Brief Event-Driven: Nexon Valuation Analysis and more

In this briefing:

1. Nexon Valuation Analysis

1. Nexon Valuation Analysis

In this report, we provide a valuation analysis of Nexon Co Ltd (3659 JP). A key question is “How much are investors willing to pay for Nexon which would drive higher EV/EBIT multiples and inversely reduce the earnings yield (measured by EBIT/EV)?” 

In our view, we believe that investors would be comfortable with earnings yield (measured by EBIT/EV) of about 7-9% given the risks of operating a global game franchise such as Nexon. This would suggest EV/EBIT of about 11x to 14x, using 2019 estimates. Our sensitivity analysis suggests that at the top end of the EV/EBIT valuation range of 14x, this would imply market cap of 1,905 billion yen, which would be 21% higher than current market cap. As such, despite Nexon’s share price rising 25% YTD, we think there could be further upside in the months ahead. 

Having digested plethora of public information on this deal (but not privy to all the bankers’ discussions) in the past several days, we believe that the US based companies including Amazon and Comcast are better positioned to acquire NXC Corp/Nexon, rather than the consortium led by Tencent. 

We believe there is an intense Chinese government pressure on Tencent to not do this deal. (This is just our guess based on public information). The game industry is not strategically important to China, unlike other industries such as semiconductors, energy, or financial. Depending on how much controlling stake Tencent wants to take, it is likely to involve several billions of dollars ($4 billion to $7 billion for Tencent, for example). This is a lot of money. Plus, China Inc’s balance sheet is not as strong as pre-GFC of 2008. Forking over $4 to $7 billion out of China into Japan/Korea would be meaningful. In short, although Tencent would like to do this deal, we think that behind the scenes, the Chinese government appears to be putting intense pressure on Tencent to not do this deal.