Game business solid. NHNE’s mobile game business is in healthy shape – its flagshiptitle Disney Tsum Tsum is still a cash cow, while Compass (launched in 4Q16) sales arealso rising. The company has a stronger pipeline planned in 2H17e, including IP-basedgames and Critical OPS (a first-person shooting game, highly anticipated by the market).    Web-board game sales have also recovered steadily since related regulations wereeased in Mar 2016. Yet, we note that quarterly revenue hovers around KRW30-40bn (vs.    KRW60-70bn prior to regulations); thus, we expect further upside if regulations were toease. Note that Korea revisits game industry regulations every two years and the nextreview is due Feb 2018.    Payment a swing factor. Payment solution ‘Payco’ delivers stable growth, reachingKRW1trn cumulative transactions and KRW100bn monthly transactions as of Apr. Whilethis is ahead of our expectation, it is only a fraction of Korea’s total mobile commercemarket (3% in 1Q17, on our estimate), and far behind leading payment solutions in Korea(for instance, Naver Pay recorded KRW1.5trn GMV in 1Q17). Thus, we think it would takemuch time until NHNE can launch a big data-based targeted ad business in full force. Weremain cautious on the Payco business’ near-term monetization prospects, but flag itsrecent partnerships with third-party retailers (including Hyundai Department Store [069960KS, KRW107,000, Buy), convenience chains and 11st) as an upside risk to our view.    2Q17e preview (due mid-Aug) – Payco’s spin-off to be key area of interest. This willbe the first set of quarterly results following Payco’s spin off in Apr 2017. Thus, investorswill be able to better gauge the profitability of its different business segments. At aconsolidated level, we expect 2Q17e sales of KRW230bn (+9% y-y, +2% q-q) and OP ofKRW14bn (+32% y-y, +47% q-q). Web-board game sales likely dropped slightly q-q toKRW34bn on seasonal factors, but are still up 20% on a y-y basis. Mobile game salescould increase 5% q-q led by the steady performance of Compass in Japan, offsettingslowing sales from existing games. For its non-game business, Payco should see a rapidgrowth in transaction volume backed by strategic alliances with Hyundai DepartmentStore and large convenience store chains. Meanwhile, marketing costs could decline toKRW15bn (-25% q-q) as Payco-related TV ads end in 1Q17.    Maintain Hold but raise TP from KRW58,000 to KRW67,000, on an 82% increase inour 2017e OP estimate to reflect our smaller marketing cost estimate this year. While thislooks significant, we flag that it is due to the small base. In terms of valuationmethodology, we continue to apply a 1.0x PB target (stock’s historical average).

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