Netmarble establishes its lineage with IPO pricing

Third largest IPO in Korean history prices at the top of the range, but is still expected to make a solid secondary market debut after amassing strong demand.

Korean gaming company Netmarble has priced its initial public offering at the very top of its indicative price range after investors ignored war games across the Korean peninsula in favour of role playing games (RPG) on mobile phones.

Netmarble is Korea’s largest mobile gaming company and its W2.66 trillion ($2.31 billion) IPO now ranks as the country’s third largest on record behind Samsung Life and Lotte Shopping.

Investors clearly bought into an international expansion strategy which has seen Netmarble rise from seventh in the 2016 global gross gaming publisher rankings on the Apple App Store and Google Play Store to third as of February, behind Tencent and NetEase.

As a result, the 16.95 million primary share deal was priced at W157,000 per share, having initially been marketed in a W121,000 to W157,000 range.

A total of 200 investors participated in the tranche for domestic and international institutional investors, with a 70/30 split in favour of long-only funds versus hedge funds. The largest allocation went to a sovereign wealth fund, while the top 10 accounts took 40% overall. 

Retail investors were allocated 20% of the whole deal and high-risk, high-yield investment trusts a further 10%.

Bankers said one of the standout aspects of the deal was geographically wide interest from across Asia, Europe and the US. They also said a key swing factor behind top-end pricing was the charisma and roadshow performance of the company's founder, Bang Joon-hyuk, who is often compared to Steve Jobs, not least by the company itself. 

Yet, what makes the pricing outcome all the more notable is the heightened geopolitical tension relating to North Korea’s latest failed nuclear test, which dominated the bookbuilding period. 

But South Korean investors are used to bellicose rhetoric from the North. Despite the growing tension between North Korea and the US and its allies, the Kospi Index has largely been on a rising trend for the past three weeks. On Friday, it closed at 2,165.04, up 6.84% year-to-date.

Where investors are concerned, one of the most important considerations is the fact that Netmarble's IPO has priced at a discount to its nearest comparable and part shareholder, NCSoft, thanks to a jump in the latter’s share price over the past month.

Seoul-listed games developer NCSoft has been on a tear as financial analysts revised up earnings guidance in line with record breaking pre-registration levels for its forthcoming massively multiplayer online role playing game (MMORPG), Lineage M.

On Thursday, UBS raised its target share price from W345,000 to W420,000 per share on the grounds that “investors have yet to factor in potential growth from Lineage mobile titles.”

The bank also estimates that royalties from Netmarble’s Lineage 2: Revolution will account for 17% of NCSoft’s 2017 operating profit.

So far this year, NCSoft’s stock price has climbed 43.64%, closing Friday at W355,500. But the steepest rise has been since March 27. Since then it has climbed 24.95%

At its current trading level, NCSoft is valued on a consensus price-to-earnings ratio of 21.7 times 2017 forecast earnings and 18.8 times forecast 2018 earnings.

By contrast, Netmarble has been priced at 19 times 2017 earnings and 14.7 times 2018 earnings — offering investors respective discounts of 12.45% and 21.9%.

Betting on Lineage

Non-syndicate banks, which have already released research on the company, believe it should do well in the secondary market. Shinhan, for example, has a fair value estimate of W14.9 trillion, some 12% higher than the company's W13.3 trillion market capitalization. 

It says revenues from Lineage 2: Revolution should amount to W1.2 trillion in 2017, with overall revenues jumping 82% year-on-year and operating profit rising a whopping 213%.

Netmarble has said it hopes to use proceeds to further its international footprint through M&A. The company's international revenues expanded rapidly in 2016 and became the dominant segment for the first time, representing 50.5% of revenues compared to 29.5% in 2015.

Its main target markets are the US and Japan, which respectively accounted for 20.5% and 10% of 2016 revenues. In particular, Netmarble wants to move developed markets away from strategy games to the RPG and MMORPG titles, which Korea is famous for.  

In 2016, these two segments accounted for 55% of revenues, with casual games accounting for a further 40%. UBS says that the leading publishers are becoming more successful at convincing gamers to shift towards more involving and revenue-generating RPG and MMORPG titles.

Netmarble’s growth profile in China is complicated by the country’s current clampdown on Korean gaming publishers in punishment for the proposed deployment of America’s anti-missile shield THAAD. Netmarble has applied for permission to launch Lineage 2: Revolution via Tencent and is planning a fourth quarter launch date. But it has not yet received approval.

The IPO is scheduled to begin trading on May 12. On listing, public shareholders will own 20%, while founder, Bang will hold 24.47%, CJ E&M 22.09%, Tencent 17.77% and NCSoft 6.9%.

The 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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