[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
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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. 2 e-commerce player and no. 1 e-wallet and point-of-service market player.
Figure 4. Likely IPOs of internet companies: Coupang and subsidiaries of NAVER and Kakao
Source: Mirae Asset Daewoo Research
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II. 2021 growth variables for the internet sector
1. Webtoons taking center stage as a new global content platform
1) NAVER Webtoon
NAVER Webtoon is rapidly growing as a global content platform. Expectations for the platform’s growth should reach new heights in 2021, bolstering NAVER’s share performance.
Previously, the webtoon business was split between NAVER Webtoon (Korea), which oversaw the US, Europe, and Asia operations, and LINE Manga (Japan), which was responsible for Japan. Going forward, NAVER plans to fully integrate its global webtoon operations across Korea, Japan, the US, Europe, Asia, and Latin America, with US-based Webtoon Entertainment serving as headquarters.
We believe the reorganization of the webtoon business, with Webtoon Entertainment at the helm, will help the business kick into high gear (through cross-content sourcing and simultaneous global distribution) and pave the way for a Nasdaq IPO over the long term.
Figure 5. NAVER Webtoon: Global monthly revenue (including LINE Manga)
(Wbn)
90 +43% YoY
70
50
30 8/19 10/19 12/19 2/20 4/20 6/20 8/20
Source: Sensor Tower, Mirae Asset Daewoo Research estimates
Figure 6. NAVER Webtoon: Global quarterly revenue (including LINE Manga)
(Wbn) +46% 250 YoY
200
150
100
50
0 1Q19 2Q19 3Q19 4Q19 1Q20 2Q20 3Q20F
Source: Sensor Tower, Mirae Asset Daewoo Research estimates
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The reorganization began in August, with NAVER placing NAVER Webtoon (Korea), LINE Digital Frontier (Japan), and Watong Entertainment (China) under Webtoon Entertainment.
In August, LINE Manga (operated by LINE Digital Frontier) recorded a 30% YoY increase in transaction value and an 85% YoY rise in app downloads. We believe this shows that NAVER Webtoon’s efforts to convert LINE Manga into a Korean-style webtoon platform (e.g., sending specialized personnel from Korea) are having positive effects.
On Sep. 2, LINE Digital Frontier announced that LINE Manga has recorded more than 30mn app downloads since the start of the webtoon service in 2013.
NAVER Webtoon’s US transaction value expanded 191% YoY in 2Q20 and 128% YoY in August. We believe NAVER Webtoon is establishing itself as a global platform, with Korea accounting for only 43% of transaction value and 37% of monthly active users (MAU) in 2Q20.
We believe the creation of a global webtoon ecosystem will be key to the success of NAVER Webtoon. As of May, the webtoon business had around 640,000 amateur creators domestically and overseas. New content ecosystems can facilitate exchanges between different regions and cultures, as evidenced by YouTube.
Figure 7. LINE Manga: Quarterly revenue Figure 8. NAVER Webtoon: US quarterly revenue
(Wbn) (Wbn) 30 120 +132% +34% YoY YoY 25 100
20 80
15 60
40 10
20 5
0 0 3Q19 4Q19 1Q20 2Q20 3Q20F 3Q19 4Q19 1Q20 2Q20 3Q20F
Source: Sensor Tower, Mirae Asset Daewoo Research estimates Source: Sensor Tower, Mirae Asset Daewoo Research estimates
Figure 9. LINE Manga: Monthly downloads Figure 10. NAVER Webtoon: US monthly downloads
('000) ('000) +85% YoY 1000 800
800 600
600
400 400
200 200
0 0 8/19 10/19 12/19 2/20 4/20 6/20 8/20 8/19 10/19 12/19 2/20 4/20 6/20 8/20
Source: Sensor Tower, Mirae Asset Daewoo Research Source: Sensor Tower, Mirae Asset Daewoo Research
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2) Kakao’s webtoon business
We believe Kakao’s webtoon business strategy in Japan is paying off. According to App Annie, a leading provider of app analytics, Piccoma was the highest grossing app in the non-game category in July based on both App Store and Google Play data. In September, Piccoma became the second-highest grossing app in Japan based on App Store data.
Piccoma’s success in Japan is supported by the popularity of Korean webtoon content. We estimate that Piccoma has recorded daily revenue of more than W2bn since September in Japan alone.
Webtoons make up 1.3% of Piccoma’s approximately 30,000 titles but account for 35-40% of total transaction value.
We estimate Piccoma’s transaction value expanded 314% YoY in August (to W50bn). We expect Piccoma’s transaction value to expand 301% YoY to W150bn in 3Q20 (vs. 150% YoY in 2Q20).
While Piccoma (Japan) represented 54% of Kakao's webtoon business transaction value in 2Q20, KakaoPage (Korea) still accounts for 53% of MAU.
Figure 11. KakaoPage: Monthly revenue
(Wbn) 40
+25% YoY
30
20
10 8/19 10/19 12/19 2/20 4/20 6/20 8/20
Source: Sensor Tower, Mirae Asset Daewoo Research estimates
Figure 12. KakaoPage: Quarterly revenue Figure 13. KakaoPage: Monthly downloads
(Wbn) 300000
+39% YoY 250000 100
200000 80
150000 60 100000
40 50000
20 0 3Q19 4Q19 1Q20 2Q20 3Q20F 8/19 10/19 12/19 2/20 4/20 6/20 8/20
Source: Sensor Tower, Mirae Asset Daewoo Research estimates Source: Sensor Tower, Mirae Asset Daewoo Research
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Kakao has two webtoon-related subsidiaries: KakaoPage (63.5% owned by Kakao) and Kakao Japan (operator of Piccoma; 79.5% owned by Kakao and 19.9% by KakaoPage).
We think the two companies have the potential to reach a combined valuation of around W10tr (based on a P/S ratio of 6x 2022F transaction value) if: 1) the domestic webtoon market continues stable growth; 2) market share in Japan rises further amid continued market growth; and 3) operations expand into other countries.
KakaoPage and Kakao Japan plan to go public in Korea and Japan, respectively (with Nomura Securities as the lead manager for the latter’s IPO). We expect the IPOs of these two companies to prompt a re-rating of Kakao.
Meanwhile, NAVER’s LINE Manga has revealed that it will begin a webtoon originals service in Japan similar to Piccoma’s. LINE Manga is a digital platform that allows users to read existing publications on their smartphones. In the long term, we believe content competition between the two platforms will spur strong growth of the Japanese market, which generally has a higher paid user ratio and average spend per user, as well as a deeper understanding and appreciation of comics and animations.
Meanwhile, Kakao has been spearheading strategies in a way that will amplify the content power of Korean webtoons by diversifying platforms (novel webtoon dramas/films) for popular content and globally expanding market reach (Korea Japan Asia > US/Europe).
Figure 14. Piccoma: Monthly revenue
(Wbn) 50
40 +314% YoY
30
20
10
0 8/19 10/19 12/19 2/20 4/20 6/20 8/20
Source: Sensor Tower, Mirae Asset Daewoo Research estimates
Figure 15. Piccoma: Quarterly revenue Figure 16. Piccoma: Monthly downloads
(Wbn) 1,000,000 +301% YoY 150 900,000 800,000
120 700,000
600,000 +150% YoY 90 500,000 400,000 60 +106% YoY 300,000
30 200,000 100,000
0 0 3Q19 4Q19 1Q20 2Q20 3Q20F 8/19 10/19 12/19 2/20 4/20 6/20 8/20
Source: Sensor Tower, Mirae Asset Daewoo Research estimates Source: Sensor Tower, Mirae Asset Daewoo Research
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2. E-commerce market: Duopoly taking shape
In recent years, market leaders have widened their lead in the Korean e-commerce market. Indeed, while NAVER and Coupang recorded robust GMV expansion in 2018-19, other players displayed relatively slow growth.
Notably, NAVER Shopping’s margins improve in tandem with GMV growth, as its C2C shopping mall business employs a revenue model that charges commissions on purchases made on the Smart Store platform and via NAVER searches.
The two major links in the online shopping value chain are: 1) commerce (i.e., search/purchase); and 2) delivery (usually via third-party logistics players).
C2C companies have sought to provide shoppers with high-quality search results by attracting high-performing sellers and developing an extensive product base. Furthermore, they have been endeavoring to make their websites more competitive by offering incentives such as promotional coupons and discounts.
Notably, Coupang directly handles delivery to customers. Armed with Coupang Fulfillment Services (CFS) and its own fleet of delivery agents, known as Coupang Men, Coupang launched Rocket Delivery (next-day service) in 2014. Coupang’s GMV and parcel delivery volume have surged since October 2018 with the introduction of its Rocket Wow membership program, which offers unlimited overnight shipping for a monthly fee of W2,900.
Meanwhile, leveraging its competitiveness in product searches, NAVER has expanded its seller base and diversified its services to include direct shipping from fresh food suppliers, direct overseas purchases, and travel/leisure offerings. NAVER also enables consumers to make product/price comparisons across various shopping malls, including Coupang, 11th Street, and Gmarket. Consumers can find almost all products and services available on the Korean e-commerce market via NAVER and complete their purchases using the NAVER Pay simplified payment service.
Coupang has secured strong competitiveness in delivery services. Currently, 5.12-5.13mn SKUs are available for overnight delivery via a comprehensive logistics network (60 sites nationwide and fulfillment centers in Incheon and Deokpyeong). Notably, Coupang generates 88% of its GMV from directly sourced products.
Figure 17. GMV by Korean online shopping mall (2017-18) Figure 18. GMV by Korean online shopping mall (2018-19)
(Wtr) (Wtr) C2C C2C 2017 2018 2018 2019 20 25 Smart Store +43% YoY B2C +50% YoY 15 20 B2C +10% YoY +97% YoY
10 +70% YoY 15
+9% YoY 5 10 +24% YoY
0 5
0 NAVER eBay Korea 11th Street Coupang WeMakePrice
Source: Mirae Asset Daewoo Research estimates Source: Mirae Asset Daewoo Research estimates
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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 a recovery 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%.
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.
In the domestic online shopping market, NAVER has been solidifying its dominance in the C2C segment since 2Q20. The Smart Store platform’s YoY GMV growth accelerated from 56% in 1Q20 to 64% in 2Q20, and Smart Store’s contribution to NAVER’s total e-commerce GMV climbed to 60%.
Figure 19. NAVER: Quarterly e-commerce GMV
(Wtr) 8 +44% YoY +32% YoY (Smart Store +56%) 6 +43% +24% YoY YoY +39% +28% YoY YoY 4
2
0 1Q18 2Q18 3Q18 4Q18 1Q19 2Q19 3Q19 4Q19 1Q20 2Q20
Source: Mirae Asset Daewoo Research estimates
Figure 20. Coupang: Quarterly GMV and growth
(Wtr) (%) Quarterly GMV (L) YoY growth (R) 6 70
57 5 60 51 48 44 44 50 4 41 40 3 30 2 20
1 10
0 0 1Q19 2Q19 3Q19 4Q19 1Q20 2Q20
Source: Mirae Asset Daewoo Research estimates
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Looking to 2H20 and 2021, we expect the e-commerce segment to drive earnings growth momentum for NAVER. The influence of e-commerce on earnings has been increasing, with e-commerce as a percentage of business platform revenue rising from 10% in 2019 to 20% in 2020. 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); and 3) the effects of market share gains in 1Q20 and 2Q20.
As a product search tool, NAVER is taking on more importance amid the proliferation of e- commerce and increasing online shopping sites. Against this backdrop, we expect NAVER’s e- commerce revenue to surge. We are encouraged that both selling fees (2% of GMV) and e- commerce ad revenue are increasing. In particular, ad revenue as a percentage of GMV, which stood at 2% in 2Q20, is likely to rise markedly in 2021.
NAVER’s domestic e-commerce market share is hovering around the mid-10% level, while Alibaba and Amazon control around 70% and 50% of their respective local markets. We expect NAVER’s e-commerce market share to grow sharply until it reaches at least 30%.
Figure 21. NAVER: Quarterly e-commerce revenue and revenue recognition (as % of GMV)
(Wbn) Quarterly e-commerce revenue (L) Revenue recognition as % of GMV (R) (%) 350 5.0
4.1 4.2 300 4.0 4.0 3.4 250 3.0 3.0 200 2.5 2.1 2.2 150 2.0
100 1.0 50
0 0.0 1Q19 2Q19 3Q19 4Q19 1Q20 2Q20 3Q20F 4Q20F
Source: Mirae Asset Daewoo Research estimates
Figure 22. NAVER: Quarterly e-commerce GMV and M/S
(Wtr) Quarterly e-commerce GMV (L) M/S (R) (%)
8 20.0 17 17 16 15 15 6 13 14 13 15.0 13 12 13 11
4 10.0
2 5.0
0 0.0 1Q18 2Q18 3Q18 4Q18 1Q19 2Q19 3Q19 4Q19 1Q20 2Q20 3Q20F 4Q20F
Source: Mirae Asset Daewoo Research estimates
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In terms of market share, we believe NAVER’s e-commerce business (16% at end-2Q20) is currently where Amazon was in 2010. And the firm is now gearing up to advance globally, as Shopify did five years ago.
In light of the sophistication of NAVER’s business model, we think the same rationales underpinning Shopify’s investment case can be applied to NAVER.
1) A gateway for offline sellers’ entry into e-commerce: Sharp increase in the number of Smart Store openings
2) Online shopping malls’ global expansion and multi-channel exposure: Once NAVER becomes the largest shareholder of Z Holdings (Yahoo Japan, Zozotown), Japan’s no. 2 e- commerce firm, merchandise on NAVER’s Smart Store can gain exposure via online shopping malls in Japan.
3) NAVER provides payment (NAVER Pay) and delivery (partnership with CJ Logistics, investments in logistics start-ups, etc.) infrastructure.
4) Just as large foreign companies can access online distribution through Shopify Plus, large domestic companies can enter the e-commerce space by opening up NAVER Brand Stores.
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. As such, it appears that the products sold through NAVER Shopping are mainly low- to mid-priced.
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 the burden of sales commissions (paid to department stores). The direct-to-customer (D2C) business model under which NAVER’s brand stores operate has already taken hold in the US and China.
M&A activity in the e-commerce space has been increasing amid the strengthening NAVER/Coupang duopoly. Major offline retailers such as Shinsegae and Lotte Shopping are actively working to ramp up their online positions.
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 23. NAVER: Quarterly e-commerce GMV and revenue
W6tr
4% of GMV Smart Store (1Q20: 3.4%) 60% (+64% YoY)
W240bn (30% of Business Platform revenue)
40% 4Q19 1Q20 2Q20 Other Ads (2%) 1.0% → 1.4%→2.0%
Transaction commissions (2%)
2Q20 e-commerce GMV 2Q20 e-commerce revenue
Source: Mirae Asset Daewoo Research estimates
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Figure 24. E-commerce penetration by country (2018)
(%) 40 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:18한국 19 20F China Chile UK Germany US Japan Hong Kong Brazil Argentina Vietnam Mexico
Source: eMarketer, Statista, SCMP, Tech in Asia, CNC, Mirae Asset Daewoo Research estimates
Figure 25. Korea: E-commerce transaction value by month
(Wtr) 14
12
10
8
6
4 1/18 7/18 1/19 7/19 1/20 7/20
Source: KOSTAT, Mirae Asset Daewoo Research
Figure 26. Korea: E-commerce penetration trend
(%) 30
25
20
15 1/19 3/19 5/19 7/19 9/19 11/19 1/20 3/20 5/20 7/20
Source: KOSTAT, Mirae Asset Daewoo Research
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3. Cloud computing to grow sharply in the coming decade
1) Software industry is evolving rapidly
With the advent of cloud computing and ongoing technological innovation, the software industry is advancing in terms of both size and scope.
Key fields within software include analytics/business intelligence, where machine learning and AI technology are frequently utilized, and application development, which has grown rapidly with the emergence of open source and tech giants.
Table 1. Application vs. system software Definition Examples Application software Software designed to perform a specific task Word processing programs, Adobe Photoshop, Microsoft PowerPoint, etc. System software Systems/programs that support application software Operating systems, language processors, etc. Source: Mirae Asset Daewoo Research
Market size and status
By segment, customer experience and relationship management (CRM) accounts for the largest share (11.3%) of the software market, followed by database management systems (DBMS), security (8.5%), enterprise resource planning (ERP; 8.3%), and IT operations (6.6%). The fastest growing segments are DBMS (+18.4%), operating systems (+16.2%), and CRM (+15.6%).
Table 2. Software revenue and M/S by segment 2018 revenue Segment M/S YoY (US$mn) Analytics/business intelligence 21,606.80 5.10% 11.70% Application development 12,219.80 2.90% 13.00% Application infrastructure/middleware 31,974.10 7.50% 14.60% Content services 10,697.90 2.50% 11.70% CRM 48,230.50 11.30% 15.60% Data integration/quality tools 5,283.70 1.20% 5.30% DBMS 46,098.30 10.80% 18.40% E-mail /authoring 18,151.50 4.30% 8.80% ERP 35,451.40 8.30% 10.10% IT operations 28,268.50 6.60% 12.40% Master Data Management Products 1,394.20 0.30% 3.40% Operating systems 32,760.20 7.70% 16.20% Other application software 42,341.80 9.90% 13.40% Other infrastructure software 16,075.70 3.80% 25.30% Project/portfolio management 3,031.90 0.70% 14.10% Security 36,337.20 8.50% 9.70% Storage management 16,170.80 3.80% 4.70% Supply chain management 14,132.50 3.30% 12.50% Virtualization infrastructure software 6,721.10 1.60% 4.80% Total 426,947.80 100.00% 13.20% Source: Gartner, Mirae Asset Daewoo Research
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By country, the US accounts for an outsized share in the global software market, which suggests that there is ample room for growth in other regions, such as Asia. In 2018, the Chinese software market expanded a robust 24% YoY.
Figure 27. Software M/S and growth rates by country (as of 1Q19)
60% M/S (R) YoY growth (L) 30% 52.4% 24.5% 50% 25%
40% 20% 15.7% 14.7% 13.7% 14.3% 30% 12.0% 15% 12.8% 10.8% 23.6% 8.9% 20% 10% 2.9% 4.5% 10% 5% 3.0% 5.1% 5.0% 3.9% 1.7% 1.5% 2.4% 0.6% 0.8% 0% 0% North South Western Eastern Eurasia Middle South Japan Asia (DM) China Asia (EM) America America Europe Europe East Africa
Source: Gartner, Mirae Asset Daewoo Research
2) Cloud computing
Cloud computing technology is bringing about sweeping changes to the software ecosystem. In the cloud computing context, the phrase “as a service (aaS)” indicates the provision of various IT solutions as services instead of physical products. The three main categories of aaS are: Infrastructure as a Service (IaaS), Platform as a Service (PaaS), and Software as a Service (SaaS).
IaaS delivers virtualized computing resources over the internet without the use of on- premises servers, storage, and networking hardware. PaaS supplies operating systems, middleware and other services to host applications. SaaS is a software delivery model in which customers can download programs from data centers. In addition to these three main categories, Business Process as a Service (BPaaS) and security applications are experiencing rapidly increasing demand.
Table 3. Hybrid cloud and multicloud Definition Notes A cloud computing environment that uses a Hybrid cloud mix of on-premises, private cloud, and third- party public cloud services In Jul. 2019, ServiceNow signed a partnership Use of multiple cloud computing and with Microsoft (previously, the company had an Multicloud storage services in a single heterogeneous exclusive partnership with Amazon Web architecture Services). Source: Mirae Asset Daewoo Research
Table 4. Five categories of cloud computing Category Definition Examples 1 IaaS Data center as infrastructure Provision of infrastructure such as servers, storage, and networking 2 PaaS Middleware as a platform Operating systems (Windows, iOS, etc.), virtualization Applications such as Photoshop and Microsoft Word, and business 3 SaaS Software available via a third-party over the internet software (e.g., ERP and CRM) Practice of implementing business processes via a 4 BPaaS Distribution/supply chains, accounting, HR, etc. cloud computing platform Network/cybersecurity programs related to cloud 5 Management and security IT services, consulting, management/security solutions computing Source: Gartner, Mirae Asset Daewoo Research
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Revenue models have changed over time
In the IT industry, revenue models have evolved due to changes in how services are delivered. Software companies typically generate revenue from: 1) software product sales; 2) software support services; and 3) other IT services, training programs, and consulting.
Table 5. Software revenue models Revenue model Products/services 1) Software product sales Licensing, updates, subscriptions, cloud 2) Software support services Bug fixing, technical support, etc. 3) Other IT services, training programs, and consulting Training, system installations, etc. Source: Mirae Asset Daewoo Research
Traditionally, software sales have been based on licenses that grant rights and impose restrictions on the use of copyrighted software. Software licenses can be classified according to the duration of use, manner of use, conditions on distribution, and whether the source code is accessible to the user.
Rise of open source software
Tech giants have been acquiring global open source platforms, with Microsoft taking over GitHub and IBM buying Red Hat.
As data traffic (big data, IoT, etc.) and the number of IT devices have grown, more opportunities have opened up for software developers. In this environment, the licensing models traditionally used by major vendors have limitations in bringing new services to market.
Against this backdrop, open source has gained in popularity because it allows developers to meet increasingly diverse customer needs and frees them from the constraints imposed by vendors (license fees, inability to customize services).
Open source also allows businesses to respond more flexibly to changes in the software market, where openness, sharing, and collaboration are becoming essential.
The rise of open source software should also spur the growth of related businesses and infrastructure, such as software-defined networking (SDN) and software-defined data centers (SDDC).
Table 6. Open source software Segment Software Operating systems Linux, Android, Tizen, Firefox, Cent, Ubuntu DBMS MySQL, PostgreSQL, Mongo DB, Maria DB Web applications JBoss, Apache Tomcat Application software ERPNext, ERP5, SugarCRM Documents OpenOffice, LibreOffice Big data Apache Hadoop, Splunk, Spark Source: Mirae Asset Daewoo Research
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SaaS revenue model
Among the three main categories of cloud computing, SaaS has shown the fastest growth due to the pay-as-you-go model’s growing popularity.
SaaS is part of the subscription economy, which has become a lifeline for the software industry after years of struggling with the problem of piracy. Thanks to high-performance data centers and high-speed networks, software firms can now charge customers according to their usage; SaaS pricing options include per-user, per-feature, and per-gigabyte pricing.
SaaS businesses can measure customer usage because the software is hosted on (and user computers are linked to) a central server owned by the SaaS provider.
One of the SaaS model’s biggest advantages is the cost benefits arising from the outsourcing of hardware and software programming. SaaS has broad applications across most business processes, including security alerts, financial processes, DBMS, management, gamification, virtualization, CRM, management information systems (MIS), ERP, invoice management, human resource management (HRM), procurement, content management, etc.
Table 7. Advantages of SaaS
Accessibility: Easy to install/maintain products, low initial costs, etc. Compatibility: Ability to provide the same programming to all customers Advantages Openness: Ability to interact with other functions Cost benefits: Outsourcing of hardware and software programming, etc. Source: Mirae Asset Daewoo Research
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III. Investment points
1. Strongest-ever earnings momentum expected in 2020-21
We believe that now is an opportune time to buy the TIGER KRX Internet K-New Deal ETF. With internet penetration increasing across the economy, we expect the 10 companies held by the fund to deliver strong earnings growth, thanks to their increasingly diversified and sophisticated business models and global expansion initiatives.
We forecast the 10 ETF constituents to deliver combined revenue growth of 17% in 2020 and 19% in 2021, and combined operating profit growth of 43% in 2020 and 45% in 2021. We estimate their average OP margin at 13% in 2020 and 16% in 2021.
Notably, NAVER and Kakao, which are the ETF’s largest holdings, plan to list subsidiaries in Korea and overseas (e.g., Japan, US) during the next two years. And we believe that investor sentiment on growth industries like the internet sector will remain solid even after the pandemic is over.
Figure 28. TIGER KRX Internet K-New Deal ETF constituents: Figure 29. TIGER KRX Internet K-New Deal ETF constituents:
Combined revenue Combined OP and OPM
(Wbn) (Wbn)OP OPM (%) 25,000 4,000 18
15 20,000 +19% YoY 3,000 +45% YoY +17% YoY 12 15,000 +22% YoY +43% YoY 2,000 9
10,000 +11% YoY 6 1,000 5,000 3
0 0 0 2018 2019 2020F 2021F 2022F 2018 2019 2020F 2021F 2022F
Source: Bloomberg, Mirae Asset Daewoo Research Source: Bloomberg, Mirae Asset Daewoo Research
Figure 30. TIGER KRX Internet K-New Deal ETF constituents: Figure 31. TIGER KRX Internet K-New Deal ETF constituents:
2020F P/E and ROE 2020F P/E and EPS growth
(P/E, x) (P/E, x) 62 19 Kakao 80 Kakao 80
70 70 NAVER NAVER Douzone Bizon 60 60 Ubiquoss
50 Douzone Bizon NHN KCP 50 41 NHN KCP 41 40 40 AhnLab 30 30 KMW SeoJin System Afreeca TV KMW 20 20 AfreecaTV 10 10 KG Inicis KG Inicis (ROE, %) (EPS growth, %) 0 0 0 5 10 15 20 25 30 35 40 45 0 50 100 150
Source: Bloomberg, Mirae Asset Daewoo Research estimates Source: Bloomberg, Mirae Asset Daewoo Research estimates
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Table 8. TIGER KRX Internet K-New Deal ETF constituents: Annual earnings (Wbn) 2018 2019 2020F 2021F 2022F NAVER Revenue 5,587 6,593 7,601 8,562 9,675 YoY 19% 18% 15% 13% 13% OP 943 710 1,048 1,510 1,932 YoY -20% -25% 48% 44% 28% Kakao Revenue 2,417 3,070 3,953 4,859 5,747 YoY 23% 27% 29% 23% 18% OP 73 207 436 675 891 YoY -56% 183% 111% 55% 32% Douzone Bizon Revenue 227 263 306 356 408 YoY 11% 16% 16% 16% 15% OP 55 67 79 96 118 YoY 4% 22% 18% 21% 23% KMW Revenue 296 683 720 1,117 1,378 YoY 45% 130% 5% 55% 23% OP -26 137 132 200 272 YoY 761% -621% -3% 51% 36% NHN KCP Revenue 433 470 601 739 890 YoY 23% 9% 28% 23% 20% OP 22 32 39 52 62 YoY 21% 47% 23% 31% 20% AfreecaTV Revenue 127 168 186 224 256 YoY 34% 33% 11% 20% 14% OP 27 37 41 57 68 YoY 48% 35% 13% 36% 20% KG Inicis Revenue 925 956 952 1,080 1,132 YoY 22%3%0% 13%5% OP 61 86 101 117 148 YoY 11% 43% 17% 16% 26% SeoJin System Revenue 325 392 380 601 775 YoY 36% 21% -3% 58% 29% OP 37 54 34 76 97 YoY 107% 48% -37% 123% 28% AhnLab Revenue 160 167 176 185 194 YoY 6% 4% 5% 5%5% OP 18 18 19 20 21 YoY 6% 4% 5% 4%5% Ubiquoss Revenue 86 112 126 139 151 YoY 1009% 30% 12% 10% 8% OP 17 14 18 20 21 YoY 1012% -21% 32% 12% 6% Total Revenue 10,582 12,875 15,002 17,861 20,605 YoY 22% 22% 17% 19% 15% OP 1,226 1,362 1,950 2,822 3,632 YoY -19% 11% 43% 45% 29% Source: Bloomberg, Mirae Asset Daewoo Research estimates
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2. Valuation
Like many growth stocks, NAVER’s P/E has risen and fallen in line with its share price. We believe it makes sense to buy NAVER when P/E is high (expanding) and sell when P/E is low (contracting). For NAVER, one of Korea’s leading growth stocks, key business indicators and earnings forecasts appear to have a bigger impact on share prices than current earnings performance.
Historically, when the stock’s P/E has been high (expanding), share prices and earnings have risen simultaneously. On the other hand, when the growth outlook weakened in 2008 (end of the PC-led growth period), 2015 (end of expectations related to LINE’s IPO and earnings improvement), and 2017 (end of expectations on mobile ad growth), share prices fell sharply.
NAVER’s P/E valuation recently hit a record high. But we do not see this as a sign of a stretched valuation (as experienced by traditional companies during periods of stagnant growth). Rather, we believe it reflects rising share prices fueled by an abundance of future growth drivers. All in all, we believe a high P/E based on current earnings estimates should be viewed as a buying signal for select internet plays.
Figure 32. NAVER: Share performance and P/E trends
(x) (W) P/E (L) Share price (R) New business momentum 100.0 (webtoons, NAVER Financial, 350000 Yahoo Japan) 90.0 300000 80.0 Mobile ad momentum (2013-14) 79.0 250000 70.0 PC-based online business growth period 60.4 60.0 (2003-07) 200000
50.0 48.5 48.0 52.0
40.7 150000 40.0 Contraction in 31.1 34.4 revenue growth and OP margin 37.3 30.0 27.1 100000
20.0 24.5 E-commerce momentum 20.0 18.6 Absence of new businesses, 50000 16.9 15.6 10.0 OP margin contraction
5.1 0.0 0 03 05 07 09 11 13 15 17 19 21
Source: Quantiwise, Mirae Asset Daewoo Research estimates
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Appendix 1
Important disclosures and disclaimers Two-year rating and TP history
Company Date Rating TP (W) (W) NAVER NAVER (035420) 07/24/20 Buy 430,000 500,000 06/30/20 Buy 375,000 400,000 05/25/20 Buy 330,000 11/26/19 Buy 241,000 300,000 09/17/19 Buy 230,000 200,000 08/11/19 Buy 181,000 07/16/19 Buy 172,000 100,000
01/23/19 Buy 176,000 0 Oct 18 Oct 19 Oct 20 11/26/18 Buy 141,000 08/27/18 No Coverage
Stock ratings Sector ratings Buy Expected 12-month performance: +20% or greater Overweight Expected to outperform the market over 12 months Trading Buy Expected 12-month performance: +10% to +20% Neutral Expected to perform in line with the market over 12 months Hold Expected 12-month performance: -10% to +10% Underweight Expected to underperform the market over 12 months Sell Expected 12-month performance: -10% or worse
Rating and TP history: Share price (─), TP (▬), Not Rated (■), Buy (▲), Trading Buy (■), Hold (●), Sell (◆) * Our investment rating is a guide to the expected return of the stock over the next 12 months. * Outside of the official ratings of Mirae Asset Daewoo Co., Ltd., analysts may call trading opportunities should technical or short-term material developments arise. * The TP was determined by the research analyst through valuation methods discussed in this report, in part based on estimates of future earnings. * TP achievement may be impeded by risks related to the subject securities and companies, as well as general market and economic conditions.
Ratings distribution and investment banking services Buy Trading Buy Hold Sell Ratings distribution 73.62% 14.11% 11.04% 1.23% Investment banking services 72.22% 11.11% 16.67% 0.00% * Based on recommendations in the last 12 months (as of September 30, 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 divisions. 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 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 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
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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. For further information regarding company-specific information as it pertains to the representations and disclosures in this Appendix 1, please contact [email protected] or +1 (212) 407-1000.
Distribution United Kingdom: This report is being distributed by Mirae Asset Securities (UK) Ltd. in the United Kingdom only to (i) investment professionals falling within Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (the “Order”), and (ii) high net worth companies and other persons to whom it may lawfully be communicated, falling within Article 49(2)(A) to (E) of the Order (all such persons together being referred to as “Relevant Persons”). This report is directed only at Relevant Persons. Any person who is not a Relevant Person should not act or rely on this report or any of its contents. United States: Mirae Asset Daewoo is not a registered broker-dealer in the United States and, therefore, is not subject to U.S. rules regarding the preparation of research reports and the independence of research analysts. This report is distributed in the U.S. by Mirae Asset Securities (USA) Inc., a member of FINRA/SIPC, to “major U.S. institutional investors” in reliance on the exemption from registration provided by Rule 15a-6(b)(4) under the U.S. Securities Exchange Act of 1934, as amended. All U.S. persons that receive this document by their acceptance hereof represent and warrant that they are a major U.S. institutional investor and have not received this report under any express or implied understanding that they will direct commission income to Mirae Asset Daewoo or its affiliates. Any U.S. recipient of this document wishing to effect a transaction in any securities discussed herein should contact and place orders with Mirae Asset Securities (USA) Inc. Mirae Asset Securities (USA) Inc. accepts responsibility for the contents of this report in the U.S., subject to the terms hereof, to the extent that it is delivered to a U.S. person other than a major U.S. institutional investor. Under no circumstances should any recipient of this research report effect any transaction to buy or sell securities or related financial instruments through Mirae Asset Daewoo. The securities described in this report may not have been registered under the U.S. Securities Act of 1933, as amended, and, in such case, may not be offered or sold in the U.S. or to U.S. persons absent registration or an applicable exemption from the registration requirements. Hong Kong: This report is distributed in Hong Kong by Mirae Asset Securities (HK) Limited, which is regulated by the Hong Kong Securities and Futures Commission. The contents of this report have not been reviewed by any regulatory authority in Hong Kong. This report is for distribution only to professional investors within the meaning of Part I of Schedule 1 to the Securities and Futures Ordinance of Hong Kong (Cap. 571, Laws of Hong Kong) and any rules made thereunder and may not be redistributed in whole or in part in Hong Kong to any person. All other jurisdictions: Customers in all other countries who wish to effect a transaction in any securities referenced in this report should contact Mirae Asset Daewoo or its affiliates only if distribution to or use by such customer of this report would not violate applicable laws and regulations and not subject Mirae Asset Daewoo and its affiliates to any registration or licensing requirement within such jurisdiction.
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