South Korean regulators are stepping up their scrutiny of large initial public offerings as high valuations raise concerns about bubbles in the Asian market.
Krafton, the company behind the global hit game PlayerUnknown’s Battlegrounds, lowered its IPO price by more than 10 percent last week and slashed the deal size by nearly a quarter under pressure from financial regulators. Krafton, which is backed by Chinese internet group Tencent, had sought to raise $ 5 billion in what was to be the largest ever listing in Korea.
The drop in listing ambitions came as the IPO market in South Korea heads into a record year fueled by retail investors, who often expect companies to double when they start trading. Gaming, biotech and shipbuilding companies are rushing to go public as the Kospi index trades near all-time highs.
But some quotes fueled concerns about stretched valuations. Shares of Hybe, the company behind K-pop superstars BTS, and internet group Kakao Games, initially fell sharply after last year’s listings.
Krafton reduced the size of its IPO to 4.3 billion won ($ 3.8 billion) after the Korean financial monitoring service requested more information on how it had priced it. listing, which gave it a market cap of around 24 billion won. Krafton expects Seoul’s listing, which will no longer be South Korea’s largest ever, to take place on August 10.
“We have asked the company to remove certain uncertainties that may affect the judgment of investors,” said an FSS official. “We need more information on how the company calculated its IPO price and whether there are any specific similarities with the companies in comparison.”
Krafton’s price-to-earnings ratio, an indicator used by investors to value stocks, was estimated at 40.4 times 2020 earnings, compared to 30.8 for its more profitable local competitor NCSoft.
Following the FSS’s request, Krafton re-filed its IPO prospectus and admitted the investment risks associated with its reliance on PUBG, which generated 97% of its sales in the first quarter.
“We are trying to lengthen the life cycle of the game and develop new games, but if the sales of Battlefield fall, it could negatively affect our earnings and financial condition, ”the company said. He also removed comparisons between himself and the Walt Disney Company and Warner Music Group from the prospectus.
“Companies tend to price their IPOs higher than their fundamentals, given the high demand in the market,” said Hwang Sei-woon, a researcher at the Korea Capital Market Institute. “Regulators fear possible criticism from investors if companies do not live up to the hype.”
Concerns about high valuations have intensified since Hybe raised more than $ 4 billion in an IPO last year when it was known as Big Hit Entertainment, and the listing of 3, $ 5 billion from e-commerce company Coupang in New York City in March.
SD Biosensor, a maker of Covid-19 test kits that plans to go public this month, has reduced its IPO price range by almost 40% after receiving a similar FSS warning.
Analysts were also concerned about the valuation of Kakao Bank, an internet-only lender, which plans to raise up to $ 2.3 billion in an IPO at the end of the month. This would propel its expected market capitalization beyond the traditional Korean big lenders.
“It is not desirable for regulators to interfere with the IPO price, which should be decided by the market,” Hwang said. “But IPO prices are likely to come down, as current high valuations mean limited upside potential.”
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