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Global Fintech Momentum to Materialize

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Global Fintech Momentum to Materialize NAVER (035420 KS ) Global fintech momentum to materialize Internet LINE’s 2018 business strategy to center on fintech Company Report In our 2018 sector outlook report published on December 19, 2017 February 2, 2018 (Internet/Game/Advertising: “Market changes spurring shifts in business strategy”), we highlighted “domestic e-commerce and overseas fintech momentum” as a key investment point for NAVER, a s trategic direction that was confirmed in NAVER/LINE’s recent earnings announcement. (Maintain) Buy LINE officially named fintech as one of its key business strategies for 2018. The company plans to: 1) expand LINE Pay’s merchant network to broaden its everyday Target Price (12M, W) 1,200,000 use; and 2) provide a variety of financial services through a separately established company, called LINE Financial. LINE is a consolidated subsidiary of NAVER, which Share Price (02/01/18, W) 923,000 owns 79.3% of the company. In the near term, fintech will reinforce lifestyle aspect of intern et platforms Expected Return 30% LINE Pay has around 40mn subscribers globally and an annual transaction volume of over JPY450bn. Given that LINE’s messenger service has 168mn global monthly active OP (17F, Wbn) 1,179 users (MAU), including 73mn in Japan, we still see ample room for growth in LINE Pay. Consensus OP (17F, Wbn) 1,208 Generally, simplified payment has served as the starting point of internet firms’ fintech EPS Growth (17F, %) 3.1 operations. In simplified payments, many internet firms have already been successful Market EPS Growth (17F, %) 45.4 in improving user experience (e.g., through convenient processes). Going forward, P/E (17F, x) 37.1 internet firms’ fintech operations should gradually expand into the offline space and Market P/E (17F, x) 10.5 more sophisticated financial services, such as wealth management/investing. KOSPI 2,568.54 We believe internet platforms are extending their control beyond the “process ” (search, Market Cap (Wbn) 30,425 communication, etc.) to “final results and actions” (purchase, payment, investing, etc.), Shares Outstanding (mn) 33 becoming an ever-increasing presence in our daily lives. Free Float (%) 78.0 In medium/long term, data on “flow of money” to provide foundation for Foreign Ownership (%) 59.2 monetization Beta (12M) 0.73 52-Week Low 720,000 Shopping items, payment amounts/patterns, and investing styles are all data related 52-Week High 960,000 to the “flow of money,” which can be capitalized as an important asset for businesses. Many companies are already leveraging purchase histories in targeting and AI (%) 1M 6M 12M recommendations, which is helping to boost revenue from ads and payments. Absolute 6.1 16.0 19.7 Payment data and money transfers should also provide the foundation for internet Relative 1.9 9.4 -3.0 platforms to expand into full-fledged financial services, such as deposits, lending, insurance, and wealth management . One good example is China’s Tencent, which has 130 NAVER KOSPI seen its performance-based ad revenue and financial business grow alongside the 120 increasing market share of its payment service, WeChat Pay. 110 100 Maintain Buy and TP of W1,200,000; positive on NAVER’s new bus iness direction 90 80 We find it positive that NAVER’s new business is evolving around fintech in overseas 1.17 5.17 9.17 1.18 markets. Major domestic and foreign internet firms have experienced share price rallies on fintech momentum. We believe now it is NAVER’s turn to price in such momentum. Mirae Asset Daewoo Co., Ltd. [ Internet/Game/Advertising ] FY (12) 12/14 12/15 12/16 12/17F 12/18F 12/19F Revenue (Wbn) 2,758 3,254 4,023 4,679 5,461 6,297 Jee -hyun Moon +822 -3774 -1640 OP (Wbn) 758 830 1,102 1,179 1,431 1,747 [email protected] OP margin (%) 27.5 25.5 27.4 25.2 26.2 27.7 NP (Wbn) 454 519 749 773 996 1,212 EPS (W) 13,787 15,737 22,732 23,436 30,204 36,768 ROE (%) 27.8 26.5 26.2 18.5 19.0 19.3 P/E (x) 51.6 41.8 34.1 37.1 30.6 25.1 P/B (x) 8.7 6.8 5.2 4.8 4.4 3.8 Dividend yield (%) 0.1 0.2 0.1 0.2 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 February 2, 2018 NAVER LINE’s share price and earnings trends Figure 1. Share price trends of global internet players: Fintech momentum already reflected in Kakao and Tencent shares (-1Y=100) 250 LINE NAVER Tencent makes equity investment in CICC Kakao (securities company) 200 Facebook KakaoBank begins Tencent IPO of Tencent-invested operations Snap ZhongAn Insurance in HK 150 100 Disclosure of current LINE expanding status of LINE Pay fintech business 50 0 1/17 3/17 5/17 7/17 9/17 11/17 1/18 Notes: 100 is based on stock price on the beginning of 2017 (Snap’s is from the moment of IPO) Source: Thomson Reuters, Mirae Asset Daewoo Research Table 1. LINE earnings: One-off costs weigh on profits despite strong revenue of ads and LINE Pay (“Other”) (JPYbn, %) 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17P 2015 2016 2017P Revenue 33.5 33.9 35.9 37.5 38.9 39.8 42.5 45.9 120.4 140.8 167.1 Ads 11.7 12.5 14.4 15.8 16.6 17.5 20.4 22.1 36.4 54.4 76.5 - Portal 2.6 2.4 2.4 2.6 2.6 2.5 2.7 2.6 10.0 10.0 10.4 - Messenger 8.3 8.3 8.2 9.0 9.0 9.5 10.0 11.1 26.4 33.8 39.5 - Performance 0.8 1.9 3.6 4.1 5.0 5.6 7.8 8.4 0.2 10.4 26.7 Communication 7.7 7.5 7.2 7.1 8.1 7.5 7.5 7.1 28.6 29.5 30.2 Content 11.9 11.4 10.8 10.8 10.4 10.1 9.9 9.7 49.1 44.9 40.1 Other 2.0 2.5 3.4 4.0 3.9 4.6 4.7 7.0 6.1 11.9 20.3 Other one-off gains 0.7 4.4 0.2 0.7 0.3 10.7 0.5 0.5 0.0 5.9 12.0 Operating profit 5.3 8.0 4.9 1.6 4.0 14.6 5.9 0.6 2.0 19.9 25.4 OP margin (1) 15.9 23.6 13.7 4.3 10.3 36.7 13.8 1.3 1.7 14.1 15.2 Operating profit ex-one-offs 5.3 3.8 4.9 1.6 4.0 4.2 5.9 2.8 2.0 15.6 16.9 OP margin (2) 15.8 11.2 13.6 4.3 10.3 10.6 13.8 6.2 1.7 11.1 10.1 Net profit -0.2 3.1 2.8 1.4 1.6 8.9 1.6 -4.0 -8.0 7.1 8.2 Net margin -0.7 9.1 7.8 3.8 4.2 22.4 3.8 -8.7 -6.6 5.0 4.9 YoY Revenue 19.2 21.9 11.5 16.1 16.2 17.3 18.4 22.3 16.9 18.7 Ads 39.1 61.1 48.7 47.8 41.6 39.5 42.1 40.1 49.4 40.8 - Portal -7.3 -1.2 5.3 7.4 2.5 2.8 8.6 -0.9 0.7 3.2 - Messenger 47.4 54.1 11.5 12.3 7.7 14.2 22.1 23.6 28.1 17.0 - Performance 1820.9 506.8 197.6 115.9 103.9 4772.5 156.9 Communication 14.2 16.6 -7.1 -8.1 5.1 1.2 4.7 -0.6 3.0 2.6 Content -1.5 -6.8 -18.4 -7.1 -12.6 -11.6 -8.4 -10.2 -8.7 -10.7 Other 137.2 79.8 111.2 76.9 95.0 85.7 38.2 75.6 94.9 70.3 Operating profit TTB 134.6 105.1 -24.6 82.5 18.7 -62.6 893.3 27.8 Operating profit ex-one-offs -24.5 10.5 19.4 77.4 680.0 8.3 Net profit TTB TTB TTB TTB 187.6 -41.6 TTR TTB 15.7 Key indicators Global MAU (mn persons) 152 157 162 167 171 169 168 168 145 167 168 Global paid official accounts (ads) 456 480 521 549 567 605 631 645 419 549 645 LINE Pay transaction amount (JPYbn) 11 21 105 115 228 - - 469 Note: All figures are based on consolidated K-IFRS; LINE Pay transaction amount has been disclosed since 4Q16; 4Q17 operating profit ex-one-offs includes temporary marketing costs for Clova Source : LINE, Mirae Asset Daewoo Research Mirae Asset Daewoo Research 2 February 2, 2018 NAVER Global fintech business to materialize Figure 2. LINE’s fintech business is evolving around LINE Pay (money transfer/payment) and LINE Financial (insurance and other financial services and Cryptocurrency) Source: LINE, Mirae Asset Daewoo Research Figure 3.
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