[Corporate Insight] T3 Entertainment, Drone Business Growth Outpaces 'Audition'

[Asia Economy Reporter Jang Hyowon] T3 Entertainment, known as the developer of the ‘Audition’ game, is knocking on the door of KOSDAQ. Recently, T3 Entertainment has been generating higher sales from its drone subsidiary than from its games. However, after going public, T3 Entertainment plans to focus more on developing new games using the funds raised from the IPO.

Game Sales ‘Stall’ While Drone Business ‘Soars’

Founded in 2000, T3 Entertainment is a company that develops and services online and mobile games. Its flagship title is the rhythm action game ‘Audition,’ and it has released spin-offs such as ‘Club Audition’ and ‘Puzzle Audition’ utilizing this intellectual property (IP). Besides Audition, the company has developed online games like ‘Samgukjicheon’ and ‘Come on Hero,’ as well as mobile games including ‘Cheonjireulbeda’ and ‘Segyejeongbok.’

However, meaningful revenue growth has not been observed in other games, leading to an increasing concentration of sales on the online game Audition. The proportion of ‘Audition’ sales within T3 Entertainment’s standalone total revenue has risen annually: 54.3% in 2019, 55.2% in 2020, 69.5% in 2021, and 91.4% in the first half of 2022.

T3 Entertainment’s standalone revenue has been on a decline. Standalone figures reflect only the game development business. In the first half of this year, T3 Entertainment recorded sales of 11.1 billion KRW and operating profit of 5.9 billion KRW, down 11% and 4% respectively from the same period last year. This is attributed to a decrease in sales in the mobile game segment, including ‘Club Audition.’

On the other hand, consolidated sales have been increasing. On a consolidated basis, T3 Entertainment posted sales of 35.7 billion KRW and operating profit of 7.8 billion KRW in the first half of this year, up 11% and 43% year-over-year. The company has shown an upward trend with sales of 43.6 billion KRW in 2019, 59.4 billion KRW in 2020, and 68.7 billion KRW last year.

This growth is attributed to the expansion of the drone business segment. T3 Entertainment has subsidiaries including HanbitSoft and HanbitDrone. HanbitSoft is a KOSDAQ-listed company engaged in game publishing.

HanbitDrone is the official domestic dealer of the global drone company DJI. It distributes and sells drones for various fields such as agriculture, industry, and hobby use. It also operates an AS center certified by DJI (RSC) and has established an integrated solution system.

Drone sales have grown sharply from 10.9 billion KRW in 2019 to 23.5 billion KRW in 2020, 35.1 billion KRW in 2021, and 19.5 billion KRW in the first half of this year. The drone segment, which accounted for 25% of total sales in 2019, rose to 55% in the first half of this year.

Potential Supply from CB and Stock Options

T3 Entertainment’s expected IPO price range is 1,500 to 1,700 KRW per share. The offering price was calculated by applying the average price-to-earnings ratio (PER) of comparable companies. The comparable companies include eight game companies: Krafton, NCSoft, Webzen, MeetYou, Com2uS, Devsisters, Mobirix, and MeetGen. Although more than half of T3 Entertainment’s consolidated sales come from the drone distribution business, drone-related companies were not included among the comparables.

The average PER of the eight game companies is 16.89. A discount rate of 52.22% to 57.84% was applied to calculate the expected IPO price. This discount rate is the largest among companies listed in the past year. Only three companies applied a discount rate of over 50% at the lower end of their valuation.

T3 Entertainment plans to raise between 25.5 billion and 28.9 billion KRW through the IPO. Most of the funds raised will be used for new game development. Currently, aside from Audition and Club Audition, T3 Entertainment is working on three new projects.

The largest shareholder, Chairman Kim Ki-young, and related parties will have their 35.41% stake under a lock-up for 30 months after the IPO. Shares held by IDG Excel China Fund, Stick 4th Industrial Revolution Fund, Shanghai Nine You, Hanyang Securities, and employee stock ownership will be locked up for 1 to 12 months. The freely tradable shares immediately after listing will be about 31.58%.

Additionally, the number of shares convertible from convertible bonds (CB) is 253,968 shares, accounting for 0.36% after the IPO. The conversion price is 1,575 KRW. The stock option pool consists of 3.82 million shares, or 5.48% after the IPO, with an exercise price of 1,000 KRW. Both the convertible bonds and stock options are currently exercisable and could be released immediately after listing.

Meanwhile, T3 Entertainment plans to conduct institutional investor demand forecasting on November 1-2, followed by a general subscription on November 7-8, aiming for a KOSDAQ listing at the end of November. The lead underwriter is Mirae Asset Securities.