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Tencent’s share price dips on Krafton IPO announcement

Tencent’s [TCEHY] share price has gained 4.5% in the year to date, closing 23 June at $74.92. The Chinese technology company’s stock hit an intraday high of $99.40 on 12 February, which marked an increase of 38.6% since the start of the year.

However, over the following month-and-a-half, Tencent’s share price fell 22.9% to close 24 March at $76.61. Shares in the company have struggled in recent weeks, with occasional rallies only recovering lost ground in preceding dips.

Since the start of June, Tencent’s share price has fallen 7.7% (through 23 June).  However, over the trailing 12-month period to the end of May, Tencent’s share price has gained 50.4%.

On 16 June, Krafton, the gaming developer behind PlayerUnknown’s Battlegrounds (PUBG), filed for an IPO that could be South Korea’s largest ever. 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 reaction to the news.


PUBG going public

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

PUBG has since sold over 75 million PC and console copies, with mobile downloads topping one billion. Krafton’s sales increased by more than 50% in 2020 to KRW1.67trn ($1.5bn), with operating profit more than doubling to KRW774bn ($680m).


Number of copies of Krafton's PUBG sold


Tencent led a KRW70bn ($62m) venture-funding round on 28 September 2017 and a secondary-market round that raised $500m on 13 June 2018. Tencent’s share price fell 1.3% on the date of the first funding round and fell 1.1% on the date of the latter. Tencent’s stake in Krafton reportedly stands at 15.35%.

Krafton plans to list in Seoul on 22 July and is looking to raise KRW5.6trn ($5bn) through sales of 10 million-plus shares price between KRW458,000–KRW 557,000 each. The upper end of this range would give Krafton a market cap of KRW28trn ($25 bn). A key date will be 9 July, when the price of the Krafton IPO will be set, and a particularly high or low figure could have an immediate impact on the Tencent share price.

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


Amount Coupang raised on the NYSE


Pandemic recovery a game-changer

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

Secondly, analysts fear the coronavirus pandemic might have inflated Krafton’s business in the short term, with sales down 11.6% and operating profit falling 33% in the first quarter of 2021. Krafton’s prospectus acknowledges the global emergence from the pandemic and the resulting drop in time and money spent on games as a potential headwind.


Krafton's operating profit decline in Q1


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

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

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