Updated: Kakao Games to shore up M&A with IPO proceeds – CEO

Kakao Games Corp. will use proceeds from the initial public offering to carry out active M&A among game sectors, said Namkoong-whon, the company's chief executive officer during an online press conference on August 26.

“In addition to M&A activities, we will also invest in game companies to secure directly developed games,” said Namkoong. For example, if a published game is successful then Kakao Games will exercise call option to transfer the game developer company into an affiliate.

Kakao Games has a competitive advantage in terms of operating a platform that encompasses both mobile and PC games, but it has been criticized for having a weak portfolio of directly developed games and intellectual properties compared to industry peers.

The company has made efforts to overcome these barriers such as acquiring XLGames, the developer of popular MMORPG games ArcheAge, and Moonlight Sculptor.

The company also plans to shore up its presence in overseas markets. In July, Kakao Games released its latest game title Guardian Tales in 230 countries and is set to release Moonlight Sculptor in China during the fourth quarter.

“Overseas revenue accounted for 30% of our earnings during the first half of the year. We plan to bolster overseas revenue by utilizing the infrastructure of our offices in Europe, North America, Southeast Asia, and Japan. Our goal is to boost sales through directly developed games as well as publishing," said Namkoong.

Kakao Games kicked off its bookbuilding process for institutional investors on August 26 and 27 as it gears up for listing on South Korea’s junior KOSDAQ.

The company is seeking to raise up to 384 billion won ($323 million) and will use the proceeds to bolster its content portfolio and finance M&As.

The game unit of Korea’s leading mobile messaging app Kakao Corp. will launch its subscription process on September 1 and 2, as it aims to debut on the tech-heavy KOSDAQ at the end of the year. For the public offering, Kakao Games plans to issue 16 million shares for both institutional and individual investors.

Daishin Securities has set its target price for Kakao Games at 33,000 won ($28) per share, 37.5% to 65.0% higher than the company’s offering price of 20,000 won to 24,000 won. Based on the company's proposed price, its enterprise value is projected at 1.76 trillion won.

The company’s IPO is highly anticipated, touted to be the hottest offering this year. Industry experts predict Kakao Games’ shares will surge, riding on the recent BBIG (bio, battery, internet, game) wave where non-contact, non-face-to-face sectors have performed bullish amid the global pandemic.

For example, in July SK Biopharmaceuticals Co made its debut on the KOSPI with a target price between 100,000 won and 110,000 won. In just three days, shares in the Korean pharma reached 214,500 won.

A similar scenario is strongly plausible for Kakao Games in the short term, according to a securities firm analyst.

“Kakao Games’ shares traded at 65,000 won in the over-the-counter market. They will reach that price without a problem,” the analyst said.



Kakao Games has performed well of late, with its mobile game Guardian Tales landing in the top-10 game apps in terms of revenue from Google Play. Further, its upcoming Elyon, set for November launch, received positive feedback during a beta test event.

However, it is uncertain whether shares can maintain their momentum in the mid to long term as the company’s earnings may not keep up with the rising share price.

Kakao Games’ valuation hovers around the industry average, which is likely to limit further price increases in the long term. Fierce competition in the subscription process may also be burdensome for individual investors.

Daishin Securities calculated the 12-month forward price-to-earnings (P/E) ratio to be 12.7 to 15.3 times based on the company's proposed share price. The valuation is close to the digital content industry’s average P/E ratio of 13.5 times. If the target price is applied, then the 12-month forward P/E ratio rises to almost 19 to 20 times.

Kakao Games will be the first subsidiary to go public from Kakao Corp’s IPO pipeline. This is not the first time the company has attempted a KOSDAQ listing, as it received approval in 2018 but withdrew after running into regulatory hurdles.

The company earned 27.8 billion won in net profit on revenues of 203 billion won in the first half of this year, up 264% and 8.2% year on year, respectively.

The company's affiliates Kakao Page Corp., Kakao Commerce Corp., and Kakao Bank will also prepare for listings.

 

By Byeong-hun Yang

Hun@ hankyung.com



(Updated on August 26, 2020: Five paragraphs updated in the beginning to add CEO comments from online press conference)