[Korea ] Internet Kakao (035720 KS ) KakaoPage sees transaction volume surpassing W500bn in 2020 Mirae Asset Daewoo Co., Ltd. Jeong -yeob Park [email protected] Chang-kwean Kim [email protected] Kakao presented key indicators and its future vision for the webtoon business (KakaoPage and Piccoma) at IPO EXPO 2020. KakaoPage set its 2020 transaction volume target at over W500bn, far above our original expectation (W340.3bn). Maintain Buy and TP of W370,000: We expect Kakao’s webtoon business to gain increasing attention as a next-generation platform, alongside Webtoon Entertainment. 2020 transaction volume target set at over W500bn; aiming to become a global IP machine - KakaoPage (CEO Lee Jin-soo) presented a 2020 transaction volume target of over W500bn (+56.3%). - Given that roughly 40% of intellectual properties (IPs) available on Piccoma are owned by KakaoPage, we believe the W500bn target partially includes Piccoma’s transaction volume. - Still, we view the announcement as meaningful, as it presents a target well above our expectations (W340.3bn for KakaoPage and W234bn for Piccoma). - KakaoPage, which was the first in the industry to successfully monetize webtoons through its “pay or wait” model, has been strengthening its roles as both a content platform and IP holder (currently owning more than 7,000 original IP titles through investments in authors and content providers). - Meanwhile, Piccoma has successfully monetized its platform while also demonstrating the far-reaching power of “K-stories” (Korean webtoons/web novels). Of note, K-stories account for almost 40% of Piccoma’s transaction volume (but less than 5% of Piccoma’s titles). Webtoon business to continue to re-rate higher - Kakao has three webtoon-related subsidiaries: 1) KakaoPage (63.5% owned by Kakao), 2) Kakao Japan (operator of Piccoma; 79.5% owned by Kakao and 19.9% by KakaoPage), and 3) Neobazar (global; 68.4% owned by KakaoPage). - We believe the webtoon business has the potential to reach a combined valuation of around W10tr, given: 1) its positioning as a next-generation platform (comparable to Netflix [NFLX US/CP: US$502.78] and Spotify [SPOT US/CP: US$269.26]); 2) the increasing global popularity of webtoons (webtoon traffic is growing in the US, Latin America, and Europe); and 3) growing utilization of webtoon IPs (film/drama/game adaptations). - The biggest strength of Kakao’s webtoon business is that it is already making profits on the back of its strong market share in Korea/Japan (where there is limited need for marketing). In particular, Piccoma’s downloads and transaction volume (2Q20F: +213%) have been rapidly growing in 2020. Earnings and valuation metrics FY (Dec.) 12/17 12/18 12/19 12/20F 12/21F 12/22F Revenue (Wbn) 1,972 2,417 3,070 3,828 4,687 5,954 OP (Wbn) 165 73 207 443 717 952 OP Margin (%) 8.4 3.0 6.7 11.6 15.3 16.0 NP (Wbn) 109 48 -301 322 466 625 EPS (W) 1,602 613 -3,585 3,706 5,354 7,183 ROE (%) 2.9 1.0 -5.8 6.0 8.1 9.9 P/E (x) 85.5 168.0 - 88.5 61.3 45.7 P/B (x) 2.3 1.7 2.5 5.2 4.8 4.3 Dividend Yield (%) 0.1 0.1 0.1 0.0 0.0 0.0 Notes: All figures are based on consolidated K-IFRS; NP refers to net profit attributable to controlling interests Source: Company data, Mirae Asset Daewoo Research estimat es Kakao July 9, 2020 - We expect the webtoon business to continue to re-rate higher as it expands its geographical reach to countries like the US, Taiwan, Indonesia, and Thailand. Figure 1. KakaoPage transaction volume target: Over W500bn in 2020 (Wbn) 600 KakaoPage transaction volume 500 400 300 500 200 320 250 100 160 95 50 0 1.7 13 2013 2014 2015 2016 2017 2018 2019 2020F Source: KakaoPage, Mirae Asset Daewoo Research Figure 2. Projects based on KakaoPage’s IP: No. of projects in 2020-23 likely to outnumber those released over the past 14 years (No.) 25 Movies Drama series 20 15 10 5 0 2006 2008 2010 2012 2014 2016 2018 2020F 2022F Source: KakaoPage, Mirae Asset Daewoo Research Figure 3. K-stories account for almost 40% of Piccoma’s transaction volume Source: KakaoPage, Mirae Asset Daewoo Research Mirae Asset Daewoo Research 2 Kakao July 9, 2020 Figure 4. Netflix: Revenue and P/S simultaneously increased during global market expansion (%) Revenue growth (L) 12MF P/S (R) 12MT P/S (R) (x) 60 16 US cable TV market Revenue growth through Korea, encroachment regional expansion Southeast Asia 14 50 (190 countries currently) 12 Western Australia, 40 Europe Japan 10 South 30 America UK Northern 8 Europe 6 20 4 10 2 0 0 1/08 1/09 1/10 1/11 1/12 1/13 1/14 1/15 1/16 1/17 1/18 1/19 1/20 Source: Bloomberg, Mirae Asset Daewoo Research Figure 5. Spotify: P/S has risen sharply on expectations for global expansion and new content offerings (%) (x) 50 Revenue growth (L) 12MF P/S (R) 12MT P/S (R) 7 6 40 Regional/content expansion expected 5 30 4 3 20 2 10 1 0 0 1/18 4/18 7/18 10/18 1/19 4/19 7/19 10/19 1/20 4/20 Source: Bloomberg, Mirae Asset Daewoo Research Figure 6. Google Trends: Sharp increase in "webtoon" queries following service launch in South America and Europe (P) 120 Global US NAVER Webtoon monetization 100 France in US/East Asia Mexico 80 60 40 NAVER Webtoon Enters South America/Europe 20 0 6/15 1/16 8/16 3/17 10/17 5/18 12/18 7/19 2/20 Source: Google, Mirae Asset Daewoo Research Mirae Asset Daewoo Research 3 Kakao July 9, 2020 Figure 7. Piccoma: Monthly downloads 800000 700000 600000 +156% YoY 500000 400000 300000 200000 100000 0 6/19 8/19 10/19 12/19 2/20 4/20 6/20 Source: Sensor Tower, Mirae Asset Daewoo Research Figure 8. Japan book app rankings (revenue) Source: Sensor Tower, Mirae Asset Daewoo Research Figure 9. Piccoma: Monthly transaction volume Figure 10. Piccoma: Quarterly transaction volume (Wbn) (Wbn) 50 120 100 40 + 242% YoY + 213% YoY 80 30 60 20 40 10 20 0 0 6/19 8/19 10/19 12/19 2/20 4/20 6/20 2Q19 3Q19 4Q19 1Q20 2Q20F Note: Transaction volume data are based on SensorTower estimates, and could differ Note: Transaction volume data are based on SensorTower estimates, and could differ from actual data. from actual data. Source : Sensor Tower, Mirae Asset Daewoo Research estimates Source : Sensor Tower, Mirae Asset Daewoo Research estimates Mirae Asset Daewoo Research 4 Kakao July 9, 2020 Table 1. KakaoPage: Annual earnings estimates (Wbn, %, W) 2017 2018 2019 2020F 2021F Revenue (incl. Daum Webtoon, advertising) 118 188 257 299 346 Domestic platform 110 168 198 231 270 Global IP distribution 8 20 28 34 38 Ads/other 10 21 31 34 39 * Piccoma (not included in above figures) 19 51 125 214 311 KakaoPage’s operating profit 3 13 31 41 52 OP margin (%) 2.8 6.7 11.9 13.8 15 Content transaction volume (Piccoma included) 160 290 429 574 733 Note: All figures excluding annual revenue and operating profit are based on our estimates. Source: Kakao, Mirae Asset Daewoo Research Figure 11. Kakao’s webtoon business structure Kakao (035720 KS) 63.5% 79.5% 59.0% Kakao KakaoPage Kakao Japan Games Domestic 19.9% Japan 19.1% Neobazar 68.4% Indonesia Source: Company materials, Mirae Asset Daewoo Research Table 2. Kakao: Valuation (Wbn, W ) Business 2020F 2021F Notes Ad revenue 1,178 1,621 - Target multiple is based on 2020F P/S of Facebook; KakaoTalk ad revenue forecast to surge in Value 8,883 14,841 2020; valuation re -rating is expected, as was the case with Facebook back in 2013 Gaming revenue 415 430 Value 2,204 2,441 - Target multiple is in line with the 2021F avg. P/S of Netmarble, NCsoft, and Pearl Abyss Music revenue 611 635 Value 3,368 2,890 - Target multiple is based on 2021F P/S of Spotify Other content revenue 479 574 - KakaoPage and Kakao Japan plan to go public in Korea and Japan, respectively. - Piccoma’s surging transaction volume has boosted IPO value; target multiple is in line with the Value 3,834 4,593 2016-20 average P/S (8x) of Netflix - IPO values for both KakaoPage and Kakao Japan to be revisited down the line Other revenue 1,144 1,427 - Equity-method gains from KakaoBank (which is expected to go public) Value 5,573 5,999 - Target multiple is line with the avg. 2021F P/S of peers (Amazon, NAVER) Total 30,765 - Avg. P/S multiples for domestic/global peers were used to derive our target price - As the firm’s businesses are currently in the early growth phases, revenue indicators appear Per-share value 370,000 more relevant than profitability indicators Source: Bloomberg, Mirae Asset Daewoo Research estimates Mirae Asset Daewoo Research 5 Kakao July 9, 2020 Table 3. Kakao: Quarterly and annual earnings (Wbn, %) 1Q19 2Q19 3Q19 4Q19 1Q20 2Q20F 3Q20F 4Q20F 2019 2020F 2021F Revenue 706 733 783 848 868 919 966 1,074 3,070 3,828 4,687 Platform 313 327 351 444 442 478 499 569 1,435 1,988 2,594 Talk Biz 127 139 162 222 225 244 261 297 650 1,026 1,535 Portal Biz 126 137 126 134 117 125 121 144 524 507 516 New Biz 60 51 62 88 101 109 118 128 261 455 542 Content 393 406 432 404 427 441 467 505 1,635 1,840 2,094 Game 94 98 99 106 97 98 110 110 397 415 430 Music 137 145 151 153 151 151 153 156 587 611 635 Paid content 75 82 92 49 97 107 112 118 297 434 527 IP business/other 87 82 90 95 82 84 92 121 354 380 501 Operating profit 28 40 59 80 88 100 110 145 207 443 717 OP margin 4 6 8 9 10 11 11 13 7 12 15 Net profit 18 31 51 -442 80 70 77 99 -342 326 472 Net margin 2 4 7 -52 9 8 8 9 -11 9 10 YoY growth Revenue 27.2 24.5 30.7 25.9 22.9 25.3 23.4 26.7 27 24.7 22.5 Platform 34.8 30.2 38.6 46.6 41.1 46.3 42.3 28.1 38 38.6 30.5 Talk Biz 43.3 42.4 51.6 73.3 77.1 75.5 60.7 34 54.3 58 49.6 Portal Biz 3.9 6.7 9.1 3.4 -7.8 -8.5 -4.3 7.4 5.7 -3.2 1.9 New Biz 171.6 103 105.3 94.9 68.1 113.9 88.8 44.9 112.9 74.1 19.2 Content