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Internet/Game Bet on Korean Internet Stocks in 2015

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Internet/Game Bet on Korean Internet Stocks in 2015 Internet/Game Bet on Korean internet stocks in 2015 2015 could be the year of Korean internet stocks Overweight (Maintain) In 2014, Chinese internet companies, led by Alibaba, made huge advances in both 2015 Outlook earnings and share prices. We believe this was the result of a combination of factors, including the Chinese government’s staunch support of the company , an enormous December 1, 2014 domestic market, and the adoption of proven monetization models from the US and Korea. Daewoo Securities CCCo.,Co., Ltd. Alibaba’s online payment platform Alipay is similar to eBay’s Paypal, while Taobao’s [Internet/Game/Entertainment] marketplace is comparable to other C2C shopping sites like Korea’s Gmarket. Tencent’s mobile instant messaging app Wechat features the same services as KakaoTalk and LINE, Chang-kwean Kim and has seen rapid growth in 2014 driven by its mobile game center. +822-768-4321 [email protected] Major Korean internet and game companies are poised to deliver new monetization Jeong-yeob Park models that are optimized for the mobile environment in 2015. NAVER is targeting the +822-768-4124 Japanese market with its LINE Pay service, while Daum Kakao is eyeing the domestic [email protected] market with Kakao Pay and Bank Wallet Kakao. NCsoft is getting ready to take on multi- platforms and cross-border ma rkets by incorporating cloud technology to its upcoming new releases Master X Master (MXM) and Lineage Eternal. In 2014, NAVER unveiled a mobile-only search ad service with a more sophisticated interface and pricing system than Google’s. The company was a lso one step ahead of Facebook in adopting mobile “checkout”, a service that allow users to purchase a variety of products offered by different online shops using a single NAVER account. We believe China’s mobile market, the primary driver of Chinese inter net companies, will peak in 2015, as smartphone penetration nears 70%, similar to developed market levels. Buy NAVER and NCsoft In 2013, global mobile stocks rose sharply, fueled by Facebook’s strong mobile ad growth. In 2014, Chinese internet stocks rallied following Alibaba’s IPO. We believe 2015 will be the year of Korean internet stocks driven by new growth stories, such as mobile payment, offline-to-online (O2O) commerce, omni channel and cloud games. Foreign investors are always on the lookout for fresh stories as they tend to be more rewarding than familiar themes. With China’s internet growth story already played out , we believe Korean internet shares make for a more compelling play. NAVER’s market cap respective to Google and Alibaba is just 6.1% and 8.1%, while Daum Kakao’s is only 2% and 2.7%. Based on monthly active users (MAU), LINE and KakaoTalk are respectively valued at US$81 and US$64 per user, cheaper than Facebook (US$155) and Twitter (US$98). We recommend overweighting NAVER (035420 KS/Buy/TP: W1,050,000) and NCsoft (036570 KS/Buy/TP: W220,000). NAVER has been at the forefront in introducing new mobile monetization models in domestic and overseas markets. NCsoft is likely to announce shareholder friendly policies (dividends an d buybacks), which should provide downside support to shares. For Daum Kakao (035720 KQ/Buy/TP: W172,000), share performance will likely hinge on the number of merchants that sign up for Bank Wallet Kakao (to be unveiled mid- December) and the potential eff ects of promotions. Interpark INT (108790 KQ/Buy/TP: W30,000) has continued robust growth in the tourism unit , but we believe investors should wait for the company’s 4Q earnings report to confirm a recovery at its book unit. Analysts who prepared this report are registered as research analysts in Korea but not in any other jurisdiction, including t he U.S. PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES & DISCLAIMERS IN APPENDIX 1 AT THE END OF REPORT. December 1, 2014 Internet/Game C O N T E N T S I. 2014 review 3 2014: Chinese internet firms delivered remarkable performances 3 II. 2015 outlook 7 Mobile payments becoming widespread 7 III. Three-year outlook 9 1. Internet sector 9 2. Games 13 V. Valuation & investment strategy 16 Attractiveness of Korean internet stocks 16 NAVER (035420 KS) 23 NCsoft (036570 KS) 26 Daum Kakao (035720 KQ) 29 Interpark INT (108790 KQ) 32 KDB Daewoo Securities Research 2 December 1, 2014 Internet/Game I. 2014 review 2014: Chinese internet firms delivered remarkable performances In 2014, Alibaba made history with the largest global IPO (Bloomberg ticker: BABA US Equity). Alibaba was priced at US$68 amid strong interest and surged 38% on the first day of trading. The Chinese e-commerce company currently has a market cap of US$282bn, ranking second among internet firms after Google on the New York Stock Exchange. Other major Chinese internet firms, such as Tencent and Baidu, also delivered robust share performances this year. In particular, Chinese internet stocks have sharply advanced since Alibaba’s IPO, as it brought global attention to the Chinese internet market. Among US internet firms, Facebook was the only one that displayed solid share performance. The company continued to attract users by acquiring mobile firms with high growth potential, including WhatsApp, while its mobile ad revenues increased steadily. Meanwhile, shares of mobile internet companies, including Twitter and Linkedin, and internet companies with higher PC-based revenue contributions, including Google, Amazon, and Ebay, moved sideways or declined through the year. With regard to domestic internet firms, Daum Kakao, which merged in October, was the only internet stock to have advanced YoY. Shares of NAVER and Interpark INT were range-bound throughout the year. NAVER postponed the IPO of LINE, and its mobile ad revenue increased only modestly. Interpark INT failed to deliver earnings improvement due to decreased profitability. Among game companies, shares of Com2uS which made global success with the role-playing game (RPG) Summoners War, and Gamevil (Com2uS’s largest shareholder), advanced most sharply. Their robust share performances are attributable to 1) in-house game development, 2) game distribution via in-house platform, instead of LINE or KakaoTalk, and 3) greater success in the global market, than the domestic market. It has been six years since the iPhone 3 was released in 2009. Since the maturation of the domestic mobile internet market, no new player has emerged with a major breakthrough service. Although Telegram gained popularity temporarily due to KakaoTalk’s security issues, there was no change in KakaoTalk’s subscriber data. Looking back in 2014, we believe that sustainability or scalability of a revenue model is now more important than regional merits or traffic. Figure 111.1. Market cap. of major global internet companies (US$bn) 240 NAVER's market cap (W23tr) as a % of 200 Google's is 6.1% Alibaba's is 8.1% 160 Facebook's is 10.3% 370 120 275 Daum Kakao's market cap (W8tr) as a % of Google's is 2.0% 80 Alibaba's is 2.7% Facebook's is 3.4% 40 0 Source: Bloomberg, KDB Daewoo Securities Research KDB Daewoo Securities Research 3 December 1, 2014 Internet/Game Figure 222.2. USUSUS internet stocks Figure 333.3. Chinese internet stocks (-1Y=100p) Google Amazon.com Ebay (-1Y=100p) Tencent Alibaba Baidu 200 Facebook Twitter LinkedIn 160 Sina Weibo Groupon US internet shares other than Facebook 160 have slowed during the year 130 120 100 Shares with sizable M/S have outperformed 80 70 40 40 11/13 1/14 3/14 5/14 7/14 9/14 11/14 11/13 1/14 3/14 5/14 7/14 9/14 11/14 Source: Thomson Reuter, KDB Daewoo Securities Research Source: Thomson Reuter, KDB Daewoo Securities Research Figure 444.4. Korean internet stocks Figure 555.5. Mobile game stocks (-1Y=100p) (-1Y=100p) 220 NAVER 800 Gamevil Daum Kakao Com2us Interpark INT 650 Wemade 180 Zynga Daum Kakao shares have increased Dena post merger 500 Gungho Online 140 350 Com2us' shares surged with global success of Summoners War 100 200 60 50 11/13 1/14 3/14 5/14 7/14 9/14 11/14 11/13 1/14 3/14 5/14 7/14 9/14 11/14 Source: Thomson Reuter, KDB Daewoo Securities Research Source: Thomson Reuter, KDB Daewoo Securities Research Figure 666.6. Console game stocks Figure 777.7. PC game stocks (-1Y=100p) (-1Y=100p) NCsoft Neowiz Games NHN Entertainment Tencent 220 160 Activision Blizzard NetEase Nexon EA EA's shares have increased on 190 Nintendo successful expansion to mobile Sega Sammy 130 Namco Bandai 160 130 100 100 70 70 40 40 11/13 1/14 3/14 5/14 7/14 9/14 11/14 11/13 1/14 3/14 5/14 7/14 9/14 11/14 Source: Thomson Reuter, KDB Daewoo Securities Research Source: Thomson Reuter, KDB Daewoo Securities Research KDB Daewoo Securities Research 4 December 1, 2014 Internet/Game Figure 888.8. Monthly unique visitors on PC web & appappssss (mn persons) 40 94.7% of PC users visit NAVER web site 30 82.1% of PC users visit Daum web site 20 29.2% of PC users visit Kakao web or KakaoTalk PC 10 0 Source: Koreanclick, KDB Daewoo Securities Research Figure 999.9. Monthly unique visitors on mobile web & appappssss (mn persons) 96.8% of mobile users visit 30 Kakao mobile web or use Kakao apps 93.4% of mobile users visit NAVER mobile web or use NAVER apps 20 48.8% of mobile users visit facebook mobile web or use facebook apps 10 0 Source: Koreanclick, KDB Daewoo Securities Research Figure 101010.10 .
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