[Reading Securities Report] M83, Outstanding Performance in VFX... Decreasing Major Shareholder Stake 'Concern'

VFX Specialist Company Recording Surplus... Responsible for Films 'Noryang' and 'Hansan'
Funds Raised Mainly Invested in Mergers and Acquisitions
"Largest Shareholder's Stake Below 20% After Listing"

M83, a visual effects (VFX) specialist company, has initiated the public offering process for listing on the KOSDAQ. Unlike other listed VFX companies, its most notable feature is that it is recording profits. However, the largest shareholder's stake falling below 20% after listing is expected to be a concern.

VFX Specialist Company 'M83' Going Public Just 4 Years After Establishment

According to the financial investment industry on the 19th, M83 is a VFX specialist company established in February 2020. It handled large-scale VFX for films such as Noryang: Sea of Death, Hansan: Rising Dragon, Space Sweepers, and dramas like Vincenzo and Sweet Home 2.

M83 is undergoing the KOSDAQ listing process just four years after its establishment. The reason for the rapid listing is due to its solid financial performance. In 2021, it recorded operating revenue of 23 billion KRW and operating profit of 1.7 billion KRW, and last year, it posted operating revenue of 42.1 billion KRW and operating profit of 4.4 billion KRW. It has continuously generated profits since its first year. In the first quarter of this year, it achieved operating revenue of 10.8 billion KRW and operating profit of 0.5 billion KRW.

This performance growth appears to be due to consecutively handling major projects. The key factor enabling this is the company's core competitive advantage: the largest supervisor organization in Korea. A supervisor is a key person responsible for managing and overseeing the overall quality and completeness of VFX within video content. The company holds the largest number of first- and second-generation supervisors who have led the VFX industry compared to other companies.

When determining the public offering price, M83 used the price-to-earnings ratio (PER). It selected two comparable companies: AStory and Studio Mir. Their PERs are 18.21 and 32.38, respectively, averaging 25.30. Based on this, the per-share valuation was calculated at 19,588 KRW. Applying a discount rate of 33.63% to 43.84%, the desired public offering price range was set at 11,000 to 13,000 KRW per share.

M83's profitability is also evident in the public offering price calculation process. Listed companies engaged in VFX, Giant Step and Dexter Studio, were excluded. Companies that do not show operating profit and net income are excluded when selecting comparables. Both of these companies are recording losses, hence their exclusion.

Public Offering Funds Mainly Invested in Mergers & Acquisitions (M&A)... Largest Shareholder's Stake Falls Below 20%

M83 plans to raise 16.5 to 19.5 billion KRW based on the desired public offering price. The funds will primarily be used for overseas expansion and research & development (R&D). Specifically, a significant portion will be allocated to M&A. M83 intends to use 8 billion KRW to acquire local subsidiaries in the U.S. and Europe, and 1.5 billion KRW to establish a liaison office in China.

The companies to be acquired seem to have already been decided. Although the company names are not disclosed, the securities registration statement explains, "The target companies under consideration for acquisition are recognized for their capabilities not only in the European market but also in various countries including Korea," and "They are verified companies with a history of long-term collaboration with CEO Jung Sung-jin of our company and participation in leading domestic projects."

Additionally, 6.4 billion KRW will be used for R&D. Funds will be invested in acquiring AI-based technology companies, developing and building cloud services, and developing and producing content intellectual property (IP). The AI-based technology company to be acquired also appears to be somewhat finalized, with 1.5 billion KRW allocated. The securities registration statement states, "The target company for acquisition is an AI-based computer graphics technology development specialist company established in 2022," and "It was founded by experts with top-level VFX research and development experience in Korea."

The reduction of the largest shareholder's stake after listing is expected to be a concern. The lower the largest shareholder's stake, the more complicated management control issues become when raising additional funds. CEO Jung Sung-jin's stake will decrease from 23.85% before listing to 19.11% after listing.

However, management control safeguards also appear to be in place. Ten friendly shareholders, including the largest shareholder, have signed a joint purpose holding commitment for two years. Their combined stake before listing is 61.60%, which will decrease to 49.38% after listing.