The author is an analyst of KB Securities. He can be reached at drlee@kbfg.com. — Ed.

 

Initiate coverage with BUY rating, target price of KRW350,000       

We initiate coverage on Krafton with a BUY rating and TP of KRW350,000 (23.2% upside potential). We forecast 2021E-23E 15.2% revenue CAGR (vs. 8.5% WMI500 revenue CAGR, 7.2% industry revenue CAGR). Our 2022E/2023E OP of KRW694.3bn/KRW756.9bn is below the market consensus by 15.9%/21.8% based on our view on decelerating earnings growth in 4Q21 and growing cost pressure (e.g., labor, marketing). Our DCF-derived TP reflects 10.28% WACC, 1.0% TGR and represents 27.6x 12m. implied P/E (10% premium to that of peer average). 

Investment points  

Our main investment points for Krafton are as follows:

1) Revenue continues to grow thanks to the company’s global game IP PlayerUnknown’s Battlegrounds. We expect further increases in no. of users/ARPU, as the multiplayer game lowered barriers to entry on Jan 12 with its transition to free-to-play. Also, new titles in the PUBG universe (e.g., PUBG: New State launched in 2021, The Callisto Protocol slated for launch in 2023) are raising more interest in the game IP, indicating an extended lifespan.

2) The company has begun to bolster its in-house publishing capabilities with PUBG: New State, adding to main revenue drivers (fees from technology services, royalties). As revenue proportion of publishing increases, profitability should decline (2021E-23E OPM lowered to 30.2% from 33.9%) but OP should increase in absolute terms.

3) Krafton is reinforcing production capabilities (e.g., acquisition of game developers such as Unknown Worlds, signing of outside IP contracts) and investing in new growth drivers (e.g., non-fungible tokens, blockchains). 

Risk factors

The main risk factors for Krafton are as follows:

1) With its high revenue dependence on the PUBG IP, the company needs to find new growth drivers to extend overall IP lifespan.

2) There is regulatory risk from China imposing stricter gaming regulations, as Game for Peace is enjoying longstanding popularity in the country.

3) Major new titles are planned to be published directly, potentially increasing marketing costs.

4) Of total no. of company shares, 20.3% are subject to a one-year lockup period (starting from IPO date). However, the shares are owned by major shareholders,  including the largest, so overhang is not a major concern.   

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