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Search Seeing Flywheel Effect, but Global Still Needs Momentum

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Search Seeing Flywheel Effect, but Global Still Needs Momentum NAVER (035420 KS ) Search seeing flywheel effect, but global still needs momentum Internet 2Q18 review: Revenue beats consensus, but OP misses; NP boosted by one-off gain Results Comment For 2Q18, NAVER’s revenue came in above the consensus, but operating profit missed. July 27, 2018 Positives: Revenue from the business platform segment (which includes the core search ad business) was stronger than expected, growing 17% YoY and surpassing W600bn for the first time on a quarterly basis. Ad performance improved, due to increased options for a mobile search ad offering , while shopping search ads also contributed to growth. LINE’s ad revenue also jumped 42% YoY. (Maintain) Buy At the parent IT platform and content services segments, revenue grew a robust 74% Target Price (12M, W) 1,000,000 and 27% YoY, respectively. The IT platform segment was helped by NAVER Pay’s increased transaction volume, while the content services segment was supported by traction in webtoons and V LIVE. Meanwhile, net profit was temporarily boosted by a Share Price (07/26/18, W) 751,000 W112.7bn gain from the disposal of subsidiary investments caused by the exclusion of LINE Mobile (a Japan-based MVNO subsidiary) from consolidation, as a result of Expected Return 33% Softbank’s investment. Negatives: The ad segment (which includes display ads) grew a weaker-than-expected OP (18F, Wbn) 1,106 11% YoY. The ad segment bears close watching, as it could be affected by NAVER’s mobile app overhaul planned in 3Q18. Agent/partner commissions and marketing Consensus OP (18F, Wbn) 1,108 expenses were higher than anticipated, mainly due to NAVER Pay. EPS Growth (18F, %) 7.8 Nstore’s merger with NAVER Webtoon part of global content expansion Market EPS Growth (18F, %) 10.4 P/E (18F, x) 29.7 Original premium content: We expect NAVER Webtoon to play an important role in Market P/E (18F, x) 9.0 NAVER’s original premium content. NAVER plans to spin off its Nstore business, which handles digital content distribution (VOD, e-books, etc.), and merge it with NAVER KOSPI 2,289.06 Webtoon. NAVER has so far invested a total of W210bn in NAVER Webtoon this year . As Market Cap (Wbn) 24,755 for content, NAVER has spent W400bn since 2017 and intends to spend another Shares Outstanding (mn) 33 W200bn by 2019. We expect the global platform business and the intellectual property (IP)-based drama/film investment and production to gain traction. Free Float (%) 78.4 Foreign Ownership (%) 59.9 UGC: We believe Apollo will lead NAVER’s user-generated content (UGC) operations . Beta (12M) 0.80 Apollo, a company-in-company (CIC) created in May that operates and develops NAVER 52-Week Low 652,000 services, like blogs, posts, and Knowledge IN, plans to revamp domestic blogs with a 52-Week High 950,000 focus on videos, and later launch a global UGC service. (%) 1M 6M 12M We view NAVER’s efforts to expand its content business as part of its move to catch up with global video providers like Netflix (premium content) and YouTube (user content). Absolute 2.2 -19.0 -9.0 We note that a growing number of Chinese internet firms have re cently boosted their Relative 4.9 -8.9 -3.2 enterprise value by separately listing their content and video businesses. 120 NAVER KOSPI Maintain Buy and TP of W1,000,000 (not adjusting for October stock split) 110 We maintain our Buy rating on NAVER. We believe the search business is in the 100 “running on its own” stage of the ‘flywheel effect’ (spinning a heavy flywheel takes 90 significant effort, but once momentum builds the mechanism can eventually run by 80 itself without additional fuel). The commerce business, meanwhile, is in the 70 “momentum building” stage. Meanwhile, LINE, NAVER Webtoon, and Apollo are still in 7.17 11.17 3.18 7.18 the stage where the company needs to make considerable efforts in order to achieve its medium/long-term growth objective of global expansion. Mirae Asset Daewoo Co., Ltd. [ Internet/Game/Advertising ] FY (Dec.) 12/15 12/16 12/17 12/18F 12/19F 12/20F Revenue (Wbn) 3,254 4,023 4,678 5,665 6,830 8,070 Jee -hyun Moon +822 -3774 -1640 OP (Wbn) 830 1,102 1,179 1,106 1,674 2,061 [email protected] OP margin (%) 25.5 27.4 25.2 19.5 24.5 25.5 NP (Wbn) 519 749 773 834 1,069 1,320 EPS (W) 15,737 22,732 23,447 25,287 32,441 40,058 ROE (%) 26.5 26.2 18.5 16.3 18.0 18.6 P/E (x) 41.8 34.1 37.1 29.7 23.1 18.7 P/B (x) 6.8 5.2 4.8 3.7 3.2 2.7 Dividend yield (%) 0.2 0.1 0.2 0.2 0.2 0.3 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 27, 2018 NAVER Earnings review and forecasts Table 1. 2Q18 review (Wbn, %) 2Q18P Growth 2Q17 1Q18 Mirae Asset Preliminary Consensus YoY QoQ Daewoo Revenue 1,130 1,309 1,364 1,363 1,351 20.7 4.2 Operating profit 285 257 251 266 267 -12.1 -2.5 OP margin (%) 25.2 19.6 18.4 19.5 19.8 Net profit 171 154 314 159 184 83.1 104.0 Note: All figures are based on consolidated K-IFRS; net profit is attributable to controlling and non-controlling interests Source: Company data, FnGuide, Mirae Asset Daewoo Research estimates Table 2. Quarterly and annual earnings (Wbn, %) 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18P 3Q18F 4Q18F 2017 2018F 2019F Revenue 1,082 1,130 1,201 1,266 1,309 1,364 1,442 1,550 4,678 5,665 6,830 Ads 112 134 133 151 133 149 148 169 529 598 676 Business platform 511 522 550 586 593 612 643 667 2,168 2,515 2,867 IT platform 43 49 59 66 73 86 96 116 218 370 592 Content services 25 25 27 28 30 32 33 36 105 130 149 LINE and other platforms 391 400 432 446 481 486 523 563 1,669 2,053 2,546 Operating profit 291 285 312 291 257 251 270 329 1,179 1,106 1,674 OP margin 26.9 25.2 26.0 23.0 19.6 18.4 18.7 21.2 25.2 19.5 24.5 Net profit 211 171 216 172 154 314 184 212 770 863 1,099 Net margin 19.5 15.2 18.0 13.6 11.7 23.0 12.7 13.7 16.5 15.2 16.1 YoY growth Revenue 15.5 14.4 18.5 16.7 21.0 20.7 20.1 22.5 16.3 21.1 20.5 Ads 37.7 38.5 35.1 22.4 18.6 11.1 11.0 12.2 32.5 13.0 13.0 Business platform 13.5 12.9 18.9 19.2 16.1 17.2 17.0 13.9 16.2 16.0 14.0 IT platform 92.0 75.8 90.3 70.3 67.1 73.5 64.0 74.6 80.7 70.0 60.0 Content services -19.8 -8.8 20.9 22.7 19.8 26.8 20.0 29.1 1.3 24.0 15.0 LINE and other platforms 11.0 7.2 8.3 8.9 22.9 21.6 21.0 26.2 8.8 23.0 24.0 Operating profit 13.2 4.6 10.6 0.3 -11.6 -12.1 -13.6 13.0 7.0 -6.2 51.4 Net profit 27.8 -19.6 9.0 -6.2 -27.1 83.1 -14.9 23.1 1.5 12.1 27.4 Notes: All figures are based on consolidated K-IFRS; in 2017, revenue was reclassified into five segments: ads, business platform, IT platform, content services, and LINE and other platforms; ads include general and shopping display ads 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, webtoons, and V Live; LINE and other platforms include LINE and Snow; due to the parent firm’s merger with Camp Mobile in February 2018, some of the revenue from LINE and other platforms has been reclassified from 2017 onwards; the YoY revenue comparison for 2017 may have discrepancies due to Camp Mobile’s reclassification; 2Q18 net profit includes W112.7bn in one-off gains related to LINE Mobile; net profit is attributable to controlling and non-controlling interests Source: Company data, Mirae Asset Daewoo Research estimates Table 3. Earnings forecast revisions (Wbn, W, %) Previous Revised % chg. Notes 18F 19F 18F 19F 18F 19F Business platform/IT platform estimates revised upward ; ad Revenue 5,664 6,797 5,665 6,830 0.0 0.5 estimates revised down ward Platform development/operation expenses revised Operating profit 1,142 1,665 1,106 1,674 -3.1 0.6 down ward ; marketing expenses revised up ward Net profit 738 1,077 863 1,099 16.9 2.1 Exclusion of LINE Mobile reflected Profits from non -controlling interests in LINE Mobile EPS (W) 23,191 33,506 25,287 32,441 9.0 -3.2 reflected ; based on existing share count OP margin 20.2 24.5 19.5 24.5 Net margin 13.0 15.8 15.2 16.1 Notes: 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 27, 2018 NAVER LINE overview Table 4.
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