[Korea] Internet March 17, 2021 Kakao Buy (035720 KS) (Maintain) Biggest beneficiary of bitcoin frenzy TP: W590,000 ▲ Upside: 23.2% Mirae Asset Daewoo Co., Ltd. Chang-kwean Kim [email protected] HeeSeok Lim [email protected] Watch for earnings surprise Pay, Bank, and Piccoma showing robust earnings indicators in 1Q21 every quarter in 2021 Key indicators suggest Kakao’s growth businesses (Bizboard, commerce, etc.) are continuing their earnings momentum into 1Q21. We expect GMV to begin meaningful growth on the back of the introduction of the shopping tab. Unique users of the KakaoBank and Kakao Pay apps (a leading earnings indicator) continued to increase sharply in January and February. We forecast Piccoma’s 1Q21 GMV to climb 304% YoY. The webtoon service is setting new records for a Japanese mobile internet business. Dunamu to drive Poised to become biggest beneficiary of growth of Upbit earnings surprise in 2021 Upbit, Korea’s largest crypto exchange, has recently seen its traffic and trading volume exceed 4Q17 levels. Kakao directly and indirectly owns a roughly 23% stake in Dunamu, the operator of Upbit. Kakao recorded W29bn in equity-method gains from Dunamu in 4Q17. If the current cryptocurrency frenzy continues, we expect the crypto exchange operator to contribute more than W100bn in equity-method gains this year alone. Kakao’s stake could also be revalued higher following the NASDAQ listing of global crypto exchange Coinbase. Raise TP to W590,000 (from Trading to be suspended from Apr. 12-14 for 5:1 stock split, before resuming on Apr. 15 W570,000) We forecast 1Q21 revenue and operating profit to grow 46.3% and 76.9% YoY, respectively. Additionally, we believe equity-method gains from Dunamu will be much stronger than expected, thanks to the bitcoin trading boom. Kakao will split the par value of its stock from W500 to W100. Trading will be suspended for three days from Apr. 12 before resuming on Apr. 15. We expect the IPOs of Kakao Pay and KakaoBank to take place in 1H21 and 2H21, respectively. Kakao Entertainment and Kakao Japan could also go public in 2022. We raise our target price on Kakao to W590,000 (from W570,000), reflecting changes in the share prices of peer companies. Key data Current price (3/16/21, W) 479,000 Market cap (Wbn) 42,490 360 Kakao KOSP I 310 OP (20F, Wbn) 456 Shares outstanding (mn) 89 260 Consensus OP (20F, Wbn) 450 Free float (%) 71.8 210 EPS growth (20F, %) - Foreign ownership (%) 33.2 160 P/E (20F, x) 206.6 Beta (12M) 0.42 110 60 Market P/E (20F, x) 21.2 52-week low (W) 134,000 3.20 7.20 11.20 3.21 KOSPI 3,067.17 52-week high (W) 514,000 Share performance Earnings and valuation metrics (%) 1M 6M 12M (Dec.) 2017 2018 2019 2020F 2021F 2022F Absolute -6.8 27.1 224.7 Revenue (Wbn) 1,972 2,417 3,070 4,157 5,568 6,739 Relative -3.9 0.9 81.6 OP (Wbn) 165 73 207 456 736 1,084 OP margin (%) 8.4 3.0 6.7 11.0 13.2 16.1 NP (Wbn) 109 48 -301 165 655 877 EPS (W) 1,602 613 -3,585 1,885 7,388 9,892 ROE (%) 2.9 1.0 -5.8 3.1 11.5 13.6 P/E (x) 85.5 168.0 - 206.6 64.8 48.4 P/B (x) 2.3 1.7 2.5 6.4 7.0 6.2 Div. yield (%) 0.1 0.1 0.1 0.0 0.0 0.0 Notes: Under consolidated K-IFRS; NP is attributable to owners of the parent Source: Company data, Mirae Asset Daewoo Research estimates 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. March 17, 2021 Kakao Table 1. Quarterly and annual earnings (Wbn, %) 1Q20 2Q20 3Q20 4Q20 1Q21F 2Q21F 3Q21F 4Q21F 2019 2020F 2021F Revenue 868 953 1,100 1,235 1,271 1,340 1,440 1,517 3,070 4,157 5,568 Platform 442 493 554 657 672 713 774 822 1,435 2,146 2,980 Talk Biz 225 248 284 360 362 386 434 470 650 1,118 1,652 Portal Biz 117 117 121 123 117 118 120 122 524 478 477 New Biz 101 127 149 174 193 208 220 231 261 550 852 Content 427 460 546 578 599 627 666 695 1,635 2,011 2,588 Games 97 107 150 141 127 118 140 130 397 495 514 Music 151 151 156 155 151 152 157 156 587 613 616 Paid content 97 119 148 164 193 228 235 269 297 528 925 IP business/other 82 83 92 119 128 130 135 140 354 375 532 OP 88 98 120 150 156 173 190 216 207 456 736 OP margin 10.2 10.3 10.9 12.1 12.3 12.9 13.2 14.2 6.7 11.0 13.2 NP 80 145 144 -202 145 158 170 190 -342 167 663 Net margin 9.2 15.2 13.1 -16.3 11.4 11.8 11.8 12.5 -11.1 4.0 11.9 YoY growth Revenue 22.9 30.0 40.545.7 46.3 40.6 30.9 22.8 27.0 35.434.0 Platform 41.1 50.7 58.1 47.9 52.0 44.6 39.6 25.1 38.0 49.6 38.9 Talk Biz 77.1 78.8 75.1 62.6 61.1 55.5 52.5 30.4 54.3 72.0 47.8 Portal Biz -7.8 -14.2 -3.9 -8.6 0.2 0.4 -0.7 -0.8 5.7 -8.7 -0.2 New Biz 68.1 148.8 139.0 97.0 91.9 64.3 47.8 32.6 112.9 110.5 54.8 Content 8.5 13.3 26.3 43.3 40.4 36.3 22.1 20.3 18.7 23.0 28.7 Games 3.0 9.2 51.9 32.9 31.2 9.5 -7.1 -7.8 -4.7 24.7 3.8 Music 9.8 4.4 2.8 1.2 0.5 0.4 0.8 0.7 10.1 4.4 0.6 Paid content 30.0 46.0 61.5 232.6 98.6 91.8 58.5 64.6 36.1 77.6 75.3 IP business/other -6.1 1.2 1.6 24.7 55.9 57.1 47.0 18.0 69.1 5.8 42.0 OP 218.9 141.7 103.5 88.2 76.9 77.3 58.0 44.3 183.7 120.5 61.3 NP 354.9 368.6 179.3 RR 81.0 8.8 18.5 TTB TTR TTB 296.8 Source: Company data, Mirae Asset Daewoo Research estimates Table 2. Dunamu: Annual earnings (Wbn) 2017 2018 2019 Revenue 207 480 140 OP 130 285 42 Non-operating profit 5 -100 -27 Income tax -32 -44 -4 NP 103 141 12 Source: Company data, Mirae Asset Daewoo Research Mirae Asset Daewoo Research 2 March 17, 2021 Kakao Figure 1. KakaoBank: Monthly unique users Figure 2. Kakao Pay: Monthly unique users (mn users) (mn users) 10 4 3 8 2 6 1 4 0 5/19 8/19 11/19 2/20 5/20 8/20 11/20 2/21 5/19 8/19 11/19 2/20 5/20 8/20 11/20 2/21 Source: Nielsen KoreanClick, Mirae Asset Daewoo Research Source: Nielsen KoreanClick, Mirae Asset Daewoo Research Figure 3. Piccoma: Monthly transaction volume Figure 4. Piccoma: Quarterly transaction volume (Wbn) (Wbn) 90 240 +304% YoY 80 210 70 180 60 +267% YoY 150 50 120 40 90 30 60 20 10 30 0 0 2/20 4/20 6/20 8/20 10/20 12/20 2/21 1Q20 2Q20 3Q20 4Q20 1Q21F Source: Sensor Tower, Mirae Asset Daewoo Research estimates Source: Sensor Tower, Mirae Asset Daewoo Research estimates Figure 5. Upbit, Bithumb: Monthly unique users Figure 6. Upbit, Bithumb: Monthly total time spent (mn users) (bn min.) 2.5 Upbit Bithumb 1.4 Upbit Bithumb 1.2 2.0 1.0 1.5 0.8 0.6 1.0 0.4 0.5 0.2 0.0 0.0 10/17 3/18 8/18 1/19 6/19 11/19 4/20 9/20 2/21 10/173/188/181/196/1911/194/209/202/21 Source: Nielsen KoreanClick, Mirae Asset Daewoo Research Source: Nielsen KoreanClick, Mirae Asset Daewoo Research Mirae Asset Daewoo Research 3 March 17, 2021 Kakao Figure 7. Ranking of global cryptocurrency exchanges in terms of transaction value (as of Mar. 16) Source: CoinMarketCap, Mirae Asset Daewoo Research Table 3. Valuation (Wbn, W) 2019 2020 2021F Notes Ad revenue 670 1,301 1,695 Target multiple is based on 2020F P/S of Facebook; KakaoTalk ad revenue forecast to Value 4,479 11,926 20,448 surge in 2020; a valuation re-rating is expected, as was the case with Facebook in 2013. Gaming revenue 417 495 514 Value 2,551 3,364 3,450 Target multiple is in line with the 2021F avg. P/S of Netmarble, NCsoft, and Pearl Abyss. Music revenue 533 613 616 Value 1,780 4,259 3,507 Target multiple is based on 2021F P/S of Spotify.