Kakao (035720 KS ) Time to show its strength

Internet 3Q19 review: Slightly above our estimates Company Report For 3Q19, announced revenue of W783.2bn (+31% YoY) and operating profit of November 8, 2019 W59.1bn (+93% YoY), slightly exceeding our expectations (W760bn and W58 bn, respectively).

Earnings improved thanks to: 1) the recognition of new revenue from KakaoTalk chat tab ads (product name: Bizboard); 2) strong paid cont ent revenue (KakaoPage, (Maintain) Buy KakaoMusic); and 3) revenue growth in New Biz (KakaoPay and Kakao Mobility) . Notably, revenue from Talk Biz (KakaoTalk-related revenue) grew 52% YoY, driven by Target Price (12M, W) ▲ 185,000 brisk ad sales. OP margin was 7.5%, the highest level since 3Q17. Labor expenses increased by W15bn Share Price (11/07/19, W) 151,000 QoQ due to Chuseok bonus payments and payments for unused vacation time. Despite the increase in the absolute amount of labor expenses and active investments in new Expected Return 23% businesses, we believe the earnings structure began to stabilize in 3Q19.

The 3Q19 earnings release confirmed various positive business indicators. Transaction OP (19F, Wbn) 208 volumes for KakaoPage and Japan-based , which are Kakao's services Consensus OP (19F, Wbn) 177 (and potential IPO candidates), increased in 3Q19. During 1Q-3Q19, to tal transaction volume for Kakao’s webtoon services amounted to 160% of the full-year 2018 level. In EPS Growth (19F, %) 226.0 addition, KakaoPay’s transaction volume increased to W12.9tr in 3Q19. Meanwhile, we Market EPS Growth (19F, %) -31.6 expect money transfer fees, a key cost factor, to decline in early 2020 with the P/E (19F, x) 75.6 introduction of the open banking system. Market P/E (19F, x) 14.3 KOSPI 2,144.29 New Biz (mobility and financial product sales) to materialize in 4Q19

Market Cap (Wbn) 12,664 For 4Q19, we forecast Kakao to post revenue of W866bn (+28.6% YoY) and operating Shares Outstanding (mn) 86 profit of W80bn (+1,768% YoY). We expect OP margin to improve markedly in 4Q19, Free Float (%) 66.1 supported by a sharp increase in high-margin KakaoTalk Bizboard sales. Foreign Ownership (%) 29.9 We expect Kakao to fully implement new mobility businesses ( Blue and Kakao Beta (12M) 0.06 T Venti) and KakaoPay’s insurance business ( jeonse deposit insurance) in 4Q19. 52-Week Low 95,600 52-Week High 151,000 Lift TP to W185,000

(%) 1M 6M 12M In light of the 3Q19 earnings report, we revise up our 2019 and 20 20 revenue forecasts Absolute 12.3 18.4 57.9 by 0.7% and 1.9%, respectively, and our 2019 and 2020 net profit forecasts by 7.1% and Relative 5.9 20.2 53.1 4.0%, respectively, reflecting growing expectations for KakaoTalk chat tab ads in 2020. We maintain our Buy rating on Kakao and lift our target price to W185,000 (from 160 Kakao KOSPI W177,000). Our target price is based on the sum of the values of Kakao’s business 140 segments, derived by applying the average P/S of peers to the revenues of the

120 respective units.

100

80 11.18 3.19 7.19 11.19

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[ Internet ] FY (Dec.) 12/16 12/17 12/18 12/19F 12/20F 12/21F Revenue (Wbn) 1,464 1,972 2,417 3,088 3,868 4,611 Chang -kwean Kim +822 -3774 -1614 OP (Wbn) 116 165 73 208 495 628 [email protected] OP Margin (%) 7.9 8.4 3.0 6.7 12.8 13.6

NP (Wbn) 58 109 48 168 369 421 EPS (W) 874 1,602 613 1,998 4,290 4,894 ROE (%) 1.9 2.9 1.0 3.2 6.7 7.2

P/E (x) 88.1 85.5 168.0 75.6 35.2 30.9 P/B (x) 1.5 2.3 1.7 2.5 2.3 2.1 Dividend Yield (%) 0.2 0.1 0.1 0.1 0.1 0.1 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

November 8, 2019 Kakao

Table 1. Quarterly and annual earnings (Wbn, %) 1Q18 2Q18 3Q18 4Q18 1Q19 2Q19 3Q19 4Q19F 2018 2019F 2020F Revenue 555 589 599 673 706 733 783 866 2,417 3,088 3,868 Platform 232 251 253 303 313 327 351 395 1,039 1,386 1,822 Talk Biz 89 98 107 128 127 139 162 173 421 601 891 Portal Biz 122 128 116 130 126 137 126 139 495 528 561 New Biz 22 25 30 45 60 51 62 84 123 257 370 Content 323 338 346 370 393 406 432 470 1,378 1,702 2,046 Game 106 112 99 100 94 98 99 116 417 407 425 Music 126 130 136 140 137 145 151 151 533 584 611 Paid content 44 51 60 63 75 82 92 97 218 345 480 IP/other 48 45 50 67 87 82 90 106 209 365 529 Operating profit 10 28 31 4 28 40 59 80 73 208 495 OP margin 1.9 4.7 5.1 0.6 3.9 5.5 7.5 9.3 3.0 6.7 12.8 Net profit 15 22 7 -29 18 31 51 64 16 164 362 Net margin 2.6 3.8 1.2 -4.3 2.5 4.2 6.6 7.4 0.7 5.3 9.4 YoY growth Revenue 25.2 25.7 16.3 23.6 27.2 24.5 30.7 28.5 22.5 27.8 25.3 Platform 29.5 22.9 21.1 30.5 34.8 30.2 38.6 30.5 26.0 33.4 31.5 Talk Biz 78.5 73.7 51.8 56.4 43.3 42.4 51.6 35.3 63.2 42.8 48.2 Portal Biz 3.9 -2.1 -6.2 -1.2 3.9 6.7 9.1 7.0 -1.5 6.6 6.3 New Biz 73.9 49.0 100.7 137.6 171.6 103.0 105.3 84.4 92.7 109.0 44.2 Content 22.2 27.9 13.0 18.5 21.7 20.2 24.9 26.9 20.0 23.5 20.2 Game 31.5 41.9 5.8 12.5 -10.9 -11.9 -0.4 15.2 21.9 -2.4 4.3 Music 14.5 11.4 11.4 8.6 8.7 10.8 11.4 7.8 11.3 9.7 4.6 Paid content 77.4 75.2 69.0 69.1 70.6 60.3 52.0 53.8 72.1 58.2 39.1 IP/other -3.3 13.8 -7.9 17.2 83.7 81.8 78.7 59.3 4.7 74.3 45.0 Operating profit -72.9 -38.1 -35.2 -87.6 166.5 46.6 92.7 1768.0 -55.8 184.8 138.3 OP margin -73.1 79.9 -81.5 TTR 19.9 37.8 596.8 TTB -87.3 932.7 120.9 Source: Company data, Mirae Asset Daewoo Research estimates

Table 2. Earnings forecast revisions (Wbn, %) Previous Revised % chg. Notes 2019F 2020F 2019F 2020F 2019F 2020F Revenue 3,068 3,796 3,088 3,868 0.7 1.9 Operating profit 208 483 208 495 -0.1 2.4 Net profit 153 349 164 362 7.1 4.0 OP margin 6.8 12.7 6.7 12.8 - - Net margin 5.0 9.2 5.3 9.4 - - So urce: Mirae Asset Daewoo Research estimates

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Table 3. Valuation (Wbn, W) Business 2018 2019F 2020F Notes Ad revenue 670 877 1,103

Value 4,479 5,885 6,892 Target multiple is in line with the average P /S of global peers; KakaoTalk ad revenue forecast to surge in 2019; valuation re -rating is expected in 2019, as was the case with Facebook back in 2013 Gaming revenue 417 407 425

Value 2,551 2,051 1,855 Target multiple is in line with the 2020F average P/S of Netmarble, NCsoft, and PearlAbyss Music revenue 533 584 611

Value 1,780 1,963 1,663 Target multiple is based on 2020F P/S of Spotify Other content revenue 260 388 525

Value 1,127 1,425 1,624 Target multiple is in line with 2020F P/S of LINE ( LINE Manga); KakaoPage is expected to go public; the firm ’s value has been estimated by media sources at W1.5-2tr; the value of Japan-based Piccoma has not been included in the aforementioned estimates of KakaoPage ’s market value Other revenue 537 831 1,204 Revenue from KakaoBank (which is likely to go public in 2021) has not been reflected; Kakao is currently working to expand its stake in the online -only bank. Value 1,593 2,643 3,406 Target multiple is in line with the avg. 2020F P/S of peers (Amazon, eBay, NAVER) Total 11,529 13,969 15,440 The average P/S multiples of domestic/global peers were used to derive our target price Per -share value 185,000 As the firm ’s businesses are currently in the early growth phases, revenue indicators appear more relevant than profitability indicators Source: Bloomberg, Mirae Asset Daewoo Research estimates

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Kakao (035720 KS/Buy/TP: W185,000)

Comprehensive Income Statement (Summarized) Statement of Financial Condition (Summarized) (Wbn) 12/18 12/19F 12/20F 12/21F (Wbn) 12/18 12/19F 12/20F 12/21F Revenue 2,417 3,088 3,868 4,611 Current Assets 2,859 3,291 4,165 5,054 Cost of Sales 0 0 0 0 Cash and Cash Equivalents 1,247 1,238 1,601 2,002 Gross Profit 2,417 3,088 3,868 4,611 AR & Other Receivables 194 247 310 370 SG&A Expenses 2,344 2,880 3,373 3,984 Inventories 36 46 57 68 Operating Profit (Adj) 73 208 495 628 Other Current Assets 1,382 1,760 2,197 2,614 Operating Profit 73 208 495 628 Non-Current Assets 5,101 5,180 5,199 5,229 Non-Operating Profit 58 77 67 48 Investments in Associates 305 390 488 582 Net Financial Income 32 44 55 70 Property, Plant and Equipment 315 340 282 235 Net Gain from Inv in Associates 7 0 0 0 Intangible Assets 3,865 3,804 3,748 3,697 Pretax Profit 131 285 562 676 Total Assets 7,960 8,470 9,364 10,283 Income Tax 115 121 200 263 Current Liabilities 2,039 2,327 2,789 3,229 Profit from Continuing Operations 16 164 362 413 AP & Other Payables 461 589 738 879 Profit from Discontinued Operations 0 0 0 0 Short-Term Financial Liabilities 623 518 523 527 Net Profit 16 164 362 413 Other Current Liabilities 955 1,220 1,528 1,823 Controlling Interests 48 168 369 421 Non-Current Liabilities 293 362 442 519 Non-Controlling Interests -32 -3 -7 -8 Long-Term Financial Liabilities 45 45 45 45 Total Comprehensive Profit 24 164 362 413 Other Non-Current Liabilities 248 317 397 474 Controlling Interests 59 188 367 419 Total Liabilities 2,332 2,689 3,231 3,747 Non-Controlling Interests -35 -24 -5 -6 Controlling Interests 5,137 5,295 5,653 6,065 EBITDA 208 344 610 725 Capital Stock 42 42 42 42 FCF (Free Cash Flow) 394 537 868 882 Capital Surplus 4,648 4,648 4,648 4,648 EBITDA Margin (%) 8.6 11.1 15.8 15.7 Retained Earnings 453 611 970 1,381 Operating Profit Margin (%) 3.0 6.7 12.8 13.6 Non-Controlling Interests 490 487 480 471 Net Profit Margin (%) 2.0 5.4 9.5 9.1 Stockholders' Equity 5,627 5,782 6,133 6,536

Cash Flows (Summarized) Forecasts/Valuations (Summarized) (Wbn) 12/18 12/19F 12/20F 12/21F 12/18 12/19F 12/20F 12/21F Cash Flows from Op Activities 491 637 868 882 P/E (x) 168.0 75.6 35.2 30.9 Net Profit 16 164 362 413 P/CF (x) 49.1 33.7 20.9 18.5 Non-Cash Income and Expense 148 212 259 290 P/B (x) 1.7 2.5 2.3 2.1 Depreciation 68 75 59 46 EV/EBITDA (x) 35.3 32.0 16.9 13.1 Amortization 67 61 56 51 EPS (W) 613 1,998 4,290 4,894 Others 13 76 144 193 CFPS (W) 2,099 4,486 7,209 8,166 Chg in Working Capital 329 336 391 372 BPS (W) 61,614 61,524 65,693 70,467 Chg in AR & Other Receivables -1 -54 -63 -60 DPS (W) 127 127 127 127 Chg in Inventories -9 -10 -12 -11 Payout ratio (%) 63.3 6.3 2.9 2.5 Chg in AP & Other Payables 154 8 9 9 Dividend Yield (%) 0.1 0.1 0.1 0.1 Income Tax Paid -141 -121 -200 -263 Revenue Growth (%) 22.6 27.8 25.3 19.2 Cash Flows from Inv Activities -1,261 -445 -401 -382 EBITDA Growth (%) -29.5 65.4 77.3 18.9 Chg in PP&E -85 -100 0 0 Operating Profit Growth (%) -55.8 184.9 138.0 26.9 Chg in Intangible Assets -45 0 0 0 EPS Growth (%) -61.7 225.9 114.7 14.1 Chg in Financial Assets -449 -345 -401 -382 Accounts Receivable Turnover (x) 13.0 14.0 13.9 13.6 Others -682 0 0 0 Inventory Turnover (x) 84.2 75.7 75.0 73.4 Cash Flows from Fin Activities 891 -116 -5 -6 Accounts Payable Turnover (x) 0.0 0.0 0.0 0.0 Chg in Financial Liabilities -129 -106 5 5 ROA (%) 0.2 2.0 4.1 4.2 Chg in Equity 1,052 0 0 0 ROE (%) 1.0 3.2 6.7 7.2 Dividends Paid -12 -10 -10 -10 ROIC (%) 0.3 5.2 13.5 18.6 Others -20 0 0 -1 Liability to Equity Ratio (%) 41.4 46.5 52.7 57.3 Increase (Decrease) in Cash 130 -9 363 401 Current Ratio (%) 140.2 141.4 149.4 156.5 Beginning Balance 1,117 1,247 1,238 1,601 Net Debt to Equity Ratio (%) - - - - Ending Balance 1,247 1,238 1,601 2,002 Interest Coverage Ratio (x) 7.8 26.4 68.6 86.3 Source: Company data, Mirae Asset Daewoo Research estimates

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APPENDIX 1

Important Disclosures & Disclaimers 2-Year Rating and Target Price History

Company (Code) Date Rating Target Price (W) Kakao Kakao(035720) 11/07/2019 Buy 185,000 200,000 07/16/2019 Buy 177,000 05/01/2019 Buy 170,000 150,000 11/26/2018 Buy 130,000 08/27/2018 No Coverage 100,000 08/10/2018 Buy 150,000 50,000 05/11/2018 Trading Buy 130,000

02/08/2018 Trading Buy 150,000 0 12/17/2017 Trading Buy 170,000 Nov 17 Nov 18 Nov 19 11/05/2017 Buy 190,000

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 84.57% 9.88% 5.55% 0.00% Investment Banking Services 82.76% 6.90% 10.34% 0.00% * Based on recommendations in the last 12-months (as of September 30, 2019)

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 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 . 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 client of Mirae Asset Daewoo by virtue of receiving this report. This report does not take into account the particular investment objectives, financial

Mirae Asset Daewoo Research 5 November 8, 2019 Kakao

situations, or needs of individual clients. The report is not to be relied upon in substitution for the exercise of independent judgment. Information and 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.

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Mirae Asset Daewoo Research 6 November 8, 2019 Kakao

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