[Funding] Neorigin, When Will Profitability Improvement Be Possible?

After Acquiring Goddess War Rights, Game Business Launched... Achieved 6.5 Billion KRW Sales in H1
Planning to Raise 35.4 Billion KRW via Shareholder-Allocated Capital Increase... Entirely Invested in Game Business
New Hiring and Additional Rights Acquisition Planned

[Asia Economy Reporter Park Hyungsoo] Neorigin, which officially started its game business this year, is set to raise a large amount of capital through a rights offering to existing shareholders. With new sales generated in the game division in the first half of this year, total sales more than doubled compared to the previous year. Based on these visible achievements, Neorigin has decided to invest a large sum of money in the game business division.

According to the Financial Supervisory Service's electronic disclosure system on the 2nd, Neorigin will conduct a paid-in capital increase by issuing 0.55 new shares per one existing share through a rights offering followed by a general public offering of unsubscribed shares. The planned issue price per new share is 1,200 KRW, and a total of 29.5 million shares will be issued to raise 35.4 billion KRW.

All the raised funds will be invested in the game business division. 10.4 billion KRW will be used to purchase licenses or IPs that can diversify the game portfolio. 15 billion KRW will be allocated for marketing expenses, and 10 billion KRW will be invested in operating costs for hiring personnel.

In October last year, Neorigin signed a license purchase agreement with the special purpose company Happy Harbor. It secured exclusive operating rights for three years from the game release date for the Korean and Japanese licenses of the mobile game "Goddess War" (Yeosin Jeonjaeng). 550,000 USD was paid as the license acquisition cost. The running royalty rate was set at 10%.

From January to June this year, sales of Goddess War in Korea reached 5.5 billion KRW. Sales in Japan started in March and recorded 1 billion KRW over four months until June. The game division's sales in the first half amounted to 6.48 billion KRW, surpassing the existing security division's sales of 5.39 billion KRW. Neorigin recorded total sales of 11.87 billion KRW in the first half of this year, a 125.2% increase compared to the same period last year. The security division's sales increased by 2% year-on-year, reflecting the addition of new sales.

Neorigin plans to actively expand its game business division. It is considering acquiring global licenses for Goddess War excluding China. Overseas sales of Goddess War, excluding Korea, China, and Japan, reached 8.6 billion KRW in the first half of this year. Positive factors include the fact that the game has been serviced in Korea and Japan, the potential for stable business scale expansion, and the removal of license term restrictions.

Having newly started the game business, Neorigin does not directly operate the servers for Goddess War. Due to a lack of operational personnel, it relies heavily on external parties. The game business division currently has only one administrative staff member. To develop and directly publish games, Neorigin plans to hire about 50 new employees by 2024.

Neorigin spent 2.9 billion KRW on game marketing in the first half of this year, recruiting 240,000 members. From next year through the first half of 2024, it plans to spend 3 billion KRW every six months on marketing to secure 1.25 million potential customers.

There are concerns about expanding the game business division by raising a large amount of capital through the paid-in capital increase. The concern is about profitability deterioration. As the game business has been promoted, Neorigin's cost of sales ratio has increased. The average cost of sales ratio over the past three years was 57.67%. In the first half of this year, the cost of sales ratio rose to 71.31%, an increase of 13.64 percentage points compared to the average.

The game division provides mobile games to customers through various platforms. Costs include mobile game app store commissions, marketing expenses, and running royalty fees for licenses. Along with fixed costs, the game business requires continuous marketing. Marketing accounts for 60.28% of the cost of sales in the game business. Considering the cost structure, it is likely that a high cost of sales ratio will be maintained for the time being. Unless economies of scale reduce the marketing proportion or mobile game platform fees decrease, improving profitability will be difficult.

However, Neorigin expects that the uncertainty regarding the renewal of Goddess War's license is not significant. The CEO of Neorigin also serves as the CEO of Happy Harbor, the original IP holder of Goddess War. In discussions about contract renewal and new license regions, Neorigin judges that the probability of signing a contract under unfavorable conditions is relatively low.

Neorigin's debt ratio rose from 19.24% at the end of last year to 59.42% at the end of the first half of this year. The increase in debt ratio was due to the private placement of convertible bonds worth 5 billion KRW.