‘Zombie Misfits’ Game Creator Nexon Declines on First Day of Tokyo Trading

Nexon Co ., an online game creator that’s more profitable than Zynga Inc., fell on its first day of Tokyo trading after raising more from investors than any other company listing shares in Japan this year.

The developer of Internet-based games including “Zombie Misfits” and “MapleStory” dropped 3.9 percent to 1,249 yen from its IPO price of 1,300 yen as of 9:33 a.m., compared with a 0.5 percent decline in the benchmark Topix index. Like Zynga, set to sell shares tomorrow, Nexon earns revenue by letting consumers play free games and charging them for virtual goods, including costumes for characters.

For investors looking to tap global demand for virtual goods that’s forecast to reach $20 billion by 2014, Nexon’s main draw may be its presence in China, by then expected to be the world’s largest online-games market. The company got 31 percent of its revenue from gamers in China last year, compared with 35 percent from South Korea, where it was founded, and 18 percent from Japan, according to its prospectus.

“Nexon will be able to count on China even more as the company’s online games win new fans among its larger, faster- growing population,” said Mitsushige Akino, who oversees about $600 million in Tokyo at Ichiyoshi Investment Management Co. “It started outside Japan and may be in a favorable position for global expansion.”

Japan’s IPO Recovery

A total of 35 companies have conducted IPOs in Japan this year, the most since 2008, Bloomberg data show, in a sign that the nation’s equity capital market is beginning to recover from the March earthquake.

Nexon’s IPO price of 1,300 yen a share values it at about 21 times this year’s estimated profit of $335 million, according to a calculation by Bloomberg based on a company forecast. The game maker had 77 million monthly active users as of September, according to Owen Mahoney, its chief financial officer.

“We’ve got pretty broad sales growth across the world,” Mahoney said in a phone interview. “We’re really excited about China.”

Zynga, the largest maker of games on Facebook Inc.’s social network site, with 54 million daily active users, plans to offer as much as $1 billion of stock, selling 100 million shares for $8.50 to $10 apiece tomorrow, according to a regulatory filing and Bloomberg data. At the top of the pricing range, the San Francisco-based company would be valued at 95 times its profit of $73.7 million in the 12 months ended Sept. 30, the data show.

Nexon’s Japanese rivals Gree Inc. (3632), DeNA Co. (2432), and GungHo Online Entertainment Inc. (3765) fetch an average of about 12 times estimated earnings, according to Bloomberg data.

Acquisition Plans

Nexon raised $1.17 billion in its initial share sale, making it the second-largest technology or Internet IPO globally this year, trailing Yandex NV’s $1.4 billion stock sale in May, according to data compiled by Bloomberg. Zynga’s offering may be the biggest for a U.S. Internet company since Google Inc. went public in 2004.

Nexon may use proceeds to make acquisitions, Mahoney said.

“We want to have currency and cash on hand to be able to move aggressively if and when opportunities come up,” he said. “We like to buy teams and properties early in their life.”

A growing number of U.S. companies are entering the free- to-play games market, which is increasing opportunities for Nexon in North America, Mahoney said.

‘Wonder Cruise’

“We can really bring a lot to the table,” he said. “We know how to tune a game so that people will play it for months on end.”

Nexon introduced its first Facebook social game in June and now offers three titles on the site, including “MapleStory,” “Zombie Misfits” and “Wonder Cruise,” according to a Dec. 12 report byTony Wible, an analyst at Janney Montgomery Scott LLC in Philadelphia.

The game developer has boosted sales by at least 28 percent for each of the past two years and estimates a 22 percent increase this year to $1.09 billion, according to Nexon’s investor relations department. At its debut price, the company was valued at 6.5 times that revenue estimate.

Zynga, the creator of games including “Mafia Wars” and “FarmVille,” more than doubled sales to $1.02 billion in the nine months through Sept. 30. At the high end of its IPO price range, Zynga is asking 6.8 times revenue.

China Sales

Nexon has built a following in China, the world’s most populous nation with an estimated 485 million Internet users, by offering titles through Chinese companies including Tencent Holdings Ltd . (700) and Shanda Games Ltd. (GAME), according to an e-mailed statement from the company.

The Chinese market accounts for almost a third of Nexon’s group sales even though only about 20 percent of users have broadband access, Nexon said in the statement.

“Some people debate whether China’s got a lot of growth in it,” Nexon’s Mahoney said. “We think China is very early days.”

Online game sales in China may increase 18 percent to 41.4 billion yuan ($6.5 billion) this year from 35.1 billion yuan in 2010, according to research company iResearch. The market may expand to 51.2 billion yuan in 2013, iResearch said last month.

By 2014, the global market for virtual goods may more than double to $20 billion from $9.3 billion last year, according to ThinkEquity LLC, a San Francisco-based research firm.

Mobile ‘Laggard’

Nexon lists China’s regulation on games developed by foreign companies as one of the business risks in its prospectus. The company is trying to minimize the risk through its partnership with local companies, it says.

Nexon also lags behind domestic rivals in the mobile gaming market, said Tomoaki Kawasaki, a senior analyst at Cosmo Securities Co. in Tokyo. Gaming on mobile devices such as smartphones accounted for about 2 percent of Nexon’s revenue last year, compared with about 92 percent from online games played on personal computers, according to the prospectus.

“It may be difficult for Nexon to win in Japan,” Kawasaki said. “The Japan market is all about mobile, and Nexon is a bit of a laggard in that area.”

Nexon plans to boost its mobile business by developing mobile versions of popular titles and may invest in or acquire developers to expand in the segment, according to the prospectus.

‘May Go Double’

The company also faces intensifying domestic competition as companies including Konami Corp. and Square Enix Holdings Co. enter the social-games market, Kawasaki said.

“A user has only 24 hours a day,” Kawasaki said. “For a game company in general, what’s important is how much of that time they can capture.”

Takao Gotou, an analyst at SBI Securities Co. in Tokyo, said Nexon may be a defensive buy for Japanese investors amid economic uncertainty overseas and help attract individual investors to the whole gaming sector.

“It’s easier to buy amid the unclear overseas situation, such as in Europe,” Gotou said. “The stock price may go double the offer price.”

Tokyo-based Gree, which operates social networking sites in addition to games, has more than doubled on the Tokyo Stock Exchange this year. The company fetches the highest multiple of Nexon’s main three Japanese rivals, at 14.4 times expected earnings in the year ending June 2012.

DeNA has declined 21 percent and GungHo has fallen 17 percent in Tokyo trading this year, compared with an 18 percent drop in Japan’s benchmark Topix index.

“Investors might decrease the percentage of social game stocks such as DeNA and Gree in their game portfolio and buy Nexon,” said Akino at Ichiyoshi Investment.

To contact the reporters on this story: Yuki Yamaguchi in Tokyo atyyamaguchi10@bloomberg.net; Cliff Edwards in San Francisco at cedwards28@bloomberg.net

To contact the editor responsible for this story: Michael Tighe at mtighe4@bloomberg.net