[Korea] Internet March 17, 2021

Kakao Buy (035720 KS) (Maintain)

Biggest beneficiary of bitcoin frenzy TP: W590,000 ▲ Upside: 23.2%

Mirae Asset Daewoo Co., Ltd. Chang-kwean Kim [email protected] HeeSeok Lim [email protected]

Watch for earnings surprise Pay, Bank, and showing robust earnings indicators in 1Q21 every quarter in 2021  Key indicators suggest ’s growth businesses (Bizboard, commerce, etc.) are continuing their earnings momentum into 1Q21. We expect GMV to begin meaningful growth on the back of the introduction of the shopping tab.  Unique users of the KakaoBank and Kakao Pay apps (a leading earnings indicator) continued to increase sharply in January and February.  We forecast Piccoma’s 1Q21 GMV to climb 304% YoY. The service is setting new records for a Japanese mobile internet business.

Dunamu to drive Poised to become biggest beneficiary of growth of Upbit earnings surprise in 2021  Upbit, Korea’s largest crypto exchange, has recently seen its traffic and trading volume exceed 4Q17 levels.  Kakao directly and indirectly owns a roughly 23% stake in Dunamu, the operator of Upbit.  Kakao recorded W29bn in equity-method gains from Dunamu in 4Q17.  If the current cryptocurrency frenzy continues, we expect the crypto exchange operator to contribute more than W100bn in equity-method gains this year alone.  Kakao’s stake could also be revalued higher following the NASDAQ listing of global crypto exchange Coinbase.

Raise TP to W590,000 (from Trading to be suspended from Apr. 12-14 for 5:1 stock split, before resuming on Apr. 15 W570,000)  We forecast 1Q21 revenue and operating profit to grow 46.3% and 76.9% YoY, respectively. Additionally, we believe equity-method gains from Dunamu will be much stronger than expected, thanks to the bitcoin trading boom.  Kakao will split the par value of its stock from W500 to W100. Trading will be suspended for three days from Apr. 12 before resuming on Apr. 15.  We expect the IPOs of Kakao Pay and KakaoBank to take place in 1H21 and 2H21, respectively. and Kakao Japan could also go public in 2022.  We raise our target price on Kakao to W590,000 (from W570,000), reflecting changes in the share prices of peer companies.

Key data

Current price (3/16/21, W) 479,000 Market cap (Wbn) 42,490 360 Kakao KOSP I 310 OP (20F, Wbn) 456 Shares outstanding (mn) 89 260 Consensus OP (20F, Wbn) 450 Free float (%) 71.8 210 EPS growth (20F, %) - Foreign ownership (%) 33.2 160 P/E (20F, x) 206.6 Beta (12M) 0.42 110 60 Market P/E (20F, x) 21.2 52-week low (W) 134,000 3.20 7.20 11.20 3.21 KOSPI 3,067.17 52-week high (W) 514,000

Share performance Earnings and valuation metrics (%) 1M 6M 12M (Dec.) 2017 2018 2019 2020F 2021F 2022F Absolute -6.8 27.1 224.7 Revenue (Wbn) 1,972 2,417 3,070 4,157 5,568 6,739 Relative -3.9 0.9 81.6 OP (Wbn) 165 73 207 456 736 1,084 OP margin (%) 8.4 3.0 6.7 11.0 13.2 16.1 NP (Wbn) 109 48 -301 165 655 877 EPS (W) 1,602 613 -3,585 1,885 7,388 9,892 ROE (%) 2.9 1.0 -5.8 3.1 11.5 13.6 P/E (x) 85.5 168.0 - 206.6 64.8 48.4 P/B (x) 2.3 1.7 2.5 6.4 7.0 6.2 Div. yield (%) 0.1 0.1 0.1 0.0 0.0 0.0 Notes: Under consolidated K-IFRS; NP is attributable to owners of the parent Source: Company data, Mirae Asset Daewoo Research estimates Analysts who prepared this report are registered as research analysts in Korea but not in any other jurisdiction, including the US. PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES AND DISCLAIMERS IN APPENDIX 1 AT THE END OF REPORT. March 17, 2021 Kakao

Table 1. Quarterly and annual earnings (Wbn, %) 1Q20 2Q20 3Q20 4Q20 1Q21F 2Q21F 3Q21F 4Q21F 2019 2020F 2021F Revenue 868 953 1,100 1,235 1,271 1,340 1,440 1,517 3,070 4,157 5,568 Platform 442 493 554 657 672 713 774 822 1,435 2,146 2,980 Talk Biz 225 248 284 360 362 386 434 470 650 1,118 1,652 Portal Biz 117 117 121 123 117 118 120 122 524 478 477 New Biz 101 127 149 174 193 208 220 231 261 550 852 Content 427 460 546 578 599 627 666 695 1,635 2,011 2,588 Games 97 107 150 141 127 118 140 130 397 495 514 Music 151 151 156 155 151 152 157 156 587 613 616 Paid content 97 119 148 164 193 228 235 269 297 528 925 IP business/other 82 83 92 119 128 130 135 140 354 375 532 OP 88 98 120 150 156 173 190 216 207 456 736 OP margin 10.2 10.3 10.9 12.1 12.3 12.9 13.2 14.2 6.7 11.0 13.2 NP 80 145 144 -202 145 158 170 190 -342 167 663 Net margin 9.2 15.2 13.1 -16.3 11.4 11.8 11.8 12.5 -11.1 4.0 11.9 YoY growth Revenue 22.9 30.0 40.545.7 46.3 40.6 30.9 22.8 27.0 35.434.0 Platform 41.1 50.7 58.1 47.9 52.0 44.6 39.6 25.1 38.0 49.6 38.9 Talk Biz 77.1 78.8 75.1 62.6 61.1 55.5 52.5 30.4 54.3 72.0 47.8 Portal Biz -7.8 -14.2 -3.9 -8.6 0.2 0.4 -0.7 -0.8 5.7 -8.7 -0.2 New Biz 68.1 148.8 139.0 97.0 91.9 64.3 47.8 32.6 112.9 110.5 54.8 Content 8.5 13.3 26.3 43.3 40.4 36.3 22.1 20.3 18.7 23.0 28.7 Games 3.0 9.2 51.9 32.9 31.2 9.5 -7.1 -7.8 -4.7 24.7 3.8 Music 9.8 4.4 2.8 1.2 0.5 0.4 0.8 0.7 10.1 4.4 0.6 Paid content 30.0 46.0 61.5 232.6 98.6 91.8 58.5 64.6 36.1 77.6 75.3 IP business/other -6.1 1.2 1.6 24.7 55.9 57.1 47.0 18.0 69.1 5.8 42.0 OP 218.9 141.7 103.5 88.2 76.9 77.3 58.0 44.3 183.7 120.5 61.3 NP 354.9 368.6 179.3 RR 81.0 8.8 18.5 TTB TTR TTB 296.8 Source: Company data, Mirae Asset Daewoo Research estimates

Table 2. Dunamu: Annual earnings (Wbn) 2017 2018 2019 Revenue 207 480 140 OP 130 285 42 Non-operating profit 5 -100 -27 Income tax -32 -44 -4 NP 103 141 12 Source: Company data, Mirae Asset Daewoo Research

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Figure 1. KakaoBank: Monthly unique users Figure 2. Kakao Pay: Monthly unique users

(mn users) (mn users) 10 4

3 8

2

6 1

4 0 5/19 8/19 11/19 2/20 5/20 8/20 11/20 2/21 5/19 8/19 11/19 2/20 5/20 8/20 11/20 2/21

Source: Nielsen KoreanClick, Mirae Asset Daewoo Research Source: Nielsen KoreanClick, Mirae Asset Daewoo Research

Figure 3. Piccoma: Monthly transaction volume Figure 4. Piccoma: Quarterly transaction volume

(Wbn) (Wbn) 90 240 +304% YoY

80 210 70 180 60 +267% YoY 150 50 120 40 90 30 60 20

10 30

0 0 2/20 4/20 6/20 8/20 10/20 12/20 2/21 1Q20 2Q20 3Q20 4Q20 1Q21F

Source: Sensor Tower, Mirae Asset Daewoo Research estimates Source: Sensor Tower, Mirae Asset Daewoo Research estimates

Figure 5. Upbit, Bithumb: Monthly unique users Figure 6. Upbit, Bithumb: Monthly total time spent

(mn users) (bn min.) 2.5 Upbit Bithumb 1.4 Upbit Bithumb

1.2 2.0 1.0

1.5 0.8

0.6 1.0

0.4 0.5 0.2

0.0 0.0 10/17 3/18 8/18 1/19 6/19 11/19 4/20 9/20 2/21 10/173/188/181/196/1911/194/209/202/21

Source: Nielsen KoreanClick, Mirae Asset Daewoo Research Source: Nielsen KoreanClick, Mirae Asset Daewoo Research

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Figure 7. Ranking of global cryptocurrency exchanges in terms of transaction value (as of Mar. 16)

Source: CoinMarketCap, Mirae Asset Daewoo Research

Table 3. Valuation (Wbn, W) 2019 2020 2021F Notes Ad revenue 670 1,301 1,695 Target multiple is based on 2020F P/S of ; KakaoTalk ad revenue forecast to Value 4,479 11,926 20,448 surge in 2020; a valuation re-rating is expected, as was the case with Facebook in 2013. Gaming revenue 417 495 514 Value 2,551 3,364 3,450 Target multiple is in line with the 2021F avg. P/S of Netmarble, NCsoft, and Pearl Abyss. Music revenue 533 613 616 Value 1,780 4,259 3,507 Target multiple is based on 2021F P/S of Spotify. Other content revenue 260 528 972 KakaoPage and Kakao Japan plan to go public in Korea and Japan, respectively. Piccoma’s surging transaction value has boosted potential IPO value; target multiple is in Value 1,127 4,224 10,113 line with the 2016-20 average P/S (8x) of Netflix. Other revenue 537 1,219 1,770 Equity-method gains from KakaoBank (which is expected to go public) Value 1,593 6,669 11,301 Target multiple is in line with the avg. 2021F P/S of peers (Amazon, NAVER). Total 48,818 Avg. P/S multiples for domestic/global peers were used to derive our target price. As the firm’s businesses are currently in the early growth phases, revenue indicators Per-share value 590,000 appear more relevant than profitability indicators. Source: Bloomberg, Mirae Asset Daewoo Research estimates

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Kakao (035720 KS)

Income statement (summarized) Balance sheet (summarized) (Wbn) 2019 2020F 2021F 2022F (Wbn) 2019 2020F 2021F 2022F Revenue 3,070 4,157 5,568 6,739 Current assets 2,830 3,019 3,695 4,549 Cost of revenue 0 0 0 0 Cash & equivalents 1,918 1,825 2,112 2,644 Gross profit 3,070 4,157 5,568 6,739 AR & other receivables 386 500 670 810 SG&A expenses 2,863 3,701 4,833 5,655 Inventory 49 67 90 109 OP (adj.) 207 456 736 1,084 Other current assets 477 627 823 986 OP 207 456 7361,084 Non-current assets 5,908 6,282 6,778 7,193 Non-operating profit -441 -47 148 100 Investments in associates 979 1,325 1,776 2,149 Net financial income 19 18 20 26 PP&E 350 324 306 295 Net income from associates -20 0 0 0 Intangible assets 3,548 3,566 3,582 3,597 Pretax profit -234 409 884 1,184 Total assets 8,737 9,301 10,473 11,742 Income tax 108 242 221 296 Current liabilities 2,134 2,528 3,001 3,271 Profit from continuing operations -342 167 663 888 AP & other payables 576 779 1,044 1,263 Profit from discontinued operations 0 0 0 0 Short-term financial liabilities 535 567 608 642 NP -342 167 663888 Other current liabilities 1,023 1,182 1,349 1,366 Attributable to owners -301 165 655 877 Non-current liabilities 564 677 824 945 Attributable to minority interests -41 2 8 11 Long-term financial liabilities 245 245 245 245 Total comprehensive income -346 167 663 888 Other non-current liabilities 319 432 579 700 Attributable to owners -304 165 655 877 Total liabilities 2,997 3,404 3,924 4,316 Attributable to minority interests -42 2 8 11 Equity attributable to owners 5,225 5,380 6,024 6,891 EBITDA 426 664 937 1,281 Capital stock 43 43 43 43 FCF 646 550 1,060 1,108 Capital surplus 5,043 5,043 5,043 5,043 EBITDA margin (%) 13.9 16.0 16.8 19.0 Retained earnings 148 303 947 1,813 OP margin (%) 6.7 11.0 13.2 16.1 Minority interests 515 517 525 535 Net margin (%) -9.8 4.0 11.8 13.0 Shareholders' equity 5,740 5,897 6,549 7,426

Cash flow statement (summarized) Key valuation metrics/ratios (Wbn) 2019 2020F 2021F 2022F 2019 2020F 2021F 2022F Operating cash flow 753 650 1,160 1,208 P/E (x) - 206.6 64.8 48.4 NP -342 167 663 888 P/CF (x) 36.5 57.4 40.1 31.5 Non-cash income/expenses 695 427 397 462 P/B (x) 2.5 6.4 7.0 6.2 Depreciation 139 126 117 112 EV/EBITDA (x) 29.1 50.6 44.1 31.8 Amortization 80 82 84 86 EPS (W) -3,585 1,885 7,388 9,892 Other 476 219 196264 CFPS (W) 4,200 6,781 11,960 15,219 Chg. in working capital 371 275 296 123 BPS (W) 60,615 60,802 67,951 77,719 Chg. in AR & other receivables 39 -56 -72 -60 DPS (W) 127 127 127 127 Chg. in inventory -19 -18 -23 -19 Dividend payout ratio (%) -3.0 6.5 1.7 1.2 Chg. in AP & other payables 100 10 13 11 Dividend yield (%) 0.1 0.0 0.0 0.0 Income tax -111 -242 -221 -296 Revenue growth (%) 27.0 35.4 33.9 21.0 Cash flow from investing activities -414 -418 -453 -327 EBITDA growth (%) 104.8 55.9 41.1 36.7 Chg. in PP&E -99 -100 -100 -100 OP growth (%) 183.6 120.3 61.4 47.3 Chg. in intangible assets -55 -100 -100 -100 EPS growth (%) - - 291.9 33.9 Chg. in financial assets 672 -118 -153 -127 AR turnover (x) 17.5 22.5 22.4 21.4 Other -932 -100 -100 0 Inventory turnover (x) 72.0 71.4 71.1 68.0 Cash flow from financing activities 322 21 30 23 AP turnover (x) 0.0 0.0 0.0 0.0 Chg. in financial liabilities 111 32 41 34 ROA (%) -4.1 1.9 6.7 8.0 Chg. in equity 397 0 0 0 ROE (%) -5.8 3.1 11.5 13.6 Dividends -10 -10 -11 -11 ROIC (%) 8.8 7.5 20.4 29.5 Other -176 -1 0 0 Debt-to-equity ratio (%) 52.2 57.7 59.9 58.1 Chg. in cash 671 -93 287 531 Current ratio (%) 132.6 119.4 123.1 139.1 Beginning balance 1,247 1,918 1,825 2,112 Net debt-to-equity ratio (%) -23.9 -23.3 -26.4 -31.1 Ending balance 1,918 1,825 2,112 2,644 Interest coverage ratio (x) 16.1 32.4 50.0 70.5 Source: Company data, Mirae Asset Daewoo Research estimates

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Appendix 1

Important disclosures and disclaimers Two-year rating and TP history

Company Date Rating TP (W) (W) Kakao Kakao (035720) 03/16/21 Buy 590,000 800,000 01/13/21 Buy 570,000 08/03/20 Buy 460,000 600,000 07/03/20 Buy 370,000 05/08/20 Buy 280,000 400,000 02/13/20 Buy 243,000 200,000 01/13/20 Buy 205,000

11/08/19 Buy 185,000 0 11/07/19 Buy 177,000 Mar 19 Mar 20 Mar 21 11/07/19 Buy 177,000 07/16/19 Buy 177,000 05/01/19 Buy 170,000 11/26/18 Buy 130,000

Stock ratings Sector ratings Buy Expected 12-month performance: +20% or greater Overweight Expected to outperform the market over 12 months Trading Buy Expected 12-month performance: +10% to +20% Neutral Expected to perform in line with the market over 12 months Hold Expected 12-month performance: -10% to +10% Underweight Expected to underperform the market over 12 months Sell Expected 12-month performance: -10% or worse

Rating and TP history: Share price (─), TP (▬), Not Rated (■), Buy (▲), Trading Buy (■), Hold (●), Sell (◆) * Our investment rating is a guide to the expected return of the stock over the next 12 months. * Outside of the official ratings of Mirae Asset Daewoo Co., Ltd., analysts may call trading opportunities should technical or short-term material developments arise. * The TP was determined by the research analyst through valuation methods discussed in this report, in part based on estimates of future earnings. * TP achievement may be impeded by risks related to the subject securities and companies, as well as general market and economic conditions.

Ratings distribution and investment banking services Buy Trading Buy Hold Sell Ratings distribution 78.43% 11.76% 8.50% 1.31% Investment banking services 66.67% 22.22% 11.11% 0.00% * Based on recommendations in the last 12-months (as of December 31, 2020)

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 revenues from, among other business units, the institutional equities, investment banking, proprietary trading, and private client divisions. 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 . 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 accounting 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 is not and shall not be construed as an offer or a solicitation of an offer to effect transactions in 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

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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. For further information regarding company-specific information as it pertains to the representations and disclosures in this Appendix 1, please contact [email protected] or +1 (212) 407-1000.

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