
Accounts receivable (days)         41.1          53.0        45.2        39.5       46.4     55.9       50.0       48.2
Payables (days)                     19.5         28.2        28.9        31.8       38.7     43.7       37.0       34.6
Net interest cover (x)               n.a.        n.a.        n.a.        n.a.       48.7     23.6       40.2      117.7
Net dividend payout                  0.0          0.0         0.0         0.0        0.0      0.0        0.0        0.0
Source: Company, Daiwa forecasts




                                                                                - 62 -
                                                                                                                                 Trading Places
                                                                                                                                             4 April 2012




                                                                third-party developers given that more game staff would
                                                                be needed to develop and maintain social game services.
                                                                Gamevil aims to roll out a total of 46 games in Korea and
                                                                42 games globally in 2012, up from 22 games in Korea
                                                                and 21 games overseas in 2011. Potentially higher-than-
Gamevil (063080 KS)                                             expected revenue from the new game titles in Korea and
                                                                overseas would provide strong earnings-growth
Rating: Buy → Outperform                                        momentum and be near-term share-price catalysts, in our
Target price: W79,000 →W77,500 (+5.2%)                          view. We forecast the company’s overseas revenue to
                                                                grow by 79% YoY for 2012 and 49% YoY for 2013.
Thomas Y. Kwon
(82) 2 787 9181                                                 Valuation
yskwon@kr.daiwacm.com
                                                                The stock is trading currently at a PER of 19x on our
                                                                2012 EPS forecast. We expect the stock to outperform
                                                                the market over the next six months due to a rapid
Rating downgraded on                                            growth in paid mobile gamers globally and a solid
concerns about competition                                      increase in in-game item sales of third-party titles in
                                                                Japan. The key risks would include a sharp rise in
What we recommend                                               operating costs relating to staff, sales commission, and
We are downgrading our rating for Gamevil to                    the acquisition of game IP.
Outperform (2) from Buy (1), and cutting our six-month
                                                                Forecast revisions (%)
target price to W77,500 (from W79,000), based on an             Year to 31 Dec                                              12E         13E             14E
unchanged target PER of 20x (a 15% discount to the              Revenue change                                               0.0         0.0            n.a.
average PER for 2011) on our revised 2012 EPS forecast.         Net-profit change                                          (1.5)       (1.5)            n.a.
We have become cautious on the company’s prospects              EPS change                                                 (1.9)       (1.9)            n.a.
due to increased competition, with newcomers entering           Source: Daiwa forecasts

the market from all sides, forcing Gamevil to increase its
                                                                Share price performance
R&D costs and marketing expenses.
                                                                    (W)                                                  (%)
                                                                84,000                                                     330
Key share-price catalysts
                                                                69,000                                                     270
Following our job-swap in Japan, we have become
                                                                54,000                                                     210
cautious about Gamevil’s long-term earnings outlook,
                                                                39,000                                                     150
due to: 1) increased competition from international
                                                                24,000                                                      90
peers, 2) latecomers’ aggressive marketing of free games,            Apr-11      Jul-11         Oct-11   Dec-11       Mar-12
and 3) its lack of social games and non-casual RPG titles.                    Gamevil Inc (LHS)          Relative to KOSPI (RHS)



The company plans to penetrate Japan’s mobile-game              12-month range                                                                 26,500-79,000
market directly with localised smartphone games.                Market cap (US$m)                                                                    360.43
However, we think it will take a long time for Gamevil          Average daily turnover (US$m)                                                          3.06
to gain market share, given that its line-up is focused         Shares outstanding (m)                                                                    6
                                                                Major shareholder                                                  Song, Byung-Joon (34.1%)
on sports and casual games. In our opinion, Gamevil
needs to invent a proprietary monetisation model for
                                                                Financial summary (W)
Japan, rather than provide a simple F2P service.
                                                                Year to 31 Dec                                          12E            13E              14E
                                                                Revenue (bn)                                              67            85              103
Recently, we have seen more free mobile game services           Operating profit (bn)                                     24            32               39
in Korea and globally as game developers attempt to             Net profit (bn)                                          21             28               35
enhance their user base, potentially valuable assets for        Core EPS                                              3,874          5,085            6,241
their F2P services in the future. In our view, this will        EPS change (%)                                          33.3          31.3              22.7
force the company’s marketing expenses to rise and              Daiwa vs Cons. EPS (%)                                     4             8               (1)
change its aggressive strategy, whereby it aims to              PER (x)                                                 19.0          14.5              11.8
monetise loyal gamers through in-app item sales.                Dividend yield (%)                                       0.0           0.0               0.0
                                                                DPS                                                   0.000          0.000            0.000
In addition, DeNA and Gree are gearing up to penetrate          PBR (x)                                                 4.6            3.5              2.7
                                                                EV/EBITDA (x)                                           12.8           9.1               7.0
the domestic market with proven social and mobile games,
                                                                ROE (%)                                                 27.4          27.5              25.8
which accounted for 75% of its 2011 revenue. We expect
                                                                Source: Bloomberg, Daiwa forecasts
this to lead to an increase in labour costs and royalties to

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  Key assumptions
Year to 31 Dec                           2007     2008     2009     2010     2011     2012E     2013E     2014E
Overseas revenue portion (%)               4.9      3.3      7.9     11.0     25.2      28.8      33.7      66.9
Domestic smartphone subscribers (m)          0        0        3       15       19        25        30        35
Comission and royalty costs to total
                                                   21.4     31.9     31.8     55.1      63.5      64.6      65.6
costs (%)




  Profit and loss (Wbn)
Year to 31 Dec                           2007     2008     2009     2010     2011     2012E     2013E     2014E
Feature phone game                          10       15        24       24       12         8         7         6
Smartphone game                               0        0        0        7       31        58        78        97
Others                                        0        0        0      (2)        0         0         0         0
Total revenue                               10       15        24       29       43        67        85      103
Other income                                  0        0        0        0        0         0         0         0
COGS                                          0        0        0        0        0         0         0         0
SG&A                                        (9)      (9)     (11)     (13)     (25)      (43)      (53)      (64)
Other op. expenses                            0        0        0        0        0         0         0         0
Operating profit                              1        6       14       15       17        24        32        39
Net-interest inc./(exp.)                      2        2        4        4        2         3         3         5
Assoc/forex/extraord./others                (2)      (2)      (3)      (2)        0         0         0         0
Pre-tax profit                                1        7       14       18       20        27        35        43
Tax                                           0      (1)      (3)      (3)      (4)       (5)       (7)       (9)
Min. int./pref. div./others                   0        0        0        0        0         0         0         0
Net profit (reported)                         1        5       12       15       16        21        28        35
Net profit (adjusted)                         1        5       12       15       16        21        28        35
EPS (reported) (W)                         399    1,150    2,333    2,676    2,906     3,874     5,085     6,241
EPS (adjusted) (W)                         399    1,150    2,333    2,676    2,906     3,874     5,085     6,241
EPS (adjusted fully-diluted) (W)           399    1,150    2,333    2,676    2,921     3,913     5,137     6,304
DPS (W)                                  0.000    0.000    0.000    0.000    0.000     0.000     0.000     0.000
EBIT                                          1        6       14       15       17        24        32        39
EBITDA                                        2        7       14       16       19        27        36        43



  Cash flow (Wbn)
Year to 31 Dec                           2007     2008     2009     2010     2011     2012E     2013E     2014E
Profit before tax                            1        7       14       18      20         27        35        43
Depreciation and amortisation                1        1        1        1        1         2         4         5
Tax paid                                     0        1        1        0        0         4         2         2
Change in working capital                    0        0        1      (3)        0         0         2         1
Other operational CF items                   1      (2)      (3)      (4)      (4)       (5)       (7)       (9)
Cash flow from operations                    2        7       14       12      18         28        36        43
Capex                                      (3)      (1)      (1)        0      (5)      (12)      (15)      (15)
Net (acquisitions)/disposals               (1)      (7)     (27)     (13)        4      (13)      (13)      (17)
Other investing CF items                     1        0        0        0        0         0         0         0
Cash flow from investing                   (3)      (7)     (28)     (13)      (1)      (25)      (28)      (31)
Change in debt                             (3)      (7)     (28)     (13)      (1)      (25)      (28)      (31)
Net share issues/(repurchases)               0        0       12        0      (1)         0         0         0
Dividends paid                               0        0        0        0        0         0         0         0
Other financing CF items                     4        7       28       13        1        25        28        31
Cash flow from financing                     1        0       12        0      (2)         0         0         0
Forex effect/others                          0        0        0        0        1         0         0         0
Change in cash                               1      (1)      (2)      (1)      15          3         8        11
Free cash flow                               0        6       13       12      12         16        21        28

Source: Company, Daiwa forecasts




                                       - 64 -
                                                                                                                                     Trading Places
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  Balance sheet (Wbn)
As at 31 Dec                          2007         2008        2009        2010         2011      2012E       2013E       2014E
Cash & short-term investment               5          11           36          47          57          70          85        105
Inventory                                  0            0           0           0           0           0           0          0
Accounts receivable                        2            3           3           6           0           0           0          0
Other current assets                       0            0           1           1          10          10          10         11
Total current assets                       7          14           40          54          67          80          96        116
Fixed assets                               3            3           3           3           5           7          11         20
Goodwill & intangibles                     1            1           1           1           3          11          19         20
Other non-current assets                   0            0           0           1           3           5          11         19
Total assets                             12           19           45          59          78        104         136         174
Short-term debt                            0            0           0           0           0           0           0          0
Accounts payable                           0            0           0           0           0           0           0          0
Other current liabilities                  1            2           4           4           8          12          15         18
Total current liabilities                  1            2           4           4           8          12          15         19
Long-term debt                             2            2           1           1           1           2           2          2
Other non-current liabilities              0            0           1           1           1           1           2          2
Total liabilities                          3            4           6           6          10          15          19         23
Share capital                              2            2           3           3           3           3           3          3
Reserves/R.E./others                       7          12           36          51          66          86        114         148
Shareholders' equity                       9          14           39          53          68          88        117         151
Minority interests                         0            0           0           0           0           0           0          0
Total equity & liabilities               12           19           45          59          78        104         136         174
EV                                      319          320         356         346         336         324         309         289
Net debt/(cash)                          (3)          (9)        (34)        (46)        (56)        (68)        (83)      (103)
BVPS (W)                              2,006        3,122       7,010       9,673      12,323      15,956      21,041      27,282

  Key ratios (%)
Year to 31 Dec                         2007         2008        2009        2010         2011      2012E       2013E       2014E
Sales (YoY)                            (7.4)         48.4        58.7        16.9         49.4       56.6        27.6        20.7
EBITDA (YoY)                          139.4        230.6         98.7        13.5         13.9       43.0        34.0        21.7
Operating profit (YoY)                106.7        316.5       118.1         13.6         13.1       38.3        31.5        21.4
Net profit (YoY)                       (7.1)       454.1       124.0         24.7          8.9       33.6        31.3        22.7
EPS (YoY)                            (91.0)        188.3       102.8         14.7          8.6       33.3        31.3        22.7
Gross-profit margin                     n.m.         n.m.        n.m.        n.m.         n.m.       n.m.        n.m.        n.m.
EBITDA margin                           21.1         47.0        58.8        57.1         43.5       39.7        41.7        42.1
Operating-profit margin                 14.5         40.6        55.8        54.2         41.0       36.2        37.3        37.5
ROAE                                    11.2         44.8        44.6        32.1         26.4       27.4        27.5        25.8
ROAA                                      8.6        34.2        37.4        28.5         23.5       23.6        23.5        22.3
ROCE                                    15.3         45.5        48.2        32.5         28.2       30.2        30.3        28.3
ROIC                                    23.8         89.0      238.6       203.8        140.1       115.9        93.0        75.0
Net debt to equity                 net cash     net cash    net cash    net cash     net cash    net cash    net cash    net cash
Effective tax rate                      15.2         20.4        17.5        22.3         18.9       20.0        20.0        20.0
Accounts receivable (days)             72.5          60.0        49.1        57.3         24.1         0.0         0.0         0.0
Payables (days)                          0.0          0.0         0.0         0.0          0.0         0.0         0.0         0.0
Net interest cover (x)                   n.a.        n.a.        n.a.        n.a.         n.a.        n.a.        n.a.        n.a.
Net dividend payout                      0.0          0.0         0.0         0.0          0.0         0.0         0.0         0.0
Source: Company, Daiwa forecasts




                                                                                    - 65 -
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                                                                 29% of 2012 revenue (28% in 2011), due to the growing
                                                                 number of paid gamers and service-region expansion.

                                                                 We are confident about Nexon’s ability to monetise the
                                                                 huge casual-gamer base in Asia, with ongoing game-
Nexon (3659 JP)                                                  content updates and effective monetisation strategies. On
                                                                 21 February, Nexon raised its 1Q12 revenue and net-profit
Rating: Buy                                                      targets by 18.1% and 45.1%, respectively, to reflect
Target price: ¥1,400 →¥1,650 (+14.7%)                            stronger-than-expected game sales from the core titles in
                                                                 Asia and the favourable foex rate YTD.
Thomas Y. Kwon
(82) 2 787 9181                                                  Valuation
yskwon@kr.daiwacm.com
                                                                 The stock is trading currently at PERs of 15.4x and
Koki Shiraishi                                                   13.7x on our respective 2012 and 2013 EPS forecasts.
(81) 3 5555 7083                                                 We believe it deserves to trade at a premium to the
koki.shiraishi.rc@jp.daiwacm.com
                                                                 market leaders in the desktop-gaming sector globally
                                                                 due to its strong presence in online-game markets
Strong sales momentum,                                           overseas and the strong earnings upside we expect
                                                                 from its affiliates in Korea. The key risks to our call
good earnings visibility                                         would be a sharp fall in revenue from the two flagship
                                                                 titles and tighter online-game regulation.
What we recommend
                                                                 Forecast revisions (%)
We reiterate our Buy (1) rating and are raising our six-         Year to 31 Dec                                             12E          13E             14E
month target price to ¥1,650 from ¥1,400, based on a             Revenue change                                              9.2          8.4            n.a.
revised target PER of 17.5x (the average PER for the             Net-profit change                                          15.1         10.7            n.a.
market leaders in desktop gaming globally) on our revised        EPS change                                                 14.7         10.2            n.a.
2012 EPS forecast. In our view, investors have yet to fully      Source: Daiwa forecasts

appreciate Nexon’s highly scalable revenue model and
                                                                 Share price performance
visible earnings, which should lead to higher multiples.
                                                                     (¥)                                                  (%)
                                                                 1,700                                                      110
Key share-price catalysts
                                                                 1,500                                                      100
Following our meetings with the company’s Japanese
                                                                 1,300                                                      90
peers and based on our market research in Japan, we
                                                                 1,100                                                      80
believe Nexon is enhancing its brand equity significantly
                                                                     900                                                     70
and gearing up for new game launches. By leveraging on                13-Dec-11    10-Jan-12  7-Feb-12    6-Mar-12
its internal R&D expertise to develop diverse games, the                          Nexon (LHS)            Relative to TOPIX (RHS)

company could benefit from strong casual game demand
on a range of game platforms. It plans to roll out more          12-month range                                                                   1,053-1,450
than 30 new games for smart devices and three medium-            Market cap (US$bn)                                                                     7.43
sized RPGs in 2012.                                              Average daily turnover (US$m)                                                         23.31
                                                                 Shares outstanding (m)                                                                  428
Meanwhile, Dungeon & Fighters and Maplestory in China            Major shareholder                                                               NXC (58.7%)

have seen strong game demand YTD following game-
                                                                 Financial summary (¥)
episode updates. Of note, we learned that Nexon’s affiliate
                                                                 Year to 31 Dec                                           12E           13E              14E
in Korea has been promoting in-game items for key
                                                                 Revenue (bn)                                             113           130              144
casual-game titles since February. While the market is           Operating profit (bn)                                     53            61               67
concerned about the recent regulatory initiatives, we do         Net profit (bn)                                           40            45               49
not expect any material impact on Nexon Korea’s game             Core EPS                                              93.240           105              115
sales or monetisation plans.                                     EPS change (%)                                          54.3           12.4              9.5
                                                                 Daiwa vs Cons. EPS (%)                                   9.1            0.1           (10.7)
In our view, investors should note the recent rise in the        PER (x)                                                 15.4           13.7             12.5
enterprise values of Neople and JCE in Korea, as these           Dividend yield (%)                                       0.0            0.0             0.0
affiliates have successfully commercialised new games            DPS                                                    0.000          0.000           0.000
(Cyphers and Rule The Sky, respectively) in Korea and are        PBR (x)                                                   2.9           2.4              2.0
likely to publish them in China and other markets. We            EV/EBITDA (x)                                             7.5           6.3              5.3
                                                                 ROE (%)                                                 20.5           19.0            17.3
forecast the revenue from these affiliates to account for
                                                                 Source: Bloomberg, Daiwa forecasts

                                                            - 66 -
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  Key assumptions
Year to 31 Dec                                          2008        2009         2010        2011       2012E        2013E       2014E
Ex-Japan revenue portion (%)                             80.0        76.6         82.6        85.1        86.9         85.3        85.6
Revenue contribution from Nexon Korea (%)                53.0        40.0         50.0        48.7        51.9         50.3        49.9
Nexon Korea's royalty revenue portion (%)                39.3        45.1         51.8        63.2        64.0         66.7        68.4




  Profit and loss (¥bn)
Year to 31 Dec                                         2008        2009         2010         2011       2012E        2013E       2014E
Korean customers                                           18          17           25          29           39           43          46
Chinese customers                                           6          14           22          33           44           50          57
Others                                                     16          20           24          26           30           37          42
Total revenue                                              40          52           70          88         113          130         144
Other income                                                0           0            0           0            0            0           0
COGS                                                      (8)        (10)         (12)        (15)         (19)         (23)        (27)
SG&A                                                     (22)        (22)         (28)        (34)         (40)         (45)        (50)
Other op. expenses                                          0           0            0           0            0            0           0
Operating profit                                           10          20           30          38           53           61          67
Net-interest inc./(exp.)                                    0           0            0           0            1            1           2
Assoc/forex/extraord./others                                1           4          (1)         (3)            0            0         (1)
Pre-tax profit                                             11          24           29          35           55           62          68
Tax                                                       (3)         (6)          (8)        (10)         (15)         (17)        (19)
Min. int./pref. div./others                                 0           0            0           0            0            0           0
Net profit (reported)                                       8          18           22          26           40           45          49
Net profit (adjusted)                                       8          18           22          26           40           45          49
EPS (reported) (¥)                                     2,349       5,004        6,132      60.437       93.240          105         115
EPS (adjusted) (¥)                                     2,349       5,004        6,132      60.437       93.240          105         115
EPS (adjusted fully-diluted) (¥)                       2,349       5,004        6,132      60.437       93.240          105         115
DPS (¥)                                                0.000       0.000          300       0.000        0.000        0.000       0.000
EBIT                                                       10          20           30          38           53           61          67
EBITDA                                                     15          28           41          50           65           72          78



  Cash flow (¥bn)
Year to 31 Dec                                          2008        2009         2010        2011       2012E        2013E       2014E
Profit before tax                                          11         24            29          35          55           62          68
Depreciation and amortisation                               5           8           11          12          11           11          11
Tax paid                                                  (5)         (5)         (10)        (14)        (18)         (17)        (19)
Change in working capital                                   2         (5)            1         (1)         (1)          (1)           0
Other operational CF items                                  0         (4)            2           8         (1)            0           1
Cash flow from operations                                  13         19            34          40          47           55          59
Capex                                                     (3)         (2)          (2)        (14)        (15)         (15)         (8)
Net (acquisitions)/disposals                             (39)         (5)         (28)         (2)        (10)          (8)         (5)
Other investing CF items                                    1           0            1        (13)           0            0           0
Cash flow from investing                                 (41)         (6)         (29)        (29)        (25)         (24)        (13)
Change in debt                                             26         (7)            3         (2)         (3)            0           0
Net share issues/(repurchases)                              0           0            0          87           0            0           0
Dividends paid                                              0           0            0         (1)           0            0           0
Other financing CF items                                    0           0            0         (1)           0            0           0
Cash flow from financing                                   26         (7)            3          83         (3)            0           0
Forex effect/others                                         4           1          (4)         (1)           0            0           0
Change in cash                                              3           7            4          93          19           31          46
Free cash flow                                             10         17            32          26          31           39          51

Source: Company, Daiwa forecasts
Note: The company made a 1:100 share split on ordinary shares on 21 July 2011, but no retroactive adjustments have been made for per
share data; Growth rate of per share data for 2011E is calculated on retroactively adjusted basis.




                                       - 67 -
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  Balance sheet (¥bn)
As at 31 Dec                       2008       2009        2010         2011       2012E       2013E       2014E
Cash & short-term investment          20         31         33           132         151         182         228
Inventory                              0          0           0            0           0           0           0
Accounts receivable                    4          9         11            14          18          21          23
Other current assets                   2          2           3            4           6           6           7
Total current assets                  25         42         47           151         175         209         258
Fixed assets                           3          4           7           16          28          38          41
Goodwill & intangibles                40         40         56            44          37          31          26
Other non-current assets               7          9         13            25          34          42          46
Total assets                          76         95        124           236         273         320         371
Short-term debt                        0          0           4            3           3           3           3
Accounts payable                       0          1           1            1           1           2           2
Other current liabilities              8         14         18            21          25          27          30
Total current liabilities              8         15         22            25          29          32          34
Long-term debt                        25         18         20            19          15          14          14
Other non-current liabilities         16         16         15            15          12          12          12
Total liabilities                     49         49         57            58          56          58          61
Share capital                          4          4           4           50          50          50          50
Reserves/R.E./others                  23         42         59           124         164         209         258
Shareholders' equity                  27         46         63           174         214         259         308
Minority interests                     0          0           4            3           3           3           2
Total equity & liabilities            76         95        124           236         273         320         371
EV – Delete row                        7        (8)         (1)          478         459         429         384
Net debt/(cash)                        5       (13)         (9)        (111)       (133)       (165)       (210)
BVPS (¥)                           7,668    13,003      17,819           409         500         605         720

  Key ratios (%)
Year to 31 Dec                     2008        2009        2010         2011      2012E       2013E       2014E
Sales (YoY)                         n.a.        28.2        35.3         25.6       28.9        15.0        11.0
EBITDA (YoY)                        n.a.        87.1        44.4         22.7       29.0        11.3          8.4
Operating profit (YoY)              n.a.      101.5         49.9         26.7       39.1        14.6        10.5
Net profit (YoY)                    n.a.      113.0         22.5         19.0       54.7        12.7          9.5
EPS (YoY)                           n.a.      113.0         22.5        (1.7)       54.7        12.4          9.5
Gross-profit margin                 80.6        81.5        82.9         82.9       82.9        82.0        81.5
EBITDA margin                       37.6        54.8        58.5         57.2       57.2        55.4        54.1
Operating-profit margin             24.8        39.0        43.3         43.7       47.1        47.0        46.8
ROAE                                n.a.        48.4        39.8         21.7       20.5        19.0        17.3
ROAA                                n.a.        20.7        19.8         14.3       15.7        15.1        14.2
ROCE                                n.a.        34.6        39.0         26.4       24.5        23.7        22.2
ROIC                                n.a.        45.3        48.5         44.3       50.8        48.5        49.2
Net debt to equity                  19.9   net cash    net cash     net cash    net cash    net cash    net cash
Effective tax rate                  27.5        26.0        27.1         28.0       28.0        28.0        28.0
Accounts receivable (days)          n.a.        47.4        52.7         51.3       51.2        53.9        54.8
Payables (days)                     n.a.         4.4         4.9          3.9         3.6         3.9         4.2
Net interest cover (x)              n.a.        64.3      117.0          n.a.        n.a.        n.a.        n.a.
Net dividend payout                  0.0         0.0         4.9          0.0         0.0         0.0         0.0
Source: Company, Daiwa forecasts




                                                                   - 68 -
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                                                               Management has also recognised the risk of
                                                               government intervention. It is in daily contact with the
                                                               relevant government agencies, and has established a
                                                               committee with external experts tasked with improving
                                                               the user environment of social games. We acknowledge
Gree (3632 JP)                                                 the firm’s efforts in this area, but believe the most
                                                               effective means of alleviating investor concerns would
Rating: Hold                                                   be for the government to announce that it sees no
Target price: ¥2,600 (+25.8%)                                  problems with the current set-up.

Koki Shiraishi                                                 However, as we see this as unlikely, we expect the stock
(81) 3 5555 7083                                               to trade at a PER of just 10x, in line with the average
koki.shiraishi.rc@jp.daiwacm.com
                                                               for domestic demand-oriented firms experiencing a
                                                               slowdown in growth, and those affected by regulations.
Near-term challenges likely                                    Valuation
to remain in place                                             The company’s financial year end is 30 June. Our
                                                               target price is based on a PER of about 10x on the
What we recommend                                              average of our FY11 and FY12 earnings forecasts.
We maintain our Hold (3) rating for Gree and target
price of ¥2,600, as we are concerned about the                 Share price performance
potential risk of government regulation for the                             (Y )                                 R el ative to T OP IX
                                                                   3,00 0                                                            6 10
Japanese social game market.
                                                                   2,30 0                                                             4 80
Key share-price catalysts
Although Gree continued to enjoy solid earnings                    1,60 0                                                             3 50

growth in FY11, we recently downgraded our rating, as:
1) we believe the prospect of an earnings surprise has               90 0                                                             2 20

diminished because, on the whole, earnings are
                                                                     20 0                                                             90
beginning to rise for listed companies, and 2) we now                    4 /0 9     1 1/0 9     6/10   1 /1 1     8/11        3/12
see greater risk of administrative guidance targeting
                                                               Source: Compiled by Daiwa
functions used in the core social games business.
                                                               Market data (consol)
Despite these negatives, we raise our FY12-13                  12-month range                                                                   1,330-2,840
earnings forecasts for the company and do not expect           Market cap (¥m)                                                                      481,317
its business scale to shrink. However, we believe the          Shares outstanding (000; 3/12)                                                      232,858
risks from a possible change in the government’s               Major shareholder (%, 12/11)                                                             22
regulatory stance would limit the stock’s valuation
multiple expansion, given the difficulty for investors         Investment indicators (consol)
to get a grasp on developments within the Japanese                                                                6/11             6/12E             6/13E
government.                                                    PER (x)                                            25.9                 9.1              6.9
                                                               EV/EBITDA (x)                                      14.7                 4.8              3.8
                                                               PBR (x)                                           12.67                   -                -
Although game services where in-game items are
                                                               Dividend yield (%)                                 0.44               0.53             0.58
awarded randomly have never been illegal in Japan,
                                                               ROE (%)                                               -                  -                -
such games enjoy little popularity in the US and
Europe. Furthermore, the regulatory agencies in South          Income summary (consol)
Korea and China generally do not allow games with              (¥m)                                               3/11               3/12E           3/13E
such features. This means that although overseas               Sales                                            64,178          171,000            224,000
expansion is viewed as a future earnings growth area,          Op profit                                        31,135           94,000            117,000
the company will probably either have to either adopt a        Rec profit                                       30,828            94,000           117,000
new business model or introduce new functions.                 Net income                                       18,239            53,000            70,000
                                                               EPS (¥)                                            79.9             227.6             300.6
                                                               DPS (¥)                                               9               11                 12
                                                               Source: Company, Daiwa forecasts




                                                          - 69 -
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  Gree: income summary (¥m, YoY %)
                 Year to            Sales              Op profit        Pre-tax income         Net income     EPS (¥)     C PS (¥) DPS (¥)
Consolidated     6/0                13,945    (375)     8,361 (697)         8,328 (692)         4,467 (668)     207.7       208.6    5.00
                 6/10               35,231    (153)    19,578 (134)        19,595 (135         11,505 (158)      55.8       256.9   25.00
                 6/11               64,178     (82)    31,135    (59)      30,828    (57)      18,239    (59)    79.9        80.7    9.00
                 6/12 E            171,000    (166)    94,000 (202)        94,000 (205)        53,000 (191)     227.6       228.5   11.00
                 6/13 E            224,000     (31)   117,000    (24)    117,000     (24)      70,000    (32)   300.6       301.7   12.00
                 6/14 E            237,000      (6)   121,000     (3)    121,000      (3)      73,000     (4)   313.5       314.6   12.00
                 6/12 CP                  -       -         -       -            -      -            -      -       -            -       -
Source: Company, Daiwa forecasts
Note 1: E: Daiwa forecasts, CP: company projections
Note 2: Conducted a 5-for-1 stock split in October 2010, after its 2-for-1 stock split in October 2009
Note 3: Earnings reflect non-consolidated figures through FY09. FY10 YoY change figures are comparisons with non-consolidated FY09
Note 4: Company has disclosed ranges for FY11 targets: revenue, ¥160-170bn (prev. estimates, ¥130-140bn); operating profit, ¥80-90bn
(¥60-70bn); recurring profit, ¥80-90bn (¥60-70bn); net income, ¥44-50bn (¥33-39bn); EPS, ¥189.99-215.90 (¥142.70-168.65).



  Gree: cash flow (¥m)
                                                                            FY06            FY07          FY08        FY09           FY10
     Net income                                                              (99)           1,024         8,328      19,410         30,935
     Depreciation                                                               2                7            20          52           180
     Other                                                                     24               30      (2,627)     (7,832)       (15,437)
Cash flows from operating activities                                                          (73)        1,061       5 721         11,630
     Purchases o tangible fixed assets                                       (19)             (35)          (44)      (131)          (539)
     Purchases of intangible fixed assets                                       0                0             0      (143)          (190)
     Other                                                                   (30)             (59)          (41)   (10,519)        (2,543)
Cash flows from investing activities                                         (49)             (94)          (85)   (10,793)        (3,272)
     Dividends paid                                                             0                0             0      (111)        (1,128)
     Other                                                                   362                 0        3,665           35            38
Cash flows from financing activities                                         362                 0        3,665         (76)       (1,090)
Effect of exchange rate fluctuations                                            0                0             0           0         (415)
Net increase in cash and cash equivalents                                    240              967         9,302         759         10,900
Cash and cash equivalents at end of year                                     324            1,292       10,594       11,354         22,254
Source: Company, Daiwa forecasts


  Gree: balance sheet (¥m)
                                                                            FY06            FY07          FY08           FY09        FY10
Assets
     Cash and cash equivalents                                                324            1, 92      10,594          21,354     22,254
     Account receivable                                                        85             849        3,775           7,682     16,944
     Deferred tax assets                                                        0             128           531          1,100      2,324
     Allowance for doubtful accounts                                            0             (73)        (158)          (251)      (406)
     Other                                                                     47             184           553          1,018      6,491
Current assets                                                                456           2,380       15,295          30,903     47,607
Tangible fixed assets                                                          17               47           82            150        959
Intangible fixed assets                                                         0                2            7            151     10,246
Investments and other assets                                                   36             152           234            965      4,043
     Securities                                                                 0                0            0             39      2,501
     Deferred tax assets                                                        0               59          107            319          0
     Other                                                                     36               93          127            607      1,542
Fixed assets                                                                   53             201           324          1,267     15,248
     Accounts payable other                                                   111             884        1,982           4,058     13,757
     Income taxes payable                                                       2             638        4,047           6,617      9,967
     Other                                                                     27             108           468            942      1,478
Current liabilities                                                           140           1,630         6,497         11,617     25,202
     Bonds                                                                      0                0            0              0          0
     Long-term borrowings                                                       0                0            0              0          0
     Other                                                                      0                0            0              0        191
Long-term liabilities                                                           0                0            0              0        191
Net assets                                                                    370             952         9,122         20,552     37,462
Liabilities                                                                   140           1,630         6,497         11,617     25,393
Total shareholders' equity                                                    510           2,582       15,619          32,170     62,855
Source: Company, Daiwa forecasts
Note: Earnings reflect non-consolidated figures through 2Q FY10




                                            - 70 -
                                                                                                                             Trading Places
                                                                                                                                               4 April 2012




                                                                 The FY11 earnings outlook does not look too rosy given
                                                                 a release schedule light on mainstay titles in packaged
                                                                 software games compared with FY10. However, the
                                                                 company has a richer line-up planned for FY12 in each
                                                                 sub-segment, including packaged software (Biohazard
Capcom (9697 JP)                                                 6, Steel Battalion), browser games (Onimusha), social
                                                                 games (Monster Hunter, Shrek), and pachinkio/
Rating: Outperform                                               pachislot titles (Monster Hunter, Sengoku Basara). The
Target price: ¥2,000 →¥2,200 (+13.8%)                            strong development pipeline in FY11 suggests the
                                                                 possibility of consecutive record profit through to FY13,
Koki Shiraishi                                                   making Capcom our top pick among the packaged
(81) 3 5555 7083                                                 software game developers over the medium term.
koki.shiraishi.rc@jp.daiwacm.com

                                                                 We see the risks to our target price as: 1) delays in
New games should boost                                           launching of blockbuster titles, and 2) the
                                                                 government's regulatory changes for the Pachinko and
earnings from 2013                                               Pachislot industries.

                                                                 Share price performance
We maintain our Outperform (2) rating but raise our
target price to ¥2,200 (from ¥2,000) after revising up                          (Y )                                    R e l a ti ve to T OP IX
                                                                     2 ,4 0 0                                                                  140
our FY12 earnings forecast. Our target price is based on
a PER of 12x on our FY12 EPS forecast, which is in line              2 ,0 0 0                                                                  120
with the average of its Japanese peers.
                                                                     1 ,6 0 0                                                                  100

Key share-price catalysts
We remain bullish on the medium-term outlook. We                     1 ,2 0 0                                                                  80

cut our 2011 earnings forecasts following the                          800                                                                     60
company’s weak 3Q FY11 results, which were only due                          4 /0 9    1 1 /0 9   6 /1 0   1 /1 1        8 /1 1       3 /1 2
to a title launch being delayed. However, we still expect
                                                                 Source: Compiled by Daiwa Securities CM
a record profit for FY12.
                                                                 Market data (consol)
The company did not change its full-year FY11                    12-month range                                                                      1,471-2,311
guidance in its 3Q FY11 results announcement.                    Market cap (¥m)                                                                        111,311
However, it did say that Dragon’s Dogma, a new                   Shares outstanding (000; 3/12)                                                          57,584
packaged software title that had been due for launch             Major shareholder (%, 9/11)                                                               30.5
during FY11 and expected to sell 1.5m units, would be
delayed. It estimated the full-year impact would be              Investment indicators (consol)
about ¥5bn on sales and over ¥1bn on operating profit.                                                                3/11            3/12E               3/13E
                                                                 PER (x)                                              14.7             16.6                10.1
However, the company believed the strong
                                                                 EV/EBITDA (x)                                         4.8               6.7                 4.8
performances of other segments, especially mobile
                                                                 PBR (x)                                              1.97                 -                   -
content and arcade operations, would offset this.
                                                                 Dividend yield (%)                                   2.07              2.07               2.07
                                                                 ROE (%)                                              13.8                 -                  -
Our forecasts had already factored in overly optimistic
revenue for these businesses, so we cut them to reflect          Income summary (consol)
the impact of the delayed game launch.                           (¥m)                                                 3/11             3/12E              3/13E
                                                                 Sales                                              97,716           84,000             105,000
Although we cut our FY11 forecasts, the swing factor in          Op profit                                          14,295           12,300              18,500
our assessment of the company will be the degree of              Rec profit                                         12,861           11,600              18,500
earnings growth following the resumption of major title          Net income                                          7,750            6,700              11,000
releases (Resident Evil 6, etc.) by the mainstay                 EPS (¥)                                             131.2             116.4                191
packaged software business from FY12.                            DPS (¥)                                               40                 40                 40
                                                                 Source: Company, Daiwa forecasts




                                                            - 71 -
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  Capcom: income summary (¥m, YoY %)
                 Year to            Sales              Op profit        Pre-tax income         Net income     EPS (¥)   CFPS (¥) DPS ¥)
Co solidated     3/09               91,878    (11)     14,618    (11)      13,808    (13)       8,063     (3)   131.0      198.3  35.00
                 3/10               66,837   (-27)      5,587 (-62)         5 530 (-60)         2,167 (-73)      35.7       91.2  35.00
                 3/11               97,716    (46)     14,295 (156)        12,861 (133)         7,750 (258)     131.2      187.3  40.00
                 3/12 E             84,000   (-14)     12,300 (-14)        11,600 (-10)         6,700 (-14)     116.4      171.9  40.00
                 3/13 E            105,000    (25)     18,500    (50)      18,500    (59)      11,000    (64)   191.0      244.9  40.00
                 3/14 E            110,000     (5)     19,400     (5)      19,400      (5)     11,500     (5)   199.7      253.5  40.00
                 3/12 CP            86,000   (-12)     12,100 (-15)        12,000     (-7)      7,000 (-10)     120.9          -  40.00
Source: Company, Daiwa forecasts
Note: E: Daiwa forecasts, CP: company projections

  Capcom: cash flow (¥m)
                                                                            FY06           FY07          FY08         FY09         FY10
       Income Before Income Taxes                                           9,986        11,962         12,448        1,124      10,807
       Depreciation And Amortization                                        2 774          3,393         4,143        3,368         ,315
       Impairment Loss                                                                       181         1,146          223          149
       Amortization Of Goodwil                                                   2              0          481          229          239
       Increase Decrease In Allowance For Doubtful Accounts                   137            (99)        (198)        (351)          (56)
       Increase Decrease In Provision For Bonuses                             676            345             43       (755)        1,180
       Interest And Dividends Income                                        (900)        (1,161)         (923)        (438)        (142)
       Interest Expenses                                                        72             71            86         165          143
       Foreign Exchange Losses Gains                                        (396)          1,601             40         162        1,039
       Decrease Increase In Notes And Accounts Receivable Trade             1,659        (3,911)      (14,933)      20,897       (5,531)
       Decrease Increase In Inventories                                     (252)          (782)       (2,345)        1,095          409
       Decrease Increase In Work In Progress For Game Software              2,933        (2,962)       (4,052)      (5,545)        3,246
       Increase Decrease In Notes And Accounts Payable Trade                  186              56        2,945      (5,952)        2,264
       Other                                                                  719          (868)           927        2,617        6,269
       Subtotal                                                            17,596          7,826         (192)      16,839       23,331
       Interest And Dividends Income Received                                 876          1,160           948          335          141
       Interest Expenses Paid                                                 (67)           (71)          (88)       (167)        (144)
       Payments For Loss On Litigation                                                     (420)         (126)                     (161)
       Income Taxes Paid                                                   (2,444)       (1,041)       (1,092)      (2,687)        (774)
Net Cash Provided By Used In Operating Activities                          16,063          7,452         (551)      14,320       22,392
       Purchase Of Property Plant And Equipment                            (3,804)       (3,119)       (2,419)      (1,693)      (1,734)
       Purchase Of Intangible Assets                                         (671)       (1,271)         (964)        (289)        (429)
       Purchase Of Investment Securities                                     (116)         (565)           (12)        (12)          (12)
       Purchase Of Investments In Subsidiaries Resulting In Change         (1,612)                         (18)                    (482)
       In Scope Of Consolidation
       Other                                                                6,360            5,139        3,765         376          611
Net Cash Provided By Used In Investment Activities                            157              184          352     (1,618)      (2,046)
       Decrease In Short Term Loans Payable                                    55                            (6)    (2,555)     (12,500)
       Proceeds From Long Term Loans Payable                                                              4,400                    3,000
       Repayment Of Long Term Loans Payable                                 (700)            (700)      (2,119)       (711)        (711)
       Repayments Of Lease Obligations Fin CF                                                             (334)       (525)        (640)
       Purchase Of Treasury Stock                                         (3,251)                         (144)     (5,125)           (2)
       Cash Dividends Paid                                                (1,337)        (1,732)        (2,147)     (1,829)      (2,064)
       Other                                                              (9,973)           (16)               8         (2)          (2)
Net Cash Provided By Used In Financing Activities                        (15,206)        (2,448)          (342)    (10,747)     (12,919)
Effect Of Exchange Rate Change On Cash And Cash Equivalents                   203        (3,887)          (845)       (751)      (2,230)
Net Increase Decrease In Cash And Cash Equivalents                        (5,654)        (2,256)        (4,454)       1,203        5,196
Cash And Cash Equivalents At Beginning Of Year                             40,652        35,020         32,763       28,611       29,815
Cash And Cash Equivalents At End Of Year                                   35,020        23,763         28,611       29,815       35,011
Source: Company, Daiwa forecasts




                                         - 72 -
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                                                                                          4 April 2012




  Capcom: balance sheet (¥m)
                                                     FY06      FY07        FY08      FY09        FY10
Assets
Current assets                                      60,089    62,505     78,806     61,303      67,176
     Cash and cash equivalents                      35,020    32,763     28,611     29,865      35,011
     Accounts receivable                            11,417    14,182     27,894      6,288      11,700
     Inventories                                      6,903   10,385     17,020     17,063      12,707
     Deferred tax assets                              3,215    3,009      2,712      3,204       5,210
     Other                                            5,077    2,620      2,949      4,927       2,582
     Allowance for doubtful accounts                (1,543)    (456)      (383)        (48)        (37)
Fixed assets                                                  31,389     31,101     27,404      23,232
     Tangible fixed assets                          15,500    15,253     15,217     14,049      13,532
     Intangible fixed assets                         2,277     4,091      3,574      3,227       3,071
     Investments and other assets                   13,611    11,755      8,612      8,040       6,628
          Investment securities                      1,794     1,728        920        957         390
          Other                                     11,817    10,027      7,692      7,083       6,238
Total assets                                        91,478    93,606    106,210     86,621      90,408
Liabilities
Current liabilities                                 19,747    34,818     38,415     25,211      24,950
     Accounts payable                                7,489      7,303      9,682      3,477       5,665
     Short-term borrowings                             755      2,015    15,766     13,211        3,711
     Long-term borrowings due within one year            -    14,997         400          --          --
     Other                                          11,503    10,503     12,567       8,523     15,574
Long-term liabilities                               26,586      5,128      8,445      7,453       7,450
     Corporate bonds                                21,635      1,220          --         --          --
     Long-term borrowings                            3,430      1,470      5,067      4,355       3,644
     Retirement benefit reserve                        933      1,048      1,171      1,388       1,382
     Other                                             588      1,390      2,207      1,710       2,424
Total liabilities                                   46,334    39,946     46,861     32,665      32,400
Total net assets                                    45,144    53,660     59,349     53,956      58,007
     Total shareholders' equity                     44,970    56,447     63,152     58,689      64,370
          Common stock                              29,915    32,626     33,039     33,239      33,239
          Capital surplus                           17,637    20,344     21,129     21,328      21,328
          Retained earnings                          5,555    11,631     17,000     17,262      22,945
          Valuation and translation adjustments        157    (2,787)    (3,803)    (4,732)     (6,362)
          Minority interests                            16          -          --         --          --
Total liabilities and net assets                    91,478    93,606    106,210     86,621      90,408
Source: Company, Daiwa forecasts




                                           - 73 -
                                                                                                                         Trading Places
                                                                                                                                            4 April 2012




                                                               We expect FY12 earnings to be driven largely by big-
                                                               name titles in multiple genres, including packaged
                                                               software (Hitman, Tomb Raider games), MMORPGs
                                                               (Final Fantasy 14, Dragon Quest 10), and browser
                                                               games (Monster Dragon).
Square Enix (9684 JP)                                          Of particular interest to investors is the potential in
Rating: Hold → Outperform                                      each area for the emergence of sustained revenue
Target price: ¥1,650 →¥1,900 (+10.6%)                          streams different from the one-off income seen with
                                                               traditional packaged software, including monthly
Koki Shiraishi                                                 subscriptions and digital-item sales.
(81) 3 5555 7083
koki.shiraishi.rc@jp.daiwacm.com
                                                               We see the risks to our target price as: 1) delays in
                                                               launching of blockbuster titles, and 2) the divulging of
                                                               user information for the on-line game business.
Upgrade to Outperform on
emerging earnings-growth                                       Share price performance

cycle on strong game line-up                                       2,700
                                                                            (Y )                                Relative to T OP IX
                                                                                                                                  130


                                                                   2,200                                                          110
What we recommend
We are upgrading our rating for Square Enix to                     1,700                                                          90
Outperform (2) from Hold (3).
                                                                   1,200                                                          70

The stock does not look particularly undervalued based
on our FY12 earnings forecast, but we see the potential             700                                                           50
                                                                         4/09       11/09       6/10   1/11      8/11      3/12
for a record profit level in FY13, when the company
should see meaningful contributions from the                   Source: Compiled by Daiwa Securities CM.

recurring revenue streams.
                                                               Market data (consol)
                                                               12-month range                                                                  1,233-1,878
We are adding the stock to our picks, given the                Market cap (¥m)                                                                    197,690
potential for further earnings upside based on its initial     Shares outstanding (000; 3/12)                                                     115,070
FY12 earnings guidance (due out in May) and the                Foreign ownership (%; 9/11)                                                           27.4
possibility of new titles being announced at the E3
Expo in June 2012.                                             Investment indicators (consol)
                                                                                                                 3/11             3/12E             3/13E
We are raising our target price to ¥1,900 (from ¥1,650),       PER (x)                                            NA               31.4              14.9
after revising up our FY13 earnings forecast. Our target       EV/EBITDA (x)                                      8.8               6.6               4.3
price is based on a target PER of 14x on our FY13 EPS          PBR (x)                                           1.48                 -                 -
forecast (we have used FY13 EPS in order to capture            Dividend yield (%)                                1.75              1.75              1.75
the full impact from the launch of MMORPG titles in            ROE (%)                                            NA                    -                -

the second half of FY12). We expect Square Enix’s
                                                               Income summary (consol)
earnings sustainability to be higher than its Japanese
                                                               (¥m)                                               3/11          3/12E               3/13E
peers backed by the launch of some MMORPG titles in
                                                               Sales                                          125,271         128,000             151,000
FY12. We have therefore applied a 20% premium when             Op profit                                        7,325           13,000             23,500
calculating our target PER for Square Enix compared            Rec profit                                       5,390           12,000             23,000
to its peers.                                                  Net income                                     -12,043             6,300            13,300
                                                               EPS (¥)                                         -104.7              54.7             115.6
Key share-price catalysts                                      DPS (¥)                                             30                  30              30
Our focus is on the sharp operating profit growth we           Source: Company, Daiwa forecasts
forecast in FY11 (up 77% YoY) and FY12 (up 81% YoY),
although some may argue that low YoY bases are the
reason for this.




                                                          - 74 -
                                                                                                             Trading Places
                                                                                                                              4 April 2012




  Square Enix: income summary (¥m, YoY %)
                 Year to           Sales              Op profit         Pre-tax income          Net income       EPS (¥)    CFPS (¥ DPS ¥)
Consolidated     3/09             135,693 (-8)        12,277    (-4 )      11,261 (-40)           6,333 (-31)       55.1      115.8   30. 0
                 3/10             192,257 (42)        28,235 (130)         27,822 (147)            ,509    (50)     82.7      151.9  35.00
                 3/11             125,271 (-35)        7,325 (-74)          5,390 (-81)         -12,043 (loss) -104.7          -47.2 30.00
                 3/12 E           128,000 (2)         13,000    (77)       12,000 (123)           6,300 (profit)    54.7      111.2  30.00
                 3/13 E           151,000 (18)        23,500    (81)       23,000    (92)        13,300 (111)      115.6      172.1  30.00
                 3/14 E           151,000 (0)         26,200    (11)       25,700    (12)        15,000    (13)    130.4      186.8  30.00
                 3/12 CP          130,000 (4)         10,000    (37)       10,000    (86)         5,000 (profit)    43.5           - 30.00
Source: Company, Daiwa forecasts
Note: E: Daiwa forecasts, CP: company projections

  Square Enix: cash flow (¥m)
                                                                            FY06          FY07             FY08          FY09          FY10
       Income Before Income Taxes                                         16,681          9,153           10,026        10,026       (9,970)
       Depreciation And Amortization                                        9,933         6,978            7,962         7,962         6,608
       Amortization Of Goodwill                                              ,230         1, 04           13,906        13,906         9,9 8
       Impairment Loss                                                          9           859              255           255           437
       Increase Decrease In Allowance For Doubtful Accounts               (4,949)         (221)            (190)         (190)         (394)
       Interest And Dividends Income                                        (962)         (708)            (531)         (531)         (131)
       Foreign Exchange Losses Gains                                        1,670         1,255              990           990         2,206
       Decrease Increase In Notes And Accounts Receivable Trade             2,940         1,569         (14,157)      (14,157)       13,800
       Decrease Increase In Inventories                                   (2,365)       (4,273)            9,019         9,019       (4,827)
       Increase Decrease In Notes And Accounts Payable Trade              (3,095)         1,493            (890)         (890)       (2,007)
       Other                                                                2,253         2,527            3,133         3,133         2,297
       Subtotal                                                           23,345        19,736            29,523        29,523       17,927
       Interest And Dividends Income Received                                 974           713              163           163           198
       Interest Expenses Paid                                                   0            (1)             (31)          (31)          (54)
       Income Taxes Paid                                                    (663)       (1,473)          (5,269)       (5,269)       (1,994)
       Income Taxes Refund                                                                                                             1,226
       Income Taxes Paid For Prior Periods                                                               (3,548)       (3,548)       (2,475)
Net Cash Provided By Used In Operating Activities                         23,655            18,974        20,838        20,838       14,827
       Payments Into Time Deposits                                           (62)              (83)      (2,618)       (2,618)       (1,062)
       Proceeds From Withdrawal Of Time Deposits                               31                          1,229         1,229         1,052
       Purchase Of Short Term Investment Securities                       (4,014)      (36,000)         (35,000)      (35,000)
       Proceeds From Redemption Of Securities                                                                                        35,000
       Purchase Of Property Plant And Equipment                           (6,597)       (9,983)          (6,076)       (6,076)       (4,700)
       Purchase Of Intangible Assets                                        (259)         (146)            (387)         (387)         (931)
       "Purchase Of Investments In Subsidiaries Resulting in Change                                     (12,202)      (12,202)
       In Scope Of Consolidation"
       Proceeds From Collection Of Guarantee Deposits                       1,903         1,199            1,074         1,074         1,482
       Other                                                                3,193        34,022              206           206         (434)
Net Cash Provided By Used In Investment Activities                        (5,805)      (10,991)         (53,774)      (53,774)       30,407
       Decrease In Short Term Loans Payable                                                              (2,941)       (2,941)       (1,325)
       Proceeds From Issuance Of Bonds                                                                    35,000        35,000
       Redemption Of Bonds                                                                                                          (37,000)
       Cash Dividends Paid                                                (3,882)       (3,443)           (3,442)      (3,442)       (4,026)
       Other                                                                  478           399             3,090        3,090            (3)
Net Cash Provided By Used In Financing Activities                         (3,404)       (3,044)           31,707       31,707       (42,354)
Effect Of Exchange Rate Change On Cash And Cash Equivalents               (2,756)       (4,475)             (499)        (499)       (2,744)
Net Increase Decrease In Cash And Cash Equivalents                        11,689            462           (1,728)      (1,728)           135
Cash And Cash Equivalents                                                 99,847       111,479           111,875      111,875       109,717
Increase In Cash And Cash Equivalents From Newly Consolidated                  12                              65           65
Subsidiary CCE
Decrease In Cash And Cash Equivalents Resulting From Exclusion Of            (70)             (66)         (495)           (495)       (101)
Subsidiaries From Consolidation CCE
Cash And Cash Equivalents                                                111,479       111,875           109,717      109,717       109,751
Source: Company, Daiwa forecasts




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                                                                              Trading Places
                                                                                           4 April 2012




  Square Enix: balance sheet (¥m)
                                                       FY06      FY07       FY08       FY09       FY10
Assets
Current ass ts                                       146,608   155,730    158,387    213,347    164,301
     C sh and cash equivalent                         99,852   111,515    111,981    111,211    111,126
     Accounts receivable                              21,206    17,738     15,432     30,682     15,474
     Marketable securities                                 -         -          --    35,000          --
     Inventories                                      16,091    19,061     24,181     19,785     23,596
     Deferred tax assets                               5,634     4,158      3,882      6,231      4,493
     Other                                             4,657     3,642      3,181     10,971      9,732
     Allowance for doubtful accounts                   (832)     (385)      (270)      (533)      (120)
Fixed assets                                          69,071    56,404     54,806     57,182     42,034
     Tangible fixed assets                            25,664    19,939     19,082     18,850     17,328
     Intangible fixed assets                          21,657    20,024     18,697     21,623     10,324
     Investments and other assets                     21,748    16,440     17,027     16,707     14,382
           Investment securities                         455       656      2,063        567        386
           Other                                      21,293    15,784     14,964     16,140     13,996
Total assets                                         215,679   212,134    213,194    270,529    206,336
Liabilities
Current liabilities                                   32,404    23,082     23,477     75,257     28,504
     Accounts payable                                 13,275    10,704     10,097     10,666       7,777
     Short-term borrowings                                 -         26         26      2,808      1,338
     Bonds due within one year                             -          -          -    37,000           -
     Other                                            19,129    12,352     13,354     24,783     19,389
Long-term liabilities                                 52,635    40,858     40,992     41,013     42,687
     Corporate bonds                                  50,000    37,000     37,000     35,000     35,000
     Retirement benefit reserve                        2,169      1,528      1,644      2,170      3,061
     Other                                               466      2,330      2,348      3,843      4,626
Total liabilities                                     85,040    63,940     64,469    116,271     71,192
Total net assets                                     130,639   148,193    148,724    154,258    135,143
     Total shareholders' equity                      129,092   148,552    151,879    157,641    141,501
          Common stock                                 8,038    14,928     15,134     15,204     15,204
          Capital surplus                             37,279    44,169     44,375     44,444     44,444
          Retained earnings                           84,315    90,295     93,220     98,848     82,711
          Valuation and translation adjustments          368    (1,517)    (4,560)    (4,960)    (7,943)
          Minority interests                           1,178      1,077        995        861        771
Total liabilities and net assets                     215,679   212,134    213,194    270,529    206,336
Source: Company, Daiwa forecasts




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  NCsoft: share price and Daiwa recommendation trend
Date                                                     4/4/2012                        2/15/2012                        11/10/2011                          8/17/2011                       6/17/2011                     4/11/2011                     1/27/2011
Target price                                             390,000                           370,000                           410,000                            395,000                         351,000                       342,000                       263,000
Rating                                                          1                                1                                 1                                  1                               1                             1                             2

Date                                               10/19/2010                            8/13/2010                           5/7/2010
Target price                                          285,000                              240,000                           193,000
Rating                                                      2                                    2                                  2
  450,000
                                                                                                                                                                                                                   410,000
                                                                                                                                                                                     395,000                                                                 390,000
  400,000
                                                                                                                                                                       351,000
                                                                                                                                               342,000
  350,000
                                                                                                                                                                                                                                                  370,000
                                                                                   285,000
  300,000                                                                                                                263,000
                                                              240,000
  250,000
                        193,000
  200,000

  150,000

  100,000

   50,000

         0
                                                                                                                            Feb-11




                                                                                                                                                                                                                                               Feb-12
                                                            Aug-10

                                                                      Sep-10




                                                                                           Nov-10

                                                                                                     Dec-10




                                                                                                                                                                                     Aug-11

                                                                                                                                                                                                 Sep-11




                                                                                                                                                                                                                   Nov-11

                                                                                                                                                                                                                            Dec-11
                                                Jul-10




                                                                                                                                                                            Jul-11
                                                                                Oct-10




                                                                                                                                                                                                          Oct-11
               Apr-10




                                                                                                                                               Apr-11




                                                                                                                                                                                                                                                                    Apr-12
                         May-10

                                      Jun-10




                                                                                                                Jan-11




                                                                                                                                                          May-11

                                                                                                                                                                   Jun-11




                                                                                                                                                                                                                                      Jan-12
                                                                                                                                      Mar-11




                                                                                                                                                                                                                                                        Mar-12
                                                                                                              Target price (W)                          Closing price (W)
Source: Daiwa


  Neowiz Games: share price and Daiwa recommendation trend
Date                                                     4/4/2012                         2/8/2012                        11/17/2011                          8/10/2011                       6/24/2011                     2/11/2011                    10/18/2010
Target price                                               37,500                           49,000                            69,000                             71,000                          64,000                        61,000                        57,000
Rating                                                          3                                2                                 2                                  2                               2                             2                             2

Date                                                    4/29/2010
Target price                                               48,000
Rating                                                          2
  80,000

  70,000                                                                                                                                                                                       71,000                        69,000
                                                                                                                                                                            64,000
  60,000                                                                                  57,000                                     61,000

  50,000                                                                                                                                                                                                                                                49,000
                                  48,000
  40,000                                                                                                                                                                                                                                                         37,500

  30,000

  20,000

  10,000

        0
                                                                                                                           Feb-11




                                                                                                                                                                                                                                               Feb-12
                                                           Aug-10

                                                                     Sep-10




                                                                                                                                                                                     Aug-11

                                                                                                                                                                                                Sep-11
                                                                                          Nov-10

                                                                                                    Dec-10




                                                                                                                                                                                                                   Nov-11

                                                                                                                                                                                                                            Dec-11
                                               Jul-10




                                                                                                                                                                            Jul-11
                                                                               Oct-10




                                                                                                                                                                                                          Oct-11
                                                                                                                                               Apr-11




                                                                                                                                                                                                                                                                    Apr-12
             Apr-10

                        May-10




                                                                                                                                                         May-11
                                     Jun-10




                                                                                                               Jan-11




                                                                                                                                                                   Jun-11




                                                                                                                                                                                                                                      Jan-12
                                                                                                                                     Mar-11




                                                                                                                                                                                                                                                        Mar-12




                                                                                                                 Target price (W)                            Closing price (W)
Source: Daiwa




                                                                                                                                     - 77 -
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                                                                                                                                                                                                                                    4 April 2012




  Gamevil: share price and Daiwa recommendation trend
Date                                                4/4/12                      2/13/12                          11/8/11                           9/21/11
Target price                                       77,500                       79,000                           90,000                            79,000
Rating                                                   2                            1                                1                                 1
  100,000
                                                                                                                                                                                                             90,000
    90,000
                                                                                                                                                                                          79,000                                  79,000
    80,000                                                                                                                                                                                                                                          77,500

    70,000
    60,000
    50,000
    40,000
    30,000
    20,000
    10,000
         0
                                          Jul-10




                                                                       Oct-10




                                                                                                                                                               Jul-11




                                                                                                                                                                                           Oct-11
                                 Jun-10




                                                                                                     Jan-11




                                                                                                                                                      Jun-11




                                                                                                                                                                                                                         Jan-12
                        May-10




                                                                                                                                          May-11
                                                                                                              Feb-11

                                                                                                                       Mar-11




                                                                                                                                                                                                                                  Feb-12

                                                                                                                                                                                                                                           Mar-12
                                                     Aug-10

                                                              Sep-10




                                                                                Nov-10

                                                                                          Dec-10




                                                                                                                                                                        Aug-11

                                                                                                                                                                                 Sep-11




                                                                                                                                                                                                    Nov-11

                                                                                                                                                                                                                Dec-11
               Apr-10




                                                                                                                                Apr-11




                                                                                                                                                                                                                                                        Apr-12
                                                                                                   Target price (W)                      Closing price (W)
Source: Daiwa




                                                                                                                       - 78 -
                                                                                                                                    Trading Places
                                                                                                                                                    4 April 2012




Daiwa’s Asia Pacific Research Directory
Hong Kong
Regional Research Head                                                           Nagahisa MIYABE       (852) 2848 4971     nagahisa.miyabe@hk.daiwacm.com
Regional Research Co-head                                                        Christopher LOBELLO   (852) 2848 4916     christopher.lobello@hk.daiwacm.com
Head of Product Management                                                       John HETHERINGTON     (852) 2773 8787     john.hetherington@hk.daiwacm.com
Head of Thematic Research; Product Management                                    Tathagata Guha ROY    (852) 2773 8731     tathagata.guharoy@hk.daiwacm.com
Head of China Research, Chief Economist (Regional)                               Mingchun SUN          (852) 2773 8751     mingchun.sun@hk.daiwacm.com
Macro Economics (Regional)                                                       Kevin LAI             (852) 2848 4926     kevin.lai@hk.daiwacm.com
Head of Hong Kong Research; Regional Property Coordinator;                       Jonas KAN             (852) 2848 4439     jonas.kan@hk.daiwacm.com
Co-head of Hong Kong and China Property; Property Developers (Hong Kong)
Automobiles and Components (China)                                               Jeff CHUNG            (852) 2773 8783     jeff.chung@hk.daiwacm.com
Head of Greater China FIG; Banking (Hong Kong, China)                            Grace WU              (852) 2532 4383     grace.wu@hk.daiwacm.com
Banking/Diversified Financials (Taiwan)                                          Jerry YANG            (852) 2773 8842     jerry.yang@hk.daiwacm.com
Banking (Hong Kong, China)                                                       Queenie POON          (852) 2532 4381     queenie.poon@hk.daiwacm.com
Capital Goods –Electronics Equipments and Machinery (Hong Kong, China)           Joseph HO             (852) 2848 4443     joseph.ho@hk.daiwacm.com
Consumer, Pharmaceuticals and Healthcare (China)                                 Hongxia ZHU           (852) 2848 4460     hongxia.zhu@hk.daiwacm.com
Internet (Hong Kong, China)                                                      Alicia HU             (852) 2532 4180     alicia.hu@hk.daiwacm.com
Regional Head of IT/Electronics; Semiconductor/IC Design (Regional)              Eric CHEN             (852) 2773 8702     eric.chen@hk.daiwacm.com
IT/Electronics - Semiconductor/IC Design (Taiwan)                                Ashley CHUNG          (852) 2848 4431     ashley.chung@hk.daiwacm.com
Regional Head of Materials; Materials/Energy (Regional)                          Alexander LATZER      (852) 2848 4463     alexander.latzer@hk.daiwacm.com
Materials (China)                                                                Felix LAM             (852) 2532 4341     felix.lam@hk.daiwacm.com
Regional Head of Small/Medium Cap; Small/Medium Cap (Regional)                   Mark CHANG            (852) 2773 8729     mark.chang@hk.daiwacm.com
Small/Medium Cap (Regional)                                                      John CHOI             (852) 2773 8730     john.choi@hk.daiwacm.com
Head of Solar                                                                    Pranab Kumar SARMAH   (852) 2848 4441     pranab.sarmah@hk.daiwacm.com
Transportation – Aviation, Land and Transportation Infrastructure (Regional)     Kelvin LAU            (852) 2848 4467     kelvin.lau@hk.daiwacm.com
Regional Head of Clean Energy and Utilities; Utilities; Power Equipment;         Dave DAI              (852) 2848 4068     dave.dai@hk.daiwacm.com
Renewables (Hong Kong, China)
Head of Custom Products Group; Custom Products Group                             Justin LAU            (852) 2773 8741     justin.lau@hk.daiwacm.com
Custom Products Group                                                            Philip LO             (852) 2773 8714     philip.lo@hk.daiwacm.com
Custom Products Group                                                            Jibo MA               (852) 2848 4489     jibo.ma@hk.daiwacm.com


South Korea
Head of Research; Strategy; Banking/Finance                                      Chang H LEE           (82) 2 787 9177     chlee@kr.daiwacm.com
Regional Head of Automobiles and Components; Automobiles; Shipbuilding; Steel    Sung Yop CHUNG        (82) 2 787 9157     sychung@kr.daiwacm.com
Banking/Finance                                                                  Anderson CHA          (82) 2 787 9185     anderson.cha@kr.daiwacm.com
Capital Goods (Construction and Machinery)                                       Mike OH               (82) 2 787 9179     mike.oh@kr.daiwacm.com
Consumer/Retail                                                                  Sang Hee PARK         (82) 2 787 9165     sanghee.park@kr.daiwacm.com
IT/Electronics (Tech Hardware and Memory Chips)                                  Jae H LEE             (82) 2 787 9173     jhlee@kr.daiwacm.com
Materials (Chemicals); Oil and Gas                                               Jihye CHOI            (82) 2 787 9121     jihye.choi@kr.daiwacm.com
Telecommunications; Software (Internet/Online Games)                             Thomas Y KWON         (82) 2 787 9181     yskwon@kr.daiwacm.com
Custom Products Group                                                            Shannen PARK          (82) 2 787 9184     shannen.park@kr.daiwacm.com


Taiwan
Consumer/Retail                                                                  Yoshihiko KAWASHIMA   (886) 2 8758 6247   y.kawashima@daiwacm-cathay.com.tw
IT/Technology Hardware (Communications Equipment); Software; Small/Medium Caps   Christine WANG        (886) 2 8758 6249   christine.wang@daiwacm-cathay.com.tw
IT/Technology Hardware (Handsets and Components)                                 Alex CHANG            (886) 2 8758 6248   alex.chang@daiwacm-cathay.com.tw
IT/Technology Hardware (PC Hardware - Panels)                                    Chris LIN             (886) 2 8758 6251   chris.lin@daiwacm-cathay.com.tw


India
Head of India Research; Pharmaceuticals and Healthcare                           Kartik A. MEHTA       (91) 22 6622 1012   kartik.mehta@in.daiwacm.com
Deputy Head of Research; Strategy; Banking/Finance                               Punit SRIVASTAVA      (91) 22 6622 1013   punit.srivastava@in.daiwacm.com
Automobiles and Components                                                       Ambrish MISHRA        (91) 22 6622 1060   ambrish.mishra@in.daiwacm.com
Capital Goods/Utilities                                                          Saurabh MEHTA         (91) 22 6622 1009   saurabh.mehta@in.daiwacm.com
FMCG; Consumer                                                                   Percy PANTHAKI        (91) 22 6622 1063   percy.panthaki@in.daiwacm.com




                                                                                 - 79 -
                                                                                                                                              Trading Places
                                                                                                                                                             4 April 2012




Singapore
Head of Singapore Research                                                           Tony DARWELL           (65) 6321 3050            tony.darwell@sg.daiwacm.com
Quantitative Research                                                                Josh CHERIAN           (65) 6499 6549            josh.cherian@sg.daiwacm.com
Quantitative Research                                                                Suzanne HO             (65) 6499 6545            suzanne.ho@sg.daiwacm.com
Banking (ASEAN)                                                                      Srikanth VADLAMANI     (65) 6499 6570            srikanth.vadlamani@sg.daiwacm.com
Regional Head of Oil and Gas; Oil and Gas (ASEAN and China); Capital Goods (Singapore) Adrian LOH           (65) 6499 6548            adrian.loh@sg.daiwacm.com
Property and REITs                                                                   David LUM              (65) 6329 2102            david.lum@sg.daiwacm.com
Head of ASEAN & India Telecommunications; Telecommunications (ASEAN & India)         Ramakrishna MARUVADA   (65) 6499 6543            ramakrishna.maruvada@sg.daiwacm.com
Thematic Research                                                                    Amy CHEW               (65) 6321 3085            amy.chew@sg.daiwacm.com


Philippines
Head of the Philippines Research; Strategy; Capital Goods; Materials                 Rommel RODRIGO         (63) 2 813 7344 ext 302 rommel.rodrigo@dbpdaiwacm.com.ph
Economy; Consumer; Power and Utilities; Transportation – Aviation                    Alvin AROGO            (63) 2 813 7344 ext 301   alvin.arogo@dbpdaiwacm.com.ph
Property; Banking; Transportation – Port                                             Danielo PICACHE        (63) 2 813 7344 ext 293 danielo.picache@dbpdaiwacm.com.ph




                                                                                    - 80 -
                                                                                                                                                   Trading Places
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Daiwa’s Office
Office / Branch / Affiliate                                       Address                                                                   Tel                 Fax
DAIWA SECURITIES GROUP INC
HEAD OFFICE                                                       Gran Tokyo North Tower, 1-9-1, Marunouchi, Chiyoda-ku, Tokyo, 100-6753 (81) 3 5555 3111       (81) 3 5555 0661
Daiwa Securities Trust Company                                    One Evertrust Plaza, Jersey City, NJ 07302, U.S.A.                        (1) 201 333 7300    (1) 201 333 7726
Daiwa Securities Trust and Banking (Europe) PLC (Head Office)     5 King William Street, London EC4N 7JB, United Kingdom                    (44) 207 320 8000 (44) 207 410 0129
Daiwa Securities Trust and Banking (Europe) PLC (Dublin Branch)   Level 3, Block 5, Harcourt Centre, Harcourt Road, Dublin 2, Ireland       (353) 1 603 9900    (353) 1 478 3469


DAIWA CAPITAL MARKETS LIMITED
HEAD OFFICE                                                       Gran Tokyo North Tower, 1-9-1, Marunouchi, Chiyoda-ku,                    (03) 5555 3111      (03) 5555 0661
                                                                  Tokyo, 100-6753
Daiwa Capital Markets America Inc                                 Financial Square, 32 Old Slip, New York, NY10005, U.S.A.                  (1) 212 612 7000    (1) 212 612 7100
Daiwa Capital Markets America Inc. San Francisco Branch           555 California Street, Suite 3360, San Francisco, CA 94104, U.S.A.        (1) 415 955 8100    (1) 415 956 1935
Daiwa Capital Markets Europe Limited                              5 King William Street, London EC4N 7AX, United Kingdom                    (44) 20 7597 8000 (44) 20 7597 8600
Daiwa Capital Markets Europe Limited, Frankfurt Branch            Trianon Building, Mainzer Landstrasse 16, 60325 Frankfurt am Main,        (49) 69 717 080     (49) 69 723 340
                                                                  Federal Republic of Germany
Daiwa Capital Markets Europe Limited, Paris Branch                127, Avenue des Champs-Elysées, 75008 Paris, France                       (33) 1 56 262 200   (33) 1 47 550 808
Daiwa Capital Markets Europe Limited, Geneva Branch               50 rue du Rhône, P.O.Box 3198, 1211 Geneva 3, Switzerland                 (41) 22 818 7400    (41) 22 818 7441
Daiwa Capital Markets Europe Limited, Milan Branch                Via Senato 14/16, 20121 Milan, Italy                                      (39) 02 763 271     (39) 02 763 27250
Daiwa Capital Markets Europe Limited,                             25/9, build. 1, Per. Sivtsev Vrazhek, Moscow 119002, Russian Federation   (7) 495 617 1960    (7) 495 244 1977
Moscow Representative Office
Daiwa Capital Markets Europe Limited, Bahrain Branch              7th Floor, The Tower, Bahrain Commercial Complex, P.O. Box 30069,         (973) 17 534 452    (973) 17 535 113
                                                                  Manama, Bahrain
Daiwa Capital Markets Europe Limited, Dubai Branch                The Gate village Building 1, 1st floor, Unit-6, DIFC, P.O.Box-506657,     (971) 47 090 401    (971) 43 230 332
                                                                  Dubai, UAE.
Daiwa Capital Markets Hong Kong Limited                           Level 28, One Pacific Place, 88 Queensway, Hong Kong                      (852) 2525 0121     (852) 2845 1621
Daiwa Capital Markets Singapore Limited                           6 Shenton Way #26-08, DBS Building Tower Two, Singapore 068809,           (65) 6220 3666      (65) 6223 6198
                                                                  Republic of Singapore
Daiwa Capital Markets Australia Limited                           Level 34, Rialto North Tower, 525 Collins Street, Melbourne,              (61) 3 9916 1300    (61) 3 9916 1330
                                                                  Victoria 3000, Australia
DBP-Daiwa Capital Markets Philippines, Inc                        18th Floor, Citibank Tower, 8741 Paseo de Roxas, Salcedo Village,         (632) 813 7344      (632) 848 0105
                                                                  Makati City, Republic of the Philippines
Daiwa-Cathay Capital Markets Co Ltd                               14/F, 200, Keelung Road, Sec 1, Taipei, Taiwan, R.O.C.                    (886) 2 2723 9698 (886) 2 2345 3638
Daiwa Securities Capital Markets Korea Co., Ltd.                  One IFC, 10 Gukjegeumyung-Ro, Yeouido-dong, Yeongdeungpo-gu,              (82) 2 787 9100     (82) 2 787 9191
                                                                  Seoul, 150-876, Korea
Daiwa Securities Capital Markets Co Ltd,                          Room 3503/3504, SK Tower,                                                 (86) 10 6500 6688 (86) 10 6500 3594
Beijing Representative Office                                     No.6 Jia Jianguomen Wai Avenue, Chaoyang District,
                                                                  Beijing 100022, People’s Republic of China
Daiwa SSC Securities Co Ltd                                       45/F, Hang Seng Tower, 1000 Lujiazui Ring Road,                           (86) 21 3858 2000 (86) 21 3858 2111
                                                                  Pudong, Shanghai 200120, People’s Republic of China
Daiwa Securities Capital Markets Co. Ltd,                         Level 8 Zuellig House, 1 Sliom Road,                                      (66) 2 231 8381     (66) 2 231 8121
Bangkok Representative Office                                     Bangkok 10500, Thailand
Daiwa Capital Markets India Private Ltd                           10th Floor, 3 North Avenue, Maker Maxity, Bandra Kurla Complex,           (91) 22 6622 1000 (91) 22 6622 1019
                                                                  Bandra East, Mumbai – 400051, India
Daiwa Securities Capital Markets Co. Ltd,                         Suite 405, Pacific Palace Building, 83B, Ly Thuong Kiet Street,           (84) 4 3946 0460    (84) 4 3946 0461
Hanoi Representative Office                                       Hoan Kiem Dist. Hanoi, Vietnam


DAIWA INSTITUTE OF RESEARCH LTD
HEAD OFFICE                                                       15-6, Fuyuki, Koto-ku, Tokyo, 135-8460, Japan                             (81) 3 5620 5100    (81) 3 5620 5603
MARUNOUCHI OFFICE                                                 Gran Tokyo North Tower, 1-9-1, Marunouchi, Chiyoda-ku, Tokyo, 100-6756 (81) 3 5555 7011       (81) 3 5202 2021


New York Research Center                                          11th Floor, Financial Square, 32 Old Slip, NY, NY 10005-3504, U.S.A.      (1) 212 612 6100    (1) 212 612 8417
London Research Centre                                            3/F, 5 King William Street, London, EC4N 7AX, United Kingdom              (44) 207 597 8000 (44) 207 597 8550




                                                                                   - 81 -
                                                                                                                                                                       Trading Places
                                                                                                                                                                                        4 April 2012




Disclaimer
This publication is produced by Daiwa Securities Group Inc. and/or its non-U.S. affiliates, and distributed by Daiwa Securities Group Inc. and/or its non-U.S. affiliates, except to the extent
expressly provided herein. This publication and the contents hereof are intended for information purposes only, and may be subject to change without further notice. Any use, disclosure,
distribution, dissemination, copying, printing or reliance on this publication for any other purpose without our prior consent or approval is strictly prohibited. Neither Daiwa Securities Group
Inc. nor any of its respective parent, holding, subsidiaries or affiliates, nor any of its respective directors, officers, servants and employees, represent nor warrant the accuracy or completeness
of the information contained herein or as to the existence of other facts which might be significant, and will not accept any responsibility or liability whatsoever for any use of or reliance upon
this publication or any of the contents hereof. Neither this publication, nor any content hereof, constitute, or are to be construed as, an offer or solicitation of an offer to buy or sell any of the
securities or investments mentioned herein in any country or jurisdiction nor, unless expressly provided, any recommendation or investment opinion or advice. Any view, recommendation,
opinion or advice expressed in this publication may not necessarily reflect those of Daiwa Securities Capital Markets Co. Ltd., and/or its affiliates nor any of its respective directors, officers,
servants and employees except where the publication states otherwise. This research report is not to be relied upon by any person in making any investment decision or otherwise advising with
respect to, or dealing in, the securities mentioned, as it does not take into account the specific investment objectives, financial situation and particular needs of any person.

Daiwa Securities Group Inc., its subsidiaries or affiliates, or its or their respective directors, officers and employees from time to time have trades as principals, or have positions in, or have
other interests in the securities of the company under research including derivatives in respect of such securities or may have also performed investment banking and other services for the
issuer of such securities. The following are additional disclosures.

Japan
Daiwa Securities Co. Ltd. and Daiwa Securities Group Inc.
Daiwa Securities Co. Ltd. is a subsidiary of Daiwa Securities Group Inc.
Investment Banking Relationship
Within the preceding 12 months, The subsidiaries and/or affiliates of Daiwa Securities Group Inc. * has lead-managed public offerings and/or secondary offerings (excluding straight bonds) of
the securities of the following companies: SBI Holdings Inc. (6488 HK); Shunfeng Photovoltaic International Ltd. (1165 HK); Rexlot Holdings Limited (555 HK); China Outfitters Holdings
Limited (1146 HK); Beijing Jingneng Clean Energy Co. Limited (579 HK); Infraware Inc. (041020 KS)
*Subsidiaries of Daiwa Securities Group Inc. for the purposes of this section shall mean any one or more of:
• Daiwa Capital Markets Hong Kong Limited
• Daiwa Capital Markets Singapore Limited
• Daiwa Capital Markets Australia Limited
• Daiwa Capital Markets India Private Limited
• Daiwa-Cathay Capital Markets Co., Ltd.
• Daiwa Securities Capital Markets Korea Co., Ltd.

Hong Kong
This research is distributed in Hong Kong by Daiwa Capital Markets Hong Kong Limited (“DHK”) which is regulated by the Hong Kong Securities and Futures Commission. Recipients of this
research in Hong Kong may contact DHK in respect of any matter arising from or in connection with this research.
Ownership of Securities
For “Ownership of Securities” information, please visit BlueMatrix disclosure Link at https://daiwa3.bluematrix.com/sellside/Disclosures.action.
Investment Banking Relationship
For “Investment Banking Relationship”, please visit BlueMatrix disclosure Link at https://daiwa3.bluematrix.com/sellside/Disclosures.action.
Relevant Relationship (DHK)
DHK may from time to time have an individual employed by or associated with it serves as an officer of any of the companies under its research coverage.
DHK market making
DHK may from time to time make a market in securities covered by this research.

Korea
The developing analyst of this research and analysis material hereby states and confirms that the contents of this material correctly reflect the analyst’s views and opinions and that the analyst
has not been placed under inappropriate pressure or interruption by an external party.

Name of Analyst : Thomas Y. Kwon / Koki Shiraishi

Disclosure of Analysts’ Interests
If an analyst engaging in or a person who exercises influences on the preparation or publication of a Research Report containing recommendations for general investors to trade financial
investment instruments with regard to which the analyst or the influential person has personal interests and if the recommendations contained in the Report may have impacts on the personal
interests, Daiwa Securities Capital Markets Korea Co., Ltd.(“Daiwa Securities Korea”)shall ensure that the Analyst or the influential person notifies that he/she has personal interests with
regard to:

1.   The equity, the equity-linked bonds and the instruments with the subscription right to the equity issued by the legal entity covered in the Research Report (or the legal entity subject to the
     investment recommendations);
2.   The stock option granted by the legal entity covered in the Research Report (or the legal entity subject to the investment recommendations); or
3.   The equity futures, the equity options and the equity-linked warrants backed by the equity prescribed in the preceding Paragraph 1 as the underlying assets.

Legal Entities subject to Research Report Coverage Restrictions
Daiwa Securities Korea hereby states and confirms that Daiwa Securities Korea has no conflicts of interests with the legal entity covered in this Research Report:

1.   In that Daiwa Securities Korea does NOT offer direct or indirect payment guarantee for the legal entity by means of, for instance, guarantee, endorsement, provision of collaterals or the
     acquisition of debts;
2.   In that Daiwa Securities Korea does NOT own one-hundredth (or 1/100) or more of the total number of outstanding equities issued by the legal entity;
3.   In that The legal entity is NOT an affiliated company of Daiwa Securities Korea pursuant to Sub-paragraph 3, Article 2 of the Monopoly Regulation and Fair Trade Act of Korea;
4.   In that, although Daiwa Securities Korea offers advisory services for the legal entity with regard to an M&A deal, the size of the M&A deal does NOT exceed five-hundredths (or 5/100) of
     the total asset size or the total number of equities issued and outstanding of the legal entity;
5.   In that, although Daiwa Securities Korea acted in the capacity of a Lead Underwriter for the initial public offering of the legal entity, more than one-year has passed since the IPO date;
6.   In that Daiwa Securities Korea is NOT designated by the legal entity as the ‘tender offer agent’ pursuant to the Paragraph 2, Article 133 of the Financial Services and Capital Market Act or
     the legal entity is NOT the issuer of the equity subject to the proposed tender offer; this requirement, however applies until the maturity of the tender offer period; or
7.   In that Daiwa Securities Korea does NOT have significant or material interests with regard to the legal entity.

Disclosure of Prior Distribution to Third Party
This report has not been distributed to the third party in advance prior to public release.

The following explains the rating system in the report as compared to KOSPI, based on the beliefs of the author(s) of this report.

"1": the security could outperform the KOSPI by more than 15% over the next six months.
"2": the security is expected to outperform the KOSPI by 5-15% over the next six months.
"3": the security is expected to perform within 5% of the KOSPI (better or worse) over the next six months.
"4": the security is expected to underperform the KOSPI by 5-15% over the next six months.
"5": the security could underperform the KOSPI by more than 15% over the next six months.

“Positive” means that the analyst expects the sector to outperform the KOSPI over the next six months.
“Neutral” means that the analyst expects the sector to be in-line with the KOSPI over the next six months
“Negative” means that the analyst expects the sector to underperform the KOSPI over the next six months

Additional information may be available upon request.




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Singapore
This research is distributed in Singapore by Daiwa Capital Markets Singapore Limited and it may only be distributed in Singapore to accredited investors, expert investors and institutional
investors as defined in the Financial Advisers Regulations and the Securities and Futures Act (Chapter 289), as amended from time to time. By virtue of distribution to these category of
investors, Daiwa Capital Markets Singapore Limited and its representatives are not required to comply with Section 36 of the Financial Advisers Act (Chapter 110) (Section 36 relates to
disclosure of Daiwa Capital Markets Singapore Limited’s interest and/or its representative’s interest in securities). Recipients of this research in Singapore may contact Daiwa Capital Markets
Singapore Limited in respect of any matter arising from or in connection with the research.

Australia
This research is distributed in Australia by Daiwa Capital Markets Stockbroking Limited and it may only be distributed in Australia to wholesale investors within the meaning of the
Corporations Act. Recipients of this research in Australia may contact Daiwa Capital Markets Stockbroking Limited in respect of any matter arising from or in connection with the research.
Ownership of Securities
For “Ownership of Securities” information, please visit BlueMatrix disclosure Link at https://daiwa3.bluematrix.com/sellside/Disclosures.action.

India
This research is distributed by Daiwa Capital Markets India Private Limited (DAIWA) which is an intermediary registered with Securities & Exchange Board of India. This report is not to be
considered as an offer or solicitation for any dealings in securities. While the information in this report has been compiled by DAIWA in good faith from sources believed to be reliable, no
representation or warranty, express of implied, is made or given as to its accuracy, completeness or correctness. DAIWA its officers, employees, representatives and agents accept no liability
whatsoever for any loss or damage whether direct, indirect, consequential or otherwise howsoever arising (whether in negligence or otherwise) out of or in connection with or from any use of
or reliance on the contents of and/or omissions from this document. Consequently DAIWA expressly disclaims any and all liability for, or based on or relating to any such information
contained in or errors in or omissions in this report. Accordingly, you are recommended to seek your own legal, tax or other advice and should rely solely on your own judgment, review and
analysis, in evaluating the information in this document. The data contained in this document is subject to change without any prior notice DAIWA reserves its right to modify this report as
maybe required from time to time. DAIWA is committed to providing independent recommendations to its Clients and would be happy to provide any information in response to any query
from its Clients. This report is strictly confidential and is being furnished to you solely for your information. The information contained in this document should not be reproduced (in whole or
in part) or redistributed in any form to any other person. We and our group companies, affiliates, officers, directors and employees may from time to time, have long or short positions, in and
buy sell the securities thereof, of company(ies) mentioned herein or be engaged in any other transactions involving such securities and earn brokerage or other compensation or act as advisor
or have the potential conflict of interest with respect to any recommendation and related information or opinion. DAIWA prohibits its analyst and their family members from maintaining a
financial interest in the securities or derivatives of any companies that the analyst cover. This report is not intended or directed for distribution to, or use by any person, citizen or entity which
is resident or located in any state or country or jurisdiction where such publication, distribution or use would be contrary to any statutory legislation, or regulation which would require DAIWA
and its affiliates/ group companies to any registration or licensing requirements. The views expressed in the report accurately reflect the analyst’s personal views about the securities and
issuers that are subject of the Report, and that no part of the analyst’s compensation was, is or will be directly or indirectly, related to the recommendations or views expressed in the Report.
This report does not recommend to US recipients the use of Daiwa Capital Markets India Private Limited or any of its non – US affiliates to effect trades in any securities and is not supplied
with any understanding that US recipients will direct commission business to Daiwa Capital Markets India Private Limited.

Taiwan
This research is distributed in Taiwan by Daiwa-Cathay Capital Markets Co., Ltd and it may only be distributed in Taiwan to institutional investors or specific investors who have signed
recommendation contracts with Daiwa-Cathay Capital Markets Co., Ltd in accordance with the Operational Regulations Governing Securities Firms Recommending Trades in Securities to
Customers. Recipients of this research in Taiwan may contact Daiwa-Cathay Capital Markets Co., Ltd in respect of any matter arising from or in connection with the research.

Philippines
This research is distributed in the Philippines by DBP-Daiwa Capital Markets Philippines, Inc. which is regulated by the Philippines Securities and Exchange Commission and the Philippines
Stock Exchange, Inc. Recipients of this research in the Philippines may contact DBP-Daiwa Capital Markets Philippines, Inc. in respect of any matter arising from or in connection with the
research. DBP-Daiwa Capital Markets Philippines, Inc. recommends that investors independently assess, with a professional advisor, the specific financial risks as well as the legal, regulatory,
tax, accounting, and other consequences of a proposed transaction. DBP-Daiwa Capital Markets Philippines, Inc. may have positions or may be materially interested in the securities in any of
the markets mentioned in the publication or may have performed other services for the issuers of such securities.
For relevant securities and trading rules please visit SEC and PSE Link at http://www.sec.gov.ph/irr/AmendedIRRfinalversion.pdf and http://www.pse.com.ph/ respectively.

United Kingdom
This research report is produced by Daiwa Securities Capital Markets Co., Ltd and/or its affiliates and is distributed by Daiwa Capital Markets Europe Limited in the European Union, Iceland,
Liechtenstein, Norway and Switzerland. Daiwa Capital Markets Europe Limited is authorised and regulated by The Financial Services Authority (“FSA”) and is a member of the London Stock
Exchange, Chi-X, Eurex and NYSE Liffe. Daiwa Capital Markets Europe Limited and its affiliates may, from time to time, to the extent permitted by law, participate or invest in other financing
transactions with the issuers of the securities referred to herein (the “Securities”), perform services for or solicit business from such issuers, and/or have a position or effect transactions in the
Securities or options thereof and/or may have acted as an underwriter during the past twelve months for the issuer of such securities. In addition, employees of Daiwa Capital Markets Europe
Limited and its affiliates may have positions and effect transactions in such securities or options and may serve as Directors of such issuers. Daiwa Capital Markets Europe Limited may, to the
extent permitted by applicable UK law and other applicable law or regulation, effect transactions in the Securities before this material is published to recipients.

This publication is intended for investors who are not Retail Clients in the United Kingdom within the meaning of the Rules of the FSA and should not therefore be distributed to such Retail
Clients in the United Kingdom. Should you enter into investment business with Daiwa Capital Markets Europe’s affiliates outside the United Kingdom, we are obliged to advise that the
protection afforded by the United Kingdom regulatory system may not apply; in particular, the benefits of the Financial Services Compensation Scheme may not be available.

Daiwa Capital Markets Europe Limited has in place organisational arrangements for the prevention and avoidance of conflicts of interest. Our conflict management policy is available at
http://www.uk.daiwacm.com/about-us/corporate-governance-and-regulatory. Regulatory disclosures of investment banking relationships are available at
https://daiwa3.bluematrix.com/sellside/Disclosures.action.

United States
This report is distributed in the U.S. by Daiwa Capital Markets America Inc. (DCMA). It may not be accurate or complete and should not be relied upon as such. It reflects the preparer’s views
at the time of its preparation, but may not reflect events occurring after its preparation; nor does it reflect DCMA’s views at any time. Neither DCMA nor the preparer has any obligation to
update this report or to continue to prepare research on this subject. This report is not an offer to sell or the solicitation of any offer to buy securities. Unless this report says otherwise, any
recommendation it makes is risky and appropriate only for sophisticated speculative investors able to incur significant losses. Readers should consult their financial advisors to determine
whether any such recommendation is consistent with their own investment objectives, financial situation and needs. This report does not recommend to U.S. recipients the use of any of
DCMA’s non-U.S. affiliates to effect trades in any security and is not supplied with any understanding that U.S. recipients of this report will direct commission business to such non-U.S.
entities. Unless applicable law permits otherwise, non-U.S. customers wishing to effect a transaction in any securities referenced in this material should contact a Daiwa entity in their local
jurisdiction. Most countries throughout the world have their own laws regulating the types of securities and other investment products which may be offered to their residents, as well as a
process for doing so. As a result, the securities discussed in this report may not be eligible for sales in some jurisdictions. Customers wishing to obtain further information about this report
should contact DCMA: Daiwa Capital Markets America Inc., Financial Square, 32 Old Slip, New York, New York 10005 (telephone 212-612-7000).

Ownership of Securities
For “Ownership of Securities” information please visit BlueMatrix disclosure Link at https://daiwa3.bluematrix.com/sellside/Disclosures.action.

Investment Banking Relationships
For “Investment Banking Relationships” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action.

DCMA Market Making
For “DCMA Market Making” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action.

Research Analyst Conflicts
For updates on “Research Analyst Conflicts” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. The principal research analysts who
prepared this report have no financial interest in securities of the issuers covered in the report, are not (nor are any members of their household) an officer, director or advisory board member
of the issuer(s) covered in the report, and are not aware of any material relevant conflict of interest involving the analyst or DCMA, and did not receive any compensation from the issuer during
the past 12 months except as noted: no exceptions.

Research Analyst Certification
For updates on “Research Analyst Certification” and “Rating System” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. The views about any
and all of the subject securities and issuers expressed in this Research Report accurately reflect the personal views of the research analyst(s) primarily responsible for this report (or the views


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of the firm producing the report if no individual analysts[s] is named on the report); and no part of the compensation of such analyst(s) (or no part of the compensation of the firm if no
individual analyst[s)] is named on the report) was, is, or will be directly or indirectly related to the specific recommendations or views contained in this Research Report.

The following explains the rating system in the report as compared to relevant local indices, based on the beliefs of the author of the report.
"1": the security could outperform the local index by more than 15% over the next six months.
"2": the security is expected to outperform the local index by 5-15% over the next six months.
"3": the security is expected to perform within 5% of the local index (better or worse) over the next six months.
"4": the security is expected to underperform the local index by 5-15% over the next six months.
"5": the security could underperform the local index by more than 15% over the next six months.

Additional information may be available upon request.

Japan - additional notification items pursuant to Article 37 of the Financial Instruments and Exchange Law
(This Notification is only applicable where report is distributed by Daiwa Securities Co. Ltd.)

If you decide to enter into a business arrangement with us based on the information described in materials presented along with this document, we ask you to pay close attention to the
following items.
• In addition to the purchase price of a financial instrument, we will collect a trading commission* for each transaction as agreed beforehand with you. Since commissions may be included in
   the purchase price or may not be charged for certain transactions, we recommend that you confirm the commission for each transaction.
• In some cases, we may also charge a maximum of ¥ 2 million (including tax) per year as a standing proxy fee for our deposit of your securities, if you are a non-resident of Japan.
• For derivative and margin transactions etc., we may require collateral or margin requirements in accordance with an agreement made beforehand with you. Ordinarily in such cases, the
   amount of the transaction will be in excess of the required collateral or margin requirements.
• There is a risk that you will incur losses on your transactions due to changes in the market price of financial instruments based on fluctuations in interest rates, exchange rates, stock prices,
   real estate prices, commodity prices, and others. In addition, depending on the content of the transaction, the loss could exceed the amount of the collateral or margin requirements.
• There may be a difference between bid price etc. and ask price etc. of OTC derivatives handled by us.
• Before engaging in any trading, please thoroughly confirm accounting and tax treatments regarding your trading in financial instruments with such experts as certified public accountants.
   *The amount of the trading commission cannot be stated here in advance because it will be determined between our company and you based on current market conditions and the content of
   each transaction etc.

When making an actual transaction, please be sure to carefully read the materials presented to you prior to the execution of agreement, and to take responsibility for your own decisions
regarding the signing of the agreement with us.

                                                                                        Corporate Name: Daiwa Securities Co. Ltd.
                                                                                                        Financial instruments firm: chief of Kanto Local Finance Bureau (Kin-sho) No.108
                                                                                        Memberships:    Japan Securities Dealers Association, Financial Futures Association of Japan
                                                                                                        Japan Securities Investment Advisers Association
                                                                                                        Type II Financial Instruments Firms Association




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