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.

Equity Capital Markets

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

Korea/Asia, Events, IPOs, Douglas Research Advisory

Douglas Kim

Korea/Asia, Events, IPOs

<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.

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)

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

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

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