NAVER (035420 KS) Focus on shifts in online shopping trends
Internet February data confirm NAVER-Coupang duopoly Company Report The spread of COVID-19 is spurring faster-than-expected growth of the online April 16, 2020 shopping market. While the virus outbreak has dampened demand for performances, travel, leisure, and apparel, it has fueled demand for consumer staples (e.g., F&B). Spending on performances and travel will eventually resume, while newer categories, such as (Maintain) Buy financial services, should benefit from consumers’ increasing experience with online shopping. Target Price(12M, W) 241,000 Consumer preferences regarding online shopping malls are also becoming clearer. In terms of gross merchandise volume (GMV), NAVER and Coupang were the only online Share Price (04/14/20, W) 168,500 shopping malls that outperformed the market (+24.5% YoY) in February. We think NAVER is replacing department stores, while Coupang is supplanting hypermarkets Expected Return 43% and supermarkets.
E-commerce to drive earnings momentum in 4Q20 OP (20F, Wbn) 951 We expect NAVER to report below-consensus 1Q20 earnings (scheduled to be released Consensus OP (20F, Wbn) 967 on April 23rd) and issue conservative guidance for 2Q20, as growth in display/search EPS Growth (20F, %) 33.0 ads has been slowing since mid-February due to the impact of COVID-19. Market EPS Growth (20F, %) 40.5 We look for 1Q20 revenue of W1.73tr (+14.6% YoY) and operating profit of W180bn P/E (20F, x) 35.8 (-12.5% YoY; vs. current consensus of W198bn). We see earnings improving heading Market P/E (20F, x) 11.4 into 2H20 and anticipate sharper improvement in 2021. KOSPI 1,857.08 Notably, the e-commerce segment is likely to drive earnings momentum in 4Q20, aided Market Cap (Wbn) 27,678 by market share gains, a pickup in consumer demand, peak-season effects, and an Shares Outstanding (mn) 164 easy YoY comparison. Free Float (%) 76.2 Foreign Ownership (%) 57.7 High premiums of top-tier online shopping firms could also apply to NAVER Beta (12M) 0.54 We expect NAVER’s e-commerce business to be re-rated higher. Top-tier online 52-Week Low 108,500 shopping malls trade at high premiums because their GMV (which is largely made up 52-Week High 191,500 of repeat transactions) is more than just a source of commissions and ad revenues; it is (%) 1M 6M 12M also the foundation for big data accumulation and income model expansion. Absolute 1.5 8.0 41.0 P/S based on GMV is one metric that explains the high valuations of Amazon (AMZN Relative -3.2 20.2 69.6 US/CP: US$2,307.68) and Alibaba (BABA US/CP: US$208.17). On average, Amazon has traded at a P/S of around 1.5x its GMV, while Alibaba has traded at 0.52x. Applying 170 NAVER KOSPI 150 these multiples to NAVER’s 2019 GMV estimate puts the company’s market value at 130 W10-29tr. 110 Conditions for contactless online businesses should become more favorable in the 90 70 wake of COVID-19. In addition, we see significant growth momentum coming from 50 NAVER Financial and NAVER Webtoon’s global services in 2H20. We reaffirm our Buy 4.19 8.19 12.19 4.20 rating and target price of W241,000 on NAVER.
Mirae Asset Daewoo Co., Ltd.
[Internet] FY (12) 12/17 12/18 12/19 12/20F 12/21F 12/22F Revenue (Wbn) 4,678 5,587 6,593 7,601 8,704 10,272 Chang-kwean Kim +822-3774-1614 OP (Wbn) 1,179 943 710 951 1,657 1,840 [email protected] OP Margin (%) 25.2 16.9 10.8 12.5 19.0 17.9 NP (Wbn) 773 649 583 773 1,745 1,869 EPS (W) 4,689 3,937 3,538 4,704 10,625 11,378 ROE (%) 18.5 13.0 10.6 12.5 23.7 20.5 P/E (x) 37.1 31.0 52.7 35.8 15.9 14.8 P/B (x) 4.8 3.1 4.3 3.5 2.9 2.4 Dividend Yield (%) 0.2 0.3 0.2 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
Analysts who prepared this report are registered as research analysts in Korea but not in any other jurisdiction, including the U.S. PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES & DISCLAIMERS IN APPENDIX 1 AT THE END OF REPORT.
April 16, 2020 NAVER
I. Online shopping goes mainstream
1. Korea’s online retail sales up 34.2% YoY in February 2020
Key data on February retail sales are now available following the release of: 1) the Ministry of Trade, Industry and Energy’s (MOTIE) survey of major retailers (i.e., offline discount stores, department stores, convenience stores, and online shopping malls); and 2) Statistics Korea’s monthly online shopping figures.
According to the MOTIE survey, major retailers saw a 7.5% YoY decline in offline sales but a 34.2% YoY increase in online sales in February . Overall, online sales as a percentage of total retail sales expanded to 49% in the month.
Notably, offline department store sales fell 21.4% in February. We believe this trend has important implications for NAVER, given that NAVER Shopping—with its high exposure to durable goods—is well-positioned to take significant share from the department store channel .
Figure 1. February retail sales growth: Offline vs. online Figure 2. February offline retail sales growth by channel
(%) (%) 40 10 7.8 8.2 34.2 5 30 Hypermarket Department store 0 Convenience store SSM 20 -5
9.1 10 -10 -10.6 Offline -15 0 Total Online -20
-10 -21.4 -7.5 -25
Source: MOTIE, Mirae Asset Daewoo Research Source: MOTIE, Mirae Asset Daewoo Research
Figure 3. February 2019 retail sales breakdown Figure 4. February 2020 retail sales breakdown
4% 4% 16% 16% E-commerce E-commerce 41% Hypermarket Hypermarket Department store 49% Department store 13% 18% Convenience store Convenience store SSM SSM
18% 21%
Source: MOTIE, Mirae Asset Daewoo Research Source: MOTIE, Mirae Asset Daewoo Research
Mirae Asset Daewoo Research 2 April 16, 2020 NAVER
2. February e-commerce penetration reached 35%, but travel/leisure saw sharply lower transaction volume
We also see several implications for NAVER in Statistics Korea’s online shopping data. In February, Korea’s e-commerce transaction volume reached W11.96tr, up 24.5% YoY—the largest increase since October 2018 (+30.7% YoY).
We believe e-commerce transaction volume expanded further in March, as the rapid spread of COVID-19 prompted consumers to stay home and embrace the contactless trend in earnest.
By category, February e-commerce transaction volume increased 71% YoY (to W1.48tr) for grocery products, 52.8% YoY for household goods, and 82.2% (to W1.12tr) for food delivery services.
The robust growth of online grocery shopping and food delivery services benefited players like Coupang, Market Kurly, and Baedal Minjok rather than NAVER. Meanwhile, travel/transportation (e.g., hotels and flights) and culture/leisure (e.g., concert tickets)— categories to which NAVER has high exposure—saw sharply lower transaction volume in February (-46.2% and -60% YoY, respectively).
Figure 5. E-commerce transaction value and e-commerce penetration by month
Source: Statistics Korea, Mirae Asset Daewoo Research Source: Statistics Korea, Mirae Asset Daewoo Research
Mirae Asset Daewoo Research 3 April 16, 2020 NAVER
3. Domestic e-commerce market charting a new path
We believe the COVID-19 pandemic is providing a boost to e-commerce market growth. In 2019, the domestic e-commerce market’s growth slowed slightly to 19.4% (from 20.3% in 2018), but we see growth recovering to 20.0% in 2020, despite a likely contraction in overall consumer spending .
We forecast e-commerce penetration, which rose from 24.4% in 2018 to 28.6% in 2019, to reach 34.3% in 2020, up from our previous estimate of 31%.
In 2018, Korea already had the highest e-commerce penetration rate among major markets, reflecting the rapid encroachment of online stores/marketplaces into the retail sector .
Amid the spread of COVID-19, there are reports of shipping delays at US retailers (even at Amazon), and American consumers are cutting back on non-essential spending. Meanwhile, we have yet to observe shipping delays in Korea, despite a recent spike in delivery volumes.
Source: Statistics Korea, Mirae Asset Daewoo Research Source: Statistics Korea, Mirae Asset Daewoo Research
Figure 10. E-commerce penetration by country (2018)
(%) 40 World's highest penetration rate → Korea is leading the way in e-commerce 34.3
30 28.6 24.4
18.2 20 17.2 16.8 14.8
9.8 9.0 10 4.3 3.0 2.7 2.3
0 Domestic:18 19 20F China Chile UK Germany US Japan Hong Kong Brazil Argentina Vietnam Mexico
Source: eMarketer, Statista, SCMP, Tech in Asia, CNC, official national statistics, Mirae Asset Daewoo Research
Mirae Asset Daewoo Research 4 April 16, 2020 NAVER
II. NAVER: A leading e-commerce player
1. While NAVER is taking on department stores, Coupang is competing against supermarkets Since 2018, the domestic e-commerce market has been a battle between NAVER and Coupang, a dynamic only reinforced by the February retail data. While these two dominant players recorded robust growth in GMV in 2018 and 2019, their rivals displayed relatively slow GMV growth . While NAVER provides a host platform for C2C shopping malls (in essence serving as an intermediary for e-commerce activities), Coupang is centered on B2C. Of Coupang’s total GMV in 2019, we estimate 90% was generated from its directly sourced products (up from 88% in 2018). NAVER Shopping has relatively high exposure to durable goods, and the platform enables various search options (price comparisons, bundling options, etc.) based on NAVER’s database. Coupang’s areas of strength, meanwhile, are groceries and household goods— categories where rapid delivery capabilities are important. We believe NAVER poses a competitive threat to department stores, while Coupang is taking on supermarkets and hypermarkets. Korea’s total e-commerce transaction volume grew 24.5% YoY in February, and NAVER and Coupang were the only companies that posted above-market growth . We estimate NAVER and Coupang increased their respective shares of the domestic e- commerce market to 14% and 12% in February 2020 (vs. 11% and 8% in February 2019).
Figure 11. GMV by Korean online shopping platform (2017-18) Figure 12. GMV by Korean online shopping platform (2018-19)
Note: GMV is based on our estimate for NAVER and WiseApp estimates for others Source: Press reports, WiseApp, Mirae Asset Daewoo Research
Mirae Asset Daewoo Research 5 April 16, 2020 NAVER
2. Brand stores: A new growth engine
NAVER Shopping has long served as an e-commerce platform for small/medium-sized sellers. As of 1Q20, Smart Store, NAVER’s C2C platform, has 300,000 registered sellers offering 800mn products (with 7mn new products being listed daily).
We estimate the platform’s average transaction value (ATV) at W45,000, with 15mn customers spending an average of W120,000-130,000 per month. This ATV figure is much lower than that of department stores (W100,000 or higher)—the format that NAVER is positioned to replace; this suggests that the products sold through NAVER Shopping are mainly low- to mid-priced.
In February 2020, NAVER unveiled a “brand store” category showcasing large conglomerates and brands looking to sell directly to customers. A wide variety of players opened stores on the platform in February, including: home appliance brands (Miele and Philips); household goods/staples companies (LG H&H, Downy, L'Occitane, CJ CheilJedang, and Pulmuone); and furniture makers (Iloom, Hyundai Livart, and Hanssem).
NAVER-based brand stores allow businesses to save on fees/commissions and provide customers with a safe, scam-free shopping experience as well as opportunities to earn NAVER Pay reward points. Simply put, they serve as a channel through which large companies can reach customers without passing through intermediaries . By year-end, NAVER aims to increase its brand store count to 200 and attract massive brands such as Samsung, LG, and Apple.
As more brands are added, GMV should surge, allowing NAVER to truly threaten department stores. And for large conglomerates, increasing exposure to NAVER-based sales will reduce sales commission burdens (paid to department stores) and facilitate efficient analysis of customers’ consumption patterns.
We note that the direct-to-customer (D2C) business model under which NAVER’s brand stores operate has already taken hold in the US and China . For example, the official brand outlets available on Taobao and Tmall are popular with Chinese consumers .
Table 1. NAVER’s Smart Store statistics Metric Status No. of sellers 300,000 as of 4Q19 (vs. 100,000 as of 1Q16) No. of products 800mn No. of daily new listings 7mn (average) ATV W45,000 Monthly ATV (per customer) W120-130,000 No. of customers 15mn Commissions/fees (store opening, registration) None Selling fees 2% of GMV Platform revenue GMV x 2% + ad revenue E-commerce category C2C (100%) Note: As of 1Q20 Source: Company data, press release, Mirae Asset Daewoo Research estimates included
Mirae Asset Daewoo Research 6 April 16, 2020 NAVER
Figure 14. E-commerce categories: B2C, C2C, B2B, and D2C
Source: Mirae Asset Daewoo Research
Figure 15. NAVER Shopping launched brand stores in February 2020
Source: Company materials, Mirae Asset Daewoo Research
Mirae Asset Daewoo Research 7 April 16, 2020 NAVER
Figure 16. Overview of Tmall and Tmall Global
Source: Company data, Mirae Asset Daewoo Research
Figure 17. Brand stores are showcased on Tmall’s main page
Source: Tmall, Mirae Asset Daewoo Research
Mirae Asset Daewoo Research 8 April 16, 2020 NAVER
3. NAVER’s e-commerce dominance to increase despite changing competitive landscape
M&A activity in the e-commerce space has been increasing amid the deepening NAVER/Coupang duopoly. Major offline retailers such as Shinsegae (004170 KS/Buy/TP: W360,000/CP: W233,000) and Lotte Shopping (023530 KS/Trading Buy/TP: W162,000/CP: 85,900) are actively working to strengthen their online positions. Moreover, according to recent media reports, Alibaba is considering making a move for eBay Korea, the second largest online marketplace in Korea.
Regardless of the ongoing changes in the e-commerce landscape, we believe NAVER’s competitiveness will continue to increase. The firm’s e-commerce competitiveness stems from its virtually limitless product offerings . Significantly, the vast majority of Koreans shoppers start their shopping experience with a NAVER search, regardless of which retail platform/channel they ultimately buy through .
Looking ahead, we believe NAVER’s dominance in e-commerce will only grow stronger, unless online shopping patterns change drastically or rivals with wider product offerings emerge.
Figure 18. NAVER Shopping flow chart
Source: Mirae Asset Daewoo Research
Figure 19. Korean shopping survey (online/offline): Figure 20. US online shopping survey: 88.7% of respondents said they conduct NAVER searches prior 55% of respondents identified Amazon as the starting point to making a purchase for their product searches (2016)
Yes, I check NAVER before making a purchase No, I do not
Source: Mirae Asset Daewoo Research Source: Bloomberg Intelligence, Mirae Asset Daewoo Research
Mirae Asset Daewoo Research 9 April 16, 2020 NAVER
III. E-commerce to drive earnings momentum in 4Q20
The ad market has been showing signs of a downturn in 1Q20 and 2Q20 due to the COVID- 19 outbreak. The contraction appears to be affecting not only display ads, which are primarily executed by large companies, but also search ads, which mostly come from smaller businesses (like hospitals, restaurants, gift shops, etc.). However, we expect margins to begin improving sharply in 2H20, driven by: 1) the strength of the e-commerce business; 2) NAVER Webtoon’s top-line growth and profit improvement (likely to approach breakeven); and 3) the exclusion of LINE (3938 JP/CP: JPY5,225) from consolidated earnings (expected to take place in October, after the merger with Z Holdings [4689 JP/CP: JPY367] is approved by Japanese regulators in May-June). Looking to 4Q20, we expect the e-commerce segment to drive earnings growth momentum. The impact of e-commerce on earnings has been growing, with e-commerce as a percentage of business platform revenue
rising from 10% in 2019 to 20% in 2020. In 4Q20, we believe the e-commerce segment will benefit from: 1) an easy comparison caused by sluggish apparel sales in 4Q19 due to warm weather; 2) peak-season effects (the fourth quarter typically accounts for nearly 30% of full-year GMV); 3) the effects of market share gains in February and March; and 4) the normalization of the travel and leisure sectors.
Figure 21. NAVER's quarterly e-commerce revenue and M/S
Mirae Asset Daewoo Research 11 April 16, 2020 NAVER
IV. E-commerce alone implies W10-30tr valuation
Estimating NAVER’s fair value can be challenging. Earnings forecasts tend to change significantly from month to month and quarter to quarter, and no broad consensus on valuation criteria has been reached yet. We also note that NAVER engages in a wide range of businesses, some of which struggle at the same time others are faring well.
Furthermore, it remains difficult to accurately measure the performance of the e-commerce business. The GMV of NAVER’s own Smart Store platform and that of the company’s marketplace (which acts as an intermediary for other e-commerce firms) are mixed together, making it difficult to value the business.
E-commerce has been among the most popular sectors with global investors over the years. Based on GMV (not revenue), e-commerce leaders Amazon and Alibaba have traded at P/S ratios of 1.5x and 0.52x, respectively, on average over the past couple of decades .
Applying these multiples to NAVER’s 2019 and 2020 GMV estimates puts the company’s market value at W10-29tr and W14-39tr, respectively.
We think there are two reasons e-commerce leaders have received such high valuations: 1) the widespread belief that contactless online shopping will become the dominant retail channel in the future (as is already happening in Korea); and 2) expectations on additional income models. Indeed, as seen in
and , Amazon created additional income sources (such as Amazon Web Services) as it built scale. More recently, the company has seen ad revenue soar, as its marketplace has become a major source for searching product info.
Through Ant Financial, Alibaba has expanded its reach from simple goods and services to financial products. Amazon is also expected to follow suit and broaden its product categories to include finance.
The COVID-19 outbreak has highlighted the role of e-commerce and accelerated the market’s growth. Investors are increasingly coming to understand the GMV of e-commerce leaders as not only the source of revenue and ads, but also an asset that allows them to expand their income models to areas like finance, payment, infrastructure/services, and content.
Figure 23. Amazon's US e-commerce M/S Figure 24. Alibaba's China e-commerce M/S
(%) (%) 50 80 44 M/S has been 45 M/S surpassed stagnant since 2017 30% in 2015 38 40 64.3 65.8 33 35 59.9 59.8 60.3 59.0 31 60 30 28 28 25 25 22 20 18 15 40 15 12 10 10 8 5 0 20 06 07 08 09 10 11 12 13 14 15 16 17 18 2014 2015 2016 2017 2018 2019 Source: Amazon, US Census Bureau, Mirae Asset Daewoo Research estimates Source: iResearch, Mirae Asset Daewoo Research
Mirae Asset Daewoo Research 12 April 16, 2020 NAVER
Table 4. Amazon OP by business (2014-18) (US$bn) 2014 2015 2016 2017 2018 Total 0.2 2.2 4.2 4.1 12.4 North America 0.4 1.4 2.4 2.8 7.3 International -0.6 -0.7 -1.3 -3.1 -2.1 Amazon Web Services 0.5 1.5 3.1 4.3 7.3 North America OP margin 0.7% 2.2% 3.0% 2.7% 5.1% Source: Amazon, Mirae Asset Daewoo Research
Stock Ratings Industry Ratings Buy : Relative performance of 20% or greater Overweight : Fundamentals are favorable or improving Trading Buy : Relative performance of 10% or greater, but with volatility Neutral : Fundamentals are steady without any material changes Hold : Relative performance of -10% and 10% Underweight : Fundamentals are unfavorable or worsening Sell : Relative performance of -10% Ratings and Target Price History (Share price (─), Target price (▬), Not covered (■), Buy (▲), Trading Buy (■), Hold (●), Sell (◆)) * Our investment rating is a guide to the relative return of the stock versus the market over the next 12 months. * Although it is not part of the official ratings at Mirae Asset Daewoo Co., Ltd., we may call a trading opportunity in case there is a technical or short-term material development. * The target price was determined by the research analyst through valuation methods discussed in this report, in part based on the analyst’s estimate of future earnings. * The achievement of the target price may be impeded by risks related to the subject securities and companies, as well as general market and economic conditions.
Equity Ratings Distribution & Investment Banking Services Buy Trading Buy Hold Sell Equity Ratings Distribution 82.04% 12.57% 5.39% 0.00% Investment Banking Services 80.77% 11.54% 7.69% 0.00% * Based on recommendations in the last 12-months (as of March 31, 2020)
Disclosures As of the publication date, Mirae Asset Daewoo Co., Ltd. and/or its affiliates own 1% or more of NAVER`s shares outstanding. As of the publication date, Mirae Asset Daewoo Co., Ltd. has acted as a liquidity provider for equity-linked warrants backed by shares of NAVER 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 division. 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 Korean language. 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 it 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
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Mirae Asset Daewoo Research 17 April 16, 2020 NAVER
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