Kakao (035720 KS ) Foreign investo rs taking their cue from Facebook’s 2013-14 rally Internet Three reasons why earnings uncertainty is likely to dissipate Company Report The biggest drag on ’s share price has been its earnings uncertainty. This is May 2, 2019 mainly because the company has not been generating enough revenue from new businesses (mobility, simplified payment, AI, etc.) to cover its heavy investments.

However, we believe earnings momentum is beginning to materialize, as: 1) we expect new ads on KakaoTalk chat tabs to add W60bn and W150bn to mobile display ad (Maintain) Buy revenue in 2019 and 2020, respectively; 2) the company’s mobile content lineup is also expanding beyond musi c, videos, and games to /web novels in Korea, Japan, Target Price (12M, W) ▲ 170,000 and Indonesia (we estimate Japan-based service ’s revenue surged 163% YoY in 1Q19); and 3) the Korean government is planning to lower bank wiring Share Price (04/30/19, W) 120,000 fees by 90% from 2020, which should lead to W60bn in cost savings in 2020 alone. Earnings to gain momentum from 2Q19 into 2020 Expected Return 42% For 1Q19, we forecast Kakao to post revenue of W671bn (+20.9% YoY) and operating profit of W18bn (+73% YoY), with OP margin of 2.7%. The market is expecting rev enue OP (19F, Wbn) 146 of W661.8bn and operating profit of W21.3bn. Consensus OP (19F, Wbn) 146 For 2Q19, we forecast revenue of W725bn (+23.1% YoY) and operating profit of W36bn EPS Growth (19F, %) 125.0 (+29.9% YoY). We see OP margin expanding to 4.9%, driven by a sharp increase in Market EPS Growth (19F, %) -17.0 revenue from KakaoTalk ads (which have higher margins). P/E (19F, x) 87.0 Beginning in 2019, we forecast revenue to outpace spending, aided by the full-year Market P/E (19F, x) 12.0 reflection of KakaoTalk chat ad revenue, an increase in ad accounts, and improved KOSPI 2,203.59 targeting effects. Market Cap (Wbn) 10,008 Maintain Buy, and raise TP from W130,000 to W170,000 Shares Outstanding (mn) 83 Free Float (%) 62.6 We maintain our Buy call on Kakao and raise our target price from W130,000 to Foreign Ownership (%) 25.3 W170,000. Our target price is based on our 2020 revenue forecasts of each business Beta (12M) 0.78 division and the 2020F average P/S ratio of domestic and foreign peers. 52-Week Low 87,600 The stock has seen continued foreign net buying since April 10 th . We recall that in 2013- 52-Week High 128,000 14, Facebook’s P/E multiple shot up to over 1,000x after the company delivered (%) 1M 6M 12M earnings surprises driven by SNS mobile targeted ads. We believe that foreign Absolute 15.9 32.6 8.1 investors are likening KakaoTalk chat ads to Facebook’s mobile ad growth story. Relative 12.6 21.2 23.4 New business initiatives, such as Kakao Mobility’s car pool service, Kakao Pay’s acquisition of Baro Investment & Securities, and additional stake acquisitions in Kakao 120 Kakao KOSPI 110 Bank, have been progressing more slowly than expected. We believe such potential 100 sources of growth should be seen as long-term catalysts that can drive the company’s 90 enterprise value higher. 80

70 60 4.18 8.18 12.18 4.19

Mirae Asset Daewoo Co., Ltd.

[ Internet ] FY (12) 12/16 12/17 12/18 12/19F 12/20F 12/21F Revenue (Wbn) 1,464 1,972 2,417 2,971 3,591 4,162 Chang -kwean Kim +822 -3774 -1614 OP (Wbn) 116 165 73 146 393 548 [email protected] OP margin (%) 7.9 8.4 3.0 4.9 10.9 13.2

NP (Wbn) 58 109 48 115 295 403 EPS (W) 874 1,602 613 1,380 3,539 4,835 ROE (%) 1.9 2.9 1.0 2.2 5.5 7.0

P/E (x) 88.1 85.5 168.0 87.0 33.9 24.8 P/B (x) 1.5 2.3 1.7 1.9 1.8 1.7 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

May 2, 2019 Kakao

I. Revenue from new sources to surge in 2019

Kakao has expanded into various business areas mainly via M&As (with , Melon, etc.). Major revenue sources include: ads, the company’s share of customer payments for webtoons/web novel purchases (versus entire customer payments for Piccoma) and fees for commerce, mobility, and FinTech services.

The company’s OP margin slid 8.4% YoY to 3% in 2018, due to higher labor costs and marketing expenses related to new business, like KakaoT and KakaoPay. Indeed, labor costs surged by over W100bn from the 2017 level. In addition to marketing expenses, fees for game and music content increased in line with revenue growth.

Meanwhile, revenue growth for its traditional mainstay businesses like games and music (Melon), and ads on the Daum platform is stagnating. However, revenue from ads on the Kakao platform (KakaoTalk), other content (webtoons and web novel on KakaoPage and Piccoma), and commerce/mobility (KakaoT)/payment (KakaoPay) services is expected to expand sharply in 2019 and 2020.

We project Kakao to maintain strong revenue growth of 22.9% in 2019 (following 22.5% in 2018) with margins also improving steeply through 2020.

First, we expect KakaoTalk’s ad revenue to surge. With almost no additional costs for maintaining traffic, KakaoTalk will display ads on chat and friend list tabs. Stripping away commissions for ad agencies (about 20%), gross margin on ad revenue is estimated at 80- 85%. Accordingly, growth in ad revenue should directly boost margins.

In addition, Webtoon and web novel revenue is expected to drive up top- and bottom-line growth based on strong growth in Korea (KakaoPage), Japan (Piccoma), and Indonesia (KakaoPage). The company receives higher shares of earnings for overseas distribution of domestic content. The Webtoon and web novel business is forecast to achieve economies of scale from 2019 onwards on the back of overseas success.

Furthermore, the government is planning to lower bank wiring fees by 90% from 2020. The bank fees led to an operating loss of W4-50bn in 2018 alone.

Table 1. Kakao’s consolidated revenue Item Service Business Portals Daum PC portal, Daum Mobile app #Tab, Plus Friend, Brand Emoticon, Talk Reward, Info-Talk, Support-Talk KakaoTalk Talk Hairshop, Talk Order, Talk Mart, Talk PC Ads SNS KakaoStory Shopping KakaoStyle Other Cash Friends(KakaoPage), Other Subsidiaries' Ad Game Mobile, PC, Other Music Melon, Kakao Music Content Web literature Kakao Page, Daum webtoon, Piccoma Emoticon Talk B2C Emoticon Commerce Talk Gift Shop, KakaoIX, KakaoMakers Mobility KakaoT (Taxi, Driver, Parking, Navigator) Other Fintech KakaoPay Other KakaoM (offline record distribution, etc.) Source: Company data, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 2 May 2, 2019 Kakao

Figure 1. Kakao’s major businesses and global partnership

Source: Company data, Mirae Asset Daewoo Research

Figure 2. Kakao’s financial subsidiaries (estimate)

Kakao

Common stock: 10% 60.9% Convertible preferred stock: 8% 20.0%

Kakao Pay Kakao Bank Dunamu Payments, remittances, (internet bank) (financial IT services) membership program Deposits, loans, Securities data delivery, installment savings Kakao Stock operations

60% (estimate)

Baro Investment & Securities Stocks, funds, real estate, other investments, financial product development

Source: Company data, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 3 May 2, 2019 Kakao

II. Earnings to turn around in 2Q

1. To display ads on KakaoTalk chat tabs

Ad revenue from the Kakao platform (KakaoTalk) is projected to grow 51% in 2019, following a 52% increase in 2018, sharply outpacing the single-digit growth of Daum’s mobile and PC ad revenue. The Kakao platform’s contribution to the company’s total ad revenue is anticipated to rise from 36% in 2018 to 46% in 2019.

In the content business, which generated 50% of total revenue in 2018, webtoon and web novel revenue from KakaoPage and Piccoma is forecast to expand 57% in 2018 and 50% in 2019, overwhelming growth in game and music revenue. Among other revenue items, commerce revenue improved 34% YoY in 2018, and revenue from KakaoT, KakaoPay, and other subsidiaries also climbed 40% YoY last year. Revenue contribution from other items is expected to rise to 24% in 2019 from 22% in 2018.

Ads on KakaoTalk chat tabs, which are anticipated to become a new growth driver, are scheduled to begin in 2Q19. Revenue from the new display ad item is estimated at W60bn for 2019 and W150bn for 2020 (see Table 5 and 6).

Expectations for KakaoTalk chat tab ads are premised on the facts that the revenue power of KakaoTalk ads has already been proven (the Kakao platform’s ad revenue expanded W84bn YoY in 2018 driven by KakaoTalk # tab ads) and online ads’ market penetration stood at 41% in Korea in 2018, which is over 10%p lower than those in major developed countries. In addition, the company is expected to attract new advertisers across a wider area, compared with Naver, which sells primitive types of targeted ads (based on gender, age, location, time, etc.) for a limited pool of products.

Table 2. Quarterly and annual earnings (Wbn, % ) 1Q18 2Q18 3Q18 4Q18 1Q19F 2Q19F 3Q19F 4Q19F 2018 2019F 2020F Revenue 555 589 599 673 671 725 753 822 2,417 2,971 3,591 Ads 155 166 167 182 180 200 201 225 670 807 991 Content 286 303 307 314 321 351 376 403 1,209 1,451 1,652 Games 106 112 99 100 102 112 119 137 417 470 507 Music 126 130 136 140 142 146 150 154 533 592 620 Other 54 61 71 74 77 93 107 111 260 388 525 Other 115 120 126 177 170 174 175 194 537 713 949 Operating profit 10 28 31 4 18 36 43 50 73 146 393 OP margin 1.9 4.7 5.1 0.6 2.7 4.9 5.7 6.0 3.0 4.9 10.9 Net profit 15 25 7 -29 22 24 33 35 16 113 289 Net margin 2.6 4.3 1.2 -4.2 3.3 3.3 4.3 4.2 0.7 3.8 8.0 YoY growth

Revenue 25.2 25.7 16.3 23.6 20.9 23.1 25.7 22.1 22.5 22.9 20.9 Ads 16.0 9.9 10.3 13.9 16.6 20.5 20.5 23.8 12.4 20.5 22.8 content 27.7 28.1 17.3 18.2 12.5 15.9 22.8 28.1 22.7 20.0 13.8 Games 31.5 41.9 5.8 12.5 -3.5 0.4 19.7 37.0 21.9 12.8 7.7 Music 14.5 10.4 11.5 8.6 12.7 11.8 10.3 10.0 11.4 11.2 4.6 Other 62.9 57.2 56.7 55.0 43.2 53.1 50.8 50.2 57.4 49.6 35.3 Other 32.7 44.9 22.6 48.4 47.5 44.9 39.6 9.7 37.4 32.6 33.1 Operating profit -72.9 -38.1 -35.2 -87.6 73.0 29.9 39.2 1055.4 -55.8 100.4 168.6 Net profit -73.1 103.8 -81.5 TTR 49.1 -6.8 343.6 TTB -87.3 610.3 155.4 Source: Company data, Mirae Asset Daewoo Research estimates

Mirae Asset Daewoo Research 4 May 2, 2019 Kakao

Table 3. Earnings forecast revisions (Wbn, %) Previous Revised %chg. Notes 2019F 2020F 2019F 2020F 2019F 2020F Revenue 2,926 3,439 2,971 3,591 1.5 4.4 Operating profit 167 341 146 393 -12.5 15.1 Changed assumptions reflecting a new Net profit 126 255 113 289 -10.2 13.3 revenue sources for OP margin 5.7 9.9 4.9 10.9 - - KakaoTalk in 2Q Net margin 4.3 7.4 3.8 8.0 - - Source: Company data, Mirae Asset Daewoo Research estimates

Table 4. Revenue by advertising sector (2017-2018) (Wbn) 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 4Q18 2017 2018 Advertising Revenue 133 151 151 160 155 166 167 182 596 670 Kakao platform 31 36 45 48 49 55 69 71 160 244 Daum mobile 41 47 44 48 46 48 42 49 180 185 Daum PC 61 68 62 64 59 63 57 62 255 241 Source: Company data, Mirae Asset Daewoo Research estimates

Figure 3. KakaoTalk Ads development aspect

2018 2019

Plus Friends Message Extension to ads business solutions Info Talk Kakao platform

First tab (friends) Kakao Talk Third tab (#) Second tab (chats) #Tab ads Ad expansion Full-scale expansion

Source: Company data, Mirae Asset Daewoo Research estimates

Table 5. Kakao’s ad revenue trend and forecast (Wbn, %) 1Q18 2Q18 3Q18 4Q18 1Q19F 2Q19F 3Q19F 4Q19F 2018 2019F 2020F 2021F Revenue 155 166 167 182 180 200 201 225 670 807 991 1,336 Kakao platform 49 55 69 71 71 90 94 114 244 368 549 886 Daum mobile 46 48 42 49 49 49 48 50 185 195 203 212 Daum PC 59 63 57 62 61 62 60 61 241 244 238 237 Percentage

Kakao platform 32.0 33.0 41.0 39.0 39.4 44.7 46.5 50.6 36.4 45.6 55.4 66.3 Daum mobile 30.0 29.0 25.0 27.0 27.0 24.5 23.6 22.1 27.7 24.2 20.5 15.9 Daum PC 38.0 38.0 34.0 34.0 33.6 30.8 29.9 27.3 35.9 30.2 24.1 17.8 YoY growth

Revenue 16.0 9.9 10.3 13.9 16.5 20.5 20.5 23.8 12.4 20.5 22.8 34.8 Kakao platform 61.4 51.1 50.7 48.0 43.5 63.1 36.7 60.6 52.1 51.0 49.2 61.3 Daum mobile 12.3 2.8 -4.9 2.5 4.9 1.9 13.7 1.1 3.0 5.1 4.1 4.6 Daum PC -4.2 -7.2 -8.5 -3.2 3.0 -2.4 5.9 -0.5 -5.8 1.4 -2.2 -0.4 Source: Company data, Mirae Asset Daewoo Research estimates

Mirae Asset Daewoo Research 5 May 2, 2019 Kakao

Table 6. KakaoTalk mobile display ad revenue 1Q18 2Q18 3Q18 4Q18 1Q19F 2Q19F 3Q19F 4Q19F 2018 2019F 2020F 2021F NAVER

Total stay time (bn minutes) 47.7 47.8 47.0 45.6 46.0 45.2 44.7 44.2 188.1 180.1 171.6 163.5 Mobile DA ads revenue (Wbn) 56 62 57 65 56 64 64 71 241 254 267 283 Ads revenue/Exposure time (W) A 1.2 1.3 1.2 1.4 1.2 1.4 1.4 1.6 1.3 1.4 1.4 1.4 KakaoTalk

Total stay time (bn minutes) 69.3 68.6 67.5 68.6 67.1 67.3 67.1 66.9 274 268 265.6 262.3 Mobile DA revenue (Wbn) 19 19 21 60 150 297

Ads revenue/Exposure time (W) B 0.28 0.29 0.32 0.30 0.57 1.13

= B/A 20.0 20.0 20.0 20.0 40.0 80.0 Note 1: E-commerce is excluded from Naver’s mobile ad revenue Note2: Naver applies both CPM and CPT pricing schemes for ads; revenue contribution from ads on the web front page and mobile news pages is high; ad targeting is based on locations, gender, and ages, etc. Note3: Very conservative assumptions are applied to KakaoTalk as a method of ad exposure has yet to be decided. Note4: As of 1Q19, KakaoTalk has 1.3 times more unique visitors and 1.5 times longer total time spent than Naver mobile app. Note5: Cannibalization of Daum’s PC and mobile ad revenue from KakaoTalk’s new ads is expected to be limited given that the launches of Facebook’s mobile ads and Kakao’s # tab ads had only a negligible impact on Daum’s ad revenue in the past. Source: KoreanClick, Mirae Asset Daewoo Research estimates

Mirae Asset Daewoo Research 6 May 2, 2019 Kakao

2. Webtoons/web novels: Global growth story is ongoing

As referred to in Table 7, KakaoPage (63.8% owned by Kakao) has been delivering a sharp earnings pickup, with the number of cumulative subscribers and monthly average unique visitor reaching 20mn and 5.5mn, respectively, as of end-2018. Jay Park, the entertainment sector analyst at Mirae Asset Daewoo, expects the domestic webtoon/web novel market to grow sharply, from W1.06tr in 2018 to W1.7tr in 2019 and W2.46tr in 2020.

Domestic webtoon/web novel market growth is attributable to the so-called “snack culture”, a term that comes from consuming media in a short period of time (5-10 minutes), like a snack that can be enjoyed anytime and anywhere.

Indeed, KakaoPage’s robust bottom line shows that webtoons/web novels are now recognized as intellectual properties, in our view. For KakaoPage, total transaction value, which climbed 105% YoY in 2017 and 42.3% YoY in 2018, is projected to grow 37.3% YoY in 2019, while revenue and operating profit expanded 42.3% YoY (to W187.5bn) and 281% YoY (W12.6bn), respectively, in 2018.

KakaoPage is preparing to go public, with bottom-line improvement anticipated in 2019. The firm’s revenue and operating profit are projected to grow to W258bn (37.3% YoY) and W31bn (143.6% YoY), respectively, in 2019, with OP margin forecast to rise from 7% in 2018 to 13% in 2019.

Kakao Japan’s Piccoma is a Japan-based mobile webtoon/web novel service (launched in 2016), with 12.6mn cumulative subscribers and 3.7mn monthly average net users as of end- 2018. At present, Korean operators Piccoma, LINE Manga (LINE), and Comico (NHN) rank among the top 10 in Japan App Store books category.

We expect Piccoma to drive other content revenue growth at Kakao in 2019-20. After a 170% YoY surge to W52bn in 2018, Piccoma’s Japan revenue is forecast to further expand to W88bn (+70.1% YoY) in 2019, and W132bn (+50.1% YoY) in 2020.

Market Research firm Sensor Tower estimates Piccoma’s 1Q19 revenue at W21bn (+163% YoY; Figure 6). In light of the research firm’s tentative estimates, we expect Piccoma’s Japan revenue to exceed market expectations.

Figure 4. Web novel, webtoon market scale prospects

(Wtr) 3 +45% YoY 2.46 - Continuing to thrive in OSMU market through diversification of IP - Platform companies' full-scale exploration of the global market +60% YoY 2 1.7 - Changes in Culture Consumption trends - The global mobile content market grew from $14.7 billion in 2013 to

1.06 $59.4 billion in 2017 1 - Average annual growth rate in the last five years: 32.3%

- This growth is expected to last up to 2020

0 2018 2019F 2020F

Source: Mirae Asset Daewoo Research estimates

Mirae Asset Daewoo Research 7 May 2, 2019 Kakao

Table 7. KakaoPage annual earnings (Wbn) 2015 2016 2017 2018 2019F 2020F Revenue 30 64 132 188 258 348 Operating profit -1 1 3 13 31 45 Net profit -3 -3 5 -4 22 46 Transaction amount 50 100 150 220 326 484 Transaction amount growth 250% 113% 106% 42% 37% 35% Revenue/Transaction amount 60% 64% 88% 85% 79% 72% OP margin -2% 1% 3% 7% 12% 13% Source: Mirae Asset Daewoo Research estimates

Table 8. Other content revenue outlook (Wbn) 2017 2018 2019F 2020F Other contents revenue 165 260 388 525 Kakao page 108 167 258 348 Piccoma 19 52 88 132 Emoticon, etc. 37 41 43 45 Source: Company data, Mirae Asset Daewoo Research estimates

Figure 5. LINE Manga quarterly earnings Figure 6. Piccoma quarterly earnings

(Wbn) (Wbn) 61 25 60 +118% YoY 21 54 +163% YoY 20 49 50 17 15 15 40 36 11 10 30 27 8

20 5

10 0 1Q18 2Q18 3Q18 4Q18 1Q19 1Q18 2Q18 3Q18 4Q18 1Q19F

Source: LINE, SensorTower, Mirae Asset Daewoo Research estimates Source: Kakao, SensorTower, Mirae Asset Daewoo Research estimates

Mirae Asset Daewoo Research 8 May 2, 2019 Kakao

3. Open Banking system set for December launch to drive cost savings in 2020

In 2018, Kakao posted operating profit of W283bn in the core business units (e.g., ads, music, commerce, gaming), but reported operating loss of W210bn in the new businesses, including pay, mobility (), global (Japan, Indonesia), AI, and blockchain.

Subsidiaries that delivered operating losses of over W1bn in 2018 include Kakao Pay (- W93.5bn), Kakao Japan (-W38.1bn), Kakao Mobility (-W18.9bn), Mobile, Indonesian social networking service app acquired by Kakao (W12.2bn), and Kakao Brain (AI; -W8bn).

Of these money-losing subsidiaries, Kakao Japan is expected to narrow its operating loss going forward, thanks to top-line growth at its webtoon/web novel service app Piccoma. For Kakao Pay, marketing spend on simplified payment services and bank wiring fees (account transfers between users) were mainly to blame for its losses in 2018.

Meanwhile, on April 15 th , the Financial Supervisory Commission announced its plan to launch an “open banking” system in December 2019. The system would allow all fintech companies to access the payment networks of commercial banks. Reportedly, the network usage fees will be in the W40-50 range, which is only a tenth of their current wiring fees per transaction (W400-500).

Considering the scheduled launch of the open banking system at end-2019, and likely increases in transactions via Kakao Pay in 2019-20, we expect Kakao Pay to cut its wiring fee cost by W60bn in 2020.

For Kakao Mobility, revenue grew 50% to W55bn in 2018 (driver fees for the chauffeur service represented the lion’s share of the revenue).

The launch of its much-anticipated ride-hailing services, which had been pushed back amid intense conflicts with the taxi industry, has recently been approved by the government. Based on government-proposed ideas, Kakao Mobility will be allowed to provide its ride- hailing service only during weekday commuting hours.

Figure 7. Kakao's 2018 financial performance

Operating profit +W73bn

Core businesses New businesses (Ads/music/ commerce/games) (Payments/mobility/global/AI& blockchain) +W283bn -W210bn

Source: Company data, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 9 May 2, 2019 Kakao

III. Valuation

Raise TP from W130,000 to W170,000

We maintain our Buy call on Kakao and raise our target price from W130,000 to W170,000. Our target price is based on our 2020 revenue forecasts of each business division (Table 9) and the 2020F average P/S ratio of domestic and foreign peers.

By business, we calculate the value of the ad business at W6tr; games at W2.2tr; music at W1.7tr; other content business at W1.6tr; and other business at W2.7tr.

The stock has seen continued foreign net buying since April 10 th , following news that KakaoTalk chat tab ads will be launched in May, which we believe suggests heightened expectations on services by foreign investors.

Indeed, foreign investors have observed that in 2013-14, Facebook’s P/E multiple shot up after the company delivered earnings surprises driven by SNS mobile targeted ads (Figure 10, 11).

Facebook’s mobile targeted ads led to: 1) the market’s revaluation of Facebook’s SNS services, for which the absence of profit model had long been of great concern to investors; and 2) an increase in the company’s online ad market penetration.

We also see some upside to Kakao’s other content revenue. KakaoPage (representing the greatest portion of other content revenue) is preparing for an IPO. Projections on KakaoPage’s IPO value have varied; there was news that the firm’s value may range from W1.5tr to W2tr and brokerage firms selected as underwriters for the IPO deal estimate the value at a maximum of W4tr. For reference, Japan-based Piccoma was not included in the aforementioned estimates of KakaoPage’s market value.

Table 9. Valuation by business (Wbn, W) Business 2018 2019F 2020F Notes Ad revenue 670 807 991

Target multiple is in line with the average PSR of global peers (Facebook, Google); KakaoTalk ad revenue Value 4,479 5,414 5,973 forecast to surge in 2019; valuation rerating is expected in 2019, as was case with Facebook back in 2013 Gaming revenue 417 470 507

Value 2,551 2,371 2,214 Target multiple is in line with the 2010 PSR average of peers Netmarble, NCsoft, and Pearl Abyss Music revenue 533 592 620

Value 1,780 1,990 1,686 Target multiple is based on 2020F PSR of peer Spotify Other content revenue 260 388 525

Target multiple is in line with 2020F PSR of LINE Manga; KakaoPage is preparing to go public; t here was news that the firm’s value may range from W1.5tr to W2tr and brokerage firms selected as underwriters Value 1,127 1,425 1,624 for the IPO deal estimate the value at a maximum of W4tr; for reference, Japan-based Piccoma was not included in the aforementioned estimates of KakaoPage’s market value Other revenue 537 713 949

Target multiple is line with the 2020F PSR average of peers like Amazon, eBay, Naver; we did not include Value 1,593 2,267 2,685 global mobility firms, such as Lyft, Uber, in light of the reduction and delays of Kakao’s ride-hailing business In order to derive our target price for Kakao, we applied 2020F average PSR of its global and domestic Total 11,529 13,468 14,182 peers As the firm ’s businesses are currently in the early growth phases, revenue indicators look more Per-share value 138,263 161,508 170,074 appropriate than profitability indicators Source: Bloomberg, Mirae Asset Daewoo Research estimates

Mirae Asset Daewoo Research 10 May 2, 2019 Kakao

Figure 8. Facebook revenue trend (2011~2018)

(US$bn) 60 +38% YoY

55.0

45 +49% YoY

39.9 30 +57% YoY Full-scale introduction of mobile advertising +49% YoY 26.9

15 +65% YoY 17.1 +63% YoY +36% YoY 11.5 7.0 4.3 0 3.2 2011 2012 2013 2014 2015 2016 2017 2018 Source: Bloomberg, Mirae Asset Daewoo Research

Figure 9. Facebook PER trend (2012~2019)

(x) 1800 Sharp P/E expansion 1600 amid higher spending and 1600 revenue expectations 1400 1200 1200

1000

800 Stabilization of P/E in the wake of 600 Mobile a sharp rise in net profit ad 400 launch 200 200 80 75 70 40 30 25 0 5/12 5/13 5/14 5/15 5/16 5/17 5/18

Source: Bloomberg, Mirae Asset Daewoo Research estimates

Mirae Asset Daewoo Research 11 May 2, 2019 Kakao

Kakao (035720 KS/Buy/TP: W170,000)

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 2,971 3,591 4,162 Current Assets 2,859 3,177 3,896 4,677 Cost of Sales 0 0 0 0 Cash and Cash Equivalents 1,247 1,202 1,514 1,920 Gross Profit 2,417 2,971 3,591 4,162 AR & Other Receivables 194 238 288 333 SG&A Expenses 2,344 2,825 3,199 3,613 Inventories 36 44 53 62 Operating Profit (Adj) 73 146 393 548 Other Current Assets 1,382 1,693 2,041 2,362 Operating Profit 73 146 393 548 Non-Current Assets 5,101 5,160 5,151 5,152 Non-Operating Profit 58 34 47 66 Investments in Associates 305 375 453 525 Net Financial Income 32 43 52 65 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 131 180 440 614 Total Assets 7,960 8,337 9,047 9,829 Income Tax 115 67 151 219 Current Liabilities 2,039 2,257 2,624 2,962 Profit from Continuing Operations 16 113 289 395 AP & Other Payables 461 566 685 793 Profit from Discontinued Operations 0 0 0 0 Short-Term Financial Liabilities 623 517 521 525 Net Profit 16 113 289 395 Other Current Liabilities 955 1,174 1,418 1,644 Controlling Interests 48 115 295 403 Non-Current Liabilities 293 350 414 472 Non-Controlling Interests -32 -2 -6 -8 Long-Term Financial Liabilities 45 45 45 45 Total Comprehensive Profit 24 113 289 395 Other Non-Current Liabilities 248 305 369 427 Controlling Interests 59 129 294 401 Total Liabilities 2,332 2,607 3,038 3,435 Non-Controlling Interests -35 -16 -4 -6 Controlling Interests 5,137 5,242 5,527 5,920 EBITDA 208 282 507 646 Capital Stock 42 42 42 42 FCF (Free Cash Flow) 394 426 715 778 Capital Surplus 4,648 4,648 4,648 4,648 EBITDA Margin (%) 8.6 9.5 14.1 15.5 Retained Earnings 453 558 844 1,237 Operating Profit Margin (%) 3.0 4.9 10.9 13.2 Non-Controlling Interests 490 488 482 474 Net Profit Margin (%) 2.0 3.9 8.2 9.7 Stockholders' Equity 5,627 5,730 6,009 6,394

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 491 526 715 778 P/E (x) 168.0 87.0 33.9 24.8 Net Profit 16 113 289 395 P/CF (x) 49.1 36.8 19.9 15.5 Non-Cash Income and Expense 148 159 213 250 P/B (x) 1.7 1.9 1.8 1.7 Depreciation 68 75 59 46 EV/EBITDA (x) 35.3 29.9 15.4 11.1 Amortization 67 61 56 51 EPS (W) 613 1,380 3,539 4,835 Others 13 23 98 153 CFPS (W) 2,099 3,262 6,021 7,742 Chg in Working Capital 329 277 311 286 BPS (W) 61,614 62,866 66,284 70,999 Chg in AR & Other Receivables -1 -44 -50 -46 DPS (W) 127 127 127 127 Chg in Inventories -9 -8 -9 -8 Payout ratio (%) 63.3 8.9 3.5 2.5 Chg in AP & Other Payables 154 7 8 7 Dividend Yield (%) 0.1 0.1 0.1 0.1 Income Tax Paid -141 -67 -151 -219 Revenue Growth (%) 22.6 22.9 20.9 15.9 Cash Flows from Inv Activities -1,261 -385 -319 -293 EBITDA Growth (%) -29.5 35.6 79.8 27.4 Chg in PP&E -85 -100 0 0 Operating Profit Growth (%) -55.8 100.0 169.2 39.4 Chg in Intangible Assets -45 0 0 0 EPS Growth (%) -61.7 125.1 156.4 36.6 Chg in Financial Assets -449 -285 -319 -293 Accounts Receivable Turnover (x) 13.0 13.8 13.7 13.4 Others -682 0 0 0 Inventory Turnover (x) 84.2 74.4 73.8 72.4 Cash Flows from Fin Activities 891 -117 -6 -6 Accounts Payable Turnover (x) 0.0 0.0 0.0 0.0 Chg in Financial Liabilities -129 -106 4 4 ROA (%) 0.2 1.4 3.3 4.2 Chg in Equity 1,052 0 0 0 ROE (%) 1.0 2.2 5.5 7.0 Dividends Paid -12 -10 -10 -10 ROIC (%) 0.3 4.1 10.6 15.8 Others -20 -1 0 0 Liability to Equity Ratio (%) 41.4 45.5 50.6 53.7 Increase (Decrease) in Cash 130 -45 312 407 Current Ratio (%) 140.2 140.8 148.5 157.9 Beginning Balance 1,117 1,247 1,202 1,514 Net Debt to Equity Ratio (%) -30.9 -35.9 -44.2 -52.0 Ending Balance 1,247 1,202 1,514 1,920 Interest Coverage Ratio (x) 7.8 18.6 54.5 75.7 Source: Company data, Mirae Asset Daewoo Research estimates

Mirae Asset Daewoo Research 12 May 2, 2019 Kakao

APPENDIX 1

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

Company (Code) Date Rating Target Price (W) Kakao Kakao (035720) 05/01/2019 Buy 170,000 200,000 11/26/2018 Buy 130,000 08/27/2018 No Coverage 150,000 08/10/2018 Buy 150,000 05/11/2018 Trading Buy 130,000 100,000 02/08/2018 Trading Buy 150,000 50,000 12/17/2017 Trading Buy 170,000

11/05/2017 Buy 190,000 0 08/10/2017 Buy 130,000 May 17 May 18 May 19 06/18/2017 Buy 125,000 05/11/2017 Buy 115,000 04/04/2017 Buy 105,000

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 83.52% 8.24% 8.24% 0.00% Investment Banking Services 82.61% 4.35% 13.04% 0.00% * Based on recommendations in the last 12-months (as of March 31, 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

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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 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 14 May 2, 2019 Kakao

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