Korea/Asia, Events, IPOs, Douglas Research Advisory

Douglas Kim

Korea/Asia, Events, IPOs

Equity Bottom-Up

Although NCsoft's stock price  has performed well in the past year, we believe the stock is well poised to outperform the market again this year. NCsoft, similar to many other leading global game companies, have benefited from COVID-19 as millions of people in Korea and around the world have been forced to various forms of lockdown and spend more time at home.Currently, millions of people in countries such as are starting to take new vaccines for COVID-19. However, there are new mutated COVID-19 strains that have found to be 50%+ more contagious than the existing COVID-19 virus. These events suggest that the first half of 2021 will continue to be quite restrictive in major governments around the world including South Korea and U.K. continuing to impose various kinds of lockdowns and social distancing measures which mean that people in these countries will continue to spend a lot of time at home. This would continue to benefit leading global game companies such as NCsoft. We believe NCsoft has numerous, notable investment merits.<ul>
<li>First, it has an outstanding line-up of new games in different geographies around the world in 2021.</li>
<li>Second, its ROE is improving materially.</li>
<li>Third, NCsoft's stock price is trading at a discount to historical valuations and there could be further valuation multiples re-rating on this stock in the coming months.</li>
<li>Fourth, China has started to approve new Korean games again.</li>
<li>Fifth, NCsoft and CJ ENM have agreed to form a new JV to roll out new digital contents aimed at the global market.</li>
</ul>

Although NCsoft's stock price  has performed well in the past year, we believe the stock is well poised to outperform the market again this year. NCsoft, similar to many other leading global game companies, have benefited from COVID-19 as millions of people in Korea and around the world have been forced to various forms of lockdown and spend more time at home.Currently, millions of people in countries such as are starting to take new vaccines for COVID-19. However, there are new mutated COVID-19 strains that have found to be 50%+ more contagious than the existing COVID-19 virus. These events suggest that the first half of 2021 will continue to be quite restrictive in major governments around the world including South Korea and U.K. continuing to impose various kinds of lockdowns and social distancing measures which mean that people in these countries will continue to spend a lot of time at home. This would continue to benefit leading global game companies such as NCsoft. We believe NCsoft has numerous, notable investment merits.
First, it has an outstanding line-up of new games in different geographies around the world in 2021.
Second, its ROE is improving materially.
Third, NCsoft's stock price is trading at a discount to historical valuations and there could be further valuation multiples re-rating on this stock in the coming months.
Fourth, China has started to approve new Korean games again.
Fifth, NCsoft and CJ ENM have agreed to form a new JV to roll out new digital contents aimed at the global market.


NCsoft: Key Catalysts and Valuation Sensitivity Analysis

Julie Lee

Nexon had announced in-line 3Q20 results and lackluster guidance for 4Q20 as expected. Its 4Q20 results may not be strong as its mobile game ranking has declined in Korea during 4Q20, though it can be partially offset by potentially better than expected game industry sales in Korea amid worsening COVID. However, we believe Nexon still has long-term investment value to be unlocked and a few positives may outweigh its near term weak earnings;  1) new games from Embark Studios, and 2) increasing possibility of DNF mobile launch and introduction of two new DNF IP based games. We will examine the details of these positives below.

Nexon had announced in-line 3Q20 results and lackluster guidance for 4Q20 as expected. Its 4Q20 results may not be strong as its mobile game ranking has declined in Korea during 4Q20, though it can be partially offset by potentially better than expected game industry sales in Korea amid worsening COVID. However, we believe Nexon still has long-term investment value to be unlocked and a few positives may outweigh its near term weak earnings;  1) new games from Embark Studios, and 2) increasing possibility of DNF mobile launch and introduction of two new DNF IP based games. We will examine the details of these positives below. 

Nexon (3659.T): Games from Embark Studios and Improving Chance of DNF Launch

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

Steven Chen

Quality-first, Business-perspective Strategy

<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

Event-Driven

"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?

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.

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)

NCsoft: Key Catalysts and Valuation Sensitivity Analysis

We believe NCsoft has numerous, notable investment merits, including an outstanding line-up of new games in different geographies around the world...

Douglas Kim

Nexon (3659.T): Games from Embark Studios and Improving Chance of DNF Launch

Nexon still has investment value to be unlocked. A few positives may outweigh near term weakness; 1) new games from Embark Studios, and 2) DNF...

Julie Lee

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

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