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.

Event-Driven

<p>Krafton's share price is approaching its IPO price. Today alone, it is up 4%.</p><section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/224/616/original/Screen+Shot+2021-08-18+at+3.05.36+AM.png?1629270353" class="editor-image img-responsive" data-smartkarma-image-id="224616"></figure></section><p><strong>If we look at the trading data for the past 5 days, we can see a typical rebalancing trading of the KOSPI 200.</strong> The three major players in KOSPI 200 trading are pensions, insurance, and local publicly-raised funds. And they have been buying Krafton for the past five days.</p><section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/224/594/original/Screen+Shot+2021-08-18+at+2.06.35+AM.png?1629266839" class="editor-image img-responsive" data-smartkarma-image-id="224594"></figure></section><div class="content-highlight"><p><strong>Even today, if we look at the provisional aggregate data provided by the KRX, the buying of local pension funds continues. As of 2:30 pm (in local time) today, it was counted that local pension funds were making a net buy of about 30,000 shares.</strong></p></div>

Krafton's share price is approaching its IPO price. Today alone, it is up 4%.If we look at the trading data for the past 5 days, we can see a typical rebalancing trading of the KOSPI 200. The three major players in KOSPI 200 trading are pensions, insurance, and local publicly-raised funds. And they have been buying Krafton for the past five days.Even today, if we look at the provisional aggregate data provided by the KRX, the buying of local pension funds continues. As of 2:30 pm (in local time) today, it was counted that local pension funds were making a net buy of about 30,000 shares.

Checking Passive Flow Trading for Krafton

Korea/Asia, Events, IPOs, Douglas Research Advisory

Douglas Kim

Korea/Asia, Events, IPOs

Equity Bottom-Up

<div class="content-highlight">
<p>We believe that the sales and profit estimates for Krafton in 2022 is based on the company near-perfectly executing its business plans and also the regulators in China not enforcing any major new rules that could result in reduced playing time of the company's games in China.</p>
<p>As a result, we think that the probability of Krafton being able to reach the consensus sales and profit estimates in 2022 is likely to be reduced further in the coming months causing its stock price to remain relatively weak. We maintain our Negative view of Krafton.</p>
</div><h2>Krafton 2Q 2021 Earnings Comparison</h2><p>Krafton reported its first quarterly earnings report after its IPO in the past week. Krafton reported sales of 459.3 billion won (up 7% YoY and down 0.4% QoQ) and operating profit of 174.2 billion won (down 0.3% YoY and down 23.3% QoQ) in 2Q 2021. Operating margins declined from 40.7% in 2Q 2020 to 37.9% in 2Q 2021. </p><table class="table table-striped">
<colgroup>
<col>
<col span="5">
</colgroup>
<tbody>
<tr>
<td colspan="3" style="width: 207pt;"><strong>Krafton 2Q 2021 Earnings Comparison</strong></td>
<td style="width: 60pt;"></td>
<td style="width: 60pt;"></td>
<td style="width: 60pt;"></td>
</tr>
<tr>
<td><strong>(Won bn)</strong></td>
<td style="text-align: right;"><strong>2Q 2020</strong></td>
<td style="text-align: right;"><strong>2Q 2021</strong></td>
<td style="text-align: right;"><strong>% Change YoY</strong></td>
<td style="text-align: right;"><strong>1Q 2021</strong></td>
<td style="text-align: right;"><strong>% Change QoQ</strong></td>
</tr>
<tr>
<td><strong>Sales</strong></td>
<td style="text-align: right;"><strong>429.4</strong></td>
<td style="text-align: right;"><strong>459.3</strong></td>
<td style="text-align: right;"><strong>7.0%</strong></td>
<td style="text-align: right;"><strong>461.0</strong></td>
<td style="text-align: right;"><strong>-0.4%</strong></td>
</tr>
<tr>
<td>Operating Profit</td>
<td style="text-align: right;">174.8</td>
<td style="text-align: right;">174.2</td>
<td style="text-align: right;">-0.3%</td>
<td style="text-align: right;">227.2</td>
<td style="text-align: right;">-23.3%</td>
</tr>
<tr>
<td>Net Profit</td>
<td style="text-align: right;">121.2</td>
<td style="text-align: right;">141.3</td>
<td style="text-align: right;">16.6%</td>
<td style="text-align: right;">194.0</td>
<td style="text-align: right;">-27.2%</td>
</tr>
<tr>
<td></td>
<td style="text-align: right;"></td>
<td style="text-align: right;"></td>
<td style="text-align: right;"></td>
<td style="text-align: right;"></td>
<td style="text-align: right;"></td>
</tr>
<tr>
<td><strong>Profit Margins</strong></td>
<td style="text-align: right;"><strong>2Q 2020</strong></td>
<td style="text-align: right;"><strong>2Q 2021</strong></td>
<td style="text-align: right;"></td>
<td style="text-align: right;"><strong>1Q 2021</strong></td>
<td style="text-align: right;"></td>
</tr>
<tr>
<td><strong>Operating Margin</strong></td>
<td style="text-align: right;"><strong>40.7%</strong></td>
<td style="text-align: right;"><strong>37.9%</strong></td>
<td style="text-align: right;"></td>
<td style="text-align: right;"><strong>49.3%</strong></td>
<td style="text-align: right;"></td>
</tr>
<tr>
<td>Net Margin</td>
<td style="text-align: right;">28.2%</td>
<td style="text-align: right;">30.8%</td>
<td style="text-align: right;"></td>
<td style="text-align: right;">42.1%</td>
<td style="text-align: right;"></td>
</tr>
<tr>
<td colspan="2">Source: Company data</td>
<td></td>
<td></td>
<td></td>
<td></td>
</tr>
</tbody>
</table><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/223/912/original/image_61680225921629098950166.png?1629098951" class="editor-image img-responsive" data-smartkarma-image-id="223912"></figure><div class="content-caption">Earnings CSource: Company data</div><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/223/913/original/image_45611897931629099016561.png?1629099016" class="editor-image img-responsive" data-smartkarma-image-id="223913"></figure><div class="content-caption">Sales Breakdown (Source: Company data)</div>


We believe that the sales and profit estimates for Krafton in 2022 is based on the company near-perfectly executing its business plans and also the regulators in China not enforcing any major new rules that could result in reduced playing time of the company's games in China.
As a result, we think that the probability of Krafton being able to reach the consensus sales and profit estimates in 2022 is likely to be reduced further in the coming months causing its stock price to remain relatively weak. We maintain our Negative view of Krafton.
Krafton 2Q 2021 Earnings ComparisonKrafton reported its first quarterly earnings report after its IPO in the past week. Krafton reported sales of 459.3 billion won (up 7% YoY and down 0.4% QoQ) and operating profit of 174.2 billion won (down 0.3% YoY and down 23.3% QoQ) in 2Q 2021. Operating margins declined from 40.7% in 2Q 2020 to 37.9% in 2Q 2021. 






Krafton 2Q 2021 Earnings Comparison





(Won bn)
2Q 2020
2Q 2021
% Change YoY
1Q 2021
% Change QoQ


Sales
429.4
459.3
7.0%
461.0
-0.4%


Operating Profit
174.8
174.2
-0.3%
227.2
-23.3%


Net Profit
121.2
141.3
16.6%
194.0
-27.2%










Profit Margins
2Q 2020
2Q 2021

1Q 2021



Operating Margin
40.7%
37.9%

49.3%



Net Margin
28.2%
30.8%

42.1%



Source: Company data






Earnings CSource: Company dataSales Breakdown (Source: Company data)

Krafton - Consensus Likely to Reduce Earnings Estimates in 2022

<h2>KOSPI 200 Fast Entry screening</h2><p>Kakao Bank and Krafton's KOSPI 200 Fast Entry are 100% certain at this point.</p><div class="content-highlight"><p><strong>They need to be within the top 50 full market cap rankings on the KOSPI for 15 trading days after listing.</strong></p></div><section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/223/755/original/Screen+Shot+2021-08-15+at+3.07.46+AM.png?1629011369" class="editor-image img-responsive" data-smartkarma-image-id="223755"></figure></section><p>Currently, LG Display ranks 50th in the KOSPI market cap, and its market cap is in the 7.4-8 trillion range. Fast entry is possible as long as the market caps of both Kakao Bank and Krafton do not plunge below half in the next ten trading days.</p><table class="table table-striped">
<colgroup>
<col width="100">
<col width="100">
<col width="100">
<col width="100">
</colgroup>
<tbody>
<tr>
<td data-sheets-value='{"1":2,"2":"KOSPI 200 Fast Entry"}'>KOSPI 200 Fast Entry</td>
<td style="text-align: right;" data-sheets-value='{"1":2,"2":"KakaoBank Corp"}' data-sheets-formula='=googlefinance(R[1]C[0], "name")'>KakaoBank Corp</td>
<td style="text-align: right;" data-sheets-value='{"1":2,"2":"Krafton Inc"}' data-sheets-formula='=googlefinance(R[1]C[0], "name")'>Krafton Inc</td>
<td style="text-align: right;" data-sheets-value='{"1":2,"2":"LG Display Co Ltd"}' data-sheets-formula='=googlefinance(R[1]C[0], "name")'><div><div>LG Display Co Ltd, currently at the 50th spot</div></div></td>
</tr>
<tr>
<td data-sheets-value='{"1":3,"3":44414}' data-sheets-numberformat='[null,5,"mm. dd",1]'>08. 06</td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":33.1619965426}' data-sheets-numberformat='[null,2,"₩#,##0.00T",1]' data-sheets-formula="=R[0]C[3]*R3C2/1000000000000">₩33.16T</td>
<td style="text-align: right;" data-sheets-value='{"1":2,"2":"-"}'>-</td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":7.961399325}' data-sheets-numberformat='[null,2,"₩#,##0.00T",1]' data-sheets-formula="=R[0]C[3]*R3C4/1000000000000">₩7.96T</td>
</tr>
<tr>
<td data-sheets-value='{"1":3,"3":44417}' data-sheets-numberformat='[null,5,"mm. dd",1]' data-sheets-formula="=R[-1]C[0]+3">08. 09</td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":37.2953686045}' data-sheets-numberformat='[null,2,"₩#,##0.00T",1]' data-sheets-formula="=R[0]C[3]*R3C2/1000000000000">₩37.30T</td>
<td style="text-align: right;" data-sheets-value='{"1":2,"2":"-"}'>-</td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":7.854054615}' data-sheets-numberformat='[null,2,"₩#,##0.00T",1]' data-sheets-formula="=R[0]C[3]*R3C4/1000000000000">₩7.85T</td>
</tr>
<tr>
<td data-sheets-value='{"1":3,"3":44418}' data-sheets-numberformat='[null,5,"mm. dd",1]' data-sheets-formula="=R[-1]C[0]+1">08. 10</td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":33.9221569218}' data-sheets-numberformat='[null,2,"₩#,##0.00T",1]' data-sheets-formula="=R[0]C[3]*R3C2/1000000000000">₩33.92T</td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":22.19972378}' data-sheets-numberformat='[null,2,"₩#,##0.00T",1]' data-sheets-formula="=R[0]C[3]*R3C3/1000000000000">₩22.20T</td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":7.925617755}' data-sheets-numberformat='[null,2,"₩#,##0.00T",1]' data-sheets-formula="=R[0]C[3]*R3C4/1000000000000">₩7.93T</td>
</tr>
<tr>
<td data-sheets-value='{"1":3,"3":44419}' data-sheets-numberformat='[null,5,"mm. dd",1]' data-sheets-formula="=R[-1]C[0]+1">08. 11</td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":35.3474576328}' data-sheets-numberformat='[null,2,"₩#,##0.00T",1]' data-sheets-formula="=R[0]C[3]*R3C2/1000000000000">₩35.35T</td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":19.90151449}' data-sheets-numberformat='[null,2,"₩#,##0.00T",1]' data-sheets-formula="=R[0]C[3]*R3C3/1000000000000">₩19.90T</td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":7.90772697}' data-sheets-numberformat='[null,2,"₩#,##0.00T",1]' data-sheets-formula="=R[0]C[3]*R3C4/1000000000000">₩7.91T</td>
</tr>
<tr>
<td data-sheets-value='{"1":3,"3":44420}' data-sheets-numberformat='[null,5,"mm. dd",1]' data-sheets-formula="=R[-1]C[0]+1">08. 12</td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":35.0623974906}' data-sheets-numberformat='[null,2,"₩#,##0.00T",1]' data-sheets-formula="=R[0]C[3]*R3C2/1000000000000">₩35.06T</td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":19.85261642}' data-sheets-numberformat='[null,2,"₩#,##0.00T",1]' data-sheets-formula="=R[0]C[3]*R3C3/1000000000000">₩19.85T</td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":7.710928335}' data-sheets-numberformat='[null,2,"₩#,##0.00T",1]' data-sheets-formula="=R[0]C[3]*R3C4/1000000000000">₩7.71T</td>
</tr>
<tr>
<td data-sheets-value='{"1":3,"3":44421}' data-sheets-numberformat='[null,5,"mm. dd",1]' data-sheets-formula="=R[-1]C[0]+1">08. 13</td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":36.3926781542}' data-sheets-numberformat='[null,2,"₩#,##0.00T",1]' data-sheets-formula="=R[0]C[3]*R3C2/1000000000000">₩36.39T</td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":21.36845659}' data-sheets-numberformat='[null,2,"₩#,##0.00T",1]' data-sheets-formula="=R[0]C[3]*R3C3/1000000000000">₩21.37T</td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":7.44256656}' data-sheets-numberformat='[null,2,"₩#,##0.00T",1]' data-sheets-formula="=R[0]C[3]*R3C4/1000000000000">₩7.44T</td>
</tr>
<tr><td colspan="4" data-sheets-value='{"1":2,"2":"Source: KRX"}'>Source: KRX</td></tr>
</tbody>
</table>

KOSPI 200 Fast Entry screeningKakao Bank and Krafton's KOSPI 200 Fast Entry are 100% certain at this point.They need to be within the top 50 full market cap rankings on the KOSPI for 15 trading days after listing.Currently, LG Display ranks 50th in the KOSPI market cap, and its market cap is in the 7.4-8 trillion range. Fast entry is possible as long as the market caps of both Kakao Bank and Krafton do not plunge below half in the next ten trading days.








KOSPI 200 Fast Entry
KakaoBank Corp
Krafton Inc
LG Display Co Ltd, currently at the 50th spot


08. 06
₩33.16T
-
₩7.96T


08. 09
₩37.30T
-
₩7.85T


08. 10
₩33.92T
₩22.20T
₩7.93T


08. 11
₩35.35T
₩19.90T
₩7.91T


08. 12
₩35.06T
₩19.85T
₩7.71T


08. 13
₩36.39T
₩21.37T
₩7.44T

Source: KRX



Why Would Kakao Bank/Krafton's KOSPI 200 Fast Entry Float Estimations Be Such an Extraordinary Task?

Latest News from the World’s Leading Innovators

Granite Bay Capital

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Granite Bay Capital is an innovation focussed investment company with a deep focus on the companies at the leading edge of innovation across major themes such as AI, ubiquitous computing, sustainability, automation and longevity.

Thematic (Sector/Industry)

<p>Headline Developments On the back of the Epic v Apple case, documents were released highlighting that Google (GOOG) had considered buying Epic outright.  During the case, Epic Games outlined Google’s plans to develop “a series of internal projects to address the ‘contagion’ it perceived from efforts by Epic and others to offer consumers and developers competitive alternatives and has even contemplated buying some or all of Epic to squelch this threat”.</p>

Headline Developments On the back of the Epic v Apple case, documents were released highlighting that Google (GOOG) had considered buying Epic outright.  During the case, Epic Games outlined Google’s plans to develop “a series of internal projects to address the ‘contagion’ it perceived from efforts by Epic and others to offer consumers and developers competitive alternatives and has even contemplated buying some or all of Epic to squelch this threat”.

Equity Capital Markets

<p>Krafton IPO started trading today. It reached as high as 480,000 won and as low as 405,000 won. Currently, it is trading at 454,000 won, which would be 9% lower than the IPO price of 498,000 won. The current price of Krafton is 0.4% lower than our base case valuation 455,942 won. </p><p>This was the worst first day IPO performance among the major IPOs in Korea with market cap of more than 1 trillion won in 2020 and 2021. Despite the disappointing IPO performance, Krafton is now the 20th largest stock in KOSPI. </p><p>Despite numerous positives of Krafton as one of the most popular game companies in the world, the IPO was disappointing mainly because this was a classic case of the owners being a bit too greedy in their valuation assessment of the company. Although the IPO price range was lowered, it was not lowered enough and many investor saw past this greed and have chosen not to invest in this company. </p><p>All in all, we believe that the valuation of Krafton is likely to drift towards the low-to-mid end of our valuation sensitivity analysis over the next 6 to 12 months, which would suggest implied market cap of 17.3 trillion won to 23 trillion won (344,487 won per share to 455,942 won per share). We continue to have a NEGATIVE view of the Krafton IPO. </p>

Krafton IPO started trading today. It reached as high as 480,000 won and as low as 405,000 won. Currently, it is trading at 454,000 won, which would be 9% lower than the IPO price of 498,000 won. The current price of Krafton is 0.4% lower than our base case valuation 455,942 won. This was the worst first day IPO performance among the major IPOs in Korea with market cap of more than 1 trillion won in 2020 and 2021. Despite the disappointing IPO performance, Krafton is now the 20th largest stock in KOSPI. Despite numerous positives of Krafton as one of the most popular game companies in the world, the IPO was disappointing mainly because this was a classic case of the owners being a bit too greedy in their valuation assessment of the company. Although the IPO price range was lowered, it was not lowered enough and many investor saw past this greed and have chosen not to invest in this company. All in all, we believe that the valuation of Krafton is likely to drift towards the low-to-mid end of our valuation sensitivity analysis over the next 6 to 12 months, which would suggest implied market cap of 17.3 trillion won to 23 trillion won (344,487 won per share to 455,942 won per share). We continue to have a NEGATIVE view of the Krafton IPO. 

Krafton's IPO Trading (Worst 1st Day Performance Among Major IPOs in Korea in the Past 2 Years)

South Korea

Krafton, Inc. operates as a game development company. The Company develops console games, mobile games, computer games, and other related products. Krafton markets its products throughout South Korea.

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Krafton (259960 KS)

Checking Passive Flow Trading for Krafton

Krafton is approaching its IPO price as it is up 4% today alone. This post checks the passive flow trading since the listing, including today, and...

Sanghyun Park

Krafton - Consensus Likely to Reduce Earnings Estimates in 2022

We think that the probability of Krafton being able to reach the consensus sales and profit estimates in 2022 is likely to be reduced further in...

Douglas Kim

Why Would Kakao Bank/Krafton's KOSPI 200 Fast Entry Float Estimations Be Such an Extraordinary Task?

This post explains why Kakao Bank and Krafton's KOSPI 200 Fast Entry float estimations would be such an extraordinary task.

Sanghyun Park

Weekly Innovation Review (WIRE) #44

Headline Developments On the back of the Epic v Apple case, documents were released highlighting that Google (GOOG) had considered buying Epic...

Granite Bay Capital

Krafton's IPO Trading (Worst 1st Day Performance Among Major IPOs in Korea in the Past 2 Years)

The Krafton IPO was disappointing mainly because this was a classic case of the owners being a bit too greedy in their valuation assessment of the...

Douglas Kim

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