Netmarble breathes fire into Asia's IPO market

High expectations for the flotation of Netmarble Games Corp, backed by soaring sales for its new mobile game, Lineage 2: Revolution.

Netmarble Games Corp has begun pre-marketing one of Asia's most hotly anticipated initial public offerings of 2017: a  $1.8 billion to $2.4 billion deal, which is being pitched at a discount to most of its nearest comparables.

If the 16.95 million share transaction prices at the top of its indicative range, it will rank as the third largest IPO in Korean history after Samsung LIfe and Lotte Shopping

Its passage to market is also likely to stand in marked contrast to the procession of Chinese companies, which dominate the Asian league tables, but have turned Hong Kong into a dysfunctional IPO market thanks to their illiquid cornerstones tranches and non-market valuations.

Netmarble is a "proper" IPO in the true institutional sense of the word, with a split that will see 70% placed with institutional investors, 20% with retail investors and 10% with high yield, high-risk investment trusts. 

The deal is also being marketed at a discount to peers. This will lead to expectations of strong secondary market performance similar to Korea's most recent jumbo IPO; the W2.2 trillion flotation of Samsung Biologics, which has risen 27.81% since its listing last November. 

Based on a marketed range of W121,000 to W157,000 per share and 20% issued share capital, Netmarble will have a market capitalisation of W10.04 trillion to W13.075 trillion ($8.95 billion to $11.65 billion). 


JPMorgan syndicate research values the deal at 14.6 to 19 times forecast 2017 earnings and 11.4 to 14.7 times forecast 2018 earnings. 

One of the closest comparables is Seoul-listed NCSoft, which is currently trading at 17.5 times consensus 2017 earnings and 15.2 times consensus 2018. Analysts say it typically averages 19 times forward earnings prior to new launches.

Subject to its price performance over the next month or so, Netmarble will have a larger market capitalisation than NCSoft, the company to which it owes so much.

The games developer purchased a 9.8% stake in Netmarble in February 2015 as part of a partnership agreement between the two companies, which is seeing the latter turn the former's PC-based games such as Lineage into mobile offerings. 

The unexpectedly huge success of Netmarble's Lineage 2: Revolution, which was released in mid-December has had a strong influence on NCSoft's share price so far this year. The stock closed Tuesday at W295,000, up 19.84% year-to-date.

By contrast, a second close comparable, Tokyo-listed and Korean-founded Nexon, is trading at 14.2 times consensus 2017 earnings and 13.76 times 2018 earnings. The stock is up 4.84% year-to-date, but fell 12% over four trading days in early March when China stopped approving Korean gaming licenses in retaliation for Korea's deployment of US missile system, THAAD. 

Nexon receives roughly 40% of its revenues from China, although officials have said the company already had approval for Dungeon and Fighter. The same cannot be said for Netmarble, which has applied for approval to launch Lineage 2: Revolution via shareholder Tencent, but has not yet received it.

During an earnings call earlier this year, Netmarble said it planned to increase sales across three main markets this year: China, Japan and Korea. China is likely to prove problematic: a risk factor for the IPO.

However, China is not yet that important for the company given the 2016 revenue split between Korea (50%), US (30%), Japan (9%) and rest of world (11%). This latter category covers China, India, Malaysia, Thailand and Turkey. 

One country Netmarble does intend to target is the US, where it has made two acquisitions in recent years. IPO proceeds are being used to pursue more.

Founder Bang Jun-hyuk has previously said he wants to buy US companies because of their cultural influence rather than their revenue generating opportunities. 

In July 2015, Netmarble paid $130 million for a stake in SGN (now known as Jam City) and in February this year it completed a rumoured $800 million acquisition of the Vancouver gaming studio owned by Kabam.

In terms of US IPO comparables, syndicate analysts cite Activision Blizzard, which owns the Call of Duty franchise. The Nasdaq-listed group has a current valuation around 25 times forecast 2017 earnings and 20 times 2018 earnings. 

A second Nasdaq-listed peer is China's Netease, which is valued at 18.3 times 2017 earnings and 16 times 2018. 

Soaring sales

One of Netmarble’s biggest selling points is the profit trajectory for Lineage 2: Revolution. Syndicate research suggests it will account for 45% of 2017 sales. 

In turn, overall sales are forecast to grow by a compound annual growth rate of 64% between 2016 and 2018, or from W1.5 trillion to W4.1 trillion. The company has previously said it hopes to hit W5 trillion by 2020 when it wants to be one of the world's top five gaming companies.

Net profit is also on a very strong trajectory, with analysts forecasting a rise from W209 billion in 2016 to a forecast W685.5 billion in 2017 and W886 billion in 2018. Syndicate analysts suggest new launches following Lineage 2: Revolution will account for 20% of revenues during 2018. 

Non-syndicate bankers also back up these figures. Credit Suisse, for example, recently suggested that Lineage 2 could net around $1 billion in sales over the course of 2017. 

The Medieval fantasy series, which was first launched in 1998, is the world's fifth highest grossing game of all time, netting close to $5 billion over the past two decades. Top is World of Warcraft, which has bought in close to $10 billion. 

According to App Annie, Lineage 2: Revolution is currently South Korea's top selling game by revenue. Its success underlines a shift in the gaming market from PC to mobile, which Netmarble's IPO hopes to capture.

For example, App Annie says that mobile games achieved 25% higher global sales than PC in 2016, with 60% of the spend coming from Asia.

Like many Asian gaming companies, Netmarble specialises in massively multiplayer online role-playing games (MMORPG), which are more revenue-intensive than many of their Western counterparts.  App Annie notes that Japan’s top 30 games monetise twice as effectively as the top US games because two thirds are MMORPG-based.

In 2016, it ranked Netmarble ninth in the global gaming market by revenue, with the top three spots held by Tencent, Supercell and Netease. 

Tencent currently owns 22% of Netmarble. The Chinese company paid $500 million for a 28% stake in 2014 and if the IPO prices at the top end of the range, it stands to book at least $2.56 billion based on its current shareholding.

Netmarble’s next major launch will also be South Korea’s version of Tencent’s King of Glory, an e-sport mobile game called Penta Storm.

The company’s largest shareholder is still its founder, Bang, who owns 30.6% and has often been likened locally to Apple’s Steve Jobs because of the influence he wields over the company. As with many tech companies, this presents investors with key-man risk.

Bang stepped down from the company in the mid-noughties citing exhaustion after selling a stake to CJ E&M, which now owns 27.5%. But he was back in 2011 after the company failed to match the success it had under his leadership, similar to Job’s re-emergence at Apple.

Investors will be happy if Netmarble’s IPO can match even a fraction of the Cupertino-based company’s success.

Joint global co-ordinators for the IPO are JP Morgan and NH Investment with Citi and Korea Investment & Securities as joint bookrunners.

¬ Haymarket Media Limited. All rights reserved.
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