Korea/Asia, Events, IPOs, Douglas Research Advisory

Douglas Kim

Korea/Asia, Events, IPOs

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)

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>Krafton’s IPO is having a rather inauspicious start, opening down almost 10% from its KRW498,000 IPO price and falling as much as 20% at its intraday lows. That they somehow managed to convince some investors to pay up at the high end of the downwardly revised range should be considered a godsend, but with the stock falling so dramatically, should you be chasing this downwards?</p>

Krafton’s IPO is having a rather inauspicious start, opening down almost 10% from its KRW498,000 IPO price and falling as much as 20% at its intraday lows. That they somehow managed to convince some investors to pay up at the high end of the downwardly revised range should be considered a godsend, but with the stock falling so dramatically, should you be chasing this downwards?

Krafton IPO – Should You Chase This Down?

APAC IPOs & Placements

Zhen Zhou, Toh

IPOs and Placements coverage across Asia Pacific

Aequitas Research

We cover all listing across the Asia Pacific along with follow-up placements. As of Dec 2020, our team had covered 539 IPOs with a hit rate of 73.5% and 685 placements with a hit rate of 66.8%.

We combine fundamental bottom-up views with our proprietary quantitative framework to provide a holistic coverage across new listings and placements. Our coverage includes pre-IPO notes before the deal is launched, follow-up analysis once the deal is live and post-listing trading analysis as well.

<p><a href="https://www.smartkarma.com/entities/krafton-inc" target="_blank" data-smartkarma-citation="entities:28956:1" rel="noopener"> Krafton Inc (259960 KS)</a> raised US$3.8bn at KRW498,000 per share at the top end of its IPO price range in its South Korea IPO. </p><p>Krafton Inc is a video game developer based in South Korea. The company is known for developing the global hit, PlayerUnknown's Battlegrounds (PUBG), an online multiplayer battle royale game. It is backed by Tencent and has also developed other games such as Tera, Elyon, Golf King: World Tour, Mini Golf King, Bowling King, and Archery King.</p><p>In this note, we will talk about the IPO trading dynamics.</p><p>Our previous coverage of the IPO:</p><ul>
<li>
<a href="https://www.smartkarma.com/insights/krafton-ipo-adapting-and-transforming-well" target="_blank" data-smartkarma-citation="insights:54117" rel="noopener">Krafton IPO - Adapting and Transforming Well</a> </li>
<li>
<a href="https://www.smartkarma.com/insights/krafton-ipo-assumptions-and-valuation" target="_blank" data-smartkarma-citation="insights:54469" rel="noopener">Krafton IPO - Assumptions and Valuation</a> </li>
<li>
<a href="https://www.smartkarma.com/insights/krafton-ipo-lock-up-or-lack-thereof-on-most-shares-index-inclusion" target="_blank" data-smartkarma-citation="insights:54477" rel="noopener">Krafton IPO - Lock-Up (Or Lack Thereof on Most Shares) + Index Inclusion</a> </li>
</ul>

 Krafton Inc (259960 KS) raised US$3.8bn at KRW498,000 per share at the top end of its IPO price range in its South Korea IPO. Krafton Inc is a video game developer based in South Korea. The company is known for developing the global hit, PlayerUnknown's Battlegrounds (PUBG), an online multiplayer battle royale game. It is backed by Tencent and has also developed other games such as Tera, Elyon, Golf King: World Tour, Mini Golf King, Bowling King, and Archery King.In this note, we will talk about the IPO trading dynamics.Our previous coverage of the IPO:

Krafton IPO - Adapting and Transforming Well 

Krafton IPO - Assumptions and Valuation 

Krafton IPO - Lock-Up (Or Lack Thereof on Most Shares) + Index Inclusion 


Krafton IPO Trading - Relatively Weaker Demand and Uncertainty Surrounding MSCI Inclusion

Head of Research, IPOs & Placements, Aequitas Research

Sumeet Singh

Head of Research, IPOs & Placements

Event-Driven

<div><p>Kakao Bank (KB), South Korea’s largest digital bank, raised US$2.2bn in its South Korean IPO. It ended the first day of trading up 79% from its IPO price. </p></div><div>We have covered various aspects of the deal in our previous notes:</div><div><ul>
<li>
<a href="https://www.smartkarma.com/insights/kakao-bank-ipo-riding-on-parent-s-network-but-boundaries-with-kakao-pay-remain-unclear" target="_blank" rel="noopener">Kakao Bank IPO - Riding on parents network but boundaries with Kakao Pay remain unclear</a>, </li>
<li><a href="https://www.smartkarma.com/insights/kakao-bank-ipo-pricey-as-it-should-be" target="_blank" rel="noopener">Kakao Bank IPO - Pricey as It Should Be</a></li>
<li><a href="https://www.smartkarma.com/insights/kakao-bank-ipo-lack-of-lock-up-and-msci-ftse-index-implications" target="_blank" rel="noopener">Kakao Bank IPO - Lack of Lock-Up and MSCI, FTSE Index Implications, and</a></li>
<li><a href="https://www.smartkarma.com/insights/kakao-bank-ipo-trading-one-for-instis-closer-look-at-ftse-and-msci-inclusion-remain-buyers" target="_blank" rel="noopener">Kakao Bank IPO Trading - One for Instis, Closer Look at FTSE and MSCI Inclusion. Remain Buyers</a></li>
</ul></div><div><p>In this note, we will talk about the first day trading and index inclusion.</p></div>

Kakao Bank (KB), South Korea’s largest digital bank, raised US$2.2bn in its South Korean IPO. It ended the first day of trading up 79% from its IPO price. We have covered various aspects of the deal in our previous notes:

Kakao Bank IPO - Riding on parents network but boundaries with Kakao Pay remain unclear, 
Kakao Bank IPO - Pricey as It Should Be
Kakao Bank IPO - Lack of Lock-Up and MSCI, FTSE Index Implications, and
Kakao Bank IPO Trading - One for Instis, Closer Look at FTSE and MSCI Inclusion. Remain Buyers
In this note, we will talk about the first day trading and index inclusion.

Kakao Bank - MSCI Done, Missed FTSE by a Whisker.

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

Sanghyun Park

Korea / Special Sits, Pairs, Index Rebalancing

Clepsydra Capital

Investigate special situations, pairs, and index rebalancing trades in Korea.

Final AllocationsIt seems that Krafton's institutional allocation results can only be described with the word "exquisite".Krafton and Mirae Asset made an extreme decision to completely ignore the number of subscription applications. As a result, they allocated almost 100% only to the institutions with long-term holding tendencies.In particular, 60% of the total institutional volume was allocated to foreign institutions, regardless of whether they are locked up or not. And Mirae Asset has stated several times that they are mostly long-only funds. Among them, institutions whose names have been leaked to the market by Mirae Asset include Singapore's GIC and BlackRock.








By investor type
Holding tendencies
Applications
Allocated, % of the offering


Local publicly raised funds
Long-term
38.52%
19.03%


Local brokerages/investment advisories
Short-term
2.45%
0.53%


Local pensions, funds managing proprietary assets, banks, and insurance companies

Long-term
(Mostly, local pensions)

20.99%
18.07%


Local - Other (mostly discretionary investment companies - local hedge funds))
Mainly, short-term
20.30%
2.31%


Foreign (foreign IPO funds &amp; hedge funds)

Long-term
(Mostly long-only funds)

5.40%
60.06%


Foreign - Other (mostly local hot money)
Short-term
12.33%
0.00%

Source: DART

The lockup result is even more dazzling. Most domestic institutions have tied them up with lockup. It is also close to 70% over 3 months.
Foreign organizations do not conventionally apply for lockup for various reasons. Therefore, although the proportion of lock-up is only 20% of the allocated quantity, it is safe to consider that most of the quantity that is not actually locked up is subject to long-term holding.
On the other hand, institutional investors in the Local - Others and Foreign - Other categories, which can be seen as the most severe short-term hot money, received almost no allocation.
As a result, the total amount allocated to institutions is 11.67% of the post-IPO SO, of which 6.43% is not locked up. However, since it can be inferred that most of this 6.43% is owned by overseas long-only funds, all of this 11.67% should be considered unavailable in the market right away.














Lock-up, by orders
1. Local PO
2. Local Br/IA
3. Local pension, etc.
4. Local - Other
5. Foreign
6. Foreign - Other
Total
% of post-IPO SO


6 months
3.36%
0.00%
0.00%
0.34%
0.00%
0.00%
3.70%
0.43%


3 months
7.29%
0.00%
15.79%
0.62%
0.04%
0.00%
23.74%
2.77%


1 month
3.65%
0.00%
0.72%
0.59%
11.98%
0.00%
16.94%
1.98%


15 days
0.39%
0.00%
0.00%
0.14%
0.00%
0.00%
0.53%
0.06%


No lockup
4.34%
0.53%
1.57%
0.62%
48.03%
0.00%
55.09%
6.43%


Total
19.03%
0.53%
18.07%
2.31%
60.06%
0.00%
100.00%
11.67%

Source: DART

Overall, as expected, the ESOP recorded a large under-subscription. The ESOP took only one-fifth of the allocated quantity, and the remaining was additionally allocated to institutions and retailers in a 2:1 ratio. By diverting a significant portion of the ESOP volume to institutions, the index float was increased while the real-world float was left untouched.








Allocation by type
Allocated, % of the offering
Final, % of the offering
Final, % of post-IPO SO


Institutional
55.00%
65.90%
11.67%


1. Local publicly raised funds
-
12.54%
2.22%


2. Local Br/IA
-
0.35%
0.06%


3. Local pension, etc.
-
11.91%
2.11%


4. Local - Other
-
1.52%
0.27%


5. Foreign
-
39.58%
7.01%


6. Foreign - Other
-
0.00%
0.00%


Retail
25.00%
30.00%
5.31%


ESOP
20.00%
4.10%
0.72%


Total
100.00%
100.00%
17.70%

Source: DART



A Mismatch Between Krafton Immediate Float & Passive Inflow Quantity

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'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

Krafton IPO – Should You Chase This Down?

Despite the double digit fall vs. its IPO price we feel that risks for Krafton remain skewed to the downside and that it is the most attractive...

Mio Kato

Krafton IPO Trading - Relatively Weaker Demand and Uncertainty Surrounding MSCI Inclusion

Krafton Inc (259960 KS) raised US$3.8bn at KRW498,000 per share at the top end of its IPO price range in its South Korea IPO.

Zhen Zhou, Toh

Kakao Bank - MSCI Done, Missed FTSE by a Whisker.

Kakao Bank (KB), South Korea’s largest digital bank, raised US$2.2bn in its South Korean IPO. It ended the first day of trading up 79% from its IPO...

Sumeet Singh

A Mismatch Between Krafton Immediate Float & Passive Inflow Quantity

We need to pay attention to how many shares will be actually available in the market immediately after listing and whether there is room for a...

Sanghyun Park

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