Lee Gyu-sun is the chief of the smallcap research team at Daewoo Securities.

By Lee Gyu-sun

Golfzon is a major beneficiary of the huge popularity of indoor golf courses, owning an 84 percent share of the golf simulation market. Sales of golf simulators accounted for 81 percent of the company’s sales as of 2010, but, recently, online content sales (such as downloading of new course data) are driving the company’s top-line growth.

Golfzon plans to directly operate indoor golf ranges where GDRs (Golfzon driving ranges) are installed starting in May 2011. The company is also attempting to expand into overseas markets, launching subsidiaries in Japan, Hong Kong, and China (in May 2011), and holding introductory sessions in Canada.

Sales strong in 2011

Although golf simulator sales volume is expected to shrink, the company’s online service sales are projected to surge on the back of the ongoing replacement of golf ranges with simulators that require fee-based network services. In 2011, Golfzon’s overseas simulator sales, online service sales, and golf item sales are projected to jump 65.4 percent, 266.0 percent, and 53.5 percent from 2010, respectively.

However, Golfzon’s 2011 operating profit margin is forecast to drop due to increases in personnel expenses (related to R&D hires, and overseas expansion) and marketing costs (related to new product launches). As the applicable corporate tax rate increased to 12 percent in 2011 from 4.9 percent in 2010, earnings-per-share growth may be limited.

It’s a computer game company

We believe that Golfzon should be viewed as a game company that specializes in a specific genre. The company is providing entertainment to customers just like other conventional game companies that specialize in arcade, console or online games.

Second, the company’s growth strategy is similar to that of game companies. Golfzon plans to expand its overseas market share and advance into businesses related to golf simulation, including the operation of indoor golf ranges. In addition, the company has improved its profit margin by launching high-end products and increased content sales. This strategy is similar to that of companies that produce Web board games (like Matgo), casual games (such as baseball and gun shooting), and the so-called MMORPGs.

Therefore, the company’s valuation will likely depend on future growth potential, as is the case with game companies. We believe that Golfzon shares should trade at a price-earnings ratio (P/E) of 15.8, which is the 2010 average of small- and medium-sized game companies. This means that the target share price of the firm would be 86,300 won, based on its 2010 earnings.

Business portfolio

Golfzon’s sales include golf simulators for indoor golf ranges (81 percent of 2010 sales), distribution and sale of golf equipment, including clubs, balls, and gloves (11 percent), and online download services through which the company provides course data.

Golfzon launched the P-type golf simulator in 2002. Subsequently, it introduced the S-type simulator in 2004, the N-type in 2008, and the R-type in early 2011. In the second half of this year, the company is scheduled to launch the premium 3R-type simulator. The company’s market share has risen steadily from 61 percent in 2008 to 77 percent in 2009 and 84 percent in 2010.

Currently, Golfzon is concentrating on developing new products and upgrading existing content. The company sells products through four major distributors and outsources production. Subsidiaries include Golfzon Networks, which installs products and provides maintenance services, Golfzon Japan and Golfzon Hong Kong.

In May 2011, the company is slated to establish another wholly-owned subsidiary, Golfzon China.

The largest shareholders Kim Won-il (holding 44.6 percent) and affiliates, whose combined stakes account for 63.4 percent of the company’s total shares, are subject to a lockup ― three years for the largest shareholder and one year for affiliates.

Lee Gyu-sun is the chief of the small-cap research team at Daewoo Securities.