South Korean retail investors scramble for a piece of Kakao Games IPO

The $323m initial public offering of a South Korean gaming company has smashed local records for demand, attracting orders of about 1,500 times the stock available, in a graphic illustration of what one fund manager described as “herd behaviour”.

The IPO of the gaming unit of South Korea’s leading messaging app, Kakao, drew gross bids from retail investors of about Won115tn ($97bn) for about $65m of shares, according to SK Securities. Investors scrapping for allocations from the retail tranche, which represented about one-fifth of the total offering, caused the trading systems at two local brokerages to break down last week.

Kim Mi-seon, a 52-year-old maths teacher from Incheon, was among those left disappointed ahead of Kakao Games’ debut in Seoul on Thursday. She picked up just five shares priced at Won24,000, despite placing bids for Won180m. “It feels like a lottery to me,” she said.

Analysts attributed the fervour among investors such as Ms Kim in part to the blockbuster market debut of SK Biopharmaceuticals in July, as well as the $4bn valuation attached last week to Big Hit Entertainment, the music agency behind K-pop boy band BTS.

Choi Joon-chul, head of VIP Asset Management, a Seoul-based fund, said investors have been “swept up by herd behaviour — just hoping that the previous IPO success stories will be repeated without thoroughly assessing the company’s fundamentals and risk factors”.

South Korean retail investors are known for short horizons and strong appetites for loading up on risky products. Bruce Lee, a former hedge fund manager now heading a consultancy, said the low-interest rate environment and unprecedented government stimulus measures in response to the coronavirus pandemic had left investors in Seoul looking for places to put their cash.

“There is too much liquidity out there. Money is flowing into the stock market as interest rates are too low and property prices have already risen too much,” said Mr Lee.

However, the popularity of gaming and entertainment stocks is also a sign of a broader change under way in South Korean markets. Investors are turning towards higher-growth internet and biotech companies — and away from traditional hardware manufacturers producing computer chips, ships and cars.

Companies involved in what local officials dub “cultural exports” — including music, movies, television and gaming — have been buoyed this year after city and country-wide lockdowns around the world drove a surge in the amount of time people spent online.

The market capitalisations of the country’s two biggest listed game makers, NCSoft and Netmarble, now exceed that of LG Electronics, one of the world’s biggest appliance manufacturers, on Seoul’s main bourse. At $29bn combined, the pair is closing in on the country’s biggest carmaker, Hyundai Motor ($35bn).

Despite strong recent performances and a rosy near-term outlook for gaming stocks, Lee Jin-man, an analyst at SK Securities, was wary about the unbridled optimism on display.

The companies’ earnings “will be good until next year but they are facing mounting longer-term risks as the quality of Chinese games has improved and there are few global hits like Battlegrounds that can attract users in the west as well as Asia,” said Mr Lee. 

PlayerUnknown’s Battlegrounds, which has been downloaded more than 600m times, was developed by Krafton, another South Korean group that is planning an IPO. Some analysts see few signs of the boom fading, given that tens of thousands of retail investors were left empty-handed after the Kakao Games offering.

Investors such as Baek Jong-hoon do not plan to give up. The 55-year-old office worker says he has this year spent nearly Won250m on mostly biotech stocks, with a return so far of about 40 per cent.

“People say it is risky to dive into bio stocks now but their prices keep going up so I don’t want to miss out,” said Mr Baek. “Still, I am always worried when the bubble will burst.”

Additional reporting by Edward White


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