TIGER KRX Internet K-New Deal ETF (365000 KS)
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[Korea] October 8, 2020 TIGER KRX Internet K-New Deal ETF (365000 KS) Investing in the connected age Mirae Asset Daewoo Co., Ltd. Chang-kwean Kim [email protected] Soojin Kim [email protected] HeeSeok Lim [email protected] The internet is at the center of Opportune time to invest in TIGER KRX Internet K-New Deal ETF daily life By 2030, we estimate that: 1) online ads will account for 70-80% of total ad spending; and 2) e- commerce penetration will reach 30-50%. Looking beyond 2020, internet connectivity should become increasingly ingrained in finance, education, transportation, business, and healthcare. Internet companies have been shifting from indirect to direct revenue models. For Korean internet companies, the revenue contribution of subscription-based services is likely to increase sharply from 2021. A number of high-profile IPOs are in the works. Kakao plans to list KakaoBank, KakaoPage, Kakao Mobility, and Kakao Japan during 2021 and 2022, and NAVER is likely to pursue IPOs for Webtoon Entertainment (Nasdaq) and NAVER Financial as early as 2022. Focus on growth variables in The age of cloud computing 2021 Kakao’s Piccoma and NAVER’s Webtoon Entertainment are entering the spotlight as global content platforms. In the e-commerce market, leading internet players should enjoy oligopolistic positions. The rise of cloud computing has been revolutionizing the software industry’s ecosystem. Thanks to advancements in telecom infrastructure, users can easily access web servers and IT- related services and store their data on the cloud. Internet companies to display Future growth expectations to coincide with strong earnings momentum in 2021 Good record earnings momentum in entry point for the TIGER KRX Internet K-New Deal ETF 2020-21 With internet penetration increasing across the economy, Korean internet firms’ revenue models have become more diversified and sophisticated, and their global expansion is growing more visible. We expect the combined revenue of the 10 companies held by the TIGER KRX Internet K-New Deal ETF to increase 17% in 2020 and 19% in 2021, and their combined operating profit to expand 43% in 2020 and 45% in 2021. When investing in the internet sector, we believe that accurately forecasting future growth potential is more important than traditional valuation indicators. TIGER KRX Internet K-New Deal ETF constituents (%) 30 27.9 25 23.5 23.1 20 15 10.9 10 4.3 5 3.0 2.6 2.0 1.7 1.0 0 Douzone Kakao NAVER KMW NHN KCP SeoJin AfreecaTV AhnLab KG Inicis Ubiquoss Bizon System Source: Quantiwise, Mirae Asset Daewoo Research Analysts who prepared this report are registered as research analysts in Korea but not in any other jurisdiction, including the US. PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES AND DISCLAIMERS IN APPENDIX 1 AT THE END OF REPORT. October 8, 2020 TIGER KRX Internet K-New Deal ETF CONTENTS I. Investment summary 3 1. The internet has become essential to daily life 3 2. Evolution of revenue models to gather pace in 2021 3 3. Opportune time to invest in TIGER KRX Internet K-New Deal ETF 5 II. 2021 growth variables for the internet sector 6 1. Webtoons taking center stage as a new global content platform 6 2. E-commerce market: Duopoly taking shape 10 3. Cloud computing to grow sharply in the coming decade 15 III. Investment points 19 1. Strongest-ever earnings momentum expected in 2020-21 19 2. Valuation 21 Mirae Asset Daewoo Research 2 October 8, 2020 TIGER KRX Internet K-New Deal ETF I. Investment summary 1. The internet has become essential to daily life Since the bursting of the dot-com bubble, the internet industry has been constantly evolving. Now, with the internet playing a central role in daily life, the scale and influence of the digital ecosystem are growing day by day. The industry was born in the age of fixed-line (PC) internet, which spanned from 2000 to 2010. During this time, text-based internet usage and e-mail services became commonplace, the consumption of online content was still largely free, and the analog-to-digital transition gained traction. As the internet industry expanded, it began to touch every aspect of daily life; online ads accounted for 10-20% of total ad spending, and the penetration rate of e- commerce (i.e., internet and electronic shopping) amounted to 5-10%. Wireless internet began to grow in earnest after 2010 and accelerated changes in everyday life. Just as car ownership gave individuals greater freedom of movement, the widespread availability of wireless internet enhanced the mobility of information. Facilitated by the rapid and easy flow of information, consumers began to spend more time on the internet and purchase content with increased convenience. In the wireless internet age, smartphones (rather than PCs) have become the device of choice, and apps have replaced web-based platforms. Such shifts have contributed to the increased popularity of social network services. Currently, online ads account for 40-50% of overall ad spending, and the penetration rate of e-commerce stands at 10-20%. Looking beyond 2020, we expect internet connectivity to become increasingly ingrained across the entire economy. In the wireless internet age, the internet has become an indispensable tool for information acquisition, communication, and entertainment. As the Internet of Things (IoT) era takes hold beyond 2020, internet connectivity should become the norm across finance, education, transportation, business, and healthcare. By 2030, we estimate that online ads will account for 70-80% of total ad spending and e- commerce penetration will reach 30-50%. This should prompt industries to adopt internet- centric business models. 2. Evolution of revenue models to gather pace in 2021 Some notable changes in the internet industry include: 1) the diversification of revenue models to include software, service offerings, and premium subscriptions; 2) an increased revenue mix of subscription fees with the emergence of dominant platform operators; and 3) the shift from indirect revenue models (ads, commissions paid by sellers, etc.) to direct revenue models (where consumers are charged). Many of these changes can be summed up as the rise of the subscription economy, which emphasizes usage, not ownership, of goods and services. As market-leading companies have already secured low marginal costs, they are well-positioned to deliver high margins with subscription-based business models. Tech giants Amazon, Microsoft, and Apple are all seeing sharp increases in the revenue mix of subscription services/direct fee income from customers, despite their dissimilar business models. Aside from e-commerce, Amazon has growing revenue exposure to Prime membership fees, cloud computing services (Amazon Web Services), and content offerings. Microsoft is seeing a growing revenue mix of cloud services and monthly software subscriptions. And Apple’s revenue exposure to the App Store is increasing. Similarly, for Korean internet companies, we expect the revenue contribution of subscription-based services to rise sharply from 2021. Mirae Asset Daewoo Research 3 October 8, 2020 TIGER KRX Internet K-New Deal ETF Figure 1. Amazon: Revenue contribution of services (%) 25 21 20 19 17 15 15 14 10 5 0 2016 2017 2018 2019 2020F Source: Amazon, Mirae Asset Daewoo Research estimates Figure 2. Microsoft: Revenue contribution of services Figure 3. Apple: Revenue contribution of services (%) (%) 60 25 23 51 50 44 20 17 40 36 15 14 30 13 30 11 20 10 20 5 10 0 0 2016 2017 2018 2019 2020F 2016 2017 2018 2019 2020F Source: Microsoft, Mirae Asset Daewoo Research estimates Source: Apple, Mirae Asset Daewoo Research estimates Mirae Asset Daewoo Research 4 October 8, 2020 TIGER KRX Internet K-New Deal ETF 3. Opportune time to invest in TIGER KRX Internet K-New Deal ETF We believe now is an opportune time to invest in the TIGER KRX Internet K-New Deal ETF in light of major constituents’ IPO momentum. We expect Kakao, which listed Kakao Games in 2020, to pursue IPOs for KakaoBank, KakaoPay, and KakaoPage in 2021. NAVER is likely to pursue IPOs for Webtoon Entertainment (US) and NAVER Financial in 2022. Kakao Japan, operator of Piccoma (a webtoon service focused on original Korean comics), has been taking steps to go public in Japan, selecting Nomura Securities as the lead manager. Kakao Mobility is likely to go public in 2022 or later. We expect Webtoon Entertainment, the global control tower for NAVER’s webtoon business, to seek an IPO on the Nasdaq in 2022. Of note, Webtoon Entertainment’s drama and film production subsidiary Studio N produced Strangers from Hell and Pegasus Market in collaboration with Korean production studios and plans to adapt True Beauty, a globally popular webtoon. According to media reports, the combined enterprise value of the five Kakao subsidiaries most likely to go public should exceed W50tr on a post-IPO basis. At a Sep. 23 board meeting, KakaoBank resolved to choose a lead manager for its IPO within 2020. As of August, KakaoBank had 12.94mn customers, W18.3tr in lending assets, and W22.3tr in customer deposits. We believe the IPO value of Webtoon Entertainment may significantly exceed market estimates, as the company is a global content service provider that deserves comparisons with the likes of Spotify, Netflix, and YouTube. Meanwhile, the operation of NAVER Financial is set to kick into high gear in 2H20 and 2021. We expect the IPO value of NAVER Financial to be benchmarked to Alibaba’s Ant Financial. Once the merger between LINE (NAVER’s subsidiary) and Z Holdings is finalized in Mar. 2021, Z Holdings’ shares listed on the Tokyo Stock Exchange should see positive momentum. Z Holdings is Japan’s no.