Valuation woes weigh down Krafton on Kospi debut

South Korean game developer Krafton Inc. made a disappointing local stock market debut on Aug. 10 amid concerns of overvaluation.

Krafton opened at 448,500 won ($391.2)  a share on the main Kospi, 11% lower than its initial public offering (IPO) price of 498,000 won. Shares closed at 454,000 won, 1.2% higher than their opening level, but failed to recover to the IPO price. They dropped to as low as 400,500 won during the day.

Foreign investors sold a net 162.7 billion won worth of the stock to book profit, although domestic institutional and retail investors bought a net 103.4 billion won and 124.3 billion won, respectively, helping the shares recoup some losses.

The debut's weakness was expected, given worries that Krafton's value was overrated, analysts said.

Hyundai Motor Securities predicted shares to remain under downward pressure as its IPO price had a premium of more than 30% compared to its competitors.

“Even considering revenue diversification based on the possible success of the new game Battlegrounds New State to be released in the fourth quarter, its valuation will be difficult to sustain,” said Hyundai Motor Securities analyst Hyunyong Kim.

“Since it depends on a single intellectual property and mobile sales account for more than 80%, it is tough for the current price-earnings ratio (PER) to exceed 25 to 30 times.”

Krafton’s market capitalization on the day of listing stood at 22.2 trillion won, becoming the country’s most-valued gaming label as it exceeded NCSoft Corp.’s 17.9 trillion won and Netmarble Corp.’s 11.6 trillion won.

The number of shares ready to trade was much larger than other companies, putting further pressure on the stock. About 39% of Krafton’s stocks could be traded after the listing, more than KakaoBank Corp.'s 22.6%, SK IE Technology's 15% and SK Bioscience's 1.6%. On the other hand, only 45% of Krafton’s shares allocated to institutional investors were locked up, fewer than other companies.

KOSPI 200, MSCI EM INDEX

Some investors, however, pinned some hopes on the possible inclusion of the stock in the Kospi 200 and MSCI Emerging Markets Index, which may prompt a buying spree. The Kospi 200 is likely to include the stock on Sept.10, while MSCI is scheduled to make a regular change of listed companies in the index on Aug. 23.

A new game, a key factor in a game developer’s share price, may justify Krafton’s valuation, some analysts said. It plans to release the Battlegrounds New State in the fourth quarter.

“A success of a new game is expected to raise corporate values further,” said Meritz Securities analyst Kim Dong-hee, suggesting a target price of 720,000 won.

The developer of PlayerUnknown’s Battlegrounds (PUBG) attracted tepid demand from institutional and retail investors for the largest domestic listing in the second half.

Its bookbuilding was 243 times oversubscribed, the lowest for a domestic listing so far this year, attracting 621 institutional investors. Despite lukewarm demand, Krafton priced its offering at the top end of the indicative price range of 400,000 won and 498,000 won.

During the IPO subscription for individual investors, the total amount of deposits was 5.04 trillion won, much below KakaoBank Corp.’s 58.3 trillion won and HK inno.N’s 29.2 trillion won.

Krafton plans to use the proceeds from the IPO to become a global content provider. It will use 70% of the proceeds for global buyouts and 15% for investments in other countries, including India.

Write to Yun-Sang Ko at kys@hankyung.com
Jongwoo Cheon edited this article.