Quality-first, Business-perspective Strategy, Urbem (HK) Limited

Steven Chen

Quality-first, Business-perspective Strategy

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.

Technical Analyst, Vermilion Research

Joe Jasper

Technical Analyst

Technical and Quantitative Research

Vermilion Research

Vermilion’s objective is to deliver timely, actionable, and unique technical research to professional investors through the application of our various technical indicators.

Our research strategists seek to highlight securities which we believe are at major inflection points, based on our various technical and quantitative indicators, and offer asymmetric risk/return profiles. Our unique research methodology, centered on relative strength, enables our strategists to deliver superior investment recommendations.

Our process begins by organizing the universe of actively traded stocks into discrete sectors, then into industry groups. We then apply our technical and quantitative tools to identify developing price trends. Once attractive trends are identified within a selected sector or group, we screen for individual stocks which we believe offer the best risk/reward profile. We provide a historical perspective that often reveals, through our long-term charts, how price patterns often repeat themselves over time.

Technical Analysis

MSCI Emerging Markets Index / Technical Analysis

China (MSCI China, Shanghai Comp., Shenzhen A Share) continues to offer many attractive setups and is a major focus in today’s EM Strategy report. Additionally, Taiwan (TAIEX) continues to be worthy of an overweight within the EM universe with the RS uptrend intact. We highlight several attractive set ups.

China (MSCI China, Shanghai Comp., Shenzhen A Share) continues to offer many attractive setups and is a major focus in today’s EM Strategy report. Additionally, Taiwan (TAIEX) continues to be worthy of an overweight within the EM universe with the RS uptrend intact. We highlight several attractive set ups.

EM Strategy and Chartbook: Remain Overweight EM Vs. EAFE

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)

Fire Rock: A Value Play or Value Trap?

Another superior-return, fast-growing gaming business trading at an attractive level. Should investors buy into this (seemingly quality) growth...

Steven Chen

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

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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

EM Strategy and Chartbook: Remain Overweight EM Vs. EAFE

China (MSCI China, Shanghai Comp., Shenzhen A Share) continues to offer many attractive setups and is a major focus in today’s EM Strategy report....

Vermilion Research

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