Nexon slips after Tokyo IPO, may sting Zynga debut

TOKYO Wed Dec 14, 2011 10:23am EST

Nexon Co. President Choi Seung-woo poses prior to ringing a bell during a ceremony to mark the company's debut on the Tokyo Stock Exchange in Tokyo, in this photo taken by Kyodo on December 14, 2011. REUTERS/Kyodo

Nexon Co. President Choi Seung-woo poses prior to ringing a bell during a ceremony to mark the company's debut on the Tokyo Stock Exchange in Tokyo, in this photo taken by Kyodo on December 14, 2011.

Credit: Reuters/Kyodo

TOKYO (Reuters) - Online gaming firm Nexon Co slipped on its trading debut on Wednesday following a $1.2 billion IPO, Japan's biggest this year, and may signal a bumpy ride for U.S.-based rival Zynga, which debuts on Nasdaq later this week.

Zynga, which has developed the popular "FarmVille" and "Mafia Wars" games on Facebook, is now seeking a lower valuation than a few months ago because of weak financial markets and the weaker-than-expected performance of some recent Internet IPOs now trading below their IPO prices such as Pandora Media.

At least one analyst said Zynga, which is due to price its offering on Thursday, may see demand for its shares dampened by Nexon's lukewarm stock market debut.

"I do think the initial performance of Nexon shares in Japan will give investors a pause with respect to Zynga," said Sterne Agee analyst Arvind Bhatia, who put an "underperform" rating on Zynga shares on Tuesday.

A spokesman for Zynga declined to comment on Zynga's IPO on Wednesday.

Nexon, founded in South Korea almost two decades ago, offers PC-based games for free, while charging users small fees for in-game virtual items such as clothing for avatars -- a so-called freemium model that analysts see as relatively recession-proof.

The global games industry has shrugged off the economic slowdown and should top $81 billion by 2016, according to research firm DFC Intelligence, up 23 percent from this year and more than three times the size of the recorded music industry.

Nexon, which sold more than 70 million shares, closed at 1,270 yen, below its IPO price of 1,300 yen. The broader market lost 0.4 percent, and local rivals Gree and DeNA fell 2.7 percent and 4.3 percent, respectively.

"Part of the problem is that they priced it at fair value, so it wasn't going to come on at a huge premium," said David Gibson, an analyst at Macquarie Capital Securities in Tokyo, also noting some Nexon shareholders were allowed to offload their holdings immediately.

Nexon, whose most successful offerings include role-playing adventure game MapleStory, where players band together to hunt monsters, and KartRider, has more than 77 million active monthly users, compared with Zynga's 260 million.

Analysts have said that enthusiasm for the IPO may have been dampened by a cyber attack last month in which hackers gained access to personal data, but no financial information, on more than 13 million Nexon subscribers in South Korea.

Nexon's operating profit trebled to 30 billion yen ($385 million) between 2008 and last year, and sales jumped by more than 70 percent to 70 billion yen. The company expects operating profit to rise 23 percent this year, signalling a slowdown in its breakneck growth.

"We expect growth across all regions," Chief Financial Officer Owen Mahoney told Reuters.

The company, which employs 3,240 people, mostly in South Korea, makes most of its money in South Korea and China.

"They're saying that growth will be sustained in China, but will come from inland areas, which I think is a big ask, to be honest," said Macquarie's Gibson. "Most users are coastal, which is the higher income area. Lower income means lower spending."

IPO GO-SLOW

The IPO was the biggest in Japan since drugmaker Otsuka Holdings took in 160 billion yen a year ago, and went ahead despite weak market conditions, with the Nikkei average down about 17 percent this year.

Japan's IPO market has been battered by the March earthquake and the country's weak growth outlook. Companies have raised just 160 billion yen through initial public offerings so far this year, a fraction of the 1 trillion yen seen last year and just a sixth of the average over the past decade.

Nikko Asset Management this month cancelled a planned $586 million IPO, citing weak markets and the general uncertainty sown by Europe's debt crisis.

Nexon has said it will use the IPO proceeds to pay off debt, build a new home for its Nexon Korea Corp unit, upgrade games systems and invest in third-party games developers.

At around 1,250 yen, Nexon trades at 17 times the company's projected 2011 earnings, slightly higher than Gree at 15 times its consensus forecast for the year to June 2012.

"The price-to-earnings ratio is a little high compared with DeNA and Gree, so it's likely to see some selling in the near term ... but with the inclusion in TOPIX at the end of next month we can expect demand from passive funds," said Katsumi Udagawa at Ichiyoshi Securities.

Deutsche Bank initiated coverage of Nexon with a 'hold' rating and a target price of 1,400 yen.

Nomura Securities, Morgan Stanley and Goldman Sachs were joint global coordinators for the IPO, while Barclays Capital was bookrunner on the international tranche. ($1 = 77.8450 Japanese yen)

(Additional reporting by Liana B. Baker in New York, Mari Saito, Hirotoshi Sugiyama and Hideyuki Sano; Editing by Ian Geoghegan, Dave Zimmerman)

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