Korea / Special Sits, Pairs, Index Rebalancing, Clepsydra Capital

Sanghyun Park

I investigate special situations, pairs, and index rebalancing trades in Korea.

Korea / Special Sits, Pairs, Index Rebalancing

Cafe24 IPO Bookbuilding Results - Summary & Implications

Cafe 24 IPO Preview (Part 1): Korea's Shopify - Leading Contender For "Tesla" Requirements Based IPO

Update on the Put Back Option Clause for IPOs in the Korea Stock Market

Important Regulatory Changes for IPOs on the KOSDAQ Exchange

Equity Capital Markets

Cafe24 (042000 KF) finally submitted the IPO book last Friday (Dec 15). As expected, this IPO has plenty of interesting aspects that we do not want to miss.The company plans to offer a total of 900,000 shares (100% new rights offering) at ₩43,000 - ₩57,000 which gives a market cap of ₩412.5bil - ₩546.8bil. This IPO has three bookrunners: Mirae Asset Daewoo Securities Co Ltd (006800 KS), Yuanta Securities Korea (003470 KS) and Hanwha Securities Co Ltd (003530 KS). It will be listed in KOSDAQ.IPO summaryCompany nameCafe24 (042000 KF)FoundationMay 17, 1999 in Seoul, KoreaNumber of employees900 (Seoul HQ, as of 2016)CEOLee Jae-sukHQ address15 (Sindaebang-dong, Specialty Contractor Financial Bldg.), Boramae-ro 5-gil, Dongjak-gu, Seoul, South KoreaCorporate homepagewww.cafe24corp.com/enIndustry / specialtyOnline shopping solution/platform, web hosting service, marketing, business support, business training/education service, etc.Total number of share offerings900,000 shares(100% new rights offering)Indicative price band₩43,000 - ₩57,000Total amount to be raised (at ₩43,000)₩38,700,000,000Target valuation (at ₩43,000)₩412.5bilBookrunnersMirae Asset Daewoo Securities Co Ltd (006800 KS)Yuanta Securities Korea (003470 KS)Hanwha Securities Co Ltd (003530 KS)BourseKOSDAQSource: DARTFirst, who is cafe24? (FYI, its corporate name 'cafe24' is stylized without the capital letter and space.)(cafe24 corporate logo - Courtesy cafe24 &amp; Wikipedia)You can first take a look at Douglas Kim's excellent summary on this company.Cafe 24 IPO Preview (Part 1): Korea’s Shopify - Leading Contender For “Tesla” Requirements Based IPOAs Douglas describes it, cafe24 can be simply viewed as Korean version of 'Shopify' although its beginning was quite different from Shopify. However, as of now, I guess we can safely say that cafe24 is very similar to Shopify in many ways. cafe24 mainly targets and hosts fashion and beauty (mostly fashion) online shopping stores (e-commerce retailers) in Korea, and is now Korea's largest player in this field. It now hosts a total of 1.1 million the so-called K-Style fashion and beauty online shopping stores. Its global e-commerce platform offers various one-stop services which include PG (payment gateway), advertising, marketing and hosting infrastructure.(cafe24 e-commerce platform - Courtesy cafe24)Corporate history2017Changes its company name from SimpleX Internet to cafe24 Partnership Agreement with FacebookMOU Agreement: ECPay and Quantium Solutions International2016Builds equipment for 160Tbps network Google Analytics Certified Partner accreditation Opens overseas sites: Taipei (Taiwan) &amp; Fukuoka (Japan)MOU Agreement: Sagawa, Hanjin, Chemical Inspection and Regulation Service (CIRS, China)2015MOU Agreement: Alipay ePass, Rakuten Inc., Lazada, JD.com, VIP.com2014Launches Global Open Market Business Service Starts Global Ad Marketing Service ISMS Certification Acquisition MOU Agreement: Mogujie, Alibaba2013Launches cafe24 Global E-commerce PlatformOpens overseas site in Delaware (USA) &amp; branch in Hangzhou (China)Amazon Partnership Agreement2012Launches Smart Design Open overseas branch: Tokyo (Japan) MOU Agreement: Yahoo! Japan2011cafe24 BI Restructuring Opens cafe24 SOHO Business Center Open overseas branch: LA (USA)2010Launches Mobile Shopping Mall service2008Open overseas branches: Yanji (China), Manila (Philippines)2006Opens cafe24 Marketing Center2004Opens cafe24 Design Center2003Opens cafe24 Shopping Mall Center2002Opens cafe24 Hosting Center2000Launches brand: cafe241999SimpleX Internet founded, affiliated research institute establishedSource: cafe24cafe24 currently has the three pillar businesses: 1. PG (payment gateway service for its clients), 2. Ad service/solution and 3. web hosting. All of these three businesses are directly correlated to the growth of e-commerce traffic that its clients generate.Non-consolidated sales breakdown (₩ mil)201420152016Accu. 3Q17PG17,94022,15028,03125,072Domain service4,0784,4114,6933,585SMS service8,51310,73512,3789,921Ad service/solution16,36317,16019,81218,027Web hosting22,61423,68025,36519,905Overseas direct sales8164,74411,2446,969Total70,32582,880101,52383,480Source: DARTcafe24's current market share is about 40% in the Korean e-commerce hosting market in terms of e-commerce retailers (online shopping malls). In terms of e-commerce transaction value, cafe24 accounts for about 8% of the country’s total e-commerce transaction value. cafe24 currently has 8 overseas branches.cafe24 factsheetMarket share in terms of number of e-commerce retailersAbout 40% of Korean e-commerce retailers which use outside e-commerce hosting platformMarket share in terms of e-commerce transaction valueAbout 8% of Korea's total e-commerce transaction value (only behind eBay Korea and SKT's 11st Street)Source: cafe24Now let's do the fun part.This is Korea's first so-called Tesla requirements based IPO, which was named after U.S.-based electric vehicle manufacturer Tesla Motors. This new IPO path was launched by the KRX (Korea Exchange) earlier this year allow promising startups to join bourses (mainly KOSDAQ) even if they do not meet the regular capital and capacity requirements for an IPO. cafe24 becomes the first one to go public through this Tesla IPO path. What does this mean? Yes, this means its valuation is a bit tricky.Its earnings isn't yet large enough to justify its target valuation. So, the company and its three bankers came up with PSR. Here is how they came up with a market cap of ₩412.5bil - ₩546.8bil. The following 9 local and overseas peers were picked as cafe24's valuation peers. The average PSR of the 3 local peers is 3.9x on their FY2017 annualized earnings. The average PSR of the 6 overseas peers is 5.9x on their FY2017 annualized earnings. Then, they simply add these two PSRs (3.9x and 5.9x) and divide by two and they get this 4.9x PSR. On what logical grounds could they do this simple arithmetic average calculation? Honestly, I don't know, and they don't give detailed explanation for this in the IPO book.(₩ mil)FY17 annualized salesShares outstandingSales per shareReference share price (₩)PSR (x)Gabia111,43313,535,6848,2335,5250.7Kakao1,903,52367,897,20328,035140,9005.0Naver4,550,07332,962,679138,037816,9555.9Avg. of local peers3.9Godaddy2,474,276131,075,00018,87752,5312.8Shopify683,95286,217,8707,933111,83414.1Wix.com466,23844,839,34010,39859,6445.7Tucows362,55510,577,55034,27667,3722.0VeriSign1,320,25298,570,10013,394124,2419.3Web.com   Group850,84648,741,03017,45624,4071.4Avg. of overseas peers5.9Overall avg.4.9Note: FY17 annualized sales are derived by multiplying each valuation peer's accu. 3Q17 NP by 4/3. Source: DARTAt a 4.9x PER, cafe24's total value amounts to ₩635.3bil. From this, a 13.9% - 35.1% discount range was given. As a result, we have this indicative price band of ₩43,000 - ₩57,000 which gives a market cap of ₩412.5bil - ₩546.8bil.cafe24 PSR based valuationConsolidated accu. 3Q17₩97,762milFY17 annualized sales₩130,349milPSR (x)4.9xTarget valuation₩635,307milNumber of issued shares9,593,389 sharesPrice per share₩66,223Note: Total number of issued shares = 7,940,614 existing shares + 900,000 new shares from this IPO + 23,255 new shares to be allocated to the underwriters + 729,520 BWsSource: DARTIndicative price bandPSR based price per share₩66,223Discount %13.9% - 35.1%Indicative price band₩43,000 - ₩57,000Market cap₩412.5bil - ₩546.8bilSource: DARTWell, this PSR valuation thing is quite confusing and vague. Even those valuation peers? (Kakao and Naver?) Well frankly, I'm not sure about them, and I think not many investors would find them as suitable valuation peers for cafe24.But fortunately for us, the company and the bankers gave us a PER based valuation in the IPO book.Just, the company and the bankers' PER valuation again seems to be quite aggressive. They came up with a 18.7x - 24.7x PER on the avg. of FY17E and FY18E earnings. If we think cafe24 is more of a Shopify, then a 18.7x - 24.7x PER wouldn't be aggressive. But if we think it is more of a GoDaddy, then this 18.7x - 24.7x PER would be very aggressive. Moreover, we can't get easily persuaded by their FY18-19 earnings forecasts, which are 249.5% and 504.5% up from FY17 earnings, respectively. cafe24 PER based valuationPSR based market cap₩412.5bil - ₩546.8bilAFY18E earnings₩20,298milB- PV of FY18E earnings (at a 15% interest rate)₩17,650milC = B /(1 + 15.0%)FY19E earnings₩35,109milD- PV of FY19E earnings₩26,548milE = D /(1 + 15.0%)^2Arithmetic avg. of C &amp; E₩22,099milF = (C + E)/2PER (x)18.7x - 24.7xG = A / FSource: DART(₩ mil)20162017E2018E2019ESales118,080137,407182,424233,891COGS14,25717,62230,42744,283Gross income103,823119,786151,996189,608SG&amp;A104,614112,109125,979144,341OP-7917,67626,01745,267Non-operating income666214464430Non-operating expense623722819747Earnings before tax-7497,16825,66244,951Tax5231,3615,3649,841NP-1,2725,80820,29835,109Source: DARTWell, their NP growth certainly seems to be very aggressive. But if we look at the Korea's total e-commerce transaction value growth rate over the past several years, we can start thinking that company and the bankers' NP growth forecast for the upcoming years isn't a total non-sense either. cafe24 currently has the three pillar businesses: 1. PG (payment gateway service for its clients), 2. Ad service/solution and 3. web hosting. All of these three businesses are directly correlated to the growth of e-commerce traffic that its clients generate. And check this. From 2014 to 2017E, Korea's total e-commerce transaction value posted a CAGR of 20.23%, which made it possible for the company to start pumping out profits this year as it could finally hit the cost-profit sweet spot.(₩ mil)2014201520162017E2018E2019ELocalKorea's total e-commerce transaction value45,302,48754,055,61765,617,04678,740,45594,488,546110,551,599cafe24 e-commerce transaction value3,666,7124,271,5415,159,5186,341,5497,609,8588,903,534Market share (%)8.10%7.90%7.90%8.10%8.10%8.10%E-commerce transaction value that goes through cafe24's PG1,880,8402,257,6022,773,4133,804,9294,611,5745,449,497As a % of its e-commerce transaction value51.30%52.90%53.80%60.00%60.60%61.20%Overseascafe24 e-commerce transaction value (in-house platform)31,96042,27057,82177,772104,608140,703cafe24 e-commerce transaction value (third party platforms such as Amazon and eBay)3,01114,72523,92338,86763,145102,588Source: DARTBelow is their sales breakdown for FY18 and FY19. Basically, the company and the bankers applied a 20% annual growth rate to its largest pillar business (PG). Well, I think this reasoning is quite understandable and acceptable given what we have witnessed 20+% growth in Korea's total e-commerce transaction value over the past 4 years.(₩ mil)20162017E2018E2019EPG, domain, SMS42,37750,61860,11369,960Ad18,92222,70027,24031,871Web hosting26,05726,15326,97727,827Overseas14,16716,93224,41435,523New businesses--2,4004,107Affiliates businesses16,55721,00541,28064,605Total118,080137,407182,424233,891Source: DARTWhat about the market's mood for this valuation?I first checked the Korea's largest OTC website called '38.co.kr'. Generally, the opinions there are positive on this IPO price range. In fact, at the 38.co.kr, cafe24 shares are currently trading at a ₩50,000-₩51,000 range, which is right in the middle of the indicative price band. It was also reported that cafe24 was generally warmly received by overseas investors during its overseas roadshows. Shopify's enormous success in the stock market certainly seems to be helping pump up cafe24's investment sentiments as well. In addition, this IPO's relatively small offering size (about 10% of the total shares) is widely considered as another positive factor.It is also very important to note that this is a Tesla requirements based IPO. This means those IPO shareholders will be granted a put-back option at a 90% of whatever the IPO price is. The underwriters will be obligated to buy back all IPO shares to be put back by IPO shareholders within 3 months after the IPO date. There is no doubt that this is a very nice safety net that can help attract potential investors into this IPO.Put-back option detailExercise periodWithin 3 months after the IPO dateExercisable shareIPO sharesExercise price90% of the IPO priceSource: DARTThen, what would be my recommendation on this IPO? Valuation wise, although it seems very aggressive on paper, the market seems to be willing to put a ₩500-550bil price tag to this company. Currently, at the OTC market, it is being valued at about ₩500bil. Not only that, those  who bought cafe24 BWs back in Aug valued the company at about ₩550bil. So, valuation itself doesn't seem to be an issue now. This shows many in the market actually are also pretty pumped up by the current growth pace of Korea's e-commerce traffic value and they are convinced that cafe24 is finally hitting the cost-profit sweet spot.BW issuance detailIssuance dateAug 2017Warrant exercise price₩69,264Number of shares7,940,614 sharesTotal EV₩550bilSource: MoneyToday

Cafe24 IPO Book Summary - Valuations & Market Sentiments

Cafe24 Corp

Cafe24 IPO Book Summary - Valuations & Market Sentiments