Internet/Entertainment Golden age for platforms and intellectual property Internet: Going mobile in 2016 Overweight (Maintain) In 2015, major domestic internet stocks were sluggish but global peers rallied: The 2016 Outlook Report rallies of global internet stocks were driven mainly by growth in mobile ad revenue (Facebook) and continuous earnings surprises (Google, Amazon). November 25, 2015 The domestic mobile ad market has been expanding: We expect NAVER to deliver earnings improvement on the back of its stronger market positions. Daewoo Securities CCCo.,Co., Ltd. On-demand services extending to online-to-offline (O2O) business: In particular, we [Internet/Game/Entertainment] note Kakao’s innovative O2O business model. Chang-kwean Kim +822-768-4321 Intellectual property (IP) was a buzzword of the global game market in 2015: The [email protected] market has been led by Nintendo ( Super Mario IP) and Electronic Arts (sports IP related to FIFA and the NBA). Jeong-yeob Park +822-768-4124 Top picks: [email protected] 1) NAVER (035420 KS, TP: W820,000): A winner in the mobile ad/e-commerce markets 2) Kakao (035720 KQ, TP: W170,000): A pioneer in O2O with further growth potential 3) NCSOFT (036570 KS, TP: W270,000): Benefiting from aging Lineage users; Note the value of multiple domestic IPs Entertainment: Industry to prevail in Asia over the next decade Entertainment market has expanded alongside income and growing economy : Key areas have shifted over time: Broadcasting movies concerts paid content Growth trends vary by country, providing related companies with opportunities: US, Europe, Korea: Concerts paid content China: Movies concerts Southeast Asia (Vietnam, Indonesia, etc.): Broadcasting movies Top picks: 1) CJ CGV (079160 KS, TP: W150,000): Expanding into Indonesia and Vietnam; Building theaters around the world 2) SM Entertainment (041510 KQ, TP: W59,000): Full-swing expansion into China Analysts who prepared this report are registered as research analysts in Korea but not in any other jurisdiction, including t he U.S. PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES & DISCLAIMERS IN APPENDIX 1 AT THE END OF REPORT. November 25, 2015 Internet/Entertainment C O N T E N T S I. 2015 review 3 Domestic internet stocks sluggish, in contrast to rallying global peers II. 2016 outlook 5 1. Internet sector 5 2. Entertainment sector 18 III. Valuation and investment strategy 23 1. LINE 23 2. Kakao 25 3. Global peer valuation 27 IV. Top picks NAVER (035420 KS) 30 Kakao (035720 KQ) 32 NCSOFT (036570 KS) 34 CJ CGV (079160 KS) 36 SM Entertainment (041510 KQ) 38 YG Entertainment (122870 KQ) 40 KDB Daewoo Securities Research 2 November 25, 2015 Internet/Entertainment I. 2015 review Domestic internet stocks sluggish, in contrast to rallying global peers In the US, four internet stocks—i.e., Apple, Amazon, Facebook, and Google—account for approximately 40% of the Nasdaq 100 Index. On October 23 rd , Facebook’s market cap reached W327tr, with share price exceeding the US$100 mark for the first time in the company’s history. Since falling to US$17 in September 2012, Facebook shares have risen more than five-fold to US$107. In 2015, its market cap has expanded more than 50% compared to its lowest point this year. This stock rally seems attributable to the robust growth of mobile ad revenue <Figure 1>. Since February 2012, Facebook has been aggressive in its mobile ad strategy (which includes ads on users’ “timeline” space). While mobile ad revenue accounted for just 3.6% of overall ad revenue in 1Q12, the figure soared to 78% in 3Q15. At the same time, the company’s PC ad revenue has remained solid. While Twitter has struggled with slow growth, Amazon and Google shares hit historic highs on the back of 3Q earnings surprises. Amazon’s market cap surpassed that of US-based retail giant Walmart in September 2015. In contrast to global internet stocks, domestic internet/game stocks (e.g., NAVER, Kakao, NCSOFT, Com2uS, and Gamevil) were sluggish this year, largely due to tepid margins. For domestic entertainment companies, share performances this year were largely determined by progress in overseas markets. In 1H15, Chinese box-office sales surged, amounting to 66% of the US market. In three years, we expect China to become the world’s largest movie market. CJ CGV was the only entertainment stock to soar in 2015, having risen 153% since early this year on the back of the growing Chinese movie market. As of November this year, the company has increased its theater sites in China to 56 from 38 at end-2014. The Chinese subsidiary suffered an operating loss of W1.1bn in 1Q, but swung to operating profits of W1.5bn in 2Q and W2.3bn in 3Q. Figure 111.1. Facebook sharesharess have risen in tandem with growth of mobile ad revenuerevenue (US$bn) Mobile ad revenue share in 3Q15: (US$, %) 5 Facebook revenue (L) 78% for FB vs. 40% for NAVER 120 Facebook mobile ad revenue (L) 100 4 Facebook share price (R) Share of mobile ad revenue in Facebook revenue (R) Share of mobile ad revenue in NAVER revenue (R) 80 3 NAVER's mobile ad revenue in 1Q13: 60 19.8% share of revenue 2 FB's mobile ad revenuein 1Q12: 3.6% share of revenue 40 1 20 0 0 1/11 7/11 1/12 7/12 1/13 7/13 1/14 7/14 1/15 7/15 Source: Company data, Thomson Reuters, KDB Daewoo Securities Research KDB Daewoo Securities Research 3 November 25, 2015 Internet/Entertainment Figure 333.3. Asian iiinternetinternet companiescompanies’’’’ relative share Figure 222.2. US iiinternetinternet companiescompanies’’’’ relative share performances performances (-1Y=100p) (-1Y=100p) Tencent Alibaba Baidu 220 Alphabet Amazon 150 Yahoo JPN Rakuten NAVER Ebay Facebook Kakao Twitter LinkedIn 180 Groupon 125 140 100 100 75 60 20 50 11/14 1/15 3/15 5/15 7/15 9/15 11/15 11/14 1/15 3/15 5/15 7/15 9/15 11/15 Source: Thomson Reuters, KDB Daewoo Securities Research Source: Thomson Reuters, KDB Daewoo Securities Research Figure 444.4. PC/console game developerdeveloperssss’’’’ relative share Figure 555.5. MMMobileMobile game developerdeveloperssss’’’’ relative share performances performances (-1Y=100p) (-1Y=100p) Gamevil Com2uS 200 NCSOFT 200 Wemade Zynga Activision Blizzard DeNA GungHo Online Netease EA Nintendo Namco Bandai 150 150 Tencent 100 100 50 50 11/14 1/15 3/15 5/15 7/15 9/15 11/15 11/14 1/15 3/15 5/15 7/15 9/15 11/15 Source: Thomson Reuters, KDB Daewoo Securities Research Source: Thomson Reuters, KDB Daewoo Securities Research Figure 666.6. Chinese film industryindustry----relaterelaterelatedd companies’ relative Figure 777.7. GGGlobalGlobal concertconcert----relatedrelated companiescompanies’’’’ relative share share performances performances (1/1/2015=100p) (1/1/2013=100p) 800 CJ CGV 300 SM Ent. Wanda Cinema Line YG Ent. Huayi Brothers Live Nation Ent. MSG Networks 600 Zhejiang Huace Shanghai Media 200 400 100 200 0 0 1/15 3/15 5/15 7/15 9/15 11/15 1/13 7/13 1/14 7/14 1/15 7/15 Source: Thomson Reuters, KDB Daewoo Securities Research Source: Thomson Reuters, KDB Daewoo Securities Research KDB Daewoo Securities Research 4 November 25, 2015 Internet/Entertainment II. 2016 outlook 1. Internet sector In 2016, we expect to see a more detailed picture of mobile monetization emerge in domestic and overseas markets. The monetization model is evolving from simply exposing mobile users to ads/e-commerce to targeting users based on immediate location, personal data, etc. As of 3Q15, NAVER’s mobile ad revenue was 67% of PC ad revenue, compared to 350% for Facebook. However, NAVER’s revenue from mobile ads and e-commerce is growing sharply. In 3Q, the company’s mobile display ad revenue jumped 100% YoY. We expect on-demand services to be the key word of the internet industry in 2016. Such services, for which consumer demand is a key driver, will continue to extend to the O2O area, enabling consumers to use mobile devices to obtain various services related to everyday life (e.g., delivery, transport, household chores, laundry, and car washing). On-demand services should be most easily applied to the e-commerce segment. Whereas mobile commerce is just an extension of online commerce into mobile channels, on-demand services are likely to incorporate more diverse aspects; for example, applying on-demand services to e- commerce will give customers flexibility in terms of types of services, the times and places services can be accessed, the ability to see order status information, and payment options. Figure 888.8. Mobile transformation of internet business model Source: KDB Daewoo Securities Research KDB Daewoo Securities Research 5 November 25, 2015 Internet/Entertainment (1) NAVER to enjoy accelerating mobile momentum Since early 2015, NAVER’s mobile revenue as a percentage of overall revenue has shown sharp growth, with mobile commerce revenue showing the strongest growth. In 3Q, we estimate the company’s mobile commerce revenue jumped 58.0% YoY to W37.2bn, accounting for 46.1% of overall e-commerce revenue (up 33.5%p from the figure in 1Q13, 12.6%). In just two years (3Q15 vs. 3Q13), mobile commerce revenue has leaped 259%. NAVER’s e-commerce business contributes directly to profits, given its fee-based model. For online shopping malls housed within or sharing their database with NAVER, NAVER collects a certain portion of sales revenues as a commission (e-commerce revenue for NAVER). We believe NAVER’s mobile ad revenue growth has just begun. In 3Q, mobile revenues accounted for 36% of overall search ad revenue, up 8%p from a year ago and up 16%p from two years ago.