GRVY - Gravity Co. Ltd (ADR)

[no_free_lunch]

Gravity is a korean based developer of online video games.  They have an ADR which trades on the NASDAQ under the symbol GRVY.

 

I will start by admitting that my research to date on the company is fairly slim but I have nevertheless taken a position based on a few factors.  I may be deceived but the risk reward on this one seems very appealing.  Obviously double-check everything presented.

 

For those in a rush : gravity is a company trading below liquid assets with a potentially significant new revenue source set to come online over the next year.

 

The basic situation is the company produced an online game Ragnarok about 10 years ago.  The game was quite successful and the company had a good few years off of it.  As it's cycle wound down they have struggled in finding a proper replacement for it.  However, the company has just finished creating a second version of the title, Ragnarok 2.  This title is set to release in 2013.  The game has been somewhat delayed and the beta is taking longer than expected which I believe is holding the stock back.  However, this is not the worst thing for a video game company.  I would rather have a company that takes their time and delivers a quality product than vice-versa.  I don't know much about the game but some limited googling would indicate that it at least has potential. 

 

Some Numbers:

 

Stock Price : $1.35

Cash and short term investments : $1.52

Tangible Book Value: $1.97

 

 

The company posted a loss of about $1.2 M in the most recent quarter and a loss of roughly $1.3 M over the past 9 months.  Essentially they have been treading water to losing ground.  This however, is not that bad of a situation given that they are about to launch 1 major new title and a second smaller title (which would just be a kicker). 

 

If you look at metacritic, which is widely used to judge games success, the original ragnarok had a score of 79%. These scores are based on website reviews.  This is good but not fantastic.  However when you look at the individual reviews there are 2 scores in the 90's and 3 in the low 70's/high 60's.  There is obviously some polarization here which is fine for a videogame.  People either like the game a lot or they don't want to play it.  It is very hard to have it any other way.  I do not mean to imply that the previous success will translate into success with the new version but it gives us a very crude comparison.

 

http://www.metacritic.com/game/pc/ragnarok-online

 

It is hard to say what the upside is on the title.  In 2005 they were in the $7-$10 range when the original title was still strong.  In 2011 they spiked as high as $3 but have overall been quite volatile.  I am just going to hold this one until some proper reviews come out on the game.  If it has very good reviews I will probably wait for the hype cycle to get going, otherwise I should still be able to get most of my money back.

 

[no_free_lunch]

I dug up some of their previous annual reports:

 

From 2005 (you can see the ramp-up of their original title and it's impact on revenue/earnings):

 

http://www.sec.gov/Archives/edgar/data/1313310/000114554908001180/h02250e20vf.htm

 

From 2007 (and here you watch the decline begin):

 

http://www.sec.gov/Archives/edgar/data/1313310/000114554908001180/h02250e20vf.htm

 

 

[compoundinglife]

Been long for a couple of years. Jae @ Oldschoolvalue has a bunch of research and information on his site, here a few but there are probably more on his site if you search around:

 

http://www.oldschoolvalue.com/blog/ideas/grvy-cheap-stock-net-net/

 

http://www.oldschoolvalue.com/blog/stock-analysis/gravity-delay/

 

http://www.oldschoolvalue.com/blog/stock-analysis/the-expectations-built-into-grvy-is-dead-wrong/

 

http://www.oldschoolvalue.com/blog/stock-analysis/the-secret-grvy-recipe-to-produce-50-ytd/

 

http://www.oldschoolvalue.com/blog/stock-analysis/exclusive-notes-grvy-video-conference/

 

R2 has taken a very long time to get out the door. Initial response in their home market was weak. They also had a bunch of server reliability issues in the korean beta. English version is in beta in at least Singapore. R1 rev is on run off and if R2 doesn't step up to replace it then they will be burning through their cash. GungHo owns %60 of the company, people have speculated on a buyout of the remaining %40 but it has been cheap for a long time, as low as 0.50 cents a share in 2009 and they have showed no interest that I am aware of.

 

I have not been impressed with the execution on R2 but I am waiting to see how the game is received in other markets. They have other stuff going on, iphone apps etc... but its not a big part of the business. R2 is the hail mary and if that doesn't go well I think its destined to be in net-net land.

 

I was very close to selling at 3.50 but it came back down under 3 before I got off my ass so I decided to wait, whoops could of sold for a very nice gain and bought back.

 

It is possible that initial reception of the game is not a good indicator of how it will do, so yes it could be worth a lot more than $3 a share. But it seems like video games are either a hit or they are not so I think the probability of greater than $3 per share is low. Also keep in mind this was a much anticipated sequel and it seems like the reaction from the korean gamers was "meh".

 

This position has been a waiting game with lots of delays, much like PRXI has been. But at least I am up over %100 on PRXI while I wait for the catalyst.

 

[infinitee00]

 

 

I was very close to selling at 3.50 but it came back down under 3 before I got off my ass so I decided to wait, whoops could of sold for a very nice gain and bought back.

 

 

Funny how these things work. I bought GRVY about a few years back too and saw it go up to 3.40+. Got greedy and held on ( unlike PRXI which I also owned but sold before the end of the auction), only to see it plummet to it's pre-RO2 levels and then some.  I don't have much to add here beyond those links posted. I actually see the majority ownership of Gungho as somewhat of a risk. What's to stop them from taking the company private at a hefty discount to BV or cash on it's books.  I doubt whether investors outside Korea/Japan will have any effective legal recourse. I don't think mgmt has any interest in paying dividends either. Keeping ~$2 of cash on it's books when the stock price is @$1.3 doesn't speak very highly of mgmt's capital allocation skills. It seems like we have a long wait ahead but that ADR fee makes it even more painful.

[fareastwarriors]

A friend of mine have consistently bought the stock at under 2 and sold it above 2.50 a few times and make a small killing. He usually sells where there is good news out / hype is going on then buys it back after the hype runs out. It worked for me but it seemed kind of risky for me and I just wasn't comfortable with a company dependent on just 1 unproven new product, RO2...

[eclecticvalue]

Has anyone done a check on how long they can keep burning cash until they reach a distressing point? That is what I would look into and I would like to see if they have any upcoming games in development.

[infinitee00]

Has anyone done a check on how long they can keep burning cash until they reach a distressing point? That is what I would look into and I would like to see if they have any upcoming games in development.

 

GRVY has generated +ve FCf for most of the last decade and I don't see them burning significant cash given their revenue stream now, although this can change in the future if  RO1 ( Ragnarok Online 1) revenues go to zero ( which I am guessing it will as existing RO1 players migrate to RO2 in the next few years) and RO2 fails to make up for part of that revenue. Their cash balance has not depleted significantly in the last few years and I don't see any risk of them going kaput anytime in the next 2 years although RO2 remains a big art of  equation. In the meantime, GRVy is trying to move to a subscription based model and also keeps coming out with online, mobile and DS games.

 

In addition to Ragnarok Online, we currently

offer eight other massively multiplayer online role playing games, or MMORPGs, Ragnarok Online II, Requiem, Emil Chronicle Online,

Dragonica, which is also known as Dragon Saga in the United States and Canada, R.O.S.E. Online, Canaan, Kun Woong Online and Finding

Neverland Online. We also offer a casual third person shooter, H.A.V.E. Online, which is also known as Toy Wars in Japan, a simulation role

playing game, Ragnarok Online Guild Masters, and two social network games, Fashion Star and Jeweled Planet. We are currently developing a

new MMORPG with a tentative title of East Road. We have entered into a license agreement to publish Weapons of the Gods, an MMORPG, in

Korea with Shanghai Nineyou Interactive Community and Media Co., Ltd. and its two affiliated Chinese game developers and publishers,

Shanghai Nineshine Information Technology Co., Ltd. and HitNorth International Limited. We have entered into a license agreement with RoC

Works Co., Ltd., a Korean game developer, to publish Maestia, an MMORPG, in the United States and Canada.

 

Btw here is something interesting about GRVY's RO2 license agreements from their last 20-F

 

We have entered into license and distribution agreements for Ragnarok Online II with six licensees in nine countries,

including Thailand, Japan, the Philippines, Singapore, Malaysia, Vietnam, China, Indonesia and Brazil. The total value of our license and

distribution agreements for Ragnarok Online II in nine countries is US$43,390 thousand as of December 31, 2011. The failure of Ragnarok

Online II to gain popularity or market acceptance could result in financial losses, including termination or amendments of license agreements,

which could damage our reputation and have a material adverse effect on our business, prospects, financial condition and results of operations.

 

 

 

 

 

[no_free_lunch]

Has anyone done a check on how long they can keep burning cash until they reach a distressing point? That is what I would look into and I would like to see if they have any upcoming games in development.

 

Thought I would give a breakdown of their revenue, earnings and shareholder equity over the past few years to give you the bigger picture.  You can see that in the past they have burned cash but have mostly gotten out of that recently.  They did return to negative earnings in the most recent quarter (not shown here).

 

 

All figures are in millions of Wons.  The conversion rate is roughly 1060 Wons to a USD.  There are 6.95 M shares and 4 ADRs are worth 1 standard share, so there are effectively 27.8 M ADRs.

 

There

 

Revenue

2003    2004    2005    2006    2007  2008    2009    2010  2011

49,515 64,426 53,384 40,963 40,229 53,170 57,403 52,362 57,477

 

Earnings

2003    2004    2005      2006      2007      2008    2009    2010    2011

19,140 28,057  (3,030) (22,265)  (23,201)  (2,773)  6,917 3,730    14,928  

 

Shareholder Equity

2003    2004    2005      2006      2007  2008    2009    2010    2011

22,464  50,435 120,762  98,113  75,476 76,608 83,610 98,412 110,659  

 

 

 

Here is a list of their various products, I am not sure that this counts their various subsidiaries:

 

Ragnarok Online

  Action adventure with 150 levels of skill upgrades, which features two-dimensional characters in three-dimensional  backgrounds(1)   Developed in-house   Launched in August

2002

 

Ragnarok Online II

  Three-dimensional sequel to Ragnarok Online   Developed in-house   Launched in March 2012

 

Requiem

  Three-dimensional action adventure   Developed in-house   Launched in October 2007

 

Emil Chronicle Online

  Three-dimensional action adventure   Licensed from third party developer   Launched in August 2007

 

Dragonica (Dragon Saga)(3)

  Three-dimensional action adventure   Originally licensed  from third party developer and  currently owned by  us(4)   Launched in February 2009(5)

 

R.O.S.E. Online

  Three-dimensional action adventure with seven independent storylines   Originally licensed from third party developer; currently

owned by us(6)   Launched in January 2005

 

Canaan

  Web browser-based casual   Licensed from third party developer   Launched in October 2010

 

Kun Woong Online

  Two-dimensional action adventure   Licensed from third party developer   Launched in November 2011

 

Finding Neverland Online

  Three-dimensional casual action adventure   Licensed from third party developer   Launched in January 2012

 

Maestia

  Three-dimensional action adventure   Licensed from thirdparty developer   Currently expected tolaunch in the third quarter of 2012

 

East Road (tentative title)

  Three-dimensional action adventure   Being developed in-house(7)   Not determined

 

 

[Edward]

I have been following this company for about 2 years, and did not invest.

 

It's a cash box with a marginally profitable business attached. As it trades under net cash, there is no question that it's relatively safe (Although management apparently does not know that outside shareholders exist). The big question is regarding the upside via the business.

 

I looked at Ragnarok 2: LOTS that was released recently and was underwhelmed as a gamer with some experience in MMO's. The response in the markets where it was released seems to support my initial impression. This is game that should have been released in 2008 to have some measure of success, but today it faces very stiff competition. This is not going to be nearly as profitable as the original Ragnarok was.

 

So to sum, I don't think there is a lot of upside here above and beyond net cash. As a cigar butt trade it may be fine, but definitely not for holding long term.

[no_free_lunch]

Found this review of the game, not exactly glowing but I would say it is positive overall. 

 

Overall, I’m not too far into the game yet, but I can see myself really enjoying gameplay. The limiting factor could be the extent to which paid services are required to enjoy the game. While I like the idea of supporting a game by paying for paid services, in some cases they can get out of hand and end up being more expensive than simply adopting a subscription model.

 

http://lorehound.com/news/ragnarok-online-2-open-beta-first-impressions/

 

 

Also, I appreciate the feedback people have given me on this one.  I will be the first to admit that ragnarok 2 is not going to be a runaway hit.  That begin said, I am not sure that it needs to be.  The company simply needs to stabilize, then generate some positive earnings and announce some new titles.  They were in the $3 range last year and I don't see any reason why they couldn't get back there again.

 

I admit that it is a cigar butt but with in excess of 100% upside (I got in at $1.33) versus maybe 20-30% downside I am willing to take the bet.

[siddharth18]

I know I'm resuscitating an old thread here, is there some recent news that I don't know about?

 

I hold some GRVY but can't find any news/rumors to justify the recent jump on strong volume.

[Guest Schwab711]

I lost a ton on this stock and I have no interest in it for a lot of reasons but it looks to be a pretty large, both in absolute and % terms, net-net.

 

Ignoring all other assets but cash/equivalents they have $38m in cash, $14m in liabilities. All values converted to USD. There is KRW/USD exchange risk on top of a company burning $10m annually from operating losses. I believe Softbank ultimately has a large stake through majority stake ownership of Gung-Ho.

 

Cash:        $38m

Total Lib:    $14m

NCAV:        $24m

MC:            $16m

 

50% upside to NCAV. The gap is being closed by operations at a rate of $10m/yr or a little over 9 months from now.

[matjone]

I own gravity and agree with what you've said.  It is very cheap, but it is a terrible company for now and maybe forever.

 

I was reading something the other day that interested me.  When Buffett saw union street railway at 1/3 net cash he brought it to Graham and Graham was not interested.  So it seems that Graham would pass on net nets if the business was bad enough.  Of course he was wrong and Buffett made a killing on it because they started paying special dividends almost as soon as he bought it, but I'm guessing this won't be a repeat of that situation :)

[no_free_lunch]

Not that I am any kind of expert on the company but I sold out my position about a year ago.  I will just echo what matjone said about the quality of the company.  As I learned more about it, the less interested I became.

 

That being said, from a purely statistical point of view it is very cheap.  Best of luck.

[no_free_lunch]

Reading through the Softbank annual report, I noticed that Softbank owns 59% of gravity (page 156).  It doesn't necessarily mean anything, it is a small investment for Softbank but at least you have someone, maybe looking after shareholders or agitating for change.

[usdtor05]

Softbank has owned it forever...i dont think anyone is agitating for change unfortunately

[infinitee00]

Anyone knows whats going on with GRVY? I could not find any information on the company's website or on the internet. The stock has gained almost 100% in 4 days. Seems more like momo traders bidding up the price, although I am not complaining.

[kms8717]

Resuscitating an old thread once more.

 

 

Now is probably an interesting time to take another look at GRVY. A good analysis of the company and on the current investment opportunity was shared on Seeking Alpha last December. Share price rose but is back down to where it was then. https://seekingalpha.com/article/4227458-gravity-co-ltd-ready-second-growth-cycle

 

 

Company's core asset is a globally-beloved "Ragnarok" game IP. The stock was hot in the early-mid 2000's PC era, was sold to Gungho at around ~$750mm market cap back in '08.  With the company mismanaged and the PC era coming to an end, the stock slumped substantially, and has been a popular playground for net-net play. After a long drawdown period, the stock came back to life in ~2017 as the company started to monetize the IP again under the new mobile era. The new game Ragnarok M(obile) has been released one country after another, being ranked among the top wherever it was launched - the most recent release has been in South East Asia and NA/SA, the biggest contributor to the 4Q18 income statement, to be announced shortly.

 

The stock has shown some repeated pattern of volatility  prior to earnings release since 2017 - and with investors not quite certain on the size of South East Asia gaming markets(traditionally low ARPU) and how it'd affect the Q4 earnings, the current drawdown presents an interesting opportunity IMO.

 

Company is prepping for Japan launch, the market with one of the highest mobile game ARPU/size and where Ragnarok Online PC game has been one of the steady best sellers for the past 16yrs. It's not difficult to imagine why the game(characterized by cute/colorful/anime-like features) would be popular in Jpn.

 

Moreover, there is another game based on the IP being developed(almost ready for release as it's currently awaiting 4th CBT) and that will be published by TENCENT. Grvy is having its best year since inception, but 2019 and onward will be even bigger with Tencent publishing in China and all the countries where Ragnarok M has been the top grossing. I am of the view that the current ~$260mm market cap does not fully reflect the value of the globally popular IP with a growing earnings momentum and the improving situation in Chinese mobile game license approval process.  Would love to hear what others think on the opportunity.  Thanks.

[Arski]

GRVY has had tremendous growth past years and their price has shoot up 4x since January, but still an EV/EBIT of 15? That looks quite compelling.

Thoughts?

[valueinvestor]

No real thoughts - purchased speculatively but turned out to be a pretty good investment.

 

It's really dependent if it is a good game, and if it is - then it's a great business. If not, then it's not going to be a great business.

 

I think it's more compelling today than ever, because of COVID-19. We're playing on dopamines. They recently launched titles in Korea, South East Asia and have a Fort Knox balance sheet with not a lot of fixed cost.

 

You can purchase today at less than SP500 PE ~38, although may not be a fair comparison since it is a Korean company. It's at 20x earnings. Growings close to 100% per year and not burning cash. Just added recently.