[Upcoming IPO] PUBG creator to go public to finance IP expansion

Investors are paying close attention to the Korean game holding company Krafton as it is expected to be this year's hottest initial public offering. The company behind famous game titles PlayerUnknown's Battlegrounds (PUBG) and TERA is expected to go public this year to finance its portfolio diversification including new game release, IP business expansion, and more.

Krafton is currently in the process of selecting advisors, according to investment banking sources. The company has not officially announced IPO plans.

Krafton (initially named Bluehole until 2018) was founded in 2007 by current chairman Chang Byung-gyu, a veteran entrepreneur. It is the parent company of game studios PUBG, Bluehole, Pnix, Red Sahara, Delusion, and En Masse Entertainment. It released its first massively multiplayer online role-playing game (MMORPG) TERA in 2011, tapping into overseas markets including the US, Europe, and Japan. The game achieved solid success, taking home four categories from the 2011 Korea Game Awards.

But the company's worldwide success came in 2017 when it debuted PUBG, an online multiplayer battle royale game where 100 players compete to be the final survivor on a private island. The game - selling 65 million copies worldwide - was a huge hit, generating much-needed revenue for the company which had struggled from a financial decline months prior to its launch. The mobile version of the game released in 2018 further boosted its global success. In 2019, 50.2% of Krafton's sales stemmed from mobile users.

Mobile games 'PUBG Mobile: Battlefield' and 'Game for Peace' posted a combined $226 million in sales during May, a 41% year-on-year increase, according to SensorTower, a market research service. The two games accounted for the largest turnover among mobile games. 'Game for Peace' is a Chinese version of PUBG Mobile, launched by Tencent Holdings.

Between 2017-18, Tencent subsidiary Image Frame Investment became Krafton's second-largest shareholder with a 13.2% stake. Chairman Chang is the largest shareholder with a 17.47% stake, and a private equity fund created by IMM Investment and JKL Partners accounts for a 6.88% stake as the third-largest shareholder.

Ever since PUBG's success, there has been constant market chatter regarding Krafton's IPO. According to game industry sources, the game publisher is hoping for a valuation between 10 trillion won to 12 trillion won, which does not look too far-fetched given that the company is valued at 7.2 trillion won on 38 Communications, an OTC exchange.

On July 15, Krafton’s share price reached an all-time high of 897,500 won per share on the OTC exchange, a drastic jump from just six months ago when it had ranged around 400,000 won per share.

In 2019, Krafton posted 1.8 trillion won ($1.4 billion) in revenue and 359.2 billion won in operating profits. Its net profit was 278.8 billion won, which would justify a 10 trillion won valuation with the game industry's average price-to earning-ratio of about 40x.

From January to March of this year, the company posted 508.2 billion won in revenue and 352.4 billion won in operating profits, recording a 99% year-on-year growth in revenue and 256% year-on-year growth in operating profits from the previous year.



 

“Krafton’s listing will definitely expand the domestic game market,” said Dong-hee Kim, an analyst at Meritz Securities Co., Ltd.

Krafton’s public listing is expected to create a shift among the 3N – Nexon, NCSoft, Netmarble – which has maintained leading positions in the game publishing sector. If Krafton reaches a market cap of 12 trillion won, it will secure third place ahead of Netmarble.

However, the company’s market cap will largely depend on this year’s performance. Its upcoming MMORPG game ‘Elyon’ will need to achieve commercial success for Krafton to be valued over 10 trillion won, according to market experts.

“Game industry is one that displays high volatility depending on the performance of individual games,” said Euljeong Yun, an analyst at Shinyoung Securities. She added, “The success of PUBG’s IP is already reflected in the company's share price meaning that they will need to add value through additional performance to have a successful IPO.”

For example, Netmarble had performed well with over 16 trillion won in market cap thanks to the success of ‘Lineage 2: Revolution’ which used NCSoft Lineage IP in 2017. However, its new titles including ‘BTS World’ failed to achieve similar success, and as of July 14, its market cap has dropped to 11.5 trillion won.

Considering such factors, there is much weight placed on Elyon's success. The game will be serviced by Kakao subsidiary KakaoGames.

NEXT STEPS

The company welcomed a new chief executive officer Kim Chang-han in June. Kim was the producer of PUBG in 2015, overseeing the development of Krafton's most famous game.

"My role is to solidify Krafton's position as a globally recognized company by creating games that will achieve the same success as PUBG," said Kim.

Kim also shared plans to beef up the company's IP business via securing IP that can be gamified as well as utilizing the company's IP across various content channels such as dramas, films, and webtoons (digital comics) as a way to boost growth and profitability.

For example, the company launched the mobile game 'TERA Hero' earlier in March and plans to release a new game utilizing PUBG's IP.

While the global pandemic has stricken down many businesses, Korea's IPO market has been forging ahead with newly listed companies recording an average 55.6% hike from their offering price during the first half of the year.

Krafton, also, is likely to be no exception as the company's IPO is highly anticipated by year-end.

By Bumjin Chun

forward@hankyung.com