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Growth Engine Shifting to the Parent Business

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Growth Engine Shifting to the Parent Business NAVER (035420 KS ) Growth engine shifting to the parent business Internet 1Q17 review: In-line consolidated revenue, strong parent profits For 1Q17, NAVER’s consolidated revenue was in line with the market consensus, but consolidated operating profit slightly missed. LINE’s operating profit Results Comment contracted 25% YoY, but parent ope rating profit improved 26% YoY, which is April 28, 2017 positive given that the parent business accounts for the bulk (93%) of consolidated operating profit. Revenue: In its latest earnings release, NAVER changed its classification system , (Maintain) Buy dividing revenue into five segments (ads, business platform, IT platform, content services, and LINE and other platforms) instead of three (ads, content, and other) . All categories excluding content services recorded double-digit YoY revenue Target Price (12M, W) 1,160,000 growth in the quarter. The fastest growth came from the IT platform segment (NAVER Pay, etc.), where revenue surged 92% YoY. The business platform segment Share Price (04/27/17, W) 791,000 (search ads, etc.) grew 13% YoY, while the ads segment (display ads, etc.) saw higher growth of 22% YoY. Expected Return 47% Profits: Despite LINE’s disappointing performance, NAVER’s consolidated operating profit expanded 13% YoY, and net profit climbed 28% YoY. Among operating expense items (consolidated), agent/partner expenses (which are more variable in OP (17F, Wbn) 1,274 nature) and marketing spend rose 20% and 7% YoY, respectively. As for LINE, Consensus OP (17F, Wbn) 1,327 spending on LINE Pay and its MVNO continued to increase, and expenses related to engineer hiring look likely to head higher. EPS Growth (17F, %) 18.9 Market EPS Growth (17F, %) 34.1 Growing parent businesses to capture increasing attention P/E (17F, x) 29.3 In 2017, we believe investors’ focus will move to fast-growing segments of the Market P/E (17F, x) 9.6 parent business. KOSPI 2,209.46 Parent: IT platform, business platform, and video ads are the key areas of growth , in our view. The IT platform segment is currently being driven by NAVER Pay, but Market Cap (Wbn) 26,073 should see additional growth momentum from the global cloud business, which is Shares Outstanding (mn) 33 set to get underway in 2Q17. The business platform business mostly consists of Free Float (%) 76.6 search ads. While the global search ad market is forecast to grow 5% YoY in 2017, Foreign Ownership (%) 61.1 we expect NAVER’s search ad revenue to grow faster at 15%. Indeed, the company’s search ad revenue jumped 13% YoY in 1Q17, boosted by shopping search ads Beta (12M) 0.48 (rolled out in November 2016). Revenue from video ads was also robust , growing 52-Week Low 659,000 36% YoY in 1Q17. 52-Week High 900,000 Overseas: This year, LINE is expected to focus its growth strategy on ads rather (%) 1M 6M 12M than content. Meanwhile, content and video mobile services like V Live, Snow, and Absolute -10.6 -7.9 18.9 Webtoon—which have a larger user base overseas than domestically—are Relative -12.8 -15.6 8.5 continuing steady growth. As standalone firms, Snow and Webtoon could also positively contribute to enterprise value. 140 NAVER KOSPI 130 Reiterate Buy and TP of W1,160,000 120 We keep our Buy rating on NAVER with a target price of W1,160,000. We are 110 encouraged that the parent business, a core part of the company’s enterprise 100 value, is finding promising sources of growth. While investments are steadily 90 increasing, we do not think they are unreasonably high considering the sheer size of the company’s revenue and cash flow. 80 4.16 8.16 12.16 4.17 FY (Dec.) 12/14 12/15 12/16 12/17F 12/18F 12/19F Mirae Asset Daewoo Co., Ltd. Revenue (Wbn) 2,758 3,254 4,023 4,715 5,467 6,240 [Internet/Game/Advertising ] OP (Wbn) 758 830 1,102 1,274 1,548 1,812 OP margin (%) 27.5 25.5 27.4 27.0 28.3 29.0 Jee -hyun Moon NP (Wbn) 454 519 749 891 1,073 1,249 +822 -3774 -1640 [email protected] EPS (W) 13,787 15,737 22,732 27,025 32,556 37,905 ROE (%) 27.8 26.5 26.2 22.1 21.6 20.5 P/E (x) 51.6 41.8 34.1 29.3 24.3 20.9 P/B (x) 8.7 6.8 5.2 4.5 3.8 3.2 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 April 28, 2017 NAVER Earnings and forecasts Table 1. 1Q17 review (Wbn, %) 1Q17P Growth 1Q16 4Q16 Mirae Asset Preliminary Consensus YoY QoQ Daewoo Revenue 937 1,085 1,082 1,091 1,085 15.5 -0.2 Operating profit 257 290 291 306 302 13.2 0.2 OP margin 27.4 26.7 26.9 28.1 27.9 Net profit 165 183 211 213 216 27.8 15.0 Note: All figures are based on consolidated K-IFRS Source: Company data, WISEfn, Mirae Asset Daewoo Research estimates Table 2. Quarterly and annual earnings and forecasts (Wbn, %) 1Q16 2Q16 3Q16 4Q16 1Q17P 2Q17F 3Q17F 4Q17F 2016 2017F Revenue 937 987 1,013 1,085 1,082 1,160 1,185 1,287 4,023 4,715 Ads 82 97 98 123 100 117 116 143 400 475 Business platform 450 462 462 491 510 536 536 563 1,866 2,145 IT platform 23 28 31 39 43 53 56 76 121 229 Content services 31 27 23 23 24 25 26 27 103 101 LINE and other platforms 353 373 399 409 406 429 451 478 1,534 1,764 Operating profit 257 273 282 290 291 319 320 345 1,102 1,274 OP margin 27.4 27.6 27.9 26.7 26.9 27.5 27.0 26.8 27.4 27.0 Net profit 165 213 198 183 211 228 229 239 759 909 Net margin 17.6 21.6 19.5 16.9 19.5 19.6 19.3 18.6 18.9 19.3 YoY Revenue 26.6 26.3 20.5 21.7 15.5 17.5 17.0 18.7 23.6 17.2 Ads 22.3 21.0 18.0 16.0 19.0 Business platform 13.3 16.0 16.0 14.7 15.0 IT platform 92.0 90.0 82.0 95.1 90.0 Content services -23.7 -10.0 15.1 20.4 -2.0 LINE and other platforms 15.1 15.0 13.0 16.8 15.0 Operating profit 32.1 44.0 27.6 28.9 13.2 16.9 13.4 18.7 32.7 15.6 Net profit 22.7 71.8 69.5 29.6 27.8 6.8 15.5 30.3 46.8 19.7 Notes: All figures are based on consolidated K-IFRS; revenue was reclassified into five segments: ads, business platform, IT platform, content services, and LINE and other platforms; new classification only applies from 2016; 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, Webtoon, and V Live; LINE and other platforms include LINE, Camp Mobile, and Snow Source: Company data, Mirae Asset Daewoo Research estimates Table 3. Earnings forecast revisions (Wbn, W, %) Previous Revised % chg. Notes 17F 18F 17F 18F 17F 18F Revenue 4,696 5,448 4,715 5,467 0.4 0.3 - Revised up cost estimates related to LINE and Operating profit 1,371 1,645 1,274 1,548 -7.0 -5.9 other platforms Net profit 941 1,135 909 1,095 -3.4 -3.5 - Revised up non-operating profit estimates EPS 28,184 33,979 27,025 32,556 -4.1 -4.2 OP margin 29.1 31.0 27.0 28.3 Net margin 20.0 21.4 19.3 20.0 Notes: All figures are based on consolidated K-IFRS; 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 April 28, 2017 NAVER Key trends Figure 1. Ad s: Affected by seasonality; mobile contribution on Figure 2. Business platform: Mobile and shopping search ads the rise driving up growth (Wbn) (Wbn) 150 Ad revenue 540 Business platform revenue +13% YoY +4% QoQ 510 120 +22% YoY -19% QoQ 90 480 60 450 30 420 0 390 1Q16 2Q16 3Q16 4Q16 1Q17P 1Q16 2Q16 3Q16 4Q16 1Q17P Note: Excluding LINE and other platforms Note: Excluding LINE and other platforms Source: Company data, Mirae Asset Daewoo Research Source: Company data, Mirae Asset Daewoo Research Figure 3. IT platform: NAVER Pay made the greatest Figure 4. Content services : Impact from transfer of app store contribution; On a steep uptrend business faded YoY; V Live starting to contribute to earnings (Wbn) (Wbn) 60 IT platform revenue 40 Content services revenue +92% YoY 45 +11% QoQ 30 -24% YoY +4% YoY 30 20 15 10 0 0 1Q16 2Q16 3Q16 4Q16 1Q17P 1Q16 2Q16 3Q16 4Q16 1Q17P Note: Excluding LINE and other platforms Note: Excluding LINE and other platforms Source: Company data, Mirae Asset Daewoo Research Source: Company data, Mirae Asset Daewoo Research Figure 5.
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