Initial Thoughts on Golfzon County IPO: Impact on Golfzon Newdin Holdings
This is a free article to everyone. I published this article back in January 2023. Back then, Golfzon County was considering an IPO. Golfzon Newdin is now called Golfzon Holdings.
In this insight, we discuss our initial thoughts on the Golfzon County IPO which is likely in 1H 2023.
As of September 2022, Golfzon County owned and operated 18 golf courses and 387 holes, the largest in Korea.
Golfzon Newdin owns a 43.2% in Golfzon County. We estimate Golfzon Newdin’s market cap to be 273 billion won or 6,369 won per share, representing a 44% upside.
Golfzon County Company Background & IPO
Golfzon County was spun off as a stand-alone golf course business unit of the Golfzon Group in 2018 and MBK Partners invested 114 billion at this time. Afterwards, MBK Partners participated in four additional capital increases and invested a further 288 billion won in Golfzon County (cumulative investment of 402 billion won). So far, Golfzon County has been an excellent investment for MBK Partners.
As of September 2022, Golfzon County owned and operated 18 golf courses and 387 holes, the largest in Korea. Golfzon County has done an excellent job of converting its membership-based golf courses into a public golf courses and succeeded in reducing costs through economies of scale.
Golfzon Newdin Holdings Co., Ltd. (121440 KS) is the holding company of Golfzon Group. Golfzon Newdin Holdings owns a 43.2% stake in Golfzon County. MBK Partners is the controlling shareholder with a 56.8% stake in Golfzon County.
In September/October 2022, there were numerous local reports about Golfzon County trying to complete an IPO in 2023. Back then, the local media mentioned that the value of Golfzon County could be more than 2 trillion won. If Golfzon County is valued at 2 trillion won, this would represent a P/E of 25.7x using net profit of 77.7 billion won in 2021.
The lead bankers on this IPO include Samsung Securities, NH Investment Securities, and Morgan Stanley. At the time of the original investment, MBK Partners included a clause which stated that if Golfzon County does not go public by May 2023, it could sell its stake in Golfzon County along with its stake in Golfzon Newdin.
Background on MBK Partners’ Investment in Golfzon Newdin Group - Back in September 2017, Golfzon Newdin announced that it will partner with MBK private equity firm to consolidate and franchise golf courses in Korea. At that time, this joint venture planned to raise 1 trillion won (US$885 million) in equity rights offering to acquire about 30 golf courses in Korea and franchise them. For further details, see our insight Market Analysis of Golf Course Industry in Korea: Implications for MBK & Golfzon Newdin JV.
People in Korea to play golf - There are millions of golf fanatics in Korea but limited number of golf courses. At end of the 2020, there were 514 golf courses in Korea. To put this in perspective, state of Florida has over 1,500 golf courses. It takes a lot of money to go on the golf courses to play golf in Korea. Typically, it costs about 150,000 won to 350,000 won plus to play a round of golf in Korea (including caddie/cart fees). Moreover, it has become more difficult to make a booking at golf courses in Korea at the desired time slots.
Golf courses in Korea operated by Golfzon County (Source: Company data)
Impact of COVID on the Korean golf course business
The COVID pandemic has resulted in a major boost to the local golf courses in Korea. Prior to the pandemic, millions of people in Korea would travel to other countries including Thailand, the Philippines, and Vietnam to play golf. As a result of the pandemic, they could not travel overseas which resulted in a sharp pick-up of playing golf within Korea.
As a result of the relaxation of COVID related restrictions in Korea and most other countries, the overseas travel figures have increased sharply in 2H 2022, although they are still significantly below the levels in 2019. In November 2022, there were 1.0 million overseas travelers from South Korea, which was up 604% YoY but 50% lower than in November 2019.
What this means is that 2022 could be the peak year for Golfzon County in terms of sales and profits. As millions of golfers in Korea flock to other near-by countries that offer more affordable golf fees with warmer climates, there is likely to be less demand for playing golf at the 500+ golf courses in Korea. This is likely to lead to lower sales growth and weaker profit margins for Golfzon County in 2023-2024. This trend is likely to urge Golfzon Newdin and MBK Partners to try to accelerate the IPO of Golfzon County as soon as possible in 2023.
Furthermore, due to the likely decline in sales and profits, it is unlikely for Golfzon County to fetch high valuations in the 2 trillion won or plus levels that were discussed in the local media in September 2022. Rather, the more likely scenario is for the valuation levels of Golfzon County to be reduced significantly from the 2 trillion won. Investors will try to estimate what the normalized sales and profit margins of Golfzon County could be and clearly the fat profit margins that the company has reached in 2021-2022 may be difficult to maintain.
Golfzon Newdin SoTP Valuation
The table below provides our SoTP valuation analysis of Golfzon Newdin Holdings Co., Ltd. (121440 KS). Among various holdings, Golfzon Newdin’s most valuable affiliates include Golfzon County (private), Golfzon Commerce (private), and GOLFZON (215000 KS).
Golfzon County - We estimate the value of Golfzon County to be 1 trillion won, which is a 50% cut from the valuations discussed in 3Q 2022. This valuation would represent roughly P/E of 10x (using estimated net profit of 100 billion won in 2022). Golfzon Newdin’s 43.2% stake in Golfzon County would be worth 432 billion won.
Golfzon Commerce - Golfzon Newdin owns a 97.1% stake in Golfzon Commerce which we estimate to be worth 242 billion won. Golfzon Commerce failed to complete its IPO in 2022 as the IPO valuation range was a bit too high. Our valuation estimate is lower than the company’s IPO valuation range. For further details, see our insight Golfzon Commerce IPO Valuation Analysis.
Golfzon - Golfzon Newdin owns a 20.3% stake in Golfzon which is worth 136 billion won based on public market value.
We also applied a steep holdco discount of 70% and post this discount, the estimated market cap is 273 billion won or 6,369 won per share, representing a 44% upside from current levels.
Since the highs in November 2021, Golfzon Newdin’s share price has fallen nearly 60%. To a large extent, we believe this is a reflection of the end of the COVID restrictions and the avid golfers in Korea going to other countries to play golf which has become more evident in 2H 2022 as shown by the sharp increase in overseas travelers from South Korea. Nonetheless, as a result of the sharp decline in its share price, it was come to more attractive levels.
Key Financials of Golfzon County
Income Statement Analysis - Golfzon County has generated a tremendous growth in sales and profits from 2018 to 2021. Its sales increased at a CAGR of 58.6% from 2018 to 2021. The company’s sales growth is driven by a combination of organic growth and acquisitions of numerous golf courses. Since 2018, the company has acquired Lake Hills Suncheon CC, Sunsan CC, Jace CC, Gampo Jace CC, Namyang Leisure CC, and Lake Hills Gyeongnam CC. It also bought a stake in Hanall, which operates Sacheon CC.
Operating profit jumped from 11.2 billion won in 2018 to 62 billion won in 2020 to 104.8 billion won in 2021. Operating margins improved from 16.7% in 2018 to 28.6% in 2020 to 39% in 2021. Although Golfzon County’s 2022 results are not yet available, local media mentioned that the company’s net profit is likely to be close to 100 billion won in 2022.
Golfzon County Key Income Statement Items (Source: Company data)
Golfzon County Profit Margins (Source: Company data)
Balance Sheet & Cash Flow Statement Analysis - The company has a moderately leveraged balance sheet. At the end of 2021, it had a debt ratio of 133% and net debt to equity ratio of 73%. It had cash flow from operations of 126 billion won and free cash flow of -76.4 billion won in 2021.
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