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 DearU is implied market cap of 746 billion won or 33,907 won per share, which is 41% higher than the high end of the IPO price range of 24,000 won. Given the solid upside, we have a POSITIVE view of the DearU IPO and we would subscribe to the deal.</div>Our base case valuation is based on a P/E of 33.9x our estimated profit of 22 billion won in 2022. The valuation multiple of 33.9x is based on a 10% premium to the average P/E valuation multiple of the peers in 2022. We have used a 10% premium mainly due to the much higher sales growth rate of the company as well as higher operating margin of DearU as compared to its peers, despite its lower sales and earnings base. We estimate DearU to generate sales of 40.5 billion won in 2021, up 210.7% YoY and 67.7 billion won in sales in 2022, up 67% YoY. We also estimate the company to generate an operating profit of 13.4 billion won in 2021 and 22 billion won in 2022. This represents an operating margin of 33.1% in 2021 and 32.5% in 2022.

Our base case valuation of DearU is implied market cap of 746 billion won or 33,907 won per share, which is 41% higher than the high end of the IPO price range of 24,000 won. Given the solid upside, we have a POSITIVE view of the DearU IPO and we would subscribe to the deal.Our base case valuation is based on a P/E of 33.9x our estimated profit of 22 billion won in 2022. The valuation multiple of 33.9x is based on a 10% premium to the average P/E valuation multiple of the peers in 2022. We have used a 10% premium mainly due to the much higher sales growth rate of the company as well as higher operating margin of DearU as compared to its peers, despite its lower sales and earnings base. We estimate DearU to generate sales of 40.5 billion won in 2021, up 210.7% YoY and 67.7 billion won in sales in 2022, up 67% YoY. We also estimate the company to generate an operating profit of 13.4 billion won in 2021 and 22 billion won in 2022. This represents an operating margin of 33.1% in 2021 and 32.5% in 2022.

DearU is another very interesting small cap IPO in Korea. DearU has enjoyed phenomenal sales growth rate and this company has figured out a way to monetize the huge popularity of K-Pop around the world. <a href="https://www.smartkarma.com/entities/dearu-co-ltd" target="_blank" data-smartkarma-citation="entities:34381:1" rel="noopener">DearU (376300 KS)</a> is getting ready to complete its IPO in Korea in the next several weeks. The IPO price of DearU is from 18,000 won to 24,000 won. The IPO base deal size is from $51 million to $68 million. According to the bankers' valuation, the expected market cap of the IPO is from 396 billion won to 528 billion won. The book building for the institutional investors starts on 25 October 2021. <a href="https://www.smartkarma.com/entities/dearu-co-ltd" target="_blank" data-smartkarma-citation="entities:34381:1" rel="noopener">DearU (376300 KS) </a>is a global fan messenger platform. The company's core platform is called DearU bubble which is a global fan messenger platform that has enhanced the communications among stars/artists and their fans. The company plans to capitalize on its strong global user base and IPO proceeds to expand into the metaverse platform, increase brand awareness, expand abroad, and include more top artists in the platform. Shareholding structure - The controlling shareholder of DearU is <a href="http://dart.fss.or.kr/dsaf001/main.do?rcpNo=20210817001014" target="_blank" rel="noopener">SM Studios</a> which own a 40.2% stake in the company. SM Studios is a subsidiary of SM Entertainment, the label which includes some of the top K-pop artists including Red Velvet, EXO, NCT, Girls Generation, TVXQ, and Super Junior. <a href="https://www.smartkarma.com/entities/s-m-entertainment-co" target="_blank" data-smartkarma-citation="entities:3500:1" rel="noopener">S.M.Entertainment Co (041510 KS)</a> owns a 100% stake in SM Studios.

DearU is another very interesting small cap IPO in Korea. DearU has enjoyed phenomenal sales growth rate and this company has figured out a way to monetize the huge popularity of K-Pop around the world. DearU (376300 KS) is getting ready to complete its IPO in Korea in the next several weeks. The IPO price of DearU is from 18,000 won to 24,000 won. The IPO base deal size is from $51 million to $68 million. According to the bankers' valuation, the expected market cap of the IPO is from 396 billion won to 528 billion won. The book building for the institutional investors starts on 25 October 2021. DearU (376300 KS) is a global fan messenger platform. The company's core platform is called DearU bubble which is a global fan messenger platform that has enhanced the communications among stars/artists and their fans. The company plans to capitalize on its strong global user base and IPO proceeds to expand into the metaverse platform, increase brand awareness, expand abroad, and include more top artists in the platform. Shareholding structure - The controlling shareholder of DearU is SM Studios which own a 40.2% stake in the company. SM Studios is a subsidiary of SM Entertainment, the label which includes some of the top K-pop artists including Red Velvet, EXO, NCT, Girls Generation, TVXQ, and Super Junior. S.M.Entertainment Co (041510 KS) owns a 100% stake in SM Studios.

Cross Asset Strategy

<blockquote><a href="https://twitter.com/TimSweeneyEpic/status/1432647669864878083?ref_src=twsrc%5Etfw%7Ctwcamp%5Etweetembed%7Ctwterm%5E1432647669864878083%7Ctwgr%5E%7Ctwcon%5Es1_&amp;ref_url=https%3A%2F%2Fwww.pcgamer.com%2Fsouth-korea-passes-law-with-major-implications-for-apple-vs-epic%2F" target="_blank" rel="noopener">Korea</a> is first in open platforms! Korea has rejected digital commerce monopolies and recognized open platforms as a right. This marks a major milestone in the 45-year history of personal computing. It began in Cupertino, but the forefront today is in Seoul. (Tim Sweeney - Founder of Epic Games)</blockquote>In a landmark case (an amendment of the Telecommunications Business Act), the <a href="https://www.wsj.com/articles/google-apple-hit-in-south-korea-by-worlds-first-law-ending-their-dominance-over-app-store-payments-11630403335" target="_blank" rel="noopener">Korean government</a> announced on 31 August that Google and Apple will need to open their app stores to alternative payment systems in South Korea. This change in regulation is likely to negatively impact Google and Apple's lucrative commissions on digital sales.A new bill was passed by the Korean National Assembly on 31 August which will significantly reduce Google and Apple's dominance of digital sales on their app platforms. The final step is for President Moon to sign this bill but it is almost a near certainty that he will sign this bill. The following are the major companies/sectors that could benefit from the change in law:<ul>
<li><a href="https://www.smartkarma.com/entities/naver-corp" target="_blank" data-smartkarma-citation="entities:16029:1" rel="noopener">Naver Corp (035420 KS)</a></li>
<li><a href="https://www.smartkarma.com/entities/kakao-corp" target="_blank" data-smartkarma-citation="entities:15002:1" rel="noopener">Kakao Corp (035720 KS)</a></li>
<li>Korean Telcos</li>
<li>Korean Game Companies</li>
<li>Korean Entertainment/Music/Movies/Drama Companies </li>
</ul>

Korea is first in open platforms! Korea has rejected digital commerce monopolies and recognized open platforms as a right. This marks a major milestone in the 45-year history of personal computing. It began in Cupertino, but the forefront today is in Seoul. (Tim Sweeney - Founder of Epic Games)In a landmark case (an amendment of the Telecommunications Business Act), the Korean government announced on 31 August that Google and Apple will need to open their app stores to alternative payment systems in South Korea. This change in regulation is likely to negatively impact Google and Apple's lucrative commissions on digital sales.A new bill was passed by the Korean National Assembly on 31 August which will significantly reduce Google and Apple's dominance of digital sales on their app platforms. The final step is for President Moon to sign this bill but it is almost a near certainty that he will sign this bill. The following are the major companies/sectors that could benefit from the change in law:
Naver Corp (035420 KS)
Kakao Corp (035720 KS)
Korean Telcos
Korean Game Companies
Korean Entertainment/Music/Movies/Drama Companies 


Korean Government Forces Google & Apple To Open Their App Stores to Alternative Payments

The Forbes magazine has an excellent<a href="https://www.forbes.com/soccer-valuations/list/#tab:overall" target="_blank" rel="noopener"> list</a> of the valuations of the top 20 football (soccer) teams in the world. Founded in 1902, the Real Madrid football team has been around for nearly 118 years. Real Madrid is the most valuable football franchise in the world with a valuation of $4.2 billion.
<div class="content-highlight">
Warren Buffett always recommended his followers to think in terms of buying the whole business rather than a small fraction of the business. We ask our readers this question, "If you had a choice of buying a 100% stake in either Real Madrid or Big Hit Entertainment AT THE SAME PRICE, which company would you buy?" In this insight, we go through the details of why most serious investors would buy Real Madrid rather than Big Hit at the same price. In addition, such a comparison could shed greater light on why Big Hit Entertainment IPO is more likely to be a dud rather than a big success.
</div>

The Forbes magazine has an excellent list of the valuations of the top 20 football (soccer) teams in the world. Founded in 1902, the Real Madrid football team has been around for nearly 118 years. Real Madrid is the most valuable football franchise in the world with a valuation of $4.2 billion.

Warren Buffett always recommended his followers to think in terms of buying the whole business rather than a small fraction of the business. We ask our readers this question, "If you had a choice of buying a 100% stake in either Real Madrid or Big Hit Entertainment AT THE SAME PRICE, which company would you buy?" In this insight, we go through the details of why most serious investors would buy Real Madrid rather than Big Hit at the same price. In addition, such a comparison could shed greater light on why Big Hit Entertainment IPO is more likely to be a dud rather than a big success.


Would You Rather Buy Real Madrid or Big Hit Entertainment for the Same Price?

Korea / Special Situations, Clepsydra Capital

Sanghyun Park

Korea / Special Situations

Big Hit came up a little short of beating the previous record-holder (Kakao Games), but still, it proved that it could become another hot IPO in Korea.The final subscription rate was 1,117 to 1 as a total of 1,420 institutions bothered to care for this IPO. Of them, 125 (excluding those categorized in Foreign Others) came from overseas. Well, it isn't a lot for an IPO of this size.









By investor type
Institution
%
Demand
%


Local PO funds
478
33.66%
1,775,621,000
37.15%


Local BR/IA
31
2.18%
124,161,000
2.60%


Local pension/bank/insurance
253
17.82%
911,131,000
19.06%


Local others (hedge funds)
325
22.89%
1,163,673,000
24.35%


Foreign (foreign funds)
125
8.80%
90,662,789
1.90%


Foreign others (local hot money)
208
14.65%
714,365,000
14.95%


Total
1,420
100.00%
4,779,613,789
100.00%


Subscription rate
1,117.25

Source: DART

The pricing was aggressive. Everyone priced it at 75% of the upper end or higher.But there is a tendency here. The local institutions showed greater affection as they priced it more aggressively. The foreign institutions? Well, none of them placed their orders above the upper end.









By price
Institution
%
Demand
%


Above high end
422
29.74%
1,544,842,000
32.32%


75-100% of high end
959
67.58%
3,121,231,789
65.30%


50-75% of high end
0
0.00%
0
0.00%


25-50% of high end
1
0.07%
8,000
0.00%


0-25% of high end
0
0.00%
0
0.00%


Median
0
0.00%
1,000
0.00%


75-100% of median
0
0.00%
0
0.00%


50-75% of median
0
0.00%
0
0.00%


25-50% of median
0
0.00%
0
0.00%


0-25% of median
0
0.00%
0
0.00%


Low end or below
0
0.00%
0
0.00%


Unspecified
37
2.61%
113,531,000
2.38%


Total
1,419
100.00%
4,779,613,789
100.00%

Source: DART











Local PO funds
Institution
%
Demand
%


Above high end
195
40.79%
715,327,000
40.29%


75-100% of high end
258
53.97%
984,017,000
55.42%


50-75% of high end
0
0.00%
0
0.00%


25-50% of high end
0
0.00%
0
0.00%


0-25% of high end
0
0.00%
0
0.00%


Median
0
0.00%
0
0.00%


75-100% of median
0
0.00%
0
0.00%


50-75% of median
0
0.00%
0
0.00%


25-50% of median
0
0.00%
0
0.00%


0-25% of median
0
0.00%
0
0.00%


Low end or below
0
0.00%
0
0.00%


Unspecified
25
5.23%
76,277,000
4.30%


Total
478
100.00%
1,775,621,000
100.00%

Source: DART











Local BR/IA
Institution
%
Demand
%


Above high end
5
16.13%
21,390,000
17.23%


75-100% of high end
26
83.87%
102,771,000
82.77%


50-75% of high end
0
0.00%
0
0.00%


25-50% of high end
0
0.00%
0
0.00%


0-25% of high end
0
0.00%
0
0.00%


Median
0
0.00%
0
0.00%


75-100% of median
0
0.00%
0
0.00%


50-75% of median
0
0.00%
0
0.00%


25-50% of median
0
0.00%
0
0.00%


0-25% of median
0
0.00%
0
0.00%


Low end or below
0
0.00%
0
0.00%


Unspecified
0
0.00%
0
0.00%


Total
31
100.00%
124,161,000
100.00%

Source: DART











Local pension/bank/insurance
Institution
%
Demand
%


Above high end
104
41.11%
384,988,000
42.25%


75-100% of high end
145
57.31%
513,301,000
56.34%


50-75% of high end
0
0.00%
0
0.00%


25-50% of high end
1
0.40%
8,000
0.00%


0-25% of high end
0
0.00%
0
0.00%


Median
0
0.00%
0
0.00%


75-100% of median
0
0.00%
0
0.00%


50-75% of median
0
0.00%
0
0.00%


25-50% of median
0
0.00%
0
0.00%


0-25% of median
0
0.00%
0
0.00%


Low end or below
0
0.00%
0
0.00%


Unspecified
3
1.19%
12,834,000
1.41%


Total
253
100.00%
911,131,000
100.00%

Source: DART











Local others (hedge funds)
Institution
%
Demand
%


Above high end
118
36.31%
423,137,000
36.36%


75-100% of high end
197
60.62%
716,115,000
61.54%


50-75% of high end
0
0.00%
0
0.00%


25-50% of high end
0
0.00%
0
0.00%


0-25% of high end
0
0.00%
0
0.00%


Median
0
0.00%
1,000
0.00%


75-100% of median
0
0.00%
0
0.00%


50-75% of median
0
0.00%
0
0.00%


25-50% of median
0
0.00%
0
0.00%


0-25% of median
0
0.00%
0
0.00%


Low end or below
0
0.00%
0
0.00%


Unspecified
9
2.77%
24,420,000
2.10%


Total
325
100.00%
1,163,673,000
100.00%

Source: DART











Foreign (foreign funds)
Institution
%
Demand
%


Above high end
0
0.00%
0
0.00%


75-100% of high end
125
100.00%
90,662,789
100.00%


50-75% of high end
0
0.00%
0
0.00%


25-50% of high end
0
0.00%
0
0.00%


0-25% of high end
0
0.00%
0
0.00%


Median
0
0.00%
0
0.00%


75-100% of median
0
0.00%
0
0.00%


50-75% of median
0
0.00%
0
0.00%


25-50% of median
0
0.00%
0
0.00%


0-25% of median
0
0.00%
0
0.00%


Low end or below
0
0.00%
0
0.00%


Unspecified
0
0.00%
0
0.00%


Total
125
100.00%
90,662,789
100.00%

Source: DART











Foreign others (local hot money)
Institution
%
Demand
%


Above high end
0
0.00%
0
0.00%


75-100% of high end
208
100.00%
714,365,000
100.00%


50-75% of high end
0
0.00%
0
0.00%


25-50% of high end
0
0.00%
0
0.00%


0-25% of high end
0
0.00%
0
0.00%


Median
0
0.00%
0
0.00%


75-100% of the median
0
0.00%
0
0.00%


50-75% of the median
0
0.00%
0
0.00%


25-50% of the median
0
0.00%
0
0.00%


0-25% of the median
0
0.00%
0
0.00%


Low end or below
0
0.00%
0
0.00%


Unspecified
0
0.00%
0
0.00%


Total
208
100.00%
714,365,000
100.00%

Source: DART

Lock-up is also a bit disappointing. The final result is 44%, but nearly two-thirds are one month or less, suggesting there is a long-term trust issue here.








Lock-up

6 months
464,723,000


3 months
391,101,000


1 months
1,035,585,543


15 days
204,450,464


Total
2,095,860,007


- %
43.85%

Source: DART



Big Hit IPO: Book-Building Results, Mood, & BeNX (WEVERSE) Ownership Issue

South Korea

S.M.Entertainment Co. plans, produces, promotes, and markets Korean rock and roll music in several formats, such as compact discs (CD), concert tours, television productions, and music videos.  The Company also operates artist management business as well as licensing and copyright business from the company's music records.

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S.M.Entertainment Co (041510 KS)

DearU IPO Valuation Analysis

Our base case valuation of DearU is implied market cap of 746 billion won or 33,907 won per share, which is 41% higher than the high end of the IPO...

Douglas Kim

DearU IPO Preview

DearU is another very interesting small cap IPO in Korea. It has enjoyed phenomenal sales growth rate and this company has figured out a way to...

Douglas Kim

Korean Government Forces Google & Apple To Open Their App Stores to Alternative Payments

In a landmark case, the Korean government announced on 31 August that Google and Apple will need to open their app stores to alternative payment...

Douglas Kim

Would You Rather Buy Real Madrid or Big Hit Entertainment for the Same Price?

We go through the details of why most serious investors would buy Real Madrid rather than Big Hit at the same price. In addition, such a comparison...

Douglas Kim

Big Hit IPO: Book-Building Results, Mood, & BeNX (WEVERSE) Ownership Issue

???

Sanghyun Park

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