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Krafton's downsized IPO spurred by South Korean regulator worries

Doubts swirl over whether game developer's megahit PUBG enough to ensure value

Krafton's hit game PUBG is the company's mainstay product.

SEOUL -- South Korean game developer Krafton surged to prominence on the back of its wildly popular international hit PlayerUnknown's Battlegrounds (PUBG).

The product, a pioneer of "battle royale" games, propelled the company toward what was predicted just last month to be the biggest initial public offering on the Seoul stock market, raising as much as 5.6 trillion won ($5 billion) and generating further excitement surrounding an IPO boom underway in South Korea.

But the euphoria was short-lived. After ensuing speculation that something was out of kilter the company backpedaled, announcing on Thursday that it would cut its IPO price by more than 10% as well as lower the number of shares offered to investors. It also suspended its IPO schedule, saying it will accept applications for shares for two days from Aug. 2, later than the previous timeline of mid-July.

The lowering of expectations is raising concerns about the real outlook for Krafton, which has clearly hit the jackpot with its megahit game. But given that the company relies on a single product for nearly all of its sales, questions are being asked about its valuation decisions and a high-profile intervention by regulators.

The Financial Supervisory Service clearly saw cause for concern, raising a red flag and in a rare move demanding that Krafton reassess its valuation by correcting its IPO registration form.

"We demanded [Krafton] to revise the registration form because it could undermine investors' reasonable judgment or cause critical misunderstanding by stating key points unclearly," the FSS said in a statement.

According to the FSS, fixes were required seven times out of the 117 IPO registration forms that were submitted last year -- or just 6%. And no such revisions were demanded in 2019, when 103 IPO registration forms were filed.

An FSS director, queried for insight into the decision, simply referred Nikkei Asia to Krafton's revised registration form, which showed that the company had cut the IPO price to a range of 400,000 to 498,000 won from its previous band of between 458,000 and 557,000 won. It also cut the number of shares to be raised to 8.7 million from the earlier 10.1 million.

With the changes, Krafton is now expected to haul in as much as 4.3 trillion won, which would still rank as the second-largest IPO in the country, trailing only Samsung Life Insurance's 2010 market debut, which raised 4.9 trillion won.

As for Krafton's take, the company said it had sought a "reasonable valuation" after consulting with lead manager Mirae Asset Securities. "We revised the registration document, adding detailed information," Krafton said in a statement, while stressing its "globally recognized intellectual property," a reference to PUBG.

Information for investors added in the filing included a list of game studios it has acquired since 2015 and acknowledging the risk of its heavy reliance on a single game for its revenue.

Mirae Asset declined to elaborate on the revised form, citing client confidentiality.

South Korea's Financial Supervisory Service flexed its muscles regarding Krafton's IPO as the country's benchmark stock index has been on a tear. (Source photos by AP and screenshot from The Financial Supervisory Service's website)

Lee Seung-hoon, an analyst at IBK Securities, said that the FSS stepped in on Krafton and its huge potential market cap as a series of big IPOs have sent South Korea's benchmark Kospi stock index soaring.

"The FSS warned of the high valuation to protect individual investors, as they could lose their money if the IPO price is too high," Lee said. "It did its job."

Analysts say a key problem was that Krafton initially compared itself to global companies such as Walt Disney and Warner Music, which have little to do with the gaming industry.

"For Walt Disney and Warner Music, the proportion of game content in total sales is negligible," said Park Sang-hyun, an analyst at Smartkarma Innovations, a Singapore-based research house. "More than 60% of Walt Disney's sales are media entertainment. Warner Music's vast majority of its sales come from music distribution."

Krafton had previously calculated its IPO price in comparison to 259 international companies that also included global gaming peer Activision Blizzard. But for the revised registration, it drastically downsized the comparison to just four South Korean rivals: NCSoft, Netmarble, Kakao Games and Pearl Abyss.

Park also questioned Krafton's heavy reliance on PUBG, which accounted for 96.7% of the company's sales in the first quarter of this year and 96.5% all of last year, according to the company.

"Among the companies in the valuation peer group, except for Pearl Abyss, there is no company in which a single game contributes close to 100% of sales," Park said. "This inevitably highlights the regulatory risk in China for the PUBG partnership service with Tencent, which accounts for 70% of total sales. However, in this revised report, Krafton did not add anything else about PUBG's regulatory risks in the Chinese market."

PUBG is a last-man-standing shooter game in which 100 players compete on a remote island in a winner-take-all showdown where strategic gameplay is as important as skills with weapons.

The company, which sells PUBG all around the world on the Steam platform, in 2020 racked up revenue of 1.7 trillion won. Asia, excluding South Korea, accounted for 85.8% of its revenue last year, followed by North America and Europe with 7.8%. Its home market of South Korea contributed 5.3%.

"Krafton's vision is to stay a household name in video game development by keeping true to its core value 'craftsmanship,'" the company, which traces its roots back to 2007, says on its website. Besides PUBG, which hit the market in 2017, other game offerings include Tera, Elyon and Golf King: World Tour.

Kim Dong-hee, an analyst at South Korea's Meritz Securities, maintains that Krafton's initial valuation was justified because no other game can compare to its marquee product.

"PUBG is the only IP which is a hit in both China and the U.S. in the history of gaming," said Kim, using the abbreviation for intellectual property.

Kim set her target stock price for Krafton at 720,000 won, far higher than even the company's own initial IPO suggestion.

"Investing in this game is not going to fail," Kim said, predicting that releases of new games, such as PUBG: New State and The Callisto Protocol, will also be successful.

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