Korea/Asia, Events, IPOs, Douglas Research Advisory

Douglas Kim

Nearly 25 years of experience in analyzing hundreds of companies, especially in Asia. Deep expertise in the following sectors:
- Technology (E-commerce, SaaS, Internet)
- Consumer 
- Special Situations/Deep Value Plays
- Holdcos/Stubs
- Asian Unicorns/Private Companies

Korea/Asia, Events, IPOs

Chinese Government to Crack Down on the Online Gaming Sector? A Big Negative for the Krafton IPO

Krafton: Only 20% of Employee Stock Ownership Association Apply for the IPO Shares

A Mismatch Between Krafton Immediate Float & Passive Inflow Quantity

An Updated Valuation of the Krafton IPO & Major Recent Events Impacting the Company

Equity Capital Markets

On 29 July, Krafton announced its IPO book building results. The IPO price has been determined at 498,000 won, which was at the high end of the IPO price range. The demand ratio among the institutional investors was 243 to 1. Krafton will be raising $4.3 billion in this IPO. There were 621 institutional investors that participated in the IPO survey of which 447 were domestic investors and 174 were overseas investors. <table class="table table-striped">
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<td colspan="4" style="width: 508.09px;"><div style="text-align: start;"><div><div>Institutional Investors Demand Breakdown of Krafton IPO Bookbuilding Results</div></div></div></td>
<td style="width: 106.27px;"> </td>
</tr>
<tr>
<td style="text-align: left; width: 135.28px;">Domestic Investors</td>
<td style="text-align: center; width: 106.22px;"> </td>
<td style="text-align: center; width: 120.25px;"> </td>
<td style="text-align: center; width: 146.34px;"> </td>
<td style="text-align: center; width: 106.27px;"> </td>
</tr>
<tr>
<td style="width: 135.28px;"> </td>
<td style="text-align: center; width: 106.22px;">Asset mgmt companies</td>
<td style="text-align: center; width: 120.25px;">Brokerages</td>
<td style="text-align: center; width: 146.34px;">Pension funds/insurance/banks</td>
<td style="text-align: center; width: 106.27px;">Others</td>
</tr>
<tr>
<td style="width: 135.28px;">No. of companies</td>
<td style="text-align: center; width: 106.22px;">231</td>
<td style="text-align: center; width: 120.25px;">18</td>
<td style="text-align: center; width: 146.34px;">94</td>
<td style="text-align: center; width: 106.27px;">104</td>
</tr>
<tr>
<td style="width: 135.28px;">Demand</td>
<td style="text-align: center; width: 106.22px;">93.7</td>
<td style="text-align: center; width: 120.25px;">6.0</td>
<td style="text-align: center; width: 146.34px;">51.0</td>
<td style="text-align: center; width: 106.27px;">49.4</td>
</tr>
<tr>
<td style="width: 135.28px;"> </td>
<td style="text-align: center; width: 106.22px;"> </td>
<td style="text-align: center; width: 120.25px;"> </td>
<td style="text-align: center; width: 146.34px;"> </td>
<td style="text-align: center; width: 106.27px;"> </td>
</tr>
<tr>
<td style="width: 135.28px;"> Overseas Investors</td>
<td style="text-align: center; width: 106.22px;"></td>
<td style="text-align: center; width: 120.25px;"> </td>
<td style="text-align: center; width: 146.34px;"> </td>
<td style="text-align: center; width: 106.27px;"> </td>
</tr>
<tr>
<td style="width: 135.28px;"> </td>
<td style="text-align: center; width: 106.22px;">(A)*</td>
<td style="text-align: center; width: 120.25px;">(B)**</td>
<td style="text-align: center; width: 146.34px;"> </td>
<td style="text-align: center; width: 106.27px;"> </td>
</tr>
<tr>
<td style="width: 135.28px;">No. of companies</td>
<td style="text-align: center; width: 106.22px;">146</td>
<td style="text-align: center; width: 120.25px;">28</td>
<td style="text-align: center; width: 146.34px;"> </td>
<td style="text-align: center; width: 106.27px;"> </td>
</tr>
<tr>
<td style="width: 135.28px;">Demand</td>
<td style="text-align: center; width: 106.22px;">13.1</td>
<td style="text-align: center; width: 120.25px;">30.0</td>
<td style="text-align: center; width: 146.34px;"> </td>
<td style="text-align: center; width: 106.27px;"> </td>
</tr>
<tr>
<td style="width: 135.28px;"> </td>
<td style="text-align: center; width: 106.22px;"> </td>
<td style="text-align: center; width: 120.25px;"> </td>
<td style="text-align: center; width: 146.34px;"> </td>
<td style="text-align: center; width: 106.27px;"> </td>
</tr>
<tr>
<td style="width: 135.28px;">Total (No. of companies)</td>
<td style="text-align: center; width: 106.22px;">621</td>
<td style="text-align: center; width: 120.25px;"> </td>
<td style="text-align: center; width: 146.34px;"> </td>
<td style="text-align: center; width: 106.27px;"> </td>
</tr>
<tr>
<td style="width: 135.28px;">Total Demand</td>
<td style="text-align: center; width: 106.22px;">243.1</td>
<td style="text-align: center; width: 120.25px;"> </td>
<td style="text-align: center; width: 146.34px;"> </td>
<td style="text-align: center; width: 106.27px;"> </td>
</tr>
<tr><td colspan="5" style="width: 614.36px;">Note: (A)* refers to overseas investment mgmt companies that have records of trading with the brokers involved in this deal.</td></tr>
<tr><td colspan="5" style="width: 614.36px;">(B)** refers to overseas investment mgmt companies that do not have records of trading with the brokers involved in this deal.</td></tr>
<tr>
<td colspan="2" style="width: 241.5px;">Source: Company data</td>
<td style="width: 120.25px;"> </td>
<td style="width: 146.34px;"> </td>
<td style="width: 106.27px;"> </td>
</tr>
</tbody>
</table><ul>
<li>We continue to have a NEGATIVE view of the Krafton IPO post book building results. Our base case valuation of Krafton remains implied market cap of 23.0 trillion won or implied price of 445,942 won per share, which represents 10% lower than the IPO price of 498,000 won. </li>
<li><a href="http://www.ipo38.co.kr/ipo/index.htm?o=v&amp;key=6&amp;no=1671&amp;l=&amp;page=1" target="_blank" rel="noopener">Gray market price</a> of Krafton is 530,000 won, which is 6% higher than the IPO price of 498,000 won. </li>
<li>Overall, there were some big institutional investors (both overseas and domestic) that helped to push Krafton's IPO price to the high end of the lowered IPO price range. Despite this positive, the lock-up periods and the demand ratios were relatively weak as compared to other major IPOs in the past year. </li>
<li>We do not expect any meaningful first day pop for the Krafton IPO. At best, we think there could be a 10-20% increase from the IPO price in the first few hours of trading on August 10th (IPO date). However, over a 6-12 months view, we believe that Krafton's stock price will decline lower towards our base case intrinsic value of 455,942 won.</li>
</ul>

On 29 July, Krafton announced its IPO book building results. The IPO price has been determined at 498,000 won, which was at the high end of the IPO price range. The demand ratio among the institutional investors was 243 to 1. Krafton will be raising $4.3 billion in this IPO. There were 621 institutional investors that participated in the IPO survey of which 447 were domestic investors and 174 were overseas investors. 








Institutional Investors Demand Breakdown of Krafton IPO Bookbuilding Results
 


Domestic Investors
 
 
 
 


 
Asset mgmt companies
Brokerages
Pension funds/insurance/banks
Others


No. of companies
231
18
94
104


Demand
93.7
6.0
51.0
49.4


 
 
 
 
 


 Overseas Investors

 
 
 


 
(A)*
(B)**
 
 


No. of companies
146
28
 
 


Demand
13.1
30.0
 
 


 
 
 
 
 


Total (No. of companies)
621
 
 
 


Total Demand
243.1
 
 
 

Note: (A)* refers to overseas investment mgmt companies that have records of trading with the brokers involved in this deal.
(B)** refers to overseas investment mgmt companies that do not have records of trading with the brokers involved in this deal.

Source: Company data
 
 
 



We continue to have a NEGATIVE view of the Krafton IPO post book building results. Our base case valuation of Krafton remains implied market cap of 23.0 trillion won or implied price of 445,942 won per share, which represents 10% lower than the IPO price of 498,000 won. 
Gray market price of Krafton is 530,000 won, which is 6% higher than the IPO price of 498,000 won. 
Overall, there were some big institutional investors (both overseas and domestic) that helped to push Krafton's IPO price to the high end of the lowered IPO price range. Despite this positive, the lock-up periods and the demand ratios were relatively weak as compared to other major IPOs in the past year. 
We do not expect any meaningful first day pop for the Krafton IPO. At best, we think there could be a 10-20% increase from the IPO price in the first few hours of trading on August 10th (IPO date). However, over a 6-12 months view, we believe that Krafton's stock price will decline lower towards our base case intrinsic value of 455,942 won.


Trading Strategy of Krafton IPO Post Bookbuilding Results