Major domestic game companies that benefited from the strong dollar in the first half now face a headwind from a stronger won. Over the past two months, the won has risen by around 10% against key currencies such as the dollar, yen and yuan, raising the possibility that overseas revenue converted into won will shrink. In addition, companies with large foreign-currency financial assets, such as Krafton and Pearl Abyss, could see the won-converted value of those assets fall by tens of billions of won. Still, expenses paid in foreign currency will also decrease, and the size of foreign-currency assets and liabilities and hedging strategies differ by company, so the actual impact on results is expected to vary.
According to the Bank of Korea on the 28th, the won-dollar exchange rate fell 10.9% from 1,549.4 won on June 30 to 1,380.9 won on the 27th of this month. During the same period, the won-yen rate fell 9.3% from 954.95 won per 100 yen to 866.58 won, and the won-yuan rate fell 10.0% from 228.18 won to 205.45 won. In other words, the won has risen by around 10% against major currency over the past two months.
◇ More than 90% of revenue overseas… from strong-dollar boost to a headwind
Korea's game industry is sensitive to exchange-rate swings because overseas revenue makes up a high share. As of the first half, SHIFT UP's overseas revenue ratio reached 99.4%. Krafton (93.6%) and Pearl Abyss (93.5%) also earned most of their total revenue overseas. Even NCSOFT, with a relatively lower overseas share, generated about 27% of its total revenue abroad.
Until now, a weaker won had been favorable for game companies' results. Even with the same amount of sales overseas, converting into won makes the revenue larger. In fact, the won-dollar rate, which was around 1,339 won on Aug. 28, 2024, rose to the 1,549 won range at the end of June this year. But as the won has strengthened, the won-converted revenue is inevitably decreasing even if local sales remain the same.
A game-industry official said, "As overseas revenue shares have been increasing for game companies recently, exchange-rate changes inevitably have a direct impact on results."
◇ Krafton with 1.7 trillion won in foreign-currency assets… 70.7 billion won decrease on a 5% won appreciation
A more direct way to see the impact of a stronger won is the foreign-currency-denominated financial assets held by game companies. Corporations do not immediately convert overseas revenue into won. They also hold foreign currency in the form of cash, deposits and trade receivables for overseas operations, investment and liquidity management.
According to each company's semiannual report, Krafton held a total of 1.7561 trillion won in foreign-currency financial assets as of the end of June this year. Of that, U.S. dollar (USD)-denominated foreign-currency financial assets accounted for most, at about 1.6199 trillion won.
Krafton also disclosed the impact of exchange-rate changes on profit and loss before income tax expense, assuming all other variables remain constant and the won appreciates by 5%. A won appreciation would reduce foreign-currency financial assets by about 87.8 billion won, while foreign-currency financial liabilities would show an increase effect of about 17.1 billion won as their won-converted amount decreases. Combined, profit and loss before income tax expense would decrease by about 70.7 billion won.
Pearl Abyss also held 470.4 billion won in foreign-currency financial assets as of the end of June. The company analyzed that if major foreign exchange rates fall 5% against the won, other comprehensive income would decrease by about 22.7 billion won.
The issue is that the actual exchange-rate swing far exceeded the 5% assumed in the two companies' sensitivity analyses. Assuming the size of foreign assets and foreign liabilities at the end of June remained the same and applying the recent drop in exchange rates, the combined effect of lower foreign-asset values and reduced foreign-liability amounts is estimated to result in a decrease in won-converted value of about 150 billion won for Krafton and about 48 billion won for Pearl Abyss.
◇ NCSOFT and SHIFT UP cut foreign-currency assets… reducing exchange-rate exposure
By contrast, some lowered their risk to the recent stronger won by reducing foreign-currency assets in the first half. On a consolidation basis, NCSOFT's amount of foreign-currency monetary assets minus foreign-currency monetary liabilities fell about 34% from about 1.0236 trillion won at the end of last year to 676.9 billion won at the end of June this year. In particular, dollar-denominated monetary assets fell by 358.2 billion won over the same period, from about 900.8 billion won to 542.6 billion won.
SHIFT UP also reduced foreign-currency monetary assets from about 339.6 billion won at the end of last year to 227.5 billion won at the end of June this year. As a result, the negative impact on pre-tax profit and loss from a 10% won appreciation decreased from about 32.3 billion won at the end of last year to about 21.0 billion won at the end of June this year.
Meanwhile, a stronger won is not an across-the-board negative for game companies' results. Expenses paid in foreign currency, such as labor costs at overseas subsidiaries and local marketing expenses, also decrease when converted into won. Corporations holding foreign-currency liability see the won-converted amount they must repay decline when the won strengthens, and using hedging tools such as forward contracts can partially offset the impact of lower converted values of foreign assets.
Another game-industry official said, "The impact of exchange-rate changes on results differs by company because overseas revenue and the structure of foreign-currency assets and liabilities vary," and added, "We manage exchange-rate risk by adjusting the ratio of foreign-currency assets to liabilities or by using hedging tools."