Tencent-backed Krafton's mega IPO seen as overvalued

South Korea-based game publisher Krafton Inc.'s highly-anticipated initial public offering is raising concerns that it may be overvalued. The company's enterprise value stands at 35 trillion won ($31 billion).

On June 16, Krafton filed a securities report to the Financial Services Commission to kick off the IPO process. In the report, the company appraised its IPO share to be valued at 677,539 won ($599) apiece and proposed a price band between 458,000 won and 557,000 won.

The IPO lead manager Mirae Asset Daewoo selected seven comparable companies and used their average price-to-earnings ratio of 45.2 times to reach Krafton's valuation of 35.7 trillion won.

But the comparable company analysis stirred up debate because Walt Disney and Warner Music Group were included as comparable companies. Disney's PE ratio stands at 88.8 times.

"They were included in the peer group because Krafton plans to expand the scope of its content businesses," said an official from Mirae Asset Securities.

However, market watchers remain skeptical since Disney and Waner Music Group's business structures differ significantly from Krafton's.

For example, Disney's high valuation stems from its flourishing over-the-top (OTT) service and anticipation over the re-opening of its amusement parks. Also, album sales account for over 85% of the total revenue for Waner Music Group which has a PE ratio of 38.1 times.

While Disney was used as a comparable company, Korea's major game company Nexon Co. wasn't included. If Disney and Warner Music Group were replaced with Nexon, then the average PE ratio would stand at around 33.5 times, bringing Krafton's valuation to around 25.9 trillion won -- almost 10 trillion won lower than the current valuation.

Industry players have also raised questions over the method of calculating Krafton's net profit. The company's net income attributable to controlling interest in the first quarter of this year stood at 194 billion won, to which the brokerage firm multiplied by four times to get the full year estimate of 776 billion won.

But this approach may not be suitable considering that the game industry had fared well in Q1 due to the COVID-19 crisis.

Previously, a brokerage firm that handled the listing of game developer Netmarble Corp. stated that applying PE ratio to the game industry may be unfitting since profits are highly volatile depending on the games' commercial success.

Last year, Krafton's net income attributable to controlling interest stood at 556.2 billion won, meaning that it would need to increase by 39.5% this year to arrive at the estimated 776 billion won -- an outlook seen as over-optimistic by market watchers.

Write to Yun-sang Ko at kys@hankyung.com
Danbee Lee edited this article.