South Korea’s Kakao Corp and Hong Kong-listed IMAX China displayed vastly different aftermarket performances following a pair of successful block trades on Wednesday, reflecting the increasing market sensitivity to the valuations and long-term growth prospects of Asian stocks.
Both companies are well-known among Asian investors, with Kakao being the operator of Korea’s leading instant messaging app KakaoTalk, and IMAX China a high-flying movie and entertainment stock since listing in October 2015.
It did not come as a big surprise when CMC Capital Partners and FountainVest Partners announced their intention to sell their entire combined 5.9% stake in IMAX China late Wednesday. The two private equity firms, which were pre-IPO investors in IMAX China, first sold part of their stake in March last year for $106 million.
Wednesday's 20.8 million-share offer was offered at between HK$39.72 to HK$40.52 at launch and ended up at the bottom end of the range, implying a 5% discount over its HK$41 Wednesday close. The deal raised another $106 million for the two sellers.
Kakao's seller did surprise the market. Wemade Entertainment announced its sale of 2.33 million shares in Kakao, a turn-around for a company that indicated earlier this year it had no intention to sell the stake.
Wemade’s 3.5% stake in Kakao was priced at W83,000 across an indicative range of W82,750 to W85,000, implying a discount of 3.4% and raising $172 million in total proceeds.
A well-flagged block versus a surprise selldown? It may seem obvious which stock performed best in the secondary market. Obvious, but wrong, as it turns out.
IMAX China saw its share price plummet in the secondary market, falling 9.1% to close at HK$38 Thursday. Kakao ended the day down only 1.6% at W84,500.
Market participants pointed to the fact that IMAX China has been trading at a rich valuation of 54 times earnings on a historical basis, which has put off a lot of price-sensitive investors. That was despite a fairly disappointing business performance last year that saw box office revenue falling 5.4% and profit margins dropping 10.6 percentage points on a year-on-year basis.
Nor did it help that hedge funds made up the bulk of the IMAX China block, and that the book was only slightly oversubscribed, according to sources familiar with the situation.
Analysts are fairly divided over the prospects of IMAX China, with the most bearish target price being HK$23, implying a 40% downside from the current level.
Similarly, Kakao has been trading at a hefty valuation of 46 times earnings on a forward basis — much richer than the bulk of global mobile platform operators. The uptick in active KakaoTalk users remained sluggish, and analysts have pointed to the fact that room for growth could be limited within the country.
But market participants are looking beyond the short-term price performance and believe the company could expand further outside Korea after it entered into a strategic cooperation with Ant Financial, the financial affiliate of Chinese e-commerce giant Alibaba. The company invested $200 million in Kakao last month and said it will explore mobile payment opportunities in Korea.
Kakao is yet to realise full synergies since acquiring a controlling stake in music distributor Loen Entertainment last year. The stock has been on a downward trend since hitting its all-time high in mid-2014, but has shown momentum since the beginning of the year and has gained 9.8% year-to-date.
Credit Suisse was the sole bookrunner of Kakao’s block trade. Bank of America Merrill Lynch was sole bookrunner for the IMAX China trade.
