‘Zombie Misfits’ Creator Nexon Falls in Tokyo Trading Debut

Nexon Declines in Tokyo Trading Debut
Nexon Co. got 31 percent of its revenue from games in China last year, and will be able to count on China even more as the company's online games win new fans among its larger, faster-growing population. Photographer: Qilai Shen/Bloomberg

Nexon Co., a creator of games for Facebook Inc., fell on its first day of trading after holding Japan’s biggest initial share sale this year as investors worried that the social-gaming market may be saturating.

The developer of titles including “Zombie Misfits” declined 2.3 percent to 1,270 yen at the close in Tokyo trading. The stock debuted at 1,307 yen, compared with its IPO price of 1,300 yen.

“The opening price was 7 yen higher than the offer price; I was relieved to be honest,” President Seung-woo Choi told reporters in Tokyo. “The Japanese market is stable. That’s one of the reasons we chose Japan” for the listing, he said.

Like Zynga Inc., another Facebook game developer set to sell shares tomorrow, Nexon earns revenue by letting users play for free and charging them for virtual goods.

Titles played on social-networking sites lack the “immersive experience” of traditional console games, making their staying power unclear even as they increase in popularity, according to Janney Montgomery Scott LLC.

Nexon is counting on user growth in China, where quarterly economic growth eased to the slowest in two years, to boost its share of the $9.3 billion global market for virtual goods such as character costumes.

‘Cooling Down’

“The stock price might have been higher if it was listed when social games were hotter,” said Yoshihiro Okumura, who helps manage the equivalent of $365 million at Chiba-Gin Asset Management Co. in Tokyo. “The social-games theme seems to be cooling down.”

Nexon said it generated 31 percent of revenue in China last year even as only about 20 percent of the country’s Internet users have broadband access. South Korea, where Nexon was founded, contributed 35 percent of revenue and Japan 18 percent, according to its prospectus.

The games creator aims to continue increasing revenue by more than 20 percent annually by adding users worldwide to its existing titles, Choi said today. “The history of online gaming has just started; there is very high growth potential.”

Online game sales in China may increase 18 percent to 41.4 billion yuan ($6.5 billion) this year, according to iResearch. The market may expand to 51.2 billion yuan in 2013, the research company said last month.

Tencent, Shanda

“We’ve got pretty broad sales growth across the world,” Chief Financial Officer Owen Mahoney said in a telephone interview from Tokyo. “We’re really excited about China.”

The company said it built a following in China, the world’s most populous nation with an estimated 485 million Internet users, by offering titles through Chinese companies including Tencent Holdings Ltd. and Shanda Games Ltd.

“Some people debate whether China’s got a lot of growth in it,” Mahoney said. “We think China is very early days.”

China’s regulation on games developed by foreign companies is a business risk, Nexus said in the prospectus. The company is trying to minimize the risk through its partnership with local companies.

In November, China cut the amount of cash that banks must set aside as reserves for the first time since 2008 in an attempt to spur economic growth. China’s economy expanded 9.1 percent in the third quarter, the slowest pace in two years, after curbs on property speculation and the central bank raised interest rates to combat inflation.

Technology IPOs

A total of 36 companies including Nexon held IPOs in Japan this year, the most since 2008, data compiled by Bloomberg show, in a sign that the nation’s equity capital market is beginning to recover from the March earthquake.

Nexon raised $1.17 billion in its sale, making it the second-largest technology or Internet IPO globally this year, trailing Yandex NV’s $1.4 billion offering in May, according to data compiled by Bloomberg. Zynga’s IPO may be the biggest for a U.S. Internet company since Google Inc. went public in 2004.

Nexon’s IPO price of 1,300 yen a share values it at about 21 times this year’s estimated profit of $335 million, according to a calculation by Bloomberg based on a company forecast. The game maker had 77 million monthly active users as of September, Mahoney said.

Considering Acquisitions

Zynga, with 54 million daily active users, plans to offer as much as $1 billion of stock, selling 100 million shares for $8.50 to $10 each tomorrow, according to a regulatory filing and data compiled by Bloomberg. At the top of the pricing range, the San Francisco-based company, the largest maker of games on Facebook Inc.’s social-network site, would be valued at 95 times its profit of $73.7 million in the 12 months ended Sept. 30, the data show.

Japanese rivals of Nexon including Gree Inc., DeNA Co., and GungHo Online Entertainment Inc. fetch an average of about 12 times estimated earnings, according to data compiled by Bloomberg.

Nexon may use proceeds to make acquisitions, Mahoney said.

“We want to have currency and cash on hand to be able to move aggressively if and when opportunities come up,” he said. “We like to buy teams and properties early in their life.”

A growing number of U.S. companies are entering the free-to-play games market, which is increasing opportunities for Nexon in North America, Mahoney said.

Wonder Cruise

“We can really bring a lot to the table,” he said. “We know how to tune a game so that people will play it for months on end.”

The global market for virtual goods may more than double to $20 billion by 2014 from $9.3 billion last year, according to ThinkEquity LLC, a San Francisco-based research firm.

Nexon introduced its first Facebook social game in June and now offers three titles on the site, including “MapleStory,” “Zombie Misfits” and “Wonder Cruise,” according to a Dec. 12 report by Tony Wible, an analyst at Janney Montgomery Scott LLC in Philadelphia.

The game developer has boosted sales by at least 28 percent for each of the past two years and estimates a 22 percent increase this year to $1.09 billion, according to Nexon’s investor relations department. At its debut price, the company was valued at 6.5 times that revenue estimate.

Zynga, the creator of titles including “Mafia Wars” and “FarmVille,” more than doubled sales to $1.02 billion in the nine months through Sept. 30. At the high end of its IPO price range, Zynga is asking 6.8 times revenue.

All About Mobile

Nexon lags behind Japanese rivals in the mobile gaming market, said Tomoaki Kawasaki, a senior analyst at Cosmo Securities Co. in Tokyo. Gaming on mobile devices such as smartphones accounted for about 2 percent of Nexon’s revenue last year, compared with about 92 percent from online games played on personal computers, according to the prospectus.

“It may be difficult for Nexon to win in Japan,” Kawasaki said. “The Japan market is all about mobile, and Nexon is a bit of a laggard in that area.”

Nexon plans to boost its mobile business by developing mobile versions of popular titles and may invest in or acquire developers to expand in the segment, the prospectus showed.

Nexon also faces intensifying competition in Japan as companies including Konami Corp. and Square Enix Holdings Co. enter the social-games market, Kawasaki said.

“A user has only 24 hours a day,” Kawasaki said. “For a game company in general, what’s important is how much of that time they can capture.”

Gree’s Multiple

Takao Gotou, an analyst at SBI Securities Co. in Tokyo, said Nexon may be a defensive buy for Japanese investors amid economic uncertainty overseas and help attract individual investors to the whole gaming sector.

“It’s easier to buy amid the unclear overseas situation, such as in Europe,” Gotou said. “The stock price may go double the offer price.”

Tokyo-based Gree, which operates social-networking sites in addition to games, has more than doubled on the Tokyo Stock Exchange this year. The company fetches the highest multiple of Nexon’s main three Japanese rivals, at 14.4 times expected earnings in the year ending June 2012.

DeNA has declined 22 percent and GungHo has fallen 18 percent in Tokyo trading this year, compared with an 18 percent drop for the broader Topix index.

“Investors might decrease the percentage of social game stocks such as DeNA and Gree in their game portfolio and buy Nexon,” said Mitsushige Akino at Ichiyoshi Investment Management Co.

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