[Korea ] Internet

Kakao (035720 KS ) KakaoPage sees transaction volume surpassing W500bn in 2020

Mirae Asset Daewoo Co., Ltd. Jeong -yeob Park [email protected] Chang-kwean Kim [email protected]

ó presented key indicators and its future vision for the business (KakaoPage and ) at IPO EXPO 2020. ó KakaoPage set its 2020 transaction volume target at over W500bn, far above our original expectation (W340.3bn). ó Maintain Buy and TP of W370,000: We expect Kakao’s webtoon business to gain increasing attention as a next-generation platform, alongside Webtoon Entertainment.

2020 transaction volume target set at over W500bn; aiming to become a global IP machine

- KakaoPage (CEO Lee Jin-soo) presented a 2020 transaction volume target of over W500bn (+56.3%).

- Given that roughly 40% of intellectual properties (IPs) available on Piccoma are owned by KakaoPage, we believe the W500bn target partially includes Piccoma’s transaction volume.

- Still, we view the announcement as meaningful, as it presents a target well above our expectations (W340.3bn for KakaoPage and W234bn for Piccoma).

- KakaoPage, which was the first in the industry to successfully monetize through its “pay or wait” model, has been strengthening its roles as both a content platform and IP holder (currently owning more than 7,000 original IP titles through investments in authors and content providers).

- Meanwhile, Piccoma has successfully monetized its platform while also demonstrating the far-reaching power of “K-stories” (Korean webtoons/web novels). Of note, K-stories account for almost 40% of Piccoma’s transaction volume (but less than 5% of Piccoma’s titles).

Webtoon business to continue to re-rate higher

- Kakao has three webtoon-related subsidiaries: 1) KakaoPage (63.5% owned by Kakao), 2) Kakao Japan (operator of Piccoma; 79.5% owned by Kakao and 19.9% by KakaoPage), and 3) Neobazar (global; 68.4% owned by KakaoPage).

- We believe the webtoon business has the potential to reach a combined valuation of around W10tr, given: 1) its positioning as a next-generation platform (comparable to Netflix [NFLX US/CP: US$502.78] and Spotify [SPOT US/CP: US$269.26]); 2) the increasing global popularity of webtoons (webtoon traffic is growing in the US, Latin America, and Europe); and 3) growing utilization of webtoon IPs (film/drama/game adaptations).

- The biggest strength of Kakao’s webtoon business is that it is already making profits on the back of its strong market share in Korea/Japan (where there is limited need for marketing). In particular, Piccoma’s downloads and transaction volume (2Q20F: +213%) have been rapidly growing in 2020.

Earnings and valuation metrics FY (Dec.) 12/17 12/18 12/19 12/20F 12/21F 12/22F Revenue (Wbn) 1,972 2,417 3,070 3,828 4,687 5,954 OP (Wbn) 165 73 207 443 717 952 OP Margin (%) 8.4 3.0 6.7 11.6 15.3 16.0 NP (Wbn) 109 48 -301 322 466 625 EPS (W) 1,602 613 -3,585 3,706 5,354 7,183 ROE (%) 2.9 1.0 -5.8 6.0 8.1 9.9 P/E (x) 85.5 168.0 - 88.5 61.3 45.7 P/B (x) 2.3 1.7 2.5 5.2 4.8 4.3 Dividend Yield (%) 0.1 0.1 0.1 0.0 0.0 0.0 Notes: All figures are based on consolidated K-IFRS; NP refers to net profit attributable to controlling interests Source: Company data, Mirae Asset Daewoo Research estimat es

Kakao July 9, 2020

- We expect the webtoon business to continue to re-rate higher as it expands its geographical reach to countries like the US, Taiwan, Indonesia, and Thailand.

Figure 1. KakaoPage transaction volume target: Over W500bn in 2020

(Wbn) 600 KakaoPage transaction volume

500

400

300 500 200 320 250 100 160 95 50 0 1.7 13 2013 2014 2015 2016 2017 2018 2019 2020F

Source: KakaoPage, Mirae Asset Daewoo Research

Figure 2. Projects based on KakaoPage’s IP: No. of projects in 2020-23 likely to outnumber those released over the past 14 years

(No.) 25 Movies Drama series

20

15

10

5

0 2006 2008 2010 2012 2014 2016 2018 2020F 2022F

Source: KakaoPage, Mirae Asset Daewoo Research

Figure 3. K-stories account for almost 40% of Piccoma’s transaction volume

Source: KakaoPage, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 2 Kakao July 9, 2020

Figure 4. Netflix: Revenue and P/S simultaneously increased during global market expansion

(%) Revenue growth (L) 12MF P/S (R) 12MT P/S (R) (x) 60 16 US cable TV market Revenue growth through Korea, encroachment regional expansion Southeast Asia 14 50 (190 countries currently) 12 Western Australia, 40 Europe Japan 10 South 30 America UK Northern 8 Europe 6 20 4 10 2

0 0 1/08 1/09 1/10 1/11 1/12 1/13 1/14 1/15 1/16 1/17 1/18 1/19 1/20

Source: Bloomberg, Mirae Asset Daewoo Research

Figure 5. Spotify: P/S has risen sharply on expectations for global expansion and new content offerings

(%) (x) 50 Revenue growth (L) 12MF P/S (R) 12MT P/S (R) 7

6 40 Regional/content expansion expected 5

30 4

3 20

2 10 1

0 0 1/18 4/18 7/18 10/18 1/19 4/19 7/19 10/19 1/20 4/20

Source: Bloomberg, Mirae Asset Daewoo Research

Figure 6. Google Trends: Sharp increase in "webtoon" queries following service launch in South America and Europe

(P) 120 Global US NAVER Webtoon monetization 100 France in US/East Asia Mexico 80

60

40 NAVER Webtoon Enters South America/Europe 20

0 6/15 1/16 8/16 3/17 10/17 5/18 12/18 7/19 2/20

Source: Google, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 3 Kakao July 9, 2020

Figure 7. Piccoma: Monthly downloads

800000

700000

600000 +156% YoY 500000

400000

300000

200000

100000

0 6/19 8/19 10/19 12/19 2/20 4/20 6/20

Source: Sensor Tower, Mirae Asset Daewoo Research

Figure 8. Japan book app rankings (revenue)

Source: Sensor Tower, Mirae Asset Daewoo Research

Figure 9. Piccoma: Monthly transaction volume Figure 10. Piccoma: Quarterly transaction volume

(Wbn) (Wbn) 50 120

100 40 + 242% YoY + 213% YoY 80 30 60 20 40

10 20

0 0 6/19 8/19 10/19 12/19 2/20 4/20 6/20 2Q19 3Q19 4Q19 1Q20 2Q20F

Note: Transaction volume data are based on SensorTower estimates, and could differ Note: Transaction volume data are based on SensorTower estimates, and could differ from actual data. from actual data. Source : Sensor Tower, Mirae Asset Daewoo Research estimates Source : Sensor Tower, Mirae Asset Daewoo Research estimates

Mirae Asset Daewoo Research 4 Kakao July 9, 2020

Table 1. KakaoPage: Annual earnings estimates (Wbn, %, W) 2017 2018 2019 2020F 2021F Revenue (incl. Webtoon, advertising) 118 188 257 299 346 Domestic platform 110 168 198 231 270 Global IP distribution 8 20 28 34 38 Ads/other 10 21 31 34 39 * Piccoma (not included in above figures) 19 51 125 214 311 KakaoPage’s operating profit 3 13 31 41 52 OP margin (%) 2.8 6.7 11.9 13.8 15 Content transaction volume (Piccoma included) 160 290 429 574 733 Note: All figures excluding annual revenue and operating profit are based on our estimates. Source: Kakao, Mirae Asset Daewoo Research

Figure 11. Kakao’s webtoon business structure

Kakao (035720 KS)

63.5% 79.5% 59.0%

Kakao KakaoPage Kakao Japan Games Domestic 19.9% Japan

19.1%

Neobazar

68.4% Indonesia

Source: Company materials, Mirae Asset Daewoo Research

Table 2. Kakao: Valuation (Wbn, W ) Business 2020F 2021F Notes Ad revenue 1,178 1,621

- Target multiple is based on 2020F P/S of Facebook; KakaoTalk ad revenue forecast to surge in Value 8,883 14,841 2020; valuation re -rating is expected, as was the case with Facebook back in 2013 Gaming revenue 415 430

Value 2,204 2,441 - Target multiple is in line with the 2021F avg. P/S of , NCsoft, and Pearl Abyss Music revenue 611 635

Value 3,368 2,890 - Target multiple is based on 2021F P/S of Spotify Other content revenue 479 574 - KakaoPage and Kakao Japan plan to go public in Korea and Japan, respectively. - Piccoma’s surging transaction volume has boosted IPO value; target multiple is in line with the Value 3,834 4,593 2016-20 average P/S (8x) of Netflix - IPO values for both KakaoPage and Kakao Japan to be revisited down the line Other revenue 1,144 1,427 - Equity-method gains from KakaoBank (which is expected to go public) Value 5,573 5,999 - Target multiple is line with the avg. 2021F P/S of peers (Amazon, NAVER) Total 30,765 - 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 appear Per-share value 370,000 more relevant than profitability indicators Source: Bloomberg, Mirae Asset Daewoo Research estimates

Mirae Asset Daewoo Research 5 Kakao July 9, 2020

Table 3. Kakao: Quarterly and annual earnings (Wbn, %) 1Q19 2Q19 3Q19 4Q19 1Q20 2Q20F 3Q20F 4Q20F 2019 2020F 2021F Revenue 706 733 783 848 868 919 966 1,074 3,070 3,828 4,687 Platform 313 327 351 444 442 478 499 569 1,435 1,988 2,594 Talk Biz 127 139 162 222 225 244 261 297 650 1,026 1,535 Portal Biz 126 137 126 134 117 125 121 144 524 507 516 New Biz 60 51 62 88 101 109 118 128 261 455 542 Content 393 406 432 404 427 441 467 505 1,635 1,840 2,094 Game 94 98 99 106 97 98 110 110 397 415 430 Music 137 145 151 153 151 151 153 156 587 611 635 Paid content 75 82 92 49 97 107 112 118 297 434 527 IP business/other 87 82 90 95 82 84 92 121 354 380 501 Operating profit 28 40 59 80 88 100 110 145 207 443 717 OP margin 4 6 8 9 10 11 11 13 7 12 15 Net profit 18 31 51 -442 80 70 77 99 -342 326 472 Net margin 2 4 7 -52 9 8 8 9 -11 9 10 YoY growth Revenue 27.2 24.5 30.7 25.9 22.9 25.3 23.4 26.7 27 24.7 22.5 Platform 34.8 30.2 38.6 46.6 41.1 46.3 42.3 28.1 38 38.6 30.5 Talk Biz 43.3 42.4 51.6 73.3 77.1 75.5 60.7 34 54.3 58 49.6 Portal Biz 3.9 6.7 9.1 3.4 -7.8 -8.5 -4.3 7.4 5.7 -3.2 1.9 New Biz 171.6 103 105.3 94.9 68.1 113.9 88.8 44.9 112.9 74.1 19.2 Content 21.7 20.2 24.9 8.9 8.5 8.4 8.1 25.2 18.7 12.5 13.8 Game -10.9 -11.9 -0.4 5.6 3 -0.5 10.7 3.9 -4.7 4.3 3.8 Music 8.7 10.8 11.4 9.4 9.8 4.7 1.2 1.7 10.1 4.2 3.9 Paid content 70.6 60.3 52 -22.3 30 31.3 22 140 36.1 46.1 21.4 IP business/other 83.7 81.8 78.7 42.8 -6.1 3 2.5 27.4 69.1 7.2 32 Operating profit 166.5 46.6 92.7 1751.6 218.9 147.5 86.7 81.9 183.7 114.4 61.7 Net profit 19.9 37.8 596.8 적지 354.9 127.3 49.5 TTB TTR TTB 44.8 Source: Company data, Mirae Asset Daewoo Research estimates

Mirae Asset Daewoo Research 6 Kakao July 9, 2020

Appendix 1

Important disclosures and disclaimers 2-Year Rating and Target TP History

Company (Code) Date Rating TP (W) (W) Kakao Kakao(035720) 07/03/2020 Buy 370,000 400,000 05/08/2020 Buy 280,000 02/13/2020 Buy 243,000 300,000 01/13/2020 Buy 205,000 11/07/2019 Buy 185,000 200,000 07/16/2019 Buy 177,000 100,000 05/01/2019 Buy 170,000

11/26/2018 Buy 130,000 0 08/27/2018 No Coverage Jul 18 Jul 19 Jul 20 08/10/2018 Buy 150,000 05/11/2018 Trading 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 76.22% 11.59% 11.59% 0.60% Investment banking services 75.00% 10.00% 15.00% 0% * Based on recommendations in the last 12-months (as of June 30, 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

Mirae Asset Daewoo Research 7 Kakao July 9, 2020

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. 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

Distribution United Kingdom: This report is being distributed by (UK) Ltd. in the United Kingdom only to (i) investment professionals falling within Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (the “Order”), and (ii) high net worth companies and other persons to whom it may lawfully be communicated, falling within Article 49(2)(A) to (E) of the Order (all such persons together being referred to as “Relevant Persons”). This report is directed only at Relevant Persons. Any person who is not a Relevant Person should not act or rely on this report or any of its contents. United States: Mirae Asset Daewoo is not a registered broker-dealer in the United States and, therefore, is not subject to U.S. rules regarding the preparation of research reports and the independence of research analysts. This report is distributed in the U.S. by Mirae Asset Securities (USA) Inc., a member of FINRA/SIPC, to “major U.S. institutional investors” in reliance on the exemption from registration provided by Rule 15a-6(b)(4) under the U.S. Securities Exchange Act of 1934, as amended. All U.S. persons that receive this document by their acceptance hereof represent and warrant that they are a major U.S. institutional investor and have not received this report under any express or implied understanding that they will direct commission income to Mirae Asset Daewoo or its affiliates. Any U.S. recipient of this document wishing to effect a transaction in any securities discussed herein should contact and place orders with Mirae Asset Securities (USA) Inc. Mirae Asset Securities (USA) Inc. accepts responsibility for the contents of this report in the U.S., subject to the terms hereof, to the extent that it is delivered to a U.S. person other than a major U.S. institutional investor. Under no circumstances should any recipient of this research report effect any transaction to buy or sell securities or related financial instruments through Mirae Asset Daewoo. The securities described in this report may not have been registered under the U.S. Securities Act of 1933, as amended, and, in such case, may not be offered or sold in the U.S. or to U.S. persons absent registration or an applicable exemption from the registration requirements. Hong Kong: This report is distributed in Hong Kong by Mirae Asset Securities (HK) Limited, which is regulated by the Hong Kong Securities and Futures Commission. The contents of this report have not been reviewed by any regulatory authority in Hong Kong. This report is for distribution only to professional investors within the meaning of Part I of Schedule 1 to the Securities and Futures Ordinance of Hong Kong (Cap. 571, Laws of Hong Kong) and any rules made thereunder and may not be redistributed in whole or in part in Hong Kong to any person. All other jurisdictions: Customers in all other countries who wish to effect a transaction in any securities referenced in this report should contact Mirae Asset Daewoo or its affiliates only if distribution to or use by such customer of this report would not violate applicable laws and regulations and not subject Mirae Asset Daewoo and its affiliates to any registration or licensing requirement within such jurisdiction.

Mirae Asset Daewoo Research 8 Kakao July 9, 2020

Mirae Asset Daewoo International Network

Mirae Asset Daewoo Co., Ltd. (Seoul) Mirae Asset Securities (HK) Ltd. Mirae Asset Securities (UK) Ltd. One-Asia Equity Sales Team Units 8501, 8507-8508, 85/F 41st Floor, Tower 42 Mirae Asset Center 1 Building International Commerce Centre 25 Old Broad Street, 26 Eulji-ro 5-gil, Jung-gu, Seoul 04539 1 Austin Road West London EC2N 1HQ Korea Kowloon United Kingdom Hong Kong Tel: 82-2-3774-2124 Tel: 852-2845-6332 Tel: 44-20-7982-8000

Mirae Asset Wealth Management (Brazil) Mirae Asset Securities (USA) Inc. Mirae Asset Wealth Management (USA) Inc. CCTVM 810 Seventh Avenue, 37th Floor 555 S. Flower Street, Suite 4410, Rua Funchal, 418, 18th Floor, E-Tower Building New York, NY 10019 Los Angeles, California 90071 Vila Olimpia USA USA Sao Paulo - SP 04551-060 Brazil Tel: 1-212-407-1000 Tel: 1-213-262-3807 Tel: 55-11-2789-2100

PT. Mirae Asset Sekuritas Indonesia Mirae Asset Securities (Singapore) Pte. Ltd. Mirae Asset Securities (Vietnam) LLC Equity Tower Building Lt. 50 6 Battery Road, #11-01 7F, Saigon Royal Building Sudirman Central Business District Singapore 049909 91 Pasteur St. Jl. Jend. Sudirman, Kav. 52 -53 Republic of Singapore District 1, Ben Nghe Ward, Ho Chi Minh City Jakarta Selatan 12190 Vietnam Indonesia Tel: 62-21-515-3281 Tel: 65-6671-9845 Tel: 84-8-3911-0633 (ext.110) Mirae Asset Investment Advisory (Beijing) Co., Mirae Asset Securities Mongolia UTsK LLC Beijing Representative Office Ltd #406, Blue Sky Tower, Peace Avenue 17 2401B, 24th Floor, East Tower, Twin Towers 2401A, 24th Floor, East Tower, Twin Towers 1 Khoroo, Sukhbaatar District B12 Jianguomenwai Avenue, Chaoyang District B12 Jianguomenwai Avenue, Chaoyang District Ulaanbaatar 14240 Beijing 100022 Beijing 100022 Mongolia China China

Tel: 976-7011-0806 Tel: 86-10-6567-9699 Tel: 86-10-6567-9699 (ext. 3300) Shanghai Representative Office Ho Chi Minh Representative Office 38T31, 38F, Shanghai World Financial Center 7F, Saigon Royal Building 100 Century Avenue, Pudong New Area 91 Pasteur St. Shanghai 200120 District 1, Ben Nghe Ward, Ho Chi Minh City China Vietnam

Tel: 86-21-5013-6392 Tel: 84-8-3910-7715

Mirae Asset Daewoo Research 9