South Korea's NCsoft Corp. is making headlines in the on-line-games software business, with clients like Sony and Microsoft. But is the hype justified?

When the secretive Government of Singapore Investment Corporation (GIC) starts throwing cash at a company, the news can move markets. So when GIC, which manages the republic's estimated $100 billion in foreign reserves, confirmed on June 12 that it had accumulated a 5% stake in South Korea's on-line-game software company, NCsoft Corp., investors sat up and took notice. The investment makes the Singapore government the third-largest shareholder in Korea's top game publisher, which is making inroads into Taiwan, the United States, Hong Kong and Japan.

Investment managers at GIC aren't alone in thinking highly of the stock. Pratik Gupta, an analyst at Salomon Smith Barney in Singapore, says NCsoft is a great play and is his only pick in the sector. NCsoft, which has free cash flow of $55 million-65 million, is on track in negotiations with Sony for distribution of its on-line game Lineage on Sony's PlayStation 2 game console. Microsoft has also said that third-party game-software suppliers would eventually provide approximately 75% of the on-line game titles for its Xbox, and NCsoft is well positioned to be one of the key suppliers of such game software. "Next year, growth will be driven largely by overseas operations, with further upside from new games such as EverQuest, City of Heroes and Lineage 2, new markets such as China, with upside from entry into Europe and new platforms such as Sony's PS 2," Gupta says.

Meanwhile, regulatory fears that Korea will impose an age limit of 18 years and above on players of violent on-line games are "overdone," he adds. The "stock is oversold" and "it's a good time to go and buy it," he says. Gupta argues the implementation of any such age restrictions will be very difficult, given that physical verification is next to impossible with on-line gaming. He also argues that the Korean government is unlikely to take any drastic steps that would have a significant adverse affect on leading on-line-gaming companies. "On-line gaming is a rapidly growing industry globally and the Korean companies are well positioned to dominate this industry globally," he notes.

Returns on equity are in excess of 35% and it's trading at a steep discount to other global game-software stocks, which trade at a median price-earnings ratio of 24 times 2002 earnings. By contrast, NCsoft trades at about 11.8 times 2002 earnings. While NCsoft is a pioneer in on-line gaming, however, not all analysts and fund managers are keen on the company. In most countries in Asia outside Korea there isn't the infrastructure in terms of broadband telecoms to support the aggressive take-up of on-line games, notes Devan Kaloo, a fund manager at Aberdeen Asset Management in Singapore. Because of that, the roll-out of on-line games will take longer than expected and Kaloo remains unconvinced it will be easy to spot the winners.

Kaloo, who does not hold the stock, adds that software design, particularly on-line games, "is hit and miss." On top of that, the stock looks pricey, given the uncertainty in the industry. "Companies are always worrying about the next game," he argues, "and given the low fixed-asset requirement that is needed in the industry, it means that it's likely we'll see a proliferation of small design houses develop these products."

By Trish Saywell
Far Eastern Ecomonic Review
Issue cover-dated June 27, 2002