Korea/Asia, Events, IPOs, Douglas Research Advisory

Douglas Kim

Korea/Asia, Events, IPOs

Equity Capital Markets

<div class="content-highlight">
<p>Krafton announced its ESOA (employee stock ownership association) allocation for the IPO shares today and the results were one of the worst among the major IPOs in the Korea in the past couple of years. The employees often know the best in terms of what's really going on in the companies they work for. The fact that the ESOA allocation for the IPO shares were so poor for Krafton adds to the NEGATIVE investment thesis on this IPO. </p>
<p>There were originally 1.74 million Krafton IPO shares that were allocated to ESOA. However, only 0.35 million shares were subscribed by the ESOA members, representing only 20% of the total available allocation. </p>
</div>


Krafton announced its ESOA (employee stock ownership association) allocation for the IPO shares today and the results were one of the worst among the major IPOs in the Korea in the past couple of years. The employees often know the best in terms of what's really going on in the companies they work for. The fact that the ESOA allocation for the IPO shares were so poor for Krafton adds to the NEGATIVE investment thesis on this IPO. 
There were originally 1.74 million Krafton IPO shares that were allocated to ESOA. However, only 0.35 million shares were subscribed by the ESOA members, representing only 20% of the total available allocation. 


Krafton: Only 20% of Employee Stock Ownership Association Apply for the IPO Shares

<p>In this insight, we provide the details of the Wanted Lab IPO, which received higher amounts of retail deposit interest than the Krafton IPO. Wanted Lab's IPO price has been determined at 35,000 won and at this price, Wanted Lab's market cap would be 165 billion won. The Wanted Lab IPO will start trading on 11 August. The IPO base deal size is $22 million. The lead underwriter of this IPO is Korea Investment &amp; Securities.</p>
<h2>Comparison of Wanted Lab vs. Krafton IPO Retail Demand</h2>
<p>The retail demand ratio of the Wanted Lab IPO was <strong>1,731 to 1</strong> and there were<strong> 5.5 trillion won</strong> in retail money deposits that were gathered for this IPO. </p>
<p>Krafton's IPO price has been determined at 498,000 won and at this price, Krafton's market cap would be 25 trillion won. Retail demand ratio of the Krafton IPO was <strong>7.8 to 1</strong> and there were <strong>5.03 trillion won</strong> in retail money deposits that were gathered for this IPO.</p>
<ul>
<li>Clearly, the Korean retail investors have a much more positive view of Wanted Lab versus Krafton.</li>
<li>The enormous interest in Wanted Lab is especially revealing, considering the fact at their current IPO prices, Wanted Lab's market cap is only <strong>0.7%</strong> of Krafton's market cap.  </li>
</ul>
<table class="table table-striped">
<colgroup> <col> <col> </colgroup>
<tbody>
<tr>
<td colspan="2" style="width: 448pt;">
<div><strong>Deal Specifics of the Wanted Lab IPO:</strong></div>
</td>
</tr>
<tr>
<td>Lead underwriters of the IPO: </td>
<td style="width: 234pt;">Korea Investment &amp; Securities</td>
</tr>
<tr>
<td>IPO price per share: </td>
<td style="width: 234pt;">35,000 won</td>
</tr>
<tr>
<td>Number of Shares for IPO:</td>
<td style="width: 234pt;">0.73mn (0.53mn new shares; 0.20mn old shares)</td>
</tr>
<tr>
<td>IPO base deal size: </td>
<td style="width: 234pt;">US$22mn </td>
</tr>
<tr>
<td>Expected common shares outstanding, fully diluted (post-IPO):  </td>
<td style="width: 234pt;">4.72m shares</td>
</tr>
<tr>
<td>Expected market cap after IPO:</td>
<td style="width: 234pt;">165 billion won</td>
</tr>
<tr>
<td>Listing date: </td>
<td style="text-align: left; width: 234pt;">11-Aug-21</td>
</tr>
<tr>
<td>Source: Company data</td>
<td> </td>
</tr>
</tbody>
</table>

In this insight, we provide the details of the Wanted Lab IPO, which received higher amounts of retail deposit interest than the Krafton IPO. Wanted Lab's IPO price has been determined at 35,000 won and at this price, Wanted Lab's market cap would be 165 billion won. The Wanted Lab IPO will start trading on 11 August. The IPO base deal size is $22 million. The lead underwriter of this IPO is Korea Investment &amp; Securities.
Comparison of Wanted Lab vs. Krafton IPO Retail Demand
The retail demand ratio of the Wanted Lab IPO was 1,731 to 1 and there were 5.5 trillion won in retail money deposits that were gathered for this IPO. 
Krafton's IPO price has been determined at 498,000 won and at this price, Krafton's market cap would be 25 trillion won. Retail demand ratio of the Krafton IPO was 7.8 to 1 and there were 5.03 trillion won in retail money deposits that were gathered for this IPO.

Clearly, the Korean retail investors have a much more positive view of Wanted Lab versus Krafton.
The enormous interest in Wanted Lab is especially revealing, considering the fact at their current IPO prices, Wanted Lab's market cap is only 0.7% of Krafton's market cap.  


   



Deal Specifics of the Wanted Lab IPO:



Lead underwriters of the IPO: 
Korea Investment &amp; Securities


IPO price per share: 
35,000 won


Number of Shares for IPO:
0.73mn (0.53mn new shares; 0.20mn old shares)


IPO base deal size: 
US$22mn 


Expected common shares outstanding, fully diluted (post-IPO):  
4.72m shares


Expected market cap after IPO:
165 billion won


Listing date: 
11-Aug-21


Source: Company data
 




Wanted Lab IPO - More Retail Interest than the Krafton IPO

<div class="content-highlight">
<p data-testid="paragraph-0">On 3 August, a Chinese state media outlet (Economic Information Daily) mentioned that the online video games are like "spiritual opium." The article mentioned more curbs on the online video game industry are necessary as there are significant concerns that these games may be harming millions of people, especially the younger generation.</p>
<p data-testid="paragraph-0"><em><a href="https://www.reuters.com/technology/tencent-falls-after-china-media-calls-online-gaming-spiritual-opium-2021-08-03/" target="_blank" rel="noopener">Economic Information Daily</a> stated that "No industry, no sport, can be allowed to develop in a way that will destroy a generation," likening online video games to "electronic drugs".</em></p>
</div><p>We believe that there is an increasing probability of the Chinese government cracking down much more severely on the online/mobile gaming sector in China which could severely impact major game companies such as Krafton. </p><p>We now 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>


On 3 August, a Chinese state media outlet (Economic Information Daily) mentioned that the online video games are like "spiritual opium." The article mentioned more curbs on the online video game industry are necessary as there are significant concerns that these games may be harming millions of people, especially the younger generation.
Economic Information Daily stated that "No industry, no sport, can be allowed to develop in a way that will destroy a generation," likening online video games to "electronic drugs".
We believe that there is an increasing probability of the Chinese government cracking down much more severely on the online/mobile gaming sector in China which could severely impact major game companies such as Krafton. We now 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. 

Chinese Government to Crack Down on the Online Gaming Sector? A Big Negative for the Krafton IPO

Japan/Asia Long-Short, LightStream Research

Mio Kato

Japan/Asia Long-Short

Long-Short Analysis on Japan, Asia and the World

LightStream Research

LightStream conducts quantitatively rigorous and data-driven analysis with a focus on Japan and Asia.

We consistently cover the Tech, Consumer and Industrial sectors, and provide ECM and Events coverage more broadly.

We supplement traditional qualitative insights from company relationships with a robust quantitative foundation that examines as much historical data as is available.
We further refine the accuracy of our insights and calls through the use of alternative data to flesh out current trends, and through a valuation framework that emphasises non-superficial peer group selection and a proper attempt to understand the metrics and changes that have driven security valuations in the past.

<p>In <a href="https://www.smartkarma.com/insights/krafton-ipo-this-should-be-pulled" target="_blank" rel="noopener">(1) Krafton IPO – This Should Be Pulled | Smartkarma </a>we said:</p>
<blockquote>
<p>Given the increasingly aggressive moves in China to reign in tech companies we also believe that greater regulation of mobile gaming overall is not impossible. Not only is there a strong gambling element but it is not likely to be viewed as positive for productivity at a time when labour cost inflation is an increasing problem. We believe stricter curbs on mobile gaming in China are a matter of time though we do not yet have a clear idea as to when this might occur.</p>
</blockquote>
<p>Apparently that matter of time is <a href="https://asia.nikkei.com/Business/China-tech/Tencent-dives-after-Chinese-media-calls-gaming-spiritual-opium" target="_blank" rel="noopener">looking like it will be a lot sooner than we expected</a>.</p>

In (1) Krafton IPO – This Should Be Pulled | Smartkarma we said:

Given the increasingly aggressive moves in China to reign in tech companies we also believe that greater regulation of mobile gaming overall is not impossible. Not only is there a strong gambling element but it is not likely to be viewed as positive for productivity at a time when labour cost inflation is an increasing problem. We believe stricter curbs on mobile gaming in China are a matter of time though we do not yet have a clear idea as to when this might occur.

Apparently that matter of time is looking like it will be a lot sooner than we expected.

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

Brian Freitas

Pan-Asia Index Rebalances/ Events/ Delta One

Index Rebalance

<p>There could be two changes to the <a href="https://www.smartkarma.com/entities/korea-stock-exchange-kospi-200-index" target="_blank" data-smartkarma-citation="entities:26021:1" rel="noopener">Korea Stock Exchange Kospi 200 Index (KOSPI2 INDEX)</a> at the September index futures expiry with <a href="https://www.smartkarma.com/entities/kakaobank-corp" target="_blank" data-smartkarma-citation="entities:33501:1" rel="noopener">KakaoBank (1349010D KS)</a> and <a href="https://www.smartkarma.com/entities/krafton-inc" target="_blank" data-smartkarma-citation="entities:28956:1" rel="noopener"> Krafton Inc (259960 KS)</a> getting Fast Entry and replacing <a href="https://www.smartkarma.com/entities/lock-lock-co-ltd" target="_blank" data-smartkarma-citation="entities:4739:1" rel="noopener">Lock&amp;Lock (115390 KS)</a> and <a href="https://www.smartkarma.com/entities/jw-pharmaceutical-corp" target="_blank" data-smartkarma-citation="entities:18784:1" rel="noopener">Jw Pharmaceutical (001060 KS)</a> at the close of trading on 9 September.</p><p>Then, the Korea Exchange (KRX) will announce the results of the December 2021 review of the <a href="https://www.smartkarma.com/entities/korea-stock-exchange-kospi-200-index" target="_blank" data-smartkarma-citation="entities:26021:1" rel="noopener">Korea Stock Exchange Kospi 200 Index (KOSPI2 INDEX)</a> in November. The constituent changes will be effective after the close of trading on 9 December.</p><p>We see 5 potential changes at the December rebalance with <a href="https://www.smartkarma.com/entities/f-f-co-ltd-new" target="_blank" data-smartkarma-citation="entities:33479:1" rel="noopener">F&amp;F (383220 KS)</a>, <a href="https://www.smartkarma.com/entities/sl-corp" target="_blank" data-smartkarma-citation="entities:20694:1" rel="noopener">SL Corp (005850 KS)</a>, <a href="https://www.smartkarma.com/entities/geneone-life-science-inc" target="_blank" data-smartkarma-citation="entities:6549:1" rel="noopener">GeneOne Life Science Inc. (011000 KS)</a>, <a href="https://www.smartkarma.com/entities/myoung-shin-industrial-co-ltd" target="_blank" data-smartkarma-citation="entities:29698:1" rel="noopener">Myoung Shin Industrial Co.,Ltd (009900 KS)</a> and <a href="https://www.smartkarma.com/entities/hyosung-chemical-corp" target="_blank" data-smartkarma-citation="entities:27752:1" rel="noopener">Hyosung Chemical Corp (298000 KS)</a> replacing <a href="https://www.smartkarma.com/entities/f-f-co-ltd" target="_blank" data-smartkarma-citation="entities:15983:1" rel="noopener">F&amp;F Co Ltd (007700 KS)</a>, <a href="https://www.smartkarma.com/entities/samyang-foods-co-ltd" target="_blank" data-smartkarma-citation="entities:9100:1" rel="noopener">Samyang Foods (003230 KS)</a>, <a href="https://www.smartkarma.com/entities/ilyang-pharmaceutical-co-ltd" target="_blank" data-smartkarma-citation="entities:2789:1" rel="noopener">Ilyang Pharmaceutical Co., (007570 KS)</a>, <a href="https://www.smartkarma.com/entities/lx-holdings" target="_blank" data-smartkarma-citation="entities:33384:1" rel="noopener">LX Holdings (383800 KS)</a> and <a href="https://www.smartkarma.com/entities/dongwon-f-b-co-ltd" target="_blank" data-smartkarma-citation="entities:3274:1" rel="noopener">Dongwon F&amp;B (049770 KS)</a>.</p><p>The potential inclusions have been outperforming the potential exclusions and this could continue as short selling is only permitted on index constituents and as active funds position for the rebalance following excellent returns at the June rebalance.</p>

There could be two changes to the Korea Stock Exchange Kospi 200 Index (KOSPI2 INDEX) at the September index futures expiry with KakaoBank (1349010D KS) and  Krafton Inc (259960 KS) getting Fast Entry and replacing Lock&amp;Lock (115390 KS) and Jw Pharmaceutical (001060 KS) at the close of trading on 9 September.Then, the Korea Exchange (KRX) will announce the results of the December 2021 review of the Korea Stock Exchange Kospi 200 Index (KOSPI2 INDEX) in November. The constituent changes will be effective after the close of trading on 9 December.We see 5 potential changes at the December rebalance with F&amp;F (383220 KS), SL Corp (005850 KS), GeneOne Life Science Inc. (011000 KS), Myoung Shin Industrial Co.,Ltd (009900 KS) and Hyosung Chemical Corp (298000 KS) replacing F&amp;F Co Ltd (007700 KS), Samyang Foods (003230 KS), Ilyang Pharmaceutical Co., (007570 KS), LX Holdings (383800 KS) and Dongwon F&amp;B (049770 KS).The potential inclusions have been outperforming the potential exclusions and this could continue as short selling is only permitted on index constituents and as active funds position for the rebalance following excellent returns at the June rebalance.

KOSPI200 Index Rebalance Preview: Two Changes in September; Five in December

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)

Krafton: Only 20% of Employee Stock Ownership Association Apply for the IPO Shares

Krafton announced its employee stock ownership association allocation for the IPO shares today and the results were one of the worst among the...

Douglas Kim

Wanted Lab IPO - More Retail Interest than the Krafton IPO

In this insight, we provide the details of the Wanted Lab IPO, which received higher amounts of retail deposit interest than the Krafton IPO.

Douglas Kim

Chinese Government to Crack Down on the Online Gaming Sector? A Big Negative for the Krafton IPO

There is an increasing probability of the Chinese government cracking down much more severely on the online gaming sector in China that could cause...

Douglas Kim

Krafton IPO - Didi'd by Spiritual Opium?

News laying the ground for tightened regulation on online gaming in China is hitting related stocks hard with many down 10%, but the juiciest short...

Mio Kato

KOSPI200 Index Rebalance Preview: Two Changes in September; Five in December

We see 2 potential Fast Entry changes in September & then 5 more changes at the December rebalance. The adds are outperforming the deletes and the...

Brian Freitas

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