Quality-first, Business-perspective, Long-term, Urbem (HK) Limited

Urbem Capital

Quality-first, Business-perspective, Long-term

Equity Bottom-Up

<ul>
<li>The Shenzhen-based game developer trades at an attractive valuation;</li>
<li>Meanwhile, the business has been growing at a nearly triple-digit rate while maintaining an above 30% return on equity and invested capital;</li>
<li>Should investors buy into this (seemingly quality) growth story?  We want to take a deep dive.</li>
</ul>


The Shenzhen-based game developer trades at an attractive valuation;
Meanwhile, the business has been growing at a nearly triple-digit rate while maintaining an above 30% return on equity and invested capital;
Should investors buy into this (seemingly quality) growth story?  We want to take a deep dive.


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

Brian Freitas

Pan-Asia Index Rebalances/ Events/ Delta One

Index Rebalance

"A huge leap forward for South Korea" is how President Moon described the New Deal initiative that the Government launched to digitalise social infrastructure and jumpstart the transition to green energy.
The expected spend of KRW 160 trillion (US$134.45bn) over 5 years will be financed by the Government (KRW 114.1 trillion) and from local Governments and the private sector (KRW 46 trillion) and is expected to create 1.9m jobs over the period based on the Digital New Deal and the Green New Deal that look to strengthen employment and the social safety net.
The KRX has created 4 new indices tracking the secondary Battery, Bio, Internet and Gaming sectors that are expected to benefit from the New Deal initiative plus an additional index (BBIG) that includes the top 3 stocks from each sector. While the BBIG is an equal weighted index, the sector indices allocate 75% of the index weight equally among the top 3 stocks while the remaining 25% weight is allocated to the rest of the stocks based on free float market cap. This will create some very interesting trades if ETFs that are launched on these indices gather a lot of assets.
Some stocks that have been included in these indices have already started to run up in anticipation of index flows and investors will need to monitor ETF asset gathering in determining entry/exit trades on these stocks. There are existing ETFs that track these sectors so it is hard to fathom why ETFs on the new indices would gather a lot of assets especially with a skewed weighting scheme.

"A huge leap forward for South Korea" is how President Moon described the New Deal initiative that the Government launched to digitalise social infrastructure and jumpstart the transition to green energy.
The expected spend of KRW 160 trillion (US$134.45bn) over 5 years will be financed by the Government (KRW 114.1 trillion) and from local Governments and the private sector (KRW 46 trillion) and is expected to create 1.9m jobs over the period based on the Digital New Deal and the Green New Deal that look to strengthen employment and the social safety net.
The KRX has created 4 new indices tracking the secondary Battery, Bio, Internet and Gaming sectors that are expected to benefit from the New Deal initiative plus an additional index (BBIG) that includes the top 3 stocks from each sector. While the BBIG is an equal weighted index, the sector indices allocate 75% of the index weight equally among the top 3 stocks while the remaining 25% weight is allocated to the rest of the stocks based on free float market cap. This will create some very interesting trades if ETFs that are launched on these indices gather a lot of assets.
Some stocks that have been included in these indices have already started to run up in anticipation of index flows and investors will need to monitor ETF asset gathering in determining entry/exit trades on these stocks. There are existing ETFs that track these sectors so it is hard to fathom why ETFs on the new indices would gather a lot of assets especially with a skewed weighting scheme.

Korean New Deal Fund - Could This Be a BBIG Deal?

Korea/Asia, Events, IPOs, Douglas Research Advisory

Douglas Kim

Korea/Asia, Events, IPOs

Equity Capital Markets

<div class="content-highlight">Our base case valuation of Kakao Games is EV of 2.4 trillion won, a market cap of 3.7 trillion won, and an implied price of 48,737 won per share (representing 103% upside from the high end of the IPO price range of 24,000 won per share). Given the high upside, we are including Kakao Games in our model portfolio. However, our target price remains 22% below the current gray market value of <a href="http://www.ipo38.co.kr/forum/?code=293490" target="_blank" rel="noopener">62,500 won.</a></div>We used a 30x EV/EBITDA (2020E) to value the company, which is twice as high as the average EV/EBITDA multiple of the comps. We have used the higher EV/EBITDA multiple mainly due to a) higher sales growth of the company compared to its peers, b) Kakao Corp's greater desire to aggressively expand the game business, as evidenced by the numerous acquisitions of the company in the past year, and c) a significant improvement in operating profit growth in 1H 2020. Market value of Kakao Games' stake in Krafton - Kakao Games has a 2.1% stake in Krafton, which could become the biggest game company in Korea once it lists in Korea. The local media have been mentioning Krafton to have a value of nearly 20 trillion won to <a href="http://www.thebell.co.kr/free/content/ArticleView.asp?key=202007031554089920108088&amp;svccode=00&amp;page=1&amp;sort=thebell_check_time" target="_blank" rel="noopener">30 trillion won.</a> We have used a value of 25 trillion won for the value of Krafton so a 2.1% stake would be worth 517 billion won.

Our base case valuation of Kakao Games is EV of 2.4 trillion won, a market cap of 3.7 trillion won, and an implied price of 48,737 won per share (representing 103% upside from the high end of the IPO price range of 24,000 won per share). Given the high upside, we are including Kakao Games in our model portfolio. However, our target price remains 22% below the current gray market value of 62,500 won.We used a 30x EV/EBITDA (2020E) to value the company, which is twice as high as the average EV/EBITDA multiple of the comps. We have used the higher EV/EBITDA multiple mainly due to a) higher sales growth of the company compared to its peers, b) Kakao Corp's greater desire to aggressively expand the game business, as evidenced by the numerous acquisitions of the company in the past year, and c) a significant improvement in operating profit growth in 1H 2020. Market value of Kakao Games' stake in Krafton - Kakao Games has a 2.1% stake in Krafton, which could become the biggest game company in Korea once it lists in Korea. The local media have been mentioning Krafton to have a value of nearly 20 trillion won to 30 trillion won. We have used a value of 25 trillion won for the value of Krafton so a 2.1% stake would be worth 517 billion won.

Kakao Games is getting ready for an IPO in the next several weeks. This will be the second-biggest IPO in Korea in 2020 so far. After the blockbuster SK Biopharm IPO combined with huge outperformance of leading game companies in Korea as well as relatively reasonable IPO valuation range offered by the company, there is likely to be a big demand for Kakao Games IPO. <div class="content-highlight">In the gray market,<a href="http://www.pstock.co.kr/2005pstock/common/ncomclub/ncomclub_list.asp?nco_num=5645" target="_blank" rel="noopener"> Kakao Games</a> is trading at 60,500 won per share (p-stock OTC platform). This represents nearly 3x the value proposed by the bankers in this IPO. Typically, but not always, if the share prices trade at much higher levels than the IPO price range, then the IPOs typically but not always perform well.</div>The IPO price range is from 20,000 won to 24,000 won. The IPO base deal size ranges from $267 million to $320 million. The bankers' valuation range in terms of market cap is from 1.5 trillion won to 1.8 trillion won. The book-building for the institutional investors will start on 26 August.<div class="content-highlight">This IPO is poised to be a big winner at the current IPO price range of 20,000 won to 24,000 won per share.</div>

Kakao Games is getting ready for an IPO in the next several weeks. This will be the second-biggest IPO in Korea in 2020 so far. After the blockbuster SK Biopharm IPO combined with huge outperformance of leading game companies in Korea as well as relatively reasonable IPO valuation range offered by the company, there is likely to be a big demand for Kakao Games IPO. In the gray market, Kakao Games is trading at 60,500 won per share (p-stock OTC platform). This represents nearly 3x the value proposed by the bankers in this IPO. Typically, but not always, if the share prices trade at much higher levels than the IPO price range, then the IPOs typically but not always perform well.The IPO price range is from 20,000 won to 24,000 won. The IPO base deal size ranges from $267 million to $320 million. The bankers' valuation range in terms of market cap is from 1.5 trillion won to 1.8 trillion won. The book-building for the institutional investors will start on 26 August.This IPO is poised to be a big winner at the current IPO price range of 20,000 won to 24,000 won per share.

<a href="https://www.smartkarma.com/entities/kakao-games-corp" target="_blank" data-smartkarma-citation="entities:26730:1" rel="noopener">Kakao Games (1404796D KS)</a> is attempting to complete its IPO in 2H 2020. Kakao Games and <a href="https://www.smartkarma.com/entities/krafton-inc" target="_blank" data-smartkarma-citation="entities:28956:1" rel="noopener"> Krafton Inc (1486402D KS)</a> are two major game-related IPOs that are expected in 2H 2020. In the last week of April, Kakao Games announced that it plans to complete its IPO by the end of this year. Kakao Games hired Samsung Securities and Korea Investment &amp; Securities to be the lead underwriters of this IPO.Kakao Games is a leading game publisher in Korea with a focus on mobile and PC online games. As a game publisher, it is known for Black Desert online (serviced in North America and Europe), a successful MMORPG in the global market, and Player Unknown's Battlegrounds (serviced in Korea). Kakao Games is currently offering games such as Battlegrounds, Pass of Exile, and Princess Connect Re-dive. Kraftton's Air (A:IR) is also scheduled to be launched soon. Kakao Games core business remains game publishing. However, the company is trying to expand its own game development and its recent numerous acquisitions of game developers are a strong sign of the company's aggressive expansion in this area.

Kakao Games (1404796D KS) is attempting to complete its IPO in 2H 2020. Kakao Games and  Krafton Inc (1486402D KS) are two major game-related IPOs that are expected in 2H 2020. In the last week of April, Kakao Games announced that it plans to complete its IPO by the end of this year. Kakao Games hired Samsung Securities and Korea Investment &amp; Securities to be the lead underwriters of this IPO.Kakao Games is a leading game publisher in Korea with a focus on mobile and PC online games. As a game publisher, it is known for Black Desert online (serviced in North America and Europe), a successful MMORPG in the global market, and Player Unknown's Battlegrounds (serviced in Korea). Kakao Games is currently offering games such as Battlegrounds, Pass of Exile, and Princess Connect Re-dive. Kraftton's Air (A:IR) is also scheduled to be launched soon. Kakao Games core business remains game publishing. However, the company is trying to expand its own game development and its recent numerous acquisitions of game developers are a strong sign of the company's aggressive expansion in this area. 

South Korea

Com2uS Corporation develops and markets game software based on digital convergence contents for internet mobile application.  The Company provides its products to domestic and overseas markets such as Asia, Europe, and North America.

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Com2us Corp (078340 KS)

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Urbem Capital

Korean New Deal Fund - Could This Be a BBIG Deal?

f

Brian Freitas

Kakao Games IPO Valuation Analysis

Our base case valuation of Kakao Games is EV of 2.4 trillion won, a market cap of 3.7 trillion won, and an implied price of 48,737 won per share...

Douglas Kim

Kakao Games IPO Preview

Kakao Games is getting ready for an IPO in the next several weeks. This will be the second-biggest IPO in Korea in 2020 so far. After the...

Douglas Kim

Initial Thoughts on the Kakao Games IPO

Kakao Games (1404796D KS) is attempting to complete its IPO in 2H 2020. Kakao Games and Krafton Inc (1486402D KS) are two major game-related IPOs...

Douglas Kim

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