Kakao (035720 KS ) Start of an earnings surprise cycle

Internet Earnings momentum comes a quarter earlier than expected Company Report For 1Q19, Kakao announced of W706.3bn (+27.2% YoY) and operating profit of May 10, 2019 W27.7bn (+166.5% YoY), topping our expectations (W671bn and W18bn, respectively) and the consensus (W662bn and W21.3bn, respectively).

The earnings beat was attributable to stronger-than-projected growth in Talk Biz (KakaoTalk-related revenue), New Biz (Kakao Pay and Kakao Mobility), and paid content (Maintain) Buy (Kakao Page and Japan-based Piccoma). In addition to earnings, the company highlighted a number of positive business Target Price (12M, W) 170,000 indicators, including Kakao Pay’s strong transaction volume (W10tr in 1Q19, versus W20tr in 2018), Kakao Page’s record-high transaction volume (W63bn), and a 177% YoY Share Price (05/09/19, W) 126,500 surge in Piccoma’s revenue. We believe such indicators paint a bullish picture for future earnings. Expected Return 34% Earnings expectations reset higher

On its earnings call, management expressed strong confidence in KakaoTalk chat tab OP (19F, Wbn) 195 ads (product name “Bizboard”), which began trial services on May 2 nd . For 2019, Consensus OP (19F, Wbn) 144 management guided a 20% increase in overall ad s ales and more than 50% increase in EPS Growth (19F, %) 127.8 Talk Biz ad sales. Market EPS Growth (19F, %) -18.5 Despite unfavorable seasonality, Talk Biz revenue grew 43% YoY in 1Q19, suggesting P/E (19F, x) 90.6 increased ad inventory (number of advertiser accounts) on KakaoTalk’s “#” tab. Market P/E (19F, x) 11.7 Advertiser response to KakaoTalk ads has continued to be positive overall. KOSPI 2,102.01 Following the 1Q19 earnings report, we are revising our 2019-20 revenue forecasts Market Cap (Wbn) 10,550 upward by 1.6% and 1.9%, respectively, and our 2019-20 operating profit forecasts by Shares Outstanding (mn) 83 33.4% and 7.1%, respectively. Any positive signs in Bizboard ad sales after May-June Free Float (%) 62.6 could prompt additional upward revisions to our earnings estimates. Foreign Ownership (%) 25.5 Beta (12M) 0.76 Maintain Buy and TP of W170,000 52-Week Low 87,600 We expect revenue from new businesses to begin outpacing spending in 2019, leading 52-Week High 128,500 to margin improvements. We bel ieve such earnings momentum has become even (%) 1M 6M 12M more visible with the latest earnings announcement. Absolute 25.9 25.9 11.9 The sharp increase in Kakao Pay’s transaction volume and financial product sales and Relative 32.6 24.9 30.2 Kakao Mobility’s strong revenue growth (driven by chauffeur service commi ssions) shown in the 1Q19 results also bode well for the company’s long-term growth outlook. 120 Kakao KOSPI 110 We reaffirm our Buy call and target price of W170,000 on Kakao. Our target price is 100 based on our 2020 revenue forecasts of each business division and the 2020F av erage 90 P/S ratio of domestic and foreign peers. 80 70 60 4.18 8.18 12.18 4.19

Mirae Daewoo Co., Ltd.

[ Internet ] FY (12) 12/16 12/17 12/18 12/19F 12/20F 12/21F Revenue (Wbn) 1,464 1,972 2,417 3,018 3,658 4,328 Chang -kwean Kim +822 -3774 -1614 OP (Wbn) 116 165 73 195 421 555 [email protected] OP margin (%) 7.9 8.4 3.0 6.5 11.5 12.8

NP (Wbn) 58 109 48 116 303 392 EPS (W) 874 1,602 613 1,397 3,637 4,703 ROE (%) 1.9 2.9 1.0 2.2 5.6 6.8

P/E (x) 88.1 85.5 168.0 90.6 34.8 26.9 P/B (x) 1.5 2.3 1.7 2.0 1.9 1.8 Dividend yield (%) 0.2 0.1 0.1 0.1 0.1 0.1 Note: All figures are based on consolidated K-IFRS; NP refers to net profit attributable to controlling interests Source: Company data, Mirae Asset Daewoo Research estimates

May 10, 2019 Kakao

Table 1. Quarterly and annual earnings (Wbn, % ) 1Q18 2Q18 3Q18 4Q18 1Q19 2Q19F 3Q19F 4Q19F 2018 2019F 2020F Revenue 555 589 599 673 706 736 746 830 2,417 3,018 3,658 Platform 232 251 253 303 313 331 327 345 1,039 1,316 1,725 Talk Biz 89 98 107 128 127 136 141 145 421 549 841 Portal Biz 122 128 116 130 126 133 120 131 495 510 513 New Biz 22 25 30 45 60 62 65 69 123 257 370 Content 323 338 346 370 393 405 419 485 1,378 1,702 1,933 Game 106 112 99 100 94 97 96 150 417 437 456 Music 126 130 136 140 137 143 149 155 533 584 611 Paid content 44 51 60 63 75 83 92 97 218 345 480 IP Business and others 48 45 50 67 87 82 82 83 209 335 385 Operating profit 10 28 31 4 28 45 46 59 73 195 421 OP margin 1.9 4.7 5.1 0.6 3.9 6.1 6.1 7.1 3.0 6.5 11.5 Net profit 15 25 7 -29 18 27 32 38 16 115 297 Net margin 2.6 4.3 1.2 -4.3 2.5 3.7 4.3 4.6 0.7 3.8 8.1 YoY growth Revenue 25.2 25.7 16.3 23.6 27.2 25.0 24.4 23.2 22.5 24.9 21.2 Platform 29.5 22.9 21.1 30.5 34.8 31.8 29.3 13.8 26.0 26.6 31.1 Talk Biz 78.5 73.7 51.8 56.4 43.3 39.3 32.0 13.3 63.2 30.4 53.2 Portal Biz 3.9 -2.1 -6.2 -1.2 3.9 3.7 4.1 0.6 -1.5 3.0 0.6 New Biz 73.9 49.0 100.7 137.6 171.6 147.0 115.6 53.1 92.7 109.0 44.2 Content 22.2 27.9 13.0 18.5 21.7 19.9 20.9 30.9 20.0 23.5 13.6 Game 31.5 41.9 5.8 12.5 -10.9 -12.9 -3.8 49.7 21.9 4.8 4.3 Music 14.5 11.4 11.4 8.6 8.7 9.7 9.7 10.5 11.3 9.7 4.6 Paid content 77.4 75.2 69.0 69.1 70.6 62.5 51.5 52.5 72.1 58.2 39.1 IP Business and others -3.3 13.8 -7.9 17.2 83.7 83.1 63.2 25.0 4.7 60.0 15.0 Operating profit -72.9 -38.1 -35.2 -87.6 166.5 62.0 48.8 1263.3 -55.8 167.2 116.1 OP margin -73.1 103.8 -81.5 TTR 19.9 6.5 337.1 TTB -87.3 624.8 158.3 Source: Company data, Mirae Asset Daewoo Research estimates

Table 2. Earnings forecast revisions (Wbn, %) Previous Revised %chg. Notes 2019F 2020F 2019F 2020F 2019F 2020F Revenue 2,971 3,591 3,018 3,658 1.6 1.9 Operating profit 146 393 195 421 33.4 7.1 Reflects variables Net profit 113 289 115 297 1.9 2.9 confirmed in 1Q19 results OP margin 4.9 10.9 6.5 11.5 - - Net margin 3.8 8.0 3.8 8.1 - - Source: Company data, Mirae Asset Daewoo Research estimates

Mirae Asset Daewoo Research 2 May 10, 2019 Kakao

Kakao (035720 KS/Buy/TP: W170,000)

Comprehensive (Summarized) Statement of Financial Condition (Summarized) (Wbn) 12/18 12/19F 12/20F 12/21F (Wbn) 12/18 12/19F 12/20F 12/21F Revenue 2,417 3,018 3,658 4,328 Current 2,859 3,204 3,940 4,763 Cost of Sales 0 0 0 0 and Cash Equivalents 1,247 1,197 1,514 1,897 Gross Profit 2,417 3,018 3,658 4,328 AR & Other Receivables 194 242 293 347 SG&A 2,344 2,823 3,237 3,773 Inventories 36 45 54 64 Operating Profit (Adj) 73 195 421 555 Other Current Assets 1,382 1,720 2,079 2,455 Operating Profit 73 195 421 555 Non-Current Assets 5,101 5,168 5,163 5,180 Non-Operating Profit 58 0 38 67 Investments in Associates 305 381 462 547 Net Financial Income 32 43 53 66 Property, Plant and Equipment 315 340 282 235 Net Gain from Inv in Associates 7 0 0 0 Intangible Assets 3,865 3,804 3,748 3,697 Pretax Profit 131 195 459 622 Total Assets 7,960 8,371 9,103 9,944 Income Tax 115 80 162 237 Current Liabilities 2,039 2,285 2,664 3,061 Profit from Continuing Operations 16 114 297 384 AP & Other Payables 461 575 697 825 Profit from Discontinued Operations 0 0 0 0 Short-Term Financial Liabilities 623 517 521 526 Net Profit 16 114 297 384 Other Current Liabilities 955 1,193 1,446 1,710 Controlling Interests 48 116 303 392 Non-Current Liabilities 293 355 421 489 Non-Controlling Interests -32 -2 -6 -8 Long-Term Financial Liabilities 45 45 45 45 Total Comprehensive Profit 24 114 297 384 Other Non-Current Liabilities 248 310 376 444 Controlling Interests 59 131 302 390 Total Liabilities 2,332 2,640 3,084 3,550 Non-Controlling Interests -35 -17 -4 -6 Controlling Interests 5,137 5,243 5,537 5,919 EBITDA 208 331 536 652 Capital Stock 42 42 42 42 FCF (Free Cash Flow) 394 451 733 818 Capital Surplus 4,648 4,648 4,648 4,648 EBITDA Margin (%) 8.6 11.0 14.7 15.1 Retained Earnings 453 560 853 1,235 Operating Profit Margin (%) 3.0 6.5 11.5 12.8 Non-Controlling Interests 490 488 482 474 Net Profit Margin (%) 2.0 3.8 8.3 9.1 Stockholders' 5,627 5,731 6,019 6,393

Cash Flows (Summarized) Forecasts/Valuations (Summarized) (Wbn) 12/18 12/19F 12/20F 12/21F 12/18 12/19F 12/20F 12/21F Cash Flows from Op Activities 491 551 733 818 P/E (x) 168.0 90.6 34.8 26.9 Net Profit 16 114 297 384 P/CF (x) 49.1 36.8 20.3 16.2 Non-Cash Income and 148 172 223 268 P/B (x) 1.7 2.0 1.9 1.8 68 75 59 46 EV/EBITDA (x) 35.3 27.1 15.6 11.7 Amortization 67 61 56 51 EPS (W) 613 1,397 3,637 4,703 Others 13 36 108 171 CFPS (W) 2,099 3,437 6,241 7,822 Chg in Working Capital 329 301 321 336 BPS (W) 61,614 62,880 66,397 70,979 Chg in AR & Other Receivables -1 -48 -51 -54 DPS (W) 127 127 127 127 Chg in Inventories -9 -9 -9 -10 Payout ratio (%) 63.3 8.8 3.4 2.6 Chg in AP & Other Payables 154 7 8 8 Dividend Yield (%) 0.1 0.1 0.1 0.1 Income Tax Paid -141 -80 -162 -237 Revenue Growth (%) 22.6 24.9 21.2 18.3 Cash Flows from Inv Activities -1,261 -409 -329 -345 EBITDA Growth (%) -29.5 59.1 61.9 21.6 Chg in PP&E -85 -100 0 0 Operating Profit Growth (%) -55.8 167.1 115.9 31.8 Chg in Intangible Assets -45 0 0 0 EPS Growth (%) -61.7 127.9 160.3 29.3 Chg in Financial Assets -449 -309 -329 -345 Accounts Receivable Turnover (x) 13.0 13.9 13.7 13.5 Others -682 0 0 0 Inventory Turnover (x) 84.2 74.9 73.9 73.1 Cash Flows from Fin Activities 891 -116 -6 -6 Accounts Payable Turnover (x) 0.0 0.0 0.0 0.0 Chg in Financial Liabilities -129 -106 4 4 ROA (%) 0.2 1.4 3.4 4.0 Chg in Equity 1,052 0 0 0 ROE (%) 1.0 2.2 5.6 6.8 Dividends Paid -12 -10 -10 -10 ROIC (%) 0.3 4.9 11.3 16.0 Others -20 0 0 0 Liability to Equity Ratio (%) 41.4 46.1 51.2 55.5 Increase (Decrease) in Cash 130 -50 317 383 Current Ratio (%) 140.2 140.2 147.9 155.6 Beginning Balance 1,117 1,247 1,197 1,514 Net Debt to Equity Ratio (%) -30.9 -36.2 -44.7 -52.9 Ending Balance 1,247 1,197 1,514 1,897 Interest Coverage Ratio (x) 7.8 24.8 58.4 76.5 Source: Company data, Mirae Asset Daewoo Research estimates

Mirae Asset Daewoo Research 3 May 10, 2019 Kakao

APPENDIX 1

Important Disclosures & Disclaimers 2-Year Rating and Target Price History

Company (Code) Date Rating Target Price (W) Kakao Kakao (035720) 05/01/2019 Buy 170,000 200,000 11/26/2018 Buy 130,000 08/27/2018 No Coverage 150,000 08/10/2018 Buy 150,000 05/11/2018 Trading Buy 130,000 100,000 02/08/2018 Trading Buy 150,000 50,000 12/17/2017 Trading Buy 170,000

11/05/2017 Buy 190,000 0 08/10/2017 Buy 130,000 May 17 May 18 May 19 06/18/2017 Buy 125,000 05/11/2017 Buy 115,000 04/04/2017 Buy 105,000

Stock Ratings Industry Ratings Buy : Relative performance of 20% or greater Overweight : Fundamentals are favorable or improving Trading Buy : Relative performance of 10% or greater, but with volatility Neutral : Fundamentals are steady without any material changes Hold : Relative performance of -10% and 10% Underweight : Fundamentals are unfavorable or worsening Sell : Relative performance of -10% Ratings and Target Price History (Share price (─), Target price (▬), Not covered ( ■), Buy (▲), Trading Buy (■), Hold (●), Sell ( ◆)) * Our investment rating is a guide to the relative return of the stock versus the market over the next 12 months. * Although it is not part of the official ratings at Mirae Asset Daewoo Co., Ltd., we may call a trading opportunity in case there is a technical or short-term material development. * The target price was determined by the research analyst through valuation methods discussed in this report, in part based on the analyst’s estimate of future earnings. * The achievement of the target price may be impeded by risks related to the subject securities and companies, as well as general market and economic conditions.

Equity Ratings Distribution & Investment Banking Services Buy Trading Buy Hold Sell Equity Ratings Distribution 83.52% 8.24% 8.24% 0.00% Investment Banking Services 82.61% 4.35% 13.04% 0.00% * Based on recommendations in the last 12-months (as of March 31, 2019)

Disclosures As of the publication date, Mirae Asset Daewoo Co., Ltd. has acted as a liquidity provider for equity-linked warrants backed by shares of Kakao as an underlying asset; other than this, Mirae Asset Daewoo has no other special interests in the covered companies.

Analyst Certification The research analysts who prepared this report (the “Analysts”) are registered with the Korea Financial Investment Association and are subject to Korean securities regulations. They are neither registered as research analysts in any other jurisdiction nor subject to the laws or regulations thereof. Each Analyst responsible for the preparation of this report certifies that (i) all views expressed in this report accurately reflect the personal views of the Analyst about any and all of the issuers and securities named in this report and (ii) no part of the compensation of the Analyst was, is, or will be directly or indirectly related to the specific recommendations or views contained in this report. Mirae Asset Daewoo Co., Ltd. (“Mirae Asset Daewoo”) policy prohibits its Analysts and members of their households from owning securities of any company in the Analyst’s area of coverage, and the Analysts do not serve as an officer, director or advisory board member of the subject companies. Except as otherwise specified herein, the Analysts have not received any compensation or any other benefits from the subject companies in the past 12 months and have not been promised the same in connection with this report. Like all employees of Mirae Asset Daewoo, the Analysts receive compensation that is determined by overall firm profitability, which includes from, among other business units, the institutional equities, investment banking, proprietary trading and private client division. At the time of publication of this report, the Analysts do not know or have reason to know of any actual, material conflict of interest of the Analyst or Mirae Asset Daewoo except as otherwise stated herein.

Disclaimers This report was prepared by Mirae Asset Daewoo, a broker-dealer registered in the Republic of Korea and a member of the Korea Exchange. Information and opinions contained herein have been compiled in good faith and from sources believed to be reliable, but such information has not been independently verified and Mirae Asset Daewoo makes no guarantee, representation or warranty, express or implied, as to the fairness, accuracy, completeness or correctness of the information and opinions contained herein or of any translation into English from the Korean language. In case of an English translation of a report prepared in the Korean language, the original Korean language report may have been made available to investors in advance of this report. The intended recipients of this report are sophisticated institutional investors who have substantial knowledge of the local business environment, its common practices, laws and principles and no person whose receipt or use of this report would violate any laws or regulations or subject Mirae Asset Daewoo or any of its affiliates to registration or licensing requirements in any jurisdiction shall receive or make any use hereof. This report is for general information purposes only and it is not and shall not be construed as an offer or a solicitation of an offer to effect transactions in

Mirae Asset Daewoo Research 4 May 10, 2019 Kakao

any securities or other financial instruments. The report does not constitute investment advice to any person and such person shall not be treated as a client of Mirae Asset Daewoo by virtue of receiving this report. This report does not take into account the particular investment objectives, financial situations, or needs of individual clients. The report is not to be relied upon in substitution for the exercise of independent judgment. Information and opinions contained herein are as of the date hereof and are subject to change without notice. The price and value of the investments referred to in this report and the income from them may depreciate or appreciate, and investors may incur losses on investments. Past performance is not a guide to future performance. Future returns are not guaranteed, and a loss of original capital may occur. Mirae Asset Daewoo, its affiliates and their directors, officers, employees and agents do not accept any liability for any loss arising out of the use hereof. Mirae Asset Daewoo may have issued other reports that are inconsistent with, and reach different conclusions from, the opinions presented in this report. The reports may reflect different assumptions, views and analytical methods of the analysts who prepared them. Mirae Asset Daewoo may make investment decisions that are inconsistent with the opinions and views expressed in this research report. Mirae Asset Daewoo, its affiliates and their directors, officers, employees and agents may have long or short positions in any of the subject securities at any time and may make a purchase or sale, or offer to make a purchase or sale, of any such securities or other financial instruments from time to time in the open market or otherwise, in each case either as principals or agents. Mirae Asset Daewoo and its affiliates may have had, or may be expecting to enter into, business relationships with the subject companies to provide investment banking, market-making or other financial services as are permitted under applicable laws and regulations. No part of this document may be copied or reproduced in any manner or form or redistributed or published, in whole or in part, without the prior written consent of Mirae Asset Daewoo.

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Mirae Asset Daewoo Research 5 May 10, 2019 Kakao

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Mirae Asset Daewoo Research 6