Archives November 2017

Netmarble’s Game a Bust in the USA – Stock Price Target- 103,000 KRW


Our analysis of Netmarble’s IPO was that it was “priced for perfection”.  While the Lineage 2 game releases has been near perfect in Korea and Japan, its release in the USA has been a bust and the release in China is on hold due to geopolitical tensions.

As a result, we predict that Netmarble’s stock will fall 45% from its November 26, 2017 closing price of 188,500 KRW to around 103,378 KRW once the revenue impacts of the USA and China releases are fully understood by investors.

Netmarble’s IPO Valuation: Priced for Perfection

On May 11, 2017, Netmarble Games had an IPO on the Korea KOSPI stock exchange.

Due to an enthusiastic demand by Korean, International, and Sovereign funds, the company was able to price the IPO at the high end range of 157,000 Korean won (KRW) per share, or approximately $138 USD per share based on an exchange rate of .00088 KRW / USD.

Three days before trading began,  analyst Moon Ji-hyun with the Korean brokerage house of Mirae Asset Daewoo predicted that the company would exceed expectations for YoY revenue and profit doubling.  She gave the stock a price target of 200,000 KRW, or a 27% increase from the IPO price.  

Most other financial analysts and business reporters wrote positively about the company and its IPO.

Within the first hour of trading, individual retail investors pushed the price up to 171,500 KRW. The stock closed the day at 162,000 KRW, making the funds, the underwriters, the company and its CEO Bang Jun-hyuk very happy.

We alone differed.  (Disclosure: we have never held a position in the stock and do not intend to initiate one at anytime.  We have not received any remuneration for our articles on Netmarble.)

Three weeks before the IPO, on April 18, 2017 we analysed the offering and estimated that Netmarble’s post-IPO forward price sales ratio would be 4.3.  This was based on FY17 YoY reported sales forecasts of a revenue doubling — largely driven by its newly released game Lineage 2: Revolution.

We found that Netmarble’s post-IPO valuation exceedingly high by both South Korean and Western standards for mobile game companies.  

For example, we calculated the current price sales ratio of the very successful Korean mobile game company Com2uS at only 2.6.  We also calculated the market-derived current price sales ratio of King Digital at only 3.08 based on what Activision Blizzard paid to acquire King in 2015.

Netmarble’s 2017 Performance

Our assessment in April 2017 was that Netmarble’s IPO was “priced for perfection” based on a forward price sales ratio of 4.3.  We wrote another paper in May 2017 predicting that the stock would fall 33% from the IPO price to around 105,000 KRW once investors realized that Netmarble’s 2017 sales would fall short of expectations.

To Netmarble’s credit, its performance has been near perfect in the Korean and Japanese releases of Lineage 2.  After a couple of months of drifting downward,  the stock has recovered 47.8% from a low of 127,500 on August 11, 2017, largely due to the strong Japanese release.

On November 15, 2017, Netmarble released Lineage 2 in United States. Our assessment is that the release is a bust as games destined to be long-lasting hits in the USA usually crack the Top 10 iOS revenue rank on the App Annie charts within weeks of release.  The game has now sits at revenue rank #30 which we estimate translates to an annualized run rate in the neighborhood of $75 Million.

Below is the App Annie USA iOS revenue rank chart for Lineage 2:

The stock market has yet to factor in Lineage 2’s bust in the USA.

Also, the 2017 scheduled release of the game in China has been delayed due to geopolitical tensions between the two countries.

Below is a summary of Netmarble’s game performance in 2017 to date:

While Netmarble’s 4th quarter revenue figures should be at an all time high due to the successes of Lineage 2 in Korea and Japan, we forecast that Netmarble will miss analysts’ full year sales estimate of $2.3 Billion (2.5 Trillion KRW), or a revenue doubling,  by 14.8%.

We do not believe that the revenue impacts of the failed USA release and delayed China release are fully understood by investors.  The realization that Netmarble will fail to meet full FY17 revenue doubling forecasts should cause a compression in Netmarble’s IPO valuation multiple of 4.3 times sales.   

Assuming a more realistic multiple of 3.5, we predict that Netmarble’s stock will fall 45% from its November 26, 2017 closing price of 188,500 KRW to around 103,378 KRW within the next three months.

The Bancorp Is Having An “Enron Moment” With Its Unconsolidated LLC

An Enron moment– def. when an accounting ploy to offload toxic assets to an unconsolidated LLC backfires.

The Bancorp’s Continuing Problems

The Bancorp (NASDAQ: TBBK) is a publicly-held Philadelphia regional bank with a diversified loan portfolio, but also known for being one of largest issuers of reloadable prepaid debit and gift cards in the country.

We have written a number of papers since early 2015 detailing its “continuing problems with a discontinued commercial loan operation.” There have been two basic points we have tried to make:

The portfolio was not fairly marked initially because “fairly marked assets sell fairly quickly.”

Once the bank began to take additional markdowns, the hits to equity brought it close to going below the Dodd-Frank standard of a “well-capitalized bank.”


A Deal Between Friends Gone Bad

Buried in The Bancorp’s 3Q17 10-Q filed with the SEC on November 9, 2017, but not mentioned a week earlier when releasing its financials to the public was

Note 13

“The independent investor in Walnut Street, the securitization into which the Bank sold certain loans when it discontinued its Philadelphia commercial loan operations, has taken actions which may result in litigation.  

Specifically, counsel for the independent investor has requested that the Note Administrator hold monthly distribution payments in escrow until the independent investor’s alternative interpretation of the order of payments, as compared to the interpretation of the Bank and the Note Administrator, is resolved.  

Based on the independent investor’s request, the Note Administrator withheld the September 2017 payment to the independent investor and the Bank and indicated that it would continue to do so until this issue was resolved.”  

Based on names in a copy of the Purchase Agreement between The Bancorp and the LLC,  we believe that the sale was between two friendly parties rather than an arm’s-length transaction.

The so-called “independent investor” in the Walnut Street LLC  was Angelo, Gordon & Co (AG & Co.)  out of New York City.  According to its website, AG & Co. is a large $26 Billion manager of  “alternative investments” including commercial real estate mortgage-backed securities (CDOs).  

Legally speaking, AG & Co. is an unrelated, third party to The Bancorp and its Chairman Daniel G. Cohen.  But, AG & Co. is listed as a “banner investor” of a firm that merged into Cohen’s latest concoction — a “blank check” IPO called Fintech Acquisition Corp, which we have written about in our paper Fintech Acquisition “Blank Check” IPO: Buzzy Name Fuzzy Aim.

The  LLC’s “Directing Holder”  was Jonathan Lieberman, head of AG & Co’s considerable commercial and real estate loan trading operations.

The LLC’s  “Designated Manager”  was Kenneth L. Tepper, head of Kildare Financial Group, an independent contractor that has been used by the FDIC to sort out bankruptcy messes.  The initial address for the LLC was c/o PLANcorp in Gladwyne, PA, another Tepper controlled company.

It turns out Tepper has close ties to The Bancorp. According to a Bloomberg bio, Tepper has served as Managing Director of Financial Institutions Group at Cohen & Co, a firm founded by the family of Chairman Daniel G. Cohen.   In short, Kenneth L. Tepper was a front for The Bancorp when it set up the LLC in 2014.

The LLC’s corporate attorney  — Dechert LLP — has close ties  to The Bancorp as Dechert LLP is listed as one of the Bancorp’s corporate attorneys and defended them in an investor lawsuit.

Finally, we just want to mention that the very name for the LLC — Walnut Street 2014-1 Issuer, LLC. — marks the LLC as part of The Bancorp “family”, not a true partnership.

The Bancorp’s founder, Betsy Z. Cohen, the mother of Bancorp Chairman Daniel G. Cohen, was instrumental  reviving the Walnut Street area of downtown Philadelphia in the 1970s by making risky loans to startup restaurants in the area.  It is ironic that the same Walnut Street name that was associated with a civic-minded banker/mother in the 1970’s is now associated with a rule-bending banker/son now.

In sum, the dispute that The Bancorp quietly buried in Note 13 of its 3Q17 10-Q is about a deal between friends gone bad.  

The Toxicity of the Bancorp’s Unconsolidated LLC

On October 31, 2014, The Bancorp announced that it was discontinuing its $1.2 Billion commercial lending operation.  It set aside this portfolio on its balance sheet,  claimed it was marked-to-market, and that the bank was actively seeking buyers.  Since that announcement,  the bank has had considerable trouble selling off the most troubled segments to third-parties.  

On the next to the last trading day of 2014 when most of us are making New Year’s plans, The Bancorp issued a terse 8-K saying it had made the first sale to a partnership called Walnut Street 2014-1 Issuer, LLC.  

What caught our eye initially in early 2015 was NOT the financing structure.  That came out nine months later.  What caught our eye initially was the stark contrast in markdown between the sale portion to the LLC and the remaining portion of the discontinued loan portfolio.



In February, 2017, the Bancorp provided an update  (see above) to the loan portfolio held by its unconsolidated LLC in a note accompanying the release of its 4Q16 financials.

 Based on that information we calculated a 40.6% AVERAGE markdown of the LLC portfolio despite 79% of loan principals were classified “performing.”

What a joke! The incongruity of these two statistics confirms the meaninglessness of “performing” as a sign of loan quality when a loan operation engages in “extend and pretend.”

Obviously, a lot of the so-called “performing” loans had been modified to interest only with a balloon payment after a number of years. And the non-performing loans probably involve skipped balloon payments rather than skipped flat payments according to a normal amortization schedule.

We provided more detail about the Bancorp’s commercial loan operations that spawned this toxic loan portfolio in our February 2017 paper The Bancorp: An ‘Extend And Pretend’ Loan Operation That Won’t Go Away.


The Convoluted Structure of the Bancorp’s Unconsolidated LLC

Nine months after the Bancorp finally issued its 2014 10-K (another bank debacle detailed by us elsewhere), the bank revealed that it did not consolidate this LLC into its balance sheet despite the fact that the overwhelming proportion of the LLC’s financing came from the sale of notes back to The Bancorp itself.  The table below is our presentation of the variable interests in the LLC as detailed in Note H of the bank’s 10-Ks:


In electing not to consolidate, The Bancorp cited almost verbatim in Note H of its 2014 10-K (filed 9 months late), and in its 2015 10-K,  the criteria for consolidation specified in FASB 46R – Statement 167:

“(1) the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance; and

(2) through its interests in the VIE, the obligation to absorb losses or the right to receive benefits from the VIE that could potentially be significant to the VIE.”

The fact that bank waited until the day before New Year’s to disclose this sale in a terse 8-K plus the fact that the structure of the deal was so convoluted,  giving its partner 51% of the voting stock despite practically no “skin in the game”,  suggested to us right from beginning that The Bancorp was testing the limits of Post-Enron GAAP.

In Note H of its 10-K, the bank had nothing to say about who had the most power to make decisions that affected the performance of the LLC.  It just ended the note abruptly with this conclusion:  “The company is not the primary beneficiary, as it does not have the controlling financial interest in WS 2014 (the LLC)  and therefore does not consolidate.”

We have written an accounting paper, The Bancorp: A Test for Post-Enron GAAP, presenting more evidence in support of our believe that it is The Bancorp that controls the LLC and not it’s so-called independent partner Angelo, Gordon & Co with 51% of the equity.   

In previous papers, we suggested that the bank’s independent auditor, Grant Thornton LLP, take a harder look at the Bank’s election not to consolidate.   We renew that suggestion here.  Oh…wait…

We see that in July 2017, The Bancorp appointed Mr. Armondo Burnette as Chief Audit Executive and Managing director.  The Bancorp’s website says

He will work with the Audit Committee and Executive Management to assess, direct and maintain The Bancorp’s audit management plan and oversee internal audits, risk assessments and audit finding remediation”.

It also says that

“Most recently, he was Director, National Business Advisory Services, for Grant Thornton LLP”


The Bancorp’s “Enron Moment”

An Enron moment– def. when an accounting ploy to offload toxic assets to an unconsolidated LLC backfires.

Clearly,  the so-called independent partner Angelo, Gordon & Co. (AG&Co) is not happy with the performance of the LLC and wants more cash out now.

AG&Co is a savvy player in the distressed commercial real estate market. They must have had a plan to get enough cash out early to more than cover their $16 Million investment before the flood of defaults inevitably arrives.

The LLC is clearly unprofitable.  Portfolio interest income (cash and accrued) is not enough to offset the $24 Million (non-cash) expense of additional markdowns plus the $6.6 Million in notes payable interest (cash) to The Bancorp and considerable legal expenses (cash).  

Even without precise numbers to calculate profitability, the LLC’s is clearly insolvent (assets – liabilities < 0) with $24 Million in additional markdowns since inception wiping out the $16 Million in initial equity.

The LLC is overall cash flow positive only because of the $24 Million in paydowns.

In our opinion, AG&Co has the edge in this dispute as they have 51% of the voting stock.  Even though there might have been documents created at the LLC’s inception that support the Bancorp’s position as to the distribution of cash to partners, it would seem to us that AG&Co has enough votes to rewrite these instructions in their favor.

The moral of this story is that you cannot both control and not control an unconsolidated LLC with a convoluted ownership structure.