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South Korean regulators crack down on IPOs as fears of bubble rise

South Korean regulators are stepping up scrutiny of big initial public offerings as rich valuations prompt concerns over bubbles in the Asian market.

Krafton, the company behind global hit game PlayerUnknown’s Battlegrounds, last week lowered its IPO price more than 10 per cent and cut the deal size by almost a quarter under pressure from financial regulators. Krafton, which is backed by Chinese internet group Tencent, had sought to raise $5bn in what was expected to be Korea’s largest-ever listing.

The listing’s decreased ambitions came as South Korea’s IPO market heads for a record year fuelled by retail investors, who often expect companies to double on their trading debuts. Gaming, biotech and shipbuilding companies are rushing to go public as the Kospi index trades near all-time highs.

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But some listings have stoked concerns about stretched valuations. Shares in Hybe, the company behind K-pop superstars BTS, and internet group Kakao Games, initially fell sharply following listings last year.

Krafton reduced its IPO size to Won4.3tn ($3.8bn) after Korea’s Financial Supervisory Service asked for more information on how it came up with its listing price, which gave it a market capitalisation of about Won24tn. Krafton expects the Seoul listing, which will no longer be South Korea’s biggest ever, to happen on August 10.

“We asked the company to clear some uncertainty that can affect investor judgment,” said an FSS official. “We need more information on how the company calculated its IPO pricing and whether there are specific similarities with companies in comparison.”

Krafton’s price-to-earnings ratio, a gauge used by investors to value stocks, has been estimated at 40.4 times 2020 earnings, compared with 30.8 for its more profitable local competitor NCSoft.

Following the FSS request, Krafton refiled its IPO prospectus and admitted investment risks related to its dependence on PUBG, which generated 97 per cent of its first-quarter revenues.

“We’re trying to lengthen the game’s life cycle and develop new games but if sales of Battlegrounds fall, that could negatively affect our earnings and financial status,” the company said. It also dropped comparisons between itself and the Walt Disney Company and Warner Music Group from the prospectus.

“Companies tend to price their IPOs at higher prices relative to their fundamentals, given strong demand out there,” said Hwang Sei-woon, a researcher at Korea Capital Market Institute. “Regulators are concerned about possible criticism from investors if the companies fail to live up to the hype.”

Concerns about high valuations have intensified since Hybe raised more than $4bn in an IPO last year when it was known as Big Hit Entertainment, and ecommerce company Coupang’s $3.5bn listing in New York in March.

SD Biosensor, a Covid-19 test kit maker that plans to go public this month, has slashed its IPO price range almost 40 per cent after receiving a similar FSS warning.

There were also concerns among analysts over the valuation of Kakao Bank, an internet-only lender, which plans to raise as much as $2.3bn in an IPO at the end of the month. That would propel its expected market cap past Korea’s big traditional lenders.

“It is not desirable for regulators to intervene with the IPO pricing, which should be decided by the market,” said Hwang. “But IPO prices are likely to get lower as the current high valuations mean limited upside potential.”

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