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3:53 am
December 29, 2009
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Jae Jun
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I'm just gonna run by some numbers and read some reports and I'll make my decision. I remember passing on it when GRVY was in the 70c range. Doh. Pretty stupid of me.
Here is what the game looks like. People have to purchase items and gamers in asia spend $$$$$ when in comes to customizing their characters.
To us it looks childish but hardcore gamers, especially the MMO players live and breathe this type of stuff.
http://www.youtube.com/watch?v…..oyOGiOPpBM
At least their lawsuit is over. Although GRVY lost.
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8:21 am
December 28, 2009
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Bart
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Merry christmas and happy new year to everyone, and thanks for your comments.
Re Jae: interesting about the English reporting of Korean companies, I didn't realise that that could be the reason of the limited reporting, which almost looks like shareholder-unfriendly management.
Re Ankitgu:
1. R&D has been cut significantly indeed, but I believe that has been done to rationalise the cost structure (proof is in the fact that the company has been profitable for three quarters now). A special dividend could be a catalyst behind the stockprice, but I do not see reasons/incentives for management to act in that way, since as you said, they do not possess shares. I do not see this as a real long-term investment (i.e. buy-and-hold), as soon as the shares come within range of my valuation at that point I intend on selling (if that ever happens of course;-). If they remain profitable and keep on adding to the cash balance, the stock price will eventually follow suit.
Also, Ragnarok 2 still has not been released (except for the betaversion), so it is impossible to say if it will be succesful or not.
2. I agree, see number 1.
3. I've just looked up the GungHo entertainment website, and they seem to have had their share of difficulties in the past 1.5 year, with breaches of their bankcovenants etc (now all settled). Not sure how the relationship between GungHo and Gravity is, it seems to be listed as a subsidiary/part of the GungHo group. Any more info you can find on this is certainly welcome.
cheers,
Bart
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12:17 am
December 26, 2009
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ankitgu
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Post edited 9:24 pm – December 25, 2009 by ankitgu
Bart – great analysis, this is thorough and despite owning shares, you seem to have pointed out the cons with this very well.
1. R&D has been cut significantly, bad for any long term possibilities, but if they stay profitable, their cash position will increase and with dividends made, shareholders will benefit. Is this what you see happening? Basically, revenues might fall as their current games and Ragnarok 2 lose popularity, but the current price factors in nothing happening, so we might see a return to profitability and actually see some of the investment returned.
2. I couldn't find detailed information regarding executive compensation, just a lump sum of what all the executives are paid as a total. It doesn't seem like many of them really own any shares in the business… "None of our current directors or officers beneficially owns our common shares." – 6E on the last annual report
3. In general, I'm unfortunately having a hard time putting a reason on why I think management will do what is in the interest of the shareholders. Excuse me for being outrageous, but how do we know they won't just issue very large bonuses to each other and just pack up and leave? I do like that GungHo owns a large portion almost 60%? Have you done any research on them?
Also, they have a California office, that might be a good place to call in and see what the local employees think.
You've done a lot of good work and so let me see if I can get answers to some of these questions, I'll post back if I get a hold of any one. This looks like it might be one hell of a deal if a few more things line up…
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2:02 pm
December 25, 2009
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Jae Jun
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Thanks for the article. If 52% of GRVY equates to 37m based on 2008 the math is pretty clear than GRVY has about a 100% upside. Nice.
Does seem to look better and better.
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12:38 am
December 25, 2009
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croicodile
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Unfortunately, I'm unable to read Korean. I did find this piece of information: http://www.reuters.com/article…..6220080214
Apparently, GungHo Online Entertainment put in a bid to acquire 52% of GRVY for 37M. The market cap of GRVY currently is 39M. I'm just finishing up the EPV book and once I'm done I'll be valuing this issue. My guess is that I'll come to the same conclusion as the board…. it's dirt cheap.
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5:30 pm
December 22, 2009
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Peridotic
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Thanks for the info Jae, Personally, I am going to get into this when there is another pullback. Basically the risk is the sucess of the game, even if its released there wont be much price movement unless speculators get involved. The first game was great and hopefully the second will be better. Bart mentioned a great concern. which is about burning cash. It is true in the games industry because it costs a lot of money to develop games and the budget is high nowadays.
For example, 3d realms was developing their one game called Duke Nukem Forever they have burned over $20 million dollars and 12 years of work and they have nothing to show which is an epic failure. Here is a great article about it in Wired Magazine, NSFW for one illustration of partial nudity. http://www.wired.com/magazine/…..ukem/all/1
The concern is that Gravity doesn't burn cash and delay the game and doesn't end up like 3d realms.
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5:02 pm
December 22, 2009
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Jae Jun
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Well Korean companies, much like other asian companies speak very limited english. I would compare Korean english capabilities to Japanese. Not very good. Which is why they report the bare necesseties.
Unless you are a big corporation where you have the budget to hire people from overseas to take care of the finance reporting activities, most won't be able to do this.
I'll have to check out their other portfolio of games. But one thing I know is that if a game becomes a hit, especially MMO, GRVY will go through the roof.
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4:54 pm
December 22, 2009
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Bart
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Thanks Jae! Any opinion on reporting by Korean companies? GRVY seems to be only communicate the bare necessities for NASDAQ listing, i.e. 6-K's etc..
Re Ragnarok 2: the release has been delayed since 2007, cause apparently the beta version was not well received. Since then they've completely rehauled the game, but as I said in my earlier post, it remains to be seen when the game will be released and wether or not it's a success. If it is though, this could be a homerun, but I just want everyone to know that this is far from a certainty… Last thing I read was a management communication stating it would be released 'sometime in 2010' (apologies, can't find the link to the interview anymore).
Fact is that even without Ragnarok 2, they're still profitable and trading below cash on their balance sheet.
Btw, Floris, I've sent you a personal forummessage in Dutch, just to avoid annoying all our English speaking forumcompanions out there ;-)
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4:39 pm
December 22, 2009
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Jae Jun
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In case you didn't know, I'm Korean so I'm very aware of Ragnarok, MMO, and can read Korean so if you find something that you want translated, I can skim through it.
The only thing I am worried about is that GRVY seems to rely heavily upon Ragnarok 2. I believe they have delayed the launch for quite a while as well.
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4:04 pm
December 22, 2009
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Bart
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Hi Peridotic,
I agree with your valuation, even a very conservative multiple of 5 for their current trailing earnings of 0.22 per share, plus their cash value would warrant a stock price of +$3. I got in at 1.85 a few months ago, and unless they start burning cash (i.e. lowering intrinsic value) I will keep holding on, and may buy more if price drops more. I believe that poor communication and execution are the main factors behind the low stock price currently.
Re Ragnarok 2: I know pretty much nothing about MMO, and even less about MMO's in Asia, but apparently Ragnarok was very popular. It remains to be seen if Ragnarok 2 is well received, apparently the beta in 2007 wasn't, which is why it is still not released. But fact is that the current situation warrants a substantially higher stock price, if Ragnarok 2 is succesfull this could be a major catalyst behind the stock price.
Just my two cents,
Bart
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1:51 pm
December 22, 2009
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Peridotic
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Hey Bart, I have been interested in this company and was going to write about it, but you beat me to it. I do like the company. My valuation using the OSV 5 yr sheet. With a 15% discount rate and 20% user growth rate I did get an intrinsic value of $3.75. Doing the net net valuation I got a similiar value to yours and no doubt it is one heck of a buy and I am thinking about getting in regardless of downside because this would be the first time investing in a net net I found. Another great find is the intangible and good will doesn't make up too much of the balance sheet. My calculation was around 12%. Unlike Activision Blizzard where 2/3 of their assets are intangibles.
The thing that concerns me if the company releases ragnarok 2 will there be interest because it has taken a long time for them to develop it. Plus there are many MMO's in Asia especially Korea which are popular so it is a competitve arena and there is a possibility of it getting pushed aside if it isn't good.
Also users at greenbackd blog under the tips page have valued it. There liquidation value was pretty good.
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12:38 pm
December 22, 2009
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Floris
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I should have just checked out google. Once again I'll have time this weekend to read the 10k and 10qs.
In response to your 2nd remark:
enter dutch
Dat denk ik ook. Wat is jou connectie met value investing? ben erg benieuwd!
exit dutch
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5:27 pm
December 21, 2009
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Bart
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Hello Floris,
It trades on Nasdaq. There's a very good write-up on the company on Value Investors Club, from earlier this year when it was trading below $1, worth checking out.
cheers,
Bart
Btw, I'm pretty sure we actually have the same mother tongue, even though I'm from Belgium ;-)
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2:52 pm
December 21, 2009
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Floris
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Hey,
I like your analysis. Ill have a look it this weekend.
Does it trade in London?
reg
Floris
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5:04 pm
December 18, 2009
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Bart
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Post edited 2:07 pm – December 18, 2009 by Bart
Hi all,
a short write up on GRVY, a Korean game developer that is trading at 73% of cash on their balance sheet.
What the company does (from Google Finance)
Gravity Co., Ltd. (Gravity) is engaged in developing and distributing online games and other related businesses principally in the Republic of Korea and other countries in Asia, North and South America, and Europe based on the number of peak concurrent users (PCU). The Company’s principal product, Ragnarok Online, is commercially offered in Korea and 37 other countries and markets. Requiem is offered in Korea, the United States, Canada and 15 other countries. Emil Chronicle Online is offered in Korea, Thailand, Hong Kong and Taiwan. R.O.S.E. Online is offered in the United States, Canada and Mexico. Pucca Racing is offered in Korea and Thailand. Its subsidiaries include NeoCyon, Inc., Gravity Interactive, Inc., GungHo Online Entertainment, Inc. and Heartis, Inc.
The company got a new CEO last year, who seemed to have turned the ship around, however, some new difficulties have arisen (in the cons section)
Pros:
- The company has a very strong balance sheet, numbers from their latest 6-K
Cash: 55M
Total current assets: 72.6M, with only 6M in accounts receivable, so current assets of high quality
Total liabilities: 18M
This versus a total Market Cap of only 40 M (at stock price 1.45, 18/12/2009). So stock price of 1.45 vs net cash per share 1.97 and current assets – current liabilities per share: 2.26. The company thus trades at about 73% of cash.
- The company is free cash flow positive, and has been net profitable for three consecutive quarters, adding to their cash balance.
- Black Horse capital management seems to have taken a 2-3% position in the company (source: their latest 13F), which could possibly lead to activist involvement.
Cons:
- Very uncommunicative management
- Execution is poor, with recently a litigation settled (a long standing dispute, before current management took over). However, their latest 6-K mentions that they are having a dispute with FOX re the development of Ice Age online, so this could result in a new litigation, raising uncertainty
- Latest quarterly results were not brilliant, however, this was mainly due to the (now settled) litigation expense
- No long term track record of profitability (which partly explains the low stock price)
Potential catalysts:
- Release of new games: Ragnarok II could become an important driver for future revenue. Release expected sometime in 2010, however, I do not have much confidence in timescales set by the management.
- Growth in mobile games was very strong last quarter.
- Expectations are very low, so if there are no litigation expenses in the next quarter, the earnings should surprise on the upside
Valuation:
As long as the company does not start burning cash, downside should be the cash balance, or about $2. However, if the company stays profitable (EPS 0.22 for 9 months ended September 2009), adding a conservative P/E multiple of 8, a stock price of + $4 should be possible, providing a 200-300% upside. Even though the execution is often poor, the current stock price way undervalues this company in my opinion.
If (a very big if, that is) the company improves its execution, underlying profitability could be restored, and earnings could pick up to $1 per share, increasing the potential upside dramatically.
Any opinions/feedback would be greatly appreciated!
Thanks
Bart
Disclaimer: I have a (small) position in GRVY at the time of writing.
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