Tencent’s share price drops on Krafton IPO news

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Tencent [TCEHY] the stock price is up 4.5% year-to-date, closing June 23 at $ 74.92. The Chinese tech firm’s stock hit an intraday high of $ 99.40 on February 12, a 38.6% increase since the start of the year.

However, over the next month and a half, Tencent’s share price fell 22.9% to close on March 24 at $ 76.61. The company’s shares have struggled in recent weeks, with occasional rallies only recovering ground lost in previous lows.

Since early June, Tencent’s share price has fallen 7.7% (through June 23). However, in the past 12 months to the end of May, Tencent’s share price has gained 50.4%.

On June 16, Krafton, the game developer behind PlayerUnknown’s Battlegrounds (PUBG), has filed an IPO application that may be the largest on record in South Korea. The listing is likely to have significant implications for Tencent’s share price, as the company is Krafton’s second-largest investor. Tencent’s share price fell 0.12% in response to the news.

PUBG goes public

Krafton was originally founded as Bluehole in 2007 by Chang Byung-gyu. One of Korea’s 50 richest people, Byung-gyu has previously said in interviews that he closely monitored the U.S. market and invested heavily in it during the company’s early years. Krafton’s US subsidiary was launched just a year after its inception, and its interest in the US led to the rollout of PUBG via Steam, which until then was a fairly obscure entity in Korea.

PUBG has since sold over 75 million copies of PCs and consoles, with mobile downloads exceeding one billion. Krafton’s sales grew by over 50% in 2020 to KRW 1.67 billion ($ 1.5 billion), and operating profit more than doubled to KRW 774 billion ($ 680 million). dollars).

75million

Number of copies of Krafton’s PUBG sold

Tencent conducted a KRW 70 billion ($ 62 million) venture financing round on September 28, 2017 and a secondary market fundraising round that raised $ 500 million on June 13, 2018. Tencent shares fell 1.3% on the date of the first round of financing and 11% on the date of the latter. Tencent’s stake in Krafton would be 15.35%.

Krafton expects to be listed in Seoul on July 22 and seeks to raise 5.6 billion KRW ($ 5 billion) through the sale of more than 10 million shares between KRW 458,000 and KRW 557,000 each. The higher end of that range would give Krafton a market cap of KRW28trn ($ 25 billion). A key date will be July 9, when Krafton’s IPO price will be set, and a particularly high or low number could have an immediate impact on Tencent’s share price.

South Korea is already on track for record IPO year, with Coupang’s [CPNG], a Seoul-based e-commerce company currently topping the list of the world’s largest 2021 IPOs. Coupang raised $ 4.6 billion on the New York Stock Exchange when it went public in March. However, Krafton’s IPO is expected to exceed that figure.

$ 4.6billion

Coupang amount raised on the NYSE

Recovery from a pandemic is a game-changer

In the long run, two key factors will determine the success of Krafton’s IPO. First, it will need to establish a larger product base: PUBG currently accounts for almost all of Krafton’s revenue.

Second, analysts fear the coronavirus pandemic may have inflated Krafton’s business in the near term, with sales down 11.6% and operating profit down 33% in the first quarter of 2021. The prospectus de Krafton recognizes the global emergence of the pandemic and the resulting decline in time and money spent on games as a potential headwind.

33%

Krafton’s first quarter operating profit decline

The story is similar across the gaming and esports industry. The VanEck Vectors Video Games and Esports ETF [ESPO] has fallen behind so far this year and is down 0.8% as of June 23, while Roundhill BITKRAFT Esports & Digital Entertainment ETF [NERD] is doing a little better, with growth of 2.6% over the same period. This is a weak return after the two funds gained 83.9% and 89.7%, respectively, throughout 2020, significantly outperforming the Tencent stock price, which gained 50.1. % during the year.

The performance of the two funds is closely linked to the Tencent share price. Tencent is the second largest position in the VanEck Vectors Video Gaming and eSports ETF, with 7.68% of the fund’s weighting as of June 22. It is also the second largest Roundhill BITKRAFT Esports & Digital Entertainment ETF with a weighting of 5.14%.

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