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South Korea-based game publisher Krafton appraised its enterprise value based on its initial public offering (IPO) price between 26 trillion won ($23 billion) and 28 trillion won in its prospectus to the Financial Services Commission.

The valuation surpasses NCSoft, the country’s largest game company by market capitalization, at around 18 trillion won.

In its prospectus, Krafton, known for its online multiplayer game PlayerUnknown's Battlegrounds (PUBG), appraised its fair valuation to be 35.07 trillion won, which is equal to its net profit of 776 billion won multiplied by its peer group’s average price-to-earnings ratio of 45.2 times. The company proposed a price band between 458,000 won and 557,000 won, which makes its valuation based on its IPO price to be between 26.26 trillion won and 28.02 trillion won.

The average PER of 45.2 times is an average of seven comparable companies’ PER, including Walt Disney (88.8 times), NC Soft (57.2 times), and Netmarble (51.5 times).

Its valuation based on the IPO price seems a bit high considering that it significantly surpasses NCSoft’s valuation whose profit is similar to Krafton’s. According to its prospectus, Krafton’s market capitalization stands at 18.5 trillion won.

NCSoft reported a net profit of 586.6 billion won last year, 30.3 billion won more than Krafton’s 556.3 billion won. NCSoft’s net profit for the last four quarters (from the second quarter of 2020 to the first quarter of 2021) was 471.3 billion won, 4.8 billion won more than Krafton’s 466.5 billion won.

This is because Krafton calculated its fair valuation based on its future performance. Krafton multiplied its net profit of the first quarter (194 billion won) by four to get the net profit of 776 billion won, which is 200 billion won to 300 billion won more than its net profit of the last four quarters (466.5 billion won).

Although the company has assumed that its net profits in the second to fourth quarters will be similar to that of the first quarter, Krafton’s performance has traditionally been the best in the first quarter. An increase in the company’s revenue in the first quarter is due to the soring number of Chinese game users during Chinese Lunar New Year holiday. Krafton generated 53% of last year's net profit of 556.3 billion won during the first quarter.

Krafton has maximized its valuation by using its net profit of the best time of the year in its calculation. Domestic peer companies’ recorded poor performance in the first quarter. NCSoft posted a net profit of 158.4 billion won in the second quarter, 152.5 billion won in the third quarter, and 80.3 billion won in the fourth quarter of 2020, while its net profit for the first quarter of 2021 was 80.1 billion won.

However, Krafton's estimated corporate value is not overstated, as the company's consistent and solid net profits of hundreds of millions of dollars come from global users.

The Asian markets accounted for 87% of Krafton’s revenue of 460.9 billion won in the first quarter while North America and Europe accounted for around 5%. The domestic market accounted for only 5.7%. In contrast, the domestic market accounted for 81% of NC Soft’s consolidated revenue of 512.4 billion won in the first quarter.

Krafton is also expected to launch its new mobile title, PUBG: New State, in August, an event that could help drive its shares higher after the planned market debut. The new game has already racked up five million pre-registrations.

Users of PUBG Mobile are mainly in Asian countries. In contrast, the new game is targeting users in Europe and North America, making the company more attractive in terms of its mid to long-term growth prospects. (Reporting by Kyung-ju Lee)