Lex letter from Seoul: battle-royale game spawns mega IPO

Dear readers,

A game so addictive that governments want to ban it is one investors should pay attention to. Teenagers obsessed by blockbuster hit PlayerUnknown’s Battlegrounds have been known to go for long periods without food and water. For some, dehydration became a serious problem.

The maker of the game, Tencent-backed Krafton, is about a reap a windfall from its popularity. The South Korean video game maker is set to raise as much as Won5.6tn ($4.9bn) in Seoul, valuing the company at Won28tn.

Chief executive Kim Chang-han, a child coding prodigy, came up with the idea of a battle royale game in which players would fight until there was just one left standing. It took about a year to make — a combination of Kim’s programming and the designs of Irish creative director Brendan Greene.

Initial expectations were not high. Krafton says that selling 400,000 copies of the game, or breaking even on development costs, would have been good enough. Most online games make a loss for their creators.

Instead, PlayerUnknown’s Battlegrounds has sold more than 75m copies. The mobile version has been downloaded more than 1bn times and became the world’s highest-grossing mobile game last year. Operating profit more than doubled to Won774bn in 2020. The mobile version added ways to monetise the game through in-app purchases and licensing deals.

Those numbers are reflected in the expected valuation for the company, which at the top end of the range would be valued at 37 times forward earnings. This is almost double the multiple of its biggest local rival, Nexon. It is a 50 per cent plus premium to US peer Activision Blizzard.

Such a price may not take account of the risks facing the company. Of the 94 per cent of total sales that come from overseas, China makes up one of the biggest chunks. Regulatory risk is therefore especially high. PlayerUnknown’s Battlegrounds was one of the games banned in China, for reasons that included too much gore. It has since been re-released following a redesign. The colour of blood has been changed to green. But Tencent’s backing has also created trouble in countries such as India, where political tensions with China remain high.

There is also the fact that most of Krafton’s sales come from one game. Then again, Los Angeles-based Riot Games, creator of blockbuster hit League of Legends, has lived with its one-hit wonder label for well over a decade. The fantasy game in which players battle demigods and dragons was launched in 2009. Revenues are still on the rise, increasing every year over the past three years.

PlayerUnknown’s Battlegrounds is relatively new, having been launched in 2017. But when sales do start to slow, Krafton may be able to borrow another trick from Riot Games. A decade after League of Legends was launched, it expanded on the themes in the game to create a series of spin-off and mobile games. These continue to be popular today. Investors should not underestimate gamer loyalty.

Enjoy the rest of your week,

June Yoon
Lex writer