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HONG KONG (Reuters Breakingviews) - Fantasy gaming shares offer some real-life charms. Netmarble wants a fantastical-sounding valuation in one of South Korea's biggest-ever initial public offerings. But the maker of online role-playing games is growing fast, and profitability is soaring. So this could entrance investors - provided they believe the hits will keep coming.
The Seoul-based company will start book-building next week for a May listing on the Korea Exchange, with a 20 percent stake on offer. At the top end of the indicative range, Netmarble would rake in 2.7 trillion won ($2.4 billion). That would value the whole group at some $12 billion, about 65 times last year's earnings.
That is a hefty valuation even for a high-flying sector like online gaming. It easily beats a 12-month trailing multiple of 25 times earnings for domestic peer NCSOFT, or 47 times for Chinese giant Tencent, both of which own stakes in Netmarble.
But Netmarble has a lot going for it. Over the past few years, the company, founded in 2000 with a gaming portal for personal computers, has profitably switched its focus to mobile, while aggressively expanding overseas, partly through takeovers. Revenue more than quadrupled in the last two years and net profit surged almost fivefold.
This year should be even better, if the early success of "Lineage 2 Revolution" is any guide. The latest iteration of a role-playing fantasy with a huge fan base in South Korea shows a key strength of Netmarble – it can make high-end mobile titles that are good enough to entice the many serious PC gamers in one of the most wired nations in the world. The game reached $100 million in domestic sales in less than three weeks, faster than Pokémon Go did globally.
Aided by Lineage, net profit will probably swell more than fourfold in 2017, according to Eugene Investment & Securities – implying a far more reasonable multiple of just 16 times this year's earnings.
Of course, a single hit does not guarantee long-term prosperity, and people get bored of games quickly. Still, Netmarble boasts a track record of churning out bestsellers across different genres. That should give investors some confidence in this fantasy powerhouse.
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