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Platform Expansion to Get Underway in 2H17

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Platform Expansion to Get Underway in 2H17 NAVER (035420 KS ) Platform expansion to get underway in 2H17 Internet 2Q17 review: Consolidated profit misses, but parent OP grows strongly For 2Q17, NAVER’s consolidated revenue was in line with the consensus, but Results Comment operating profit and net profit missed. Parent operating profit continued to improve, expanding 23% YoY, but losses at other subsidiaries stemming from new July 28, 2017 businesses had a negative impact on consolidated operating profit. Net profit was affected by a one-off tax item related to gains from the transfer of the camera app business to LINE. (Maintain) Buy Positives: Most business categories recorded double-digit growth, including ads, business platform, IT platform, and LINE and other subsidiaries. Among them, the Target Price (12M, W) 1,160,000 IT platform segment delivered the strongest growth, with revenue surging 76% YoY on a sharp increase in NAVER Pay transaction value. The business platform Share Price (07/27/17, W) 825,000 segment, which includes the core search ad business, also posted solid growth of 13% YoY. Expected Return 41% Negatives: The rapid growth of NAVER Pay’s transaction value also led to a steep rise in related expenses. Agent/p artner expenses (including NAVER Pay transaction fees) climbed 25% YoY, while marketing spend (including NAVER Pay points) OP (17F, Wbn) 1,246 jumped 40% YoY. Meanwhile, NAVER Pay is helping the company build a shopping Consensus OP (17F, Wbn) 1,261 database for its search ad business (the parent company’ s core revenue source). We think the mobile payment service provides consumers with better ease of use EPS Growth (17F, %) 17.1 and sellers with better conversion rates. Market EPS Growth (17F, %) 44.1 P/E (17F, x) 31.0 2H17: Platform expansion and shopping/payment-driven growth Market P/E (17F, x) 10.1 New platforms: In August, NAVER plans to laun ch Wave, a smart speaker based on KOSPI 2,443.24 its AI platform Clova, in both Korea and Japan. AI-powered speakers are not yet widely available in Japan (in contrast to the US and Korea), so it will be interesting Market Cap (Wbn) 27,194 to see whether NAVER can gain an early lead in the mark et. The company is also Shares Outstanding (mn) 33 gradually ramping up its AI-powered global cloud platform business and plans to Free Float (%) 78.5 build a global cloud data center in Yongin. Foreign Ownership (%) 60.8 NAVER platform: NAVER platform’s growth has been driven by shopping and Beta (12M) 1.36 NAVER Pay. Ads tied to commerce h ave emerged as a dominant trend in digital 52-Week Low 701,000 marketing. Advertisers in NAVER’s shopping search ad services (linked with NAVER 52-Week High 960,000 Pay) , which were rolled out in November 2016, jumped 25% QoQ in 2Q17. In August, the company also plans to expand its live streaming services. We believe (%) 1M 6M 12M increased live streaming content will help drive usage across the platform and also Absolute -5.1 9.6 15.9 have positive effects on video ads and search databases. Relative -7.1 -6.6 -4.0 Reiterate Buy and TP of W1,160,000 140 NAVER KOSPI 130 We reiterate our Buy call and target price of W1,160, 000 on NAVER. In 2H17, we 120 expect the company to ramp up its efforts to expand its platform and strengthen 110 its market dominance. Despite its robust fundamentals, we also note that NAVER’s stock has seen the weakest gains among global internet names and othe r large 100 stocks in the KOSPI. 90 80 7.16 11.16 3.17 7.17 FY (Dec.) 12/14 12/15 12/16 12/17F 12/18F 12/19F Mirae Asset Daewoo Co., Ltd. Revenue (Wbn) 2,758 3,254 4,023 4,674 5,446 6,221 [Internet/Game/Advertising ] OP (Wbn) 758 830 1,102 1,246 1,556 1,829 OP Margin (%) 27.5 25.5 27.4 26.7 28.6 29.4 Jee -hyun Moon NP (Wbn) 454 519 749 878 1,110 1,296 +822 -3774 -1640 [email protected] EPS (W) 13,787 15,737 22,732 26,623 33,678 39,315 ROE (%) 27.8 26.5 26.2 22.0 22.6 21.3 P/E (x) 51.6 41.8 34.1 31.0 24.5 21.0 P/B (x) 8.7 6.8 5.2 4.7 4.0 3.4 Dividend Yield (%) 0.1 0.2 0.1 0.1 0.2 0.2 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 July 28, 2017 NAVER Earnings review and forecasts Table 1. 2Q17 review (Wbn, %) 2Q17P Growth 2Q16 1Q17 Mirae Asset Preliminary Consensus YoY QoQ Daewoo Revenue 987 1,082 1,130 1,157 1,132 14.4 4.4 Operating profit 273 291 285 300 309 4.6 -1.9 OP margin 27.6 26.9 25.2 25.9 27.3 Net profit 213 211 171 215 224 -19.6 -18.7 Note: All figures are based on consolidated K-IFRS Source: Company data, WISEfn, Mirae Asset Daewoo Research estimates Table 2. Quarterly and annual earnings and forecasts (Wbn, %) 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17P 3Q17F 4Q17F 2016 2017F 2018F Revenue 937 987 1,013 1,085 1,082 1,130 1,183 1,280 4,023 4,674 5,446 Ads 82 97 98 123 100 118 121 141 400 479 551 Business platform 450 462 462 491 510 521 532 565 1,866 2,127 2,425 IT platform 23 28 31 39 43 49 57 84 121 234 374 Content services 31 27 23 23 24 24 26 28 103 101 111 LINE and other 353 373 399 409 406 418 447 463 1,534 1,733 1,985 platforms Operating profit 257 273 282 290 291 285 306 364 1,102 1,246 1,556 OP margin 27.4 27.6 27.9 26.7 26.9 25.2 25.9 28.4 27.4 26.7 28.6 Net profit 165 213 198 183 211 171 228 268 759 878 1,110 Net margin 17.6 21.6 19.5 16.9 19.5 15.2 19.3 20.9 18.9 18.8 20.4 YoY Revenue 26.6 26.3 20.5 21.7 15.5 14.4 16.7 18.0 23.6 16.2 16.5 Ads 22.3 21.8 23.0 14.6 20.0 15.0 Business platform 13.3 12.6 15.0 15.0 14.0 14.0 IT platform 92.0 75.8 86.1 114.5 94.0 60.0 Content services -23.7 -10.9 13.9 22.7 -2.0 10.0 LINE and other 15.1 12.0 12.0 13.1 13.0 14.5 platform s Operating profit 32.1 44.0 27.6 28.9 13.2 4.6 8.4 25.4 32.7 13.1 24.8 Net profit 22.7 71.8 69.5 29.6 27.8 -19.6 15.3 46.0 46.8 15.7 26.4 Notes: All figures are based on consolidated K-IFRS; revenue was reclassified into five segments: ads, business platform, IT platform, content services, and LINE and other platforms; the new classification has only been applicable since 2016; ads include general/shopping display and video ads; business platform includes general and shopping search ads; IT platform includes NAVER Pay, IT services, and cloud services; content services include music, Webtoon, and V Live; LINE and other platforms include LINE, Camp Mobile, and SNOW Source: Company data, Mirae Asset Daewoo Research estimates Table 3. Earnings forecast revisions (Wbn, W, %) Previous Revised % chg. Notes 17F 18F 17F 18F 17F 18F - Revised down estimates for b usiness platform/LINE Revenue 4,727 5,508 4,674 5,446 -1.1 -1.1 and other platforms Operating profit 1,272 1,573 1,246 1,556 -2.0 -1.1 - Revised up labor and marketing expenses - Reflected tax impact of camera business Net profit 907 1,112 878 1,110 -3.2 -0.2 transfer EPS 26,971 33,048 26,623 33,678 -1.3 1.9 OP margin 26.9 28.6 26.7 28.6 Net margin 19.2 20.2 18.8 20.4 Notes: All figures are based on consolidated K-IFRS; net profit is attributable to controlling and non-controlling interests; EPS is attributable to controlling interests Source: Mirae Asset Daewoo Research estimates Mirae Asset Daewoo Research 2 July 28, 2017 NAVER Business trends Figure 1. Strong ad revenue growth on higher mobile Figure 2. Business platform: Shopping driving up growth contribution and seasonality (Wbn) (Wbn) 160 Advertising revenue 550 Business platform revenue +13% YoY +2% QoQ +22% YoY +18% QoQ 120 500 80 450 40 400 0 350 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17P 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17P Source: Company data, Mirae Asset Daewoo Research Source: Company data, Mirae Asset Daewoo Research Figure 3. IT platform: Transaction growth at NAVER Pay Figure 4. Content services: YoY decrease due to app store pushed up growth business transfer (Wbn) (Wbn) 60 IT platform revenue 40 Content services revenue +76% YoY +14% QoQ 45 30 -11% YoY +4% QoQ 30 20 15 10 0 0 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17P 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17P Source: Company data, Mirae Asset Daewoo Research Source: Company data, Mirae Asset Daewoo Research Figure 5.
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