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Kakao (035720) Kakao (035720) Robust Growth Across All Divisions Continues Danny Lee Yonghyun Choi Internet & Games / Media Research Associate May 7, 2021 +82-2-6114-2960 [email protected] +82-2-6114-2915 [email protected] Maintain BUY; Revise up TP by 4.7% We maintain BUY on Kakao as we lift our TP by 4.7% to KRW135,000. While our revenue to KRW135,000 and OP forecasts have been left largely unchanged, we have revised up 2021E and 2022E NP (attributable to controlling interests) by 19.2% and 2.3%, respectively, to reflect the expected increase in equity-method gains from Dunamu. We expect the volatility in equity-method gains to fade from 2022. 1Q21 OP in line with consensus; Kakao reported 1Q21 revenue of KRW1.26tn (+44.9% YoY, +1.8% QoQ) and OP of Equity-method gains related to KRW157.5bn (+78.6% YoY, +5.3% QoQ). OP was in line with our estimate as well as market Dunamu increased consensus. Key businesses—including Talk Biz (+51.4% YoY), new businesses (+88.9% YoY), and paid content (+80.0% YoY)—catalyzed revenue growth. OPM (12.5%, +0.4pp QoQ) continued trending up on narrowing losses at new businesses (i.e., KakaoPay, mobility). Meanwhile, NP (attributable to controlling interests) skyrocketed 189.9% YoY to KRW224.5bn thanks to higher equity-method gains from Dunamu upon the growth in cryptocurrency trading value. Strong growth continues, driven by For 2021, Talk Biz revenue is expected to increase 50.4% YoY as both ad and commerce Talk Biz should continue to serve as major cash cows. In the ad segment, BizBoard customers are increasingly using add-on services (e.g., Kakao Talk Channel, Notification Talk, Talk Store), fueling a virtuous cycle in which synergies among the various services expand. In the commerce segment, along with category expansion, transaction value is growing across all categories (e.g., Kakao Talk Gift, Talk Store, Shopping Live). Buy Maintain Trading Data Risk & Total Return (annualized over three years) Free float 72.9% Target Price (Raised) KRW135,000 Avg. T/O val. (3m, KRWbn) 379.9 Return 1 2 3 4 High5 Risk Dividend yield* 0.6% Foreign ownership 33.3% 1 FALSE FALSE FALSE FALSE TRUE Major shareholders Bum-Soo Kim and 63 others 24.3% Total return 18.0% 2 FALSE FALSE FALSE FALSE FALSE Current price (May 6) KRW115,000 National Pension Service 8.4% 3 FALSE FALSE FALSE FALSE FALSE Consensus target price KRW125,304 Stock Price Performance 4High FALSE FALSE FALSE FALSE FALSE Market capitalization USD45.3bn (%) 1M 3M 6M 12M 5 FALSE FALSE FALSE FALSE FALSE * 12-month forward Absolute 5.7 26.4 55.2 188.2 Relative 4.0 24.1 18.0 74.9 Earnings Forecast & Valuation Stock Price & Relative Performance Fiscal year-end 2020A 2021E 2022E 2023E Revenue (KRWbn) 4,157 5,527 6,793 7,812 Relative performance (LHS) Stock price (RHS) OP (KRWbn) 456 754 1,117 1,569 % KRW NP to control. int. (KRWbn) 156 672 847 1,204 100 132,000 EPS (KRW) 355 1,514 1,909 2,713 80 EPS growth (%) TTB 326.5 26.1 42.1 98,000 P/E (x) 219.3 75.9 60.2 42.4 60 EV/EBITDA (x) 45.4 47.3 34.6 25.7 40 64,000 P/B (x) N/A 7.3 6.8 6.2 20 ROE (%) 2.7 10.1 11.7 15.3 Div. yield (%) 0.0 0.6 0.9 1.3 0 30,000 May '20 Aug '20 Nov '20 Feb '21 May '21 Source(s): Company data, KB Securities Investments in new-growth Kakao’s aggressive investments in a broad range of businesses—including paid businesses bearing fruit content, fintech, entertainment, and mobility—are beginning to bear fruit. A number of subsidiaries are preparing for IPOs in 2021-2022 and Kakao’s core business (i.e., KakaoTalk) should also see growth in earnings accelerate—giving way to both earnings growth and momentum for the company. 2 Investment Opinion & Risks Bull-case Scenario KRW162,000 (107.0x 12m fwd P/E) Base-case scenario: Catalysts 1) Talk Biz revenue grows 50% in 2021 2) New businesses break even in 2021 Base-case Scenario (target price) KRW135,000 (89.0x 12m fwd P/E) Bull-case scenario: Upside risks 1) Talk Biz revenue grows 60% in 2021 Current price KRW115,000 2) New businesses are profitable in 2021 Bear-case scenario: Downside risks Bear-case Scenario KRW108,000 (71.0x 12m fwd P/E) 1) Talk Biz revenue grows 40% in 2021 2) New businesses post losses in 2021 Revised Earnings Estimates Valuation & Target Price Calculation (KRWbn, %) Previous Revised Change 2021E 2022E 2021E 2022E 2021E 2022E 1) Valuation method: DCF valuation Revenue 5,575.2 6,869.4 5,527.4 6,792.8 -0.9 -1.1 OP 760.0 1,149.4 754.3 1,117.4 -0.7 -2.8 2) Target price calculation: NP (to control. int.) 563.9 828.0 672.1 847.2 19.2 2.3 Target market cap of KRW58.1tn Source(s): KB Securities estimates 3) Target price range: KB Estimates vs. Consensus KRW108,000 – KRW162,000 (KRWbn, %) KB Estimates Consensus Difference 2021E 2022E 2021E 2022E 2021E 2022E 4) Valuation at target price: 89x 12m fwd P/E Revenue 5,527.4 6,792.8 5,588.1 6,848.4 -1.1 -0.8 OP 754.3 1,117.4 784.0 1,137.1 -3.8 -1.7 NP (to control. int.) 672.1 847.2 597.0 852.5 12.6 -0.6 Source(s): Quantiwise, KB Securities estimates Revenue Composition (2021E) Earnings Sensitivity Analysis (%) EPS change 2021E 2022E +1% in FX rate +0.4 +0.4 +1pp in interest rate +1.2 +1.2 45% Platform Content 55% Source(s): Company data, KB Securities estimates Peer Group Comparison (KRWbn, x, %) Market Cap. 12m fwd P/E 5y EPS CAGR 12m fwd P/B 12m fwd EV/EBITDA 5y EBITDA CAGR Kakao 51,038.1 66.7 16.4 7.2 34.1 34.4 Naver 59,381.2 7.7 8.9 3.1 26.7 13.3 Facebook 1,004,417.2 21.3 50.9 5.2 11.6 38.0 Alphabet 1,760,714.9 23.8 17.6 5.8 13.9 18.5 Source(s): Bloomberg Consensus, KB Securities 3 Table 1. 1Q20 Earnings Results (KRWbn, %, pp) 1Q21P 4Q20 QoQ 1Q20 YoY KB Estimates Diff. Consensus Diff. Revenue 1,258.0 1,235.1 1.8 868.4 44.9 1,244.0 1.1 1,242.6 1.2 OP 157.5 149.7 5.3 88.2 78.6 163.2 (3.5) 153.8 2.4 Margin 12.5 12.1 0.4 10.2 2.4 13.1 (0.6) 12.4 0.1 NP (to control. int) 224.5 (189.1) TTB 77.5 189.9 123.5 81.8 134.8 66.6 Margin 17.8 (15.3) 33.2 8.9 8.9 9.9 7.9 10.8 7.0 Source(s): Quantiwise, KB Securities estimates Note: TTB=turn to black, TTR=turn to red, RR=remain in red Table 2. Earnings Forecast (consolidated) (KRWbn) 1Q20 2Q20 3Q20 4Q20 1Q21P 2Q21E 3Q21E 4Q21E 2019 2020 2021E 2022E Revenue 868.4 952.9 1,100.4 1,235.1 1,258.0 1,322.5 1,405.6 1,541.4 3,070.1 4,156.8 5,527.4 6,792.8 (% YoY) 22.9 30.0 40.5 45.7 44.9 38.8 27.7 24.8 27.0 35.4 33.0 22.9 (% QoQ ) 2.5 9.7 15.5 12.2 1.8 5.1 6.3 9.7 - - - - Platform 441.8 492.7 554.4 650.5 668.8 733.0 767.9 872.1 1,434.7 2,139.4 3,041.9 3,906.0 (% YoY) 41.1 50.7 58.1 46.5 51.4 48.8 38.5 34.1 38.0 49.1 42.2 28.4 (%QoQ) (0.5) 11.5 12.5 17.3 2.8 9.6 4.8 13.6 - - - - BizBoard 224.7 248.4 284.4 353.7 361.5 396.4 424.7 488.3 649.8 1,111.3 1,671.0 2,164.9 Portal 116.6 117.5 121.2 122.7 117.5 121.0 119.9 122.7 523.6 478.0 481.1 495.6 New business 100.5 126.8 148.8 174.0 189.8 215.6 223.2 261.1 261.3 550.2 889.7 1,245.6 Content 426.6 460.2 546.0 584.7 589.2 589.5 637.7 669.3 1,635.4 2,017.4 2,485.5 2,886.7 (% YoY) 8.5 13.3 26.3 44.9 38.1 28.1 16.8 14.5 18.7 23.4 23.2 16.1 (%QoQ) 5.7 7.9 18.7 7.1 0.8 0.1 8.2 5.0 - - - - Game 96.8 107.5 150.4 140.8 130.3 137.0 157.0 142.6 397.4 495.5 566.9 687.5 Music 150.7 151.0 155.7 161.7 156.8 158.6 163.5 169.8 586.6 619.2 648.7 681.2 Paid 97.0 119.0 148.4 163.6 174.7 186.4 198.1 208.6 297.2 528.0 767.8 940.7 IP & other 81.9 82.7 91.5 118.6 127.4 107.5 119.0 148.2 354.1 374.7 502.1 577.4 OPEX 780.2 855.1 980.2 1,085.5 1,100.4 1,138.6 1,203.2 1,330.8 2,863.3 3,701.0 4,773.1 5,675.4 (YoY %) 15.0 23.5 35.4 41.3 41.0 33.2 22.7 22.6 22.2 29.3 29.0 18.9 (QoQ %) 1.6 9.6 14.6 10.7 1.4 3.5 5.7 10.6 - - - - Labor 198.7 216.5 239.3 265.7 292.9 266.8 290.9 304.1 701.5 920.2 1,154.7 1,287.4 Marketing 29.9 38.5 76.3 87.5 67.2 99.2 105.4 123.3 151.2 232.3 395.1 475.5 D&A 58.7 61.6 66.8 78.2 79.2 83.2 88.4 95.4 220.6 265.3 346.2 420.6 Other 19.1 22.3 20.3 17.4 23.6 24.8 25.0 27.4 61.8 79.1 100.8 120.7 OP 88.2 97.8 120.2 149.7 157.5 183.8 202.4 210.6 206.8 455.9 754.3 1,117.4 (YoY %) 218.9 141.7 103.5 88.1 78.6 88.0 68.3 40.7 183.5 120.4 65.5 48.1 (QoQ %) 10.8 10.8 23.0 24.5 5.3 16.7 10.1 4.1 - - - - Margin (%) 10.2 10.3 10.9 12.1 12.5 13.9 14.4 13.7 6.7 11.0 13.6 16.4 NP (to control.
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