Special Situation Investing

Saturday, October 07, 2006

Webzen (WZEN) Value Play

Korean online video game producer Webzen (WZEN) is getting pretty cheap these days and I have decided to bite. The company has produced a number of online games, with flagship MU having been a hit a couple of years ago. Their fortunes have taken a turn for the worse lately but this is over-reflected in the current stock price. The company is currently selling for just over book value, and in spite of this is in no danger of bankruptcy for at least a few years. All it will take is one successful offering and the price will soar.


WZEN is an ADR (it primarily trades on the Korean stock exchange) trading on the Nasdaq. It's quarterly financials are not readily available from yahoo or google finance so I went straight to their web-site for the quarter ended, June 2006 numbers. As a side note, in terms of news coverage I would recommend google finance for this particular company, as they have a great deal more coverage. I am not affiliated with either google or yahoo in any way. In general I prefer yahoo finance.

For reference, 1 USD = 949.2 Korean Won according to yahoo finance. I have taken the liberty of converting WZEN's financial statements to US dollars.

Balance Sheet

Current Assets: $114.9 M
Tangible Fixed Assets: $53.6 M

Liabilities: $17.4 M

Tangible Equity: $151.1 M

Income Statement

Revenue: $6.7 M

COGS: $3.0 M
SG&A $15.2 M
Other Expenses: $2.0 M

Net Income (loss): $(15.5) M -- okay, I know this doesn't exactly add up based on the other items but since it is actually LESS than the numbers I added I decided not to fault them.


Webzen currently has a market cap of ~$171 million dollars. I am pretty sure that is the correct number. It is not so much that I am confused or haven't done my research but there is a lot of conflicting data about something so simple as the companies market cap. Yahoo says it's $47 million, Google says it $476 million, quotes.nasdaq.com says that no in fact it's $14 million. Well I went to the company's website and according to their numbers, the company adds up to ~$171 million US. If I'm wrong feel free to correct me but don't just point to yahoo finance please.

At any rate, assuming my market cap is correct the company is selling for just over book value. Revenue & expenses of course are the real problem. Revenue has been very low recently, below historic norms. SG&A was very high in the last quarter so it looks like the company is bleeding to death. However, even if we were to assume that these results may be repeated (I don't think they will), the company would still have some 2.5 years before it even needs to worry about refinancing. This company will not be going bankrupt anytime soon.

The Situation:

Webzen needs a hit. This is how video game developers make most of their money. It is similar to the movie industry in that a single popular title can far exceed the development costs. However, online-game companies are dissimilar to the movie industry in that their revenue stream from a hit game can go on for years, as the company upgrades it's graphic/software engines, redistributes to new regions, rebrands to cover additional demographics, etc. Basically, if Webzen can deliver a hit or two (we'll get to this momentarily) all past sins will be forgotten and the street will love them again. People start to look at not how quickly it is going to go bankrupt and start focusing on how much money it might earn. That is where P/E expansion comes in and that is the primary reason why I exclusively buy beat-up stocks. 1 or 2 hits and you make a fortune. If the hits don't materialize there is still enough booty in the bank to cover next years attempts.

Of course this entire argument is just wishful thinking if you don't have reason to believe that WZEN might actually produce something. Here is how I look at it:

1) They produced MU in the past which was a big hit and had their stock soaring for awhile. So they are certainly capable of producing a popular game. I have some faith in their management.

2) The company has a slew of games under development. Soul of the Ultimate Nation, Parfait Station, Project Wiki, Huxley, APB (All Points Bulletin). Now I don't really play games anymore so I can't comment on their quality and release schedules but barring some sort of disaster at least 2 or 3 of these games will be released over the next year. Probably the releases will be quicker than that but I like to be pessimistic. I don't know that any will be hits, they could be but I can't make that call. I do know that APB is being created by the developer of GTA (Grand Theft Auto) which was a HUGE hit in it's time and to some extent still is. Given the current valuation I don't feel that the potential for these products to catch on is being fully integrated into the stock price.

3) North Korea has the bomb. Well at least the North Koreans say they do. They certainly have something. Some seismologists thing they have the bomb and some don't. Maybe they have a big pile of TNT. I don't really care. If anything actually happened in this regard, then the reprecussions would extend far beyond South Korea. People don't think that way though, they just get scared. They hedge their bets. As a result, I believe that North Korea's testing has had at least some impact on the stock. On Monday when the initial announcment was made, the stock was down over 8%. I view this, on top of everything else, as a buying opportunity.

4) Webzen is hiring. In spite of all the terrible things people think are going to happen to this company, they just hired 4 new senior types in the US. This brings us to the next point..

5) Webzen is expanding. Previously competing chiefly in Asia, the company is refocused on North America and is talking about Europe. Even the company's vision statement drones up about the importance of gaming for everyone. While games don't exactly port effortlessly from 1 culture to the next, certainly the cost of rebranding a successful game is far less than doing it from scratch.

6) This is a weak point and hard to substantiate but I believe the company's founders are passionate about the company. Just a hunch and I could be wrong. I can't find it anymore but a year ago when I first started looking at WZEN I remember reading a quote from the CEO to the extent that their primary mission was to make great games. Not get rich, not dominate market share, make great games. To me, this is exactly what the company needs to focus on. Think of Google for instance. Why is it so popular? They are the best at what they do. Flat out, everybody knows it, don't even argue with me on this, google is the best at search. When the company was being created that is the only thing the founders tried to do. They didn't even try to incorporate any type of revenue for about 3 years. They just tried to make it better. Did it payoff? Now Webzen is certainly not a Google and maybe they really, truly aren't dedicated to being the very best but as point of reference, at the very least, passion in the founders is a good thing to have.


I own shares in Webzen. I bought them on Monday. I might buy more.

Do your own research and beware, this could go several different ways.


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