‘Zombie misfits’ creator Nexon may outshine Zynga in Tokyo debut

Nexon Co., an online game creator that’s more profitable than Zynga Inc., may overshadow the U.S. rival that’s selling shares tomorrow as investors bet on the Japanese company’s prospects in markets including China.

The developer of Internet-based games including “Zombie Misfits” and “MapleStory” will debut on the Tokyo Stock Exchange today after raising more from investors than any other company listing shares in Japan this year. Like Zynga, 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 Tokyo-based 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, with 31 million registered users as of October, will start trading at 1,300 yen a share, valuing the company at about 21 times this year’s estimated profit of $335 million, according to a calculation by Bloomberg based on a forecast provided by the company.

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, according to Bloomberg data.

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

‘Wonder Cruise’

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 sale of $1.4 billion of new shares 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 introduced its first Facebook social games in June and now offers three titles on the site, including “MapleStory,” “Zombie Misfits” and “Wonder Cruise,” according to a Dec. 12 report by Tony 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 is 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. and Shanda Games Ltd., according to an e-mailed statement from the Japanese company.

“The penetration rate of broadband in China is about a little more than 20 percent, yet the country accounts for one third of our group sales,” Nexon said in the statement. “We are expecting the country to continue with a sustainable growth.”

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 surged 158 percent on the Tokyo Stock Exchange this year. The company fetches the highest multiple of Nexon’s main three Japanese rivals, at 14.8 times expected earnings in the year ending June 2012.

DeNA has declined 18 percent and GungHo has fallen 16 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.