Korea / Special Situations, Clepsydra Capital

Sanghyun Park

Korea / Special Situations

Korea / Special Sits, Pairs, Index Rebalancing

Clepsydra Capital

Investigate special situations, pairs, and index rebalancing trades in Korea.

Equity Capital Markets

Offering price &amp; size
Krafton submitted a correction report to the Financial Supervisory Service on the afternoon yesterday. It lowered the indicative price band from ₩458,000~557,000 to ₩400,000~498,000 by about 10%. The newly adjusted price band now implies a market cap range at ₩19.56~24.35T.










Pricing
Low, previous
High, previous
Low, adjusted
High, adjusted


Price
₩458,000
₩557,000
₩400,000
₩498,000


Base deal size
₩4,607.6B
₩5,603.5B
₩3,461.7B
₩4,309.8B


- Institutional allotment
₩2,534.2B
₩3,082.0B
₩1,903.9B
₩2,370.4B


Implied market cap
₩23,039.3B
₩28,019.4B
₩19,559.2B
₩24,351.2B


- Discount
32.40%
17.79%
30.93%
14.01%

Source: DART


In addition, the issuance of new shares was also reduced from 7.03 million shares to 5.62 million shares. Therefore, based on the lower end of the public offering band, the offering size decreased by ₩1.2T from ₩4.6T to ₩3.5T.  However, the secondary offering volume remains the same at 3.03 million shares. So, the split ratio is now 0.65 (primary) to 0.35 (secondary).








Offering size
Previous
Adjusted


Pre-IPO SO
43,274,070
43,274,070


Offering
10,060,230
8,654,230


- % of SO
23.25%
20.00%


- Institutional allotment
55.00~75.00%
55.00~75.00%


Primary %
69.88%
64.99%


Secondary %
30.12%
35.01%


Post-IPO shares outstanding
50,304,070
48,898,070


Capital increase rate
16.25%
13.00%


Dilution
13.98%
11.50%

Source: DART


Schedule

Krafton will open the book on July 14 and keep it open until July 27. After finalizing the offering price on July 29, we will see subscriptions on August 2. After that, August 5 is the payment date, and listing on the stock market will be completed in mid-August.
There was a time difference of about a week with Kakao Bank, whose subscription will fall on July 26.








Schedule
Previous
Adjusted


Book open
2021. 6. 28
2021. 7. 14


Book close
2021. 7. 9
2021. 7. 27


Allotment
2021. 7. 12
2021. 7. 29


Subscription
2021. 7. 14
2021. 8. 2


Payment
2021. 7. 19
2021. 8. 5


Listing
TBA
TBA

Source: DART


Valuation

The core of this revised report is the recalculation of the offering price. First, the group of comparative companies was completely changed. Krafton deleted all overseas companies, including Walt Disney and Warner Music, and reduced the comparative group to four domestic game companies: NCsoft, Netmarble, Kakao Games, and Pearl Abyss.
The average price-to-earnings ratio (PER) to last year's net income for the comparative group was 40.4 times. The average PER for the first quarter of this year on an annualized basis was calculated to be 47.2 times. An average of 43.8x was presented as the applied PER. This is slightly lower than the previous PER of 45.2x, which was initially controversial.











FY2020 net earnings based P/E
Note
NCSoft Corp
Netmarble Corp
Kakao Games Corp
PearlAbyss Corp


Reference full market cap: MIN[1M Avg, 1W Avg, 1D Close]
(A)
₩18,068.2B
₩11,216.9B
₩4,111.6B
₩4,086.8B


FY2020 annual net earnings to controlling stake
(B)
₩587.4B
₩312.9B
₩86.0B
₩86.6B


P/E
(C)=(A)/(B)
30.76x
35.85x
47.82x
47.19x


Average P/E
-
40.41x

Source: DART













FY2021 1Q based annualized net earnings based P/E
Note
NCSoft Corp
Netmarble Corp
Kakao Games Corp
PearlAbyss Corp


Reference full market cap: MIN[1M Avg, 1W Avg, 1D Close]
(A)
₩18,068.2B
₩11,216.9B
₩4,111.6B
₩4,086.8B


FY2021 1Q based annualized net earnings to controlling stake
(B)
₩323.5B
₩225.7B
₩83.0B
₩121.8B


P/E
(C)=(A)/(B)
55.85x
49.70x
49.52x
33.56x


Average P/E
-
47.16x

Source: DART


Krafton also slightly lowered the net profit applied to the IPO price.
They derived a simple average value by adding the annualized net profit based on the net profit in the first quarter of this year and last year's net profit. Through this, the applied net profitdecreased from ₩776B to ₩666B. By lowering the applied NP and the applied PER multiple together, the company's pre-discount enterprise value, which was initially calculated at ₩35T, dropped by 17% to ₩29T.
Here, a discount rate of 14.0 to 30.9% was applied to calculate the new indicative price band.








P/E valuation
Note
Krafton


FY2020 annual net earnings to controlling stake
(A)
₩556.3B


FY2021 1Q net earnings to controlling stake
(B)
₩194.0B


FY2021 1Q based annualized net earnings to controlling stake
(C) = (B) * 4
₩776.1B


Net earnings to controlling stake used in the valuation
(D) = [(A) + (C)]/2
₩666.2B


Average P/E based on FY2020 annual net earnings to controlling stake
(E)
40.40x


Average P/E based on FY2021 1Q based annualized net earnings to controlling stake
(F)
47.20x


Reference P/E
(G) = [(E) + (F)]/2
43.80x


Full market cap
(H) = (D) * (G)
₩29,166.2B


Price per share
(I) = (H)/post-IPO SO
₩579,153


Source: DART










Krafton IPO Offering Price/​Size Adjustment & Valuation Re-Review

<p>The issue of the Financial Supervisory Service's request for correction of Krafton's securities declaration has not subsided.</p><p><strong>In this regard, local media reports are coming out one after another about the real reason the FSS requested.</strong></p><h2>Simple omission in the transfer of title?</h2><p>First, a domestic newspaper published an article two days ago that the reason for the correction request by the Financial Supervisory Service was not the public offering price.</p><p><strong>According to this newspaper, the Financial Supervisory Service's request to Krafton to revise the securities declaration was found to be due to a simple omission in the transfer of title (the act of entering the name and address in the shareholder register).</strong></p><p><a href="https://www.asiae.co.kr/article/2021062910261787865" target="_blank" rel="noopener">Here is the link to the news article By Asia Business Daily</a></p><p>The source revealed in the article was not from the Financial Supervisory Service but from the local IB industry. In fact, the Financial Supervisory Service has not yet revealed the reason for the request to revise the Krafton IPO prospectus.</p><p><strong>Then, there is a possibility that this local IB industry official cited in this article may be from the underwriter side. They may be intending to prevent the FSS's request for amendment from leading to issues of legitimacy of the offering price.</strong></p>

The issue of the Financial Supervisory Service's request for correction of Krafton's securities declaration has not subsided.In this regard, local media reports are coming out one after another about the real reason the FSS requested.Simple omission in the transfer of title?First, a domestic newspaper published an article two days ago that the reason for the correction request by the Financial Supervisory Service was not the public offering price.According to this newspaper, the Financial Supervisory Service's request to Krafton to revise the securities declaration was found to be due to a simple omission in the transfer of title (the act of entering the name and address in the shareholder register).Here is the link to the news article By Asia Business DailyThe source revealed in the article was not from the Financial Supervisory Service but from the local IB industry. In fact, the Financial Supervisory Service has not yet revealed the reason for the request to revise the Krafton IPO prospectus.Then, there is a possibility that this local IB industry official cited in this article may be from the underwriter side. They may be intending to prevent the FSS's request for amendment from leading to issues of legitimacy of the offering price.

FSS's Position on Krafton IPO & The Mood of Foreign Investors Revealed by Mirae Asset

Pan-Asia Index Rebalances/ Events/ Delta One, Periscope Analytics

Brian Freitas

Pan-Asia Index Rebalances/ Events/ Delta One

Quantitative Analysis

<div><p>The Asia Short Interest weekly looks at moves in market wide short interest and highlights movements in stock specific short interest across Hong Kong, Japan, Korea and Taiwan using the last available data published by the relevant authorities.</p></div><div><p>Hong Kong saw shorts rise on <a href="https://www.smartkarma.com/entities/geely-automobile-holdings-ltd" target="_blank" data-smartkarma-citation="entities:127:1" rel="noopener">Geely Auto (175 HK)</a>, <a href="https://www.smartkarma.com/entities/ganfeng-lithium-co-ltd" target="_blank" data-smartkarma-citation="entities:26795:1" rel="noopener">Ganfeng Lithium (1772 HK)</a>, <a href="https://www.smartkarma.com/entities/pharmaron-beijing-co-ltd" target="_blank" data-smartkarma-citation="entities:28428:1" rel="noopener">Pharmaron Beijing Co Ltd-H (3759 HK)</a>, <a href="https://www.smartkarma.com/entities/sunny-optical-tech" target="_blank" data-smartkarma-citation="entities:13363:1" rel="noopener">Sunny Optical (2382 HK)</a> and <a href="https://www.smartkarma.com/entities/china-evergrande-group" target="_blank" data-smartkarma-citation="entities:479:1" rel="noopener">Evergrande Real Estate Group (3333 HK)</a> while there was short covering on <a href="https://www.smartkarma.com/entities/alibaba-group" target="_blank" data-smartkarma-citation="entities:28434:1" rel="noopener">Alibaba Group (9988 HK)</a>, <a href="https://www.smartkarma.com/entities/ck-asset-holdings-ltd" target="_blank" data-smartkarma-citation="entities:22650:1" rel="noopener">CK Asset Holdings (1113 HK)</a>, <a href="https://www.smartkarma.com/entities/tencent-holdings-ltd" target="_blank" data-smartkarma-citation="entities:26:1" rel="noopener">Tencent (700 HK)</a>, <a href="https://www.smartkarma.com/entities/ping-an-insurance-grp-co-of-china-ltd" target="_blank" data-smartkarma-citation="entities:12880:1" rel="noopener">Ping An Insurance (H) (2318 HK)</a> and <a href="https://www.smartkarma.com/entities/netease" target="_blank" data-smartkarma-citation="entities:29030:1" rel="noopener">NetEase (9999 HK)</a>. Shorts increased in the Consumer Discretionary sector, while decreasing in the Communication Services, Real Estate, Financials and Industrials sectors.</p></div><div><p>In Japan, stocks increased on <a href="https://www.smartkarma.com/entities/fujitsu-ltd" target="_blank" data-smartkarma-citation="entities:16968:1" rel="noopener">Fujitsu Ltd (6702 JP)</a>, <a href="https://www.smartkarma.com/entities/canon-inc" target="_blank" data-smartkarma-citation="entities:1:1" rel="noopener">Canon Inc (7751 JP)</a>, <a href="https://www.smartkarma.com/entities/renesas-electronics-corp" target="_blank" data-smartkarma-citation="entities:15933:1" rel="noopener">Renesas Electronics (6723 JP)</a>, <a href="https://www.smartkarma.com/entities/brother-industries-ltd" target="_blank" data-smartkarma-citation="entities:6114:1" rel="noopener">Brother Industries (6448 JP)</a> and <a href="https://www.smartkarma.com/entities/casio-computer-co-ltd" target="_blank" data-smartkarma-citation="entities:18338:1" rel="noopener">Casio Computer (6952 JP)</a> while there was short covering on <a href="https://www.smartkarma.com/entities/toshiba-corp" target="_blank" data-smartkarma-citation="entities:637:1" rel="noopener">Toshiba Corp (6502 JP)</a>, <a href="https://www.smartkarma.com/entities/sumco-corp" target="_blank" data-smartkarma-citation="entities:379:1" rel="noopener">SUMCO Corp (3436 JP)</a>, <a href="https://www.smartkarma.com/entities/seiko-epson-corp" target="_blank" data-smartkarma-citation="entities:16793:1" rel="noopener">Seiko Epson (6724 JP)</a>, <a href="https://www.smartkarma.com/entities/symbio-pharmaceuticals-ltd" target="_blank" data-smartkarma-citation="entities:10456:1" rel="noopener">Symbio Pharmaceuticals (4582 JP)</a> and <a href="https://www.smartkarma.com/entities/ebara-corp" target="_blank" data-smartkarma-citation="entities:4728:1" rel="noopener">Ebara Corp (6361 JP)</a>. Shorts increased on Information Technology and Consumer Discretionary stock, while reducing on Industrials and Health Care names.</p></div><div><p>In Korea, shorts increased on <a href="https://www.smartkarma.com/entities/samsung-electronics-co-ltd" target="_blank" data-smartkarma-citation="entities:191:1" rel="noopener">Samsung Electronics (005930 KS)</a>, <a href="https://www.smartkarma.com/entities/lg-display-co-ltd" target="_blank" data-smartkarma-citation="entities:7145:1" rel="noopener">LG Display (034220 KS)</a>, <a href="https://www.smartkarma.com/entities/hmm-co-ltd" target="_blank" data-smartkarma-citation="entities:13494:1" rel="noopener">HMM Co., Ltd. (011200 KS)</a>, <a href="https://www.smartkarma.com/entities/mando-corp" target="_blank" data-smartkarma-citation="entities:8119:1" rel="noopener">Mando Corp (204320 KS)</a> and <a href="https://www.smartkarma.com/entities/sk-hynix-inc" target="_blank" data-smartkarma-citation="entities:16955:1" rel="noopener">SK Hynix (000660 KS)</a> while shorts were covered on <a href="https://www.smartkarma.com/entities/doosan-heavy-industries-construction" target="_blank" data-smartkarma-citation="entities:7389:1" rel="noopener">Doosan Heavy Industries &amp; Construction (034020 KS)</a>, <a href="https://www.smartkarma.com/entities/kakao-corp" target="_blank" data-smartkarma-citation="entities:15002:1" rel="noopener">Kakao Corp (035720 KS)</a>, <a href="https://www.smartkarma.com/entities/pan-ocean-co-ltd" target="_blank" data-smartkarma-citation="entities:5279:1" rel="noopener">Pan Ocean (028670 KS)</a>, <a href="https://www.smartkarma.com/entities/ncsoft-corp" target="_blank" data-smartkarma-citation="entities:5169:1" rel="noopener">NCSOFT Corp (036570 KS)</a> and <a href="https://www.smartkarma.com/entities/samsung-sdi-co-ltd" target="_blank" data-smartkarma-citation="entities:503:1" rel="noopener">Samsung SDI (006400 KS)</a>.</p></div><div><p>In Taiwan, shorts increased on <a href="https://www.smartkarma.com/entities/taiwan-semiconductor-manufacturing-company" target="_blank" data-smartkarma-citation="entities:11230:1" rel="noopener">TSMC (2330 TT)</a>, <a href="https://www.smartkarma.com/entities/yang-ming-marine-transport" target="_blank" data-smartkarma-citation="entities:8502:1" rel="noopener">Yang Ming Marine Transport (2609 TT)</a>, <a href="https://www.smartkarma.com/entities/wan-hai-lines-ltd" target="_blank" data-smartkarma-citation="entities:14262:1" rel="noopener">Wan Hai Lines (2615 TT)</a>, <a href="https://www.smartkarma.com/entities/innolux-corp" target="_blank" data-smartkarma-citation="entities:4509:1" rel="noopener">Innolux Corp (3481 TT)</a> and <a href="https://www.smartkarma.com/entities/evergreen-marine-corp-ltd" target="_blank" data-smartkarma-citation="entities:15428:1" rel="noopener">Evergreen Marine Corp (2603 TT)</a> while shorts covered on <a href="https://www.smartkarma.com/entities/au-optronics-corp" target="_blank" data-smartkarma-citation="entities:6704:1" rel="noopener">AU Optronics (2409 TT)</a>, <a href="https://www.smartkarma.com/entities/united-microelectronics-corp" target="_blank" data-smartkarma-citation="entities:6450:1" rel="noopener">United Microelectronics Corp (2303 TT)</a>, <a href="https://www.smartkarma.com/entities/hsin-kuang-steel-co-ltd" target="_blank" data-smartkarma-citation="entities:19760:1" rel="noopener">Hsin Kuang Steel (2031 TT)</a>, <a href="https://www.smartkarma.com/entities/genius-electronic-optical-co-ltd" target="_blank" data-smartkarma-citation="entities:9632:1" rel="noopener">Genius Electronic Optical (3406 TT)</a> and <a href="https://www.smartkarma.com/entities/china-airlines-ltd" target="_blank" data-smartkarma-citation="entities:4591:1" rel="noopener">China Airlines (2610 TT)</a>.</p></div>

The Asia Short Interest weekly looks at moves in market wide short interest and highlights movements in stock specific short interest across Hong Kong, Japan, Korea and Taiwan using the last available data published by the relevant authorities.Hong Kong saw shorts rise on Geely Auto (175 HK), Ganfeng Lithium (1772 HK), Pharmaron Beijing Co Ltd-H (3759 HK), Sunny Optical (2382 HK) and Evergrande Real Estate Group (3333 HK) while there was short covering on Alibaba Group (9988 HK), CK Asset Holdings (1113 HK), Tencent (700 HK), Ping An Insurance (H) (2318 HK) and NetEase (9999 HK). Shorts increased in the Consumer Discretionary sector, while decreasing in the Communication Services, Real Estate, Financials and Industrials sectors.In Japan, stocks increased on Fujitsu Ltd (6702 JP), Canon Inc (7751 JP), Renesas Electronics (6723 JP), Brother Industries (6448 JP) and Casio Computer (6952 JP) while there was short covering on Toshiba Corp (6502 JP), SUMCO Corp (3436 JP), Seiko Epson (6724 JP), Symbio Pharmaceuticals (4582 JP) and Ebara Corp (6361 JP). Shorts increased on Information Technology and Consumer Discretionary stock, while reducing on Industrials and Health Care names.In Korea, shorts increased on Samsung Electronics (005930 KS), LG Display (034220 KS), HMM Co., Ltd. (011200 KS), Mando Corp (204320 KS) and SK Hynix (000660 KS) while shorts were covered on Doosan Heavy Industries &amp; Construction (034020 KS), Kakao Corp (035720 KS), Pan Ocean (028670 KS), NCSOFT Corp (036570 KS) and Samsung SDI (006400 KS).In Taiwan, shorts increased on TSMC (2330 TT), Yang Ming Marine Transport (2609 TT), Wan Hai Lines (2615 TT), Innolux Corp (3481 TT) and Evergreen Marine Corp (2603 TT) while shorts covered on AU Optronics (2409 TT), United Microelectronics Corp (2303 TT), Hsin Kuang Steel (2031 TT), Genius Electronic Optical (3406 TT) and China Airlines (2610 TT).

Asia Shorts: Geely, Ganfeng, Pharmaron, Evergrande, Fujitsu, Canon, Renesas, Toshiba, LGD, Doosan

Korea/Asia, Events, IPOs, Douglas Research Advisory

Douglas Kim

Korea/Asia, Events, IPOs

<div class="content-highlight"><p><em>In July 2021, the Krafton and SD Biosensor are expected to complete their IPOs. We expect both of these two IPOs to be duds. The more we think about this, it appears that if indeed Krafton and SD Biosensor IPOs end up doing really poorly, this could upset the entire IPO market and change the investment sentiment for Korean IPOs which has been sizzling hot in the past 15 months.</em></p></div><p><em>In this insight, we also discuss some of the major new game launches by Krafton and its major competitors in the rest of 2021. </em></p><ul>
<li>
<strong>Krafton - </strong><a href="https://www.livemint.com/companies/news/kraftons-battlegrounds-mobile-india-receives-over-5-mn-downloads-in-two-days-11624182233199.html" target="_blank" rel="noopener">Battlegrounds Mobile India</a> (BGMI), Battleground: New State, The Callisto Protocol</li>
<li>
<strong>Netmarble - </strong>Second Country</li>
<li>
<strong>Kakao Games</strong> - ODIN: Valhalla Rising</li>
<li>
<strong>NCsoft</strong> - Blade &amp; Soul 2, Project TL (The Lineage), Aion 2</li>
</ul><p></p><p></p><p><em> </em></p>

In July 2021, the Krafton and SD Biosensor are expected to complete their IPOs. We expect both of these two IPOs to be duds. The more we think about this, it appears that if indeed Krafton and SD Biosensor IPOs end up doing really poorly, this could upset the entire IPO market and change the investment sentiment for Korean IPOs which has been sizzling hot in the past 15 months.In this insight, we also discuss some of the major new game launches by Krafton and its major competitors in the rest of 2021. 

Krafton - Battlegrounds Mobile India (BGMI), Battleground: New State, The Callisto Protocol

Netmarble - Second Country

Kakao Games - ODIN: Valhalla Rising

NCsoft - Blade &amp; Soul 2, Project TL (The Lineage), Aion 2
 

New Games Launches by Krafton & Its Major Competitors in 2021

<p>In this insight, we discuss our initial thoughts on the Krafton IPO. According to the bankers' valuation, the expected market cap of the company is expected to be from 23.7 trillion won to 28.8 trillion won (IPO price range of 458,000 won to 557,000 won).</p><div class="content-highlight"><p>Our base case valuation of Krafton is an implied market cap of 24.1 trillion won or 465,055 won per share. Our valuation sensitivity suggests a valuation range from 18.3 trillion won to 30.6 trillion won. Our base case valuation of 465,055 won is close to the low end of the IPO price range of 458,000 won to 557,000 won. <strong>Given the lack of upside, we would PASS on this IPO deal. </strong></p></div>

In this insight, we discuss our initial thoughts on the Krafton IPO. According to the bankers' valuation, the expected market cap of the company is expected to be from 23.7 trillion won to 28.8 trillion won (IPO price range of 458,000 won to 557,000 won).Our base case valuation of Krafton is an implied market cap of 24.1 trillion won or 465,055 won per share. Our valuation sensitivity suggests a valuation range from 18.3 trillion won to 30.6 trillion won. Our base case valuation of 465,055 won is close to the low end of the IPO price range of 458,000 won to 557,000 won. Given the lack of upside, we would PASS on this IPO deal. 

Initial Thoughts on the Krafton IPO Valuation

South Korea

NCSOFT Corporation develops and markets on-line games that enable users to play over the Internet and computer software, such as web editing software.  The Company also designs and constructs databases, Intranet, and commercial Internet access systems.

Price Gauge
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NCSOFT Corp (036570 KS)

Krafton IPO Offering Price/Size Adjustment & Valuation Re-Review

Still, the revised valuation does not seem appropriate in that it still uses distorted net profit and the discount rate doesn't reflect high...

Sanghyun Park

FSS's Position on Krafton IPO & The Mood of Foreign Investors Revealed by Mirae Asset

The FSS indeed pays attention to the offering price, but it doesn't have the authority to request a revision. Meanwhile, Mirae Asset argues that...

Sanghyun Park

Asia Shorts: Geely, Ganfeng, Pharmaron, Evergrande, Fujitsu, Canon, Renesas, Toshiba, LGD, Doosan

The Insight looks at large short interest movements across HK, Japan, Korea and Taiwan stocks and highlights large increases/decreases in shorts to...

Brian Freitas

New Games Launches by Krafton & Its Major Competitors in 2021

We discuss the major new game launches by Krafton and its major competitors in the rest of 2021. We also discuss how poor IPOs of Krafton and SD...

Douglas Kim

Initial Thoughts on the Krafton IPO Valuation

Our base case valuation of Krafton is an implied market cap of 24.1 trillion won or 465,055 won per share. Given the lack of upside relative to the...

Douglas Kim

Price Gauge

52-week Range

Market Cap (USDm)

P/E

Dividend (Yield)

Krafton IPO Offering Price/​Size Adjustment & Valuation Re-Review

Still, the revised valuation does not seem appropriate in that it still uses distorted net profit and the discount rate doesn't reflect high...

Sanghyun Park

FSS's Position on Krafton IPO & The Mood of Foreign Investors Revealed by Mirae Asset

The FSS indeed pays attention to the offering price, but it doesn't have the authority to request a revision. Meanwhile, Mirae Asset argues that...

Sanghyun Park

Asia Shorts: Geely, Ganfeng, Pharmaron, Evergrande, Fujitsu, Canon, Renesas, Toshiba, LGD, Doosan

The Insight looks at large short interest movements across HK, Japan, Korea and Taiwan stocks and highlights large increases/decreases in shorts to...

Brian Freitas

New Games Launches by Krafton & Its Major Competitors in 2021

We discuss the major new game launches by Krafton and its major competitors in the rest of 2021. We also discuss how poor IPOs of Krafton and SD...

Douglas Kim

Initial Thoughts on the Krafton IPO Valuation

Our base case valuation of Krafton is an implied market cap of 24.1 trillion won or 465,055 won per share. Given the lack of upside relative to the...

Douglas Kim

Krafton IPO Offering Price/Size Adjustment & Valuation Re-Review