2H19 Outlook Internet What to expect in the coming decade Chang-kwean Kim +822-3774-1614 [email protected] Analysts who prepared this report are registered as research analysts in Korea but not in any other jurisdiction, including the U.S. PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES & DISCLAIMERS IN APPENDIX 1 AT THE END OF REPORT. Contents [Summary] 3 I. 2019 outlook 4 II. Medium/long-term outlook 5 III. Key factors/issues 6 IV. Global peer group valuations 16 V. Top picks 18 NCsoft, Kakao, NAVER [Conclusion] 21 [Summary] Top picks: NCsoft, Kakao, NAVER Overweight on the internet/game sector NCsoft (036570 KS) Kakao (035720 KS) NAVER (035420 KS) TP: W700,000 TP: W170,000 TP: W176,000 • 2Q19: Renewed Lineage M • KakaoTalk Earnings • Negatives priced in momentum chat tab ads momentum to continue • E-commerce • 2H19: Lineage 2M to be • through Surge in • NAVER vs. Coupang 2020 released webtoon revenue • 2020: Aion 2 and Blade & Soul 2 • LINE Pay Banking to be released • KakaoBank Big Securities • Takeoff of the cloud gaming KakaoPay picture Insurance market Kakao Mobility Source: Mirae Asset Daewoo Research 3| 2H19 Outlook [Internet] Mirae Asset Daewoo Research I. 2019 outlook Strong earnings • NCsoft: Lineage (PC) and Lineage M revenue growth should resume in 2Q19; Lineage M revenue from Japan momentum expected in could emerge. • Kakao: New ads on KakaoTalk chat tabs (launched in May) should generate stronger earnings momentum 2Q for NCsoft and Kakao heading into the end of the year. • NAVER: Investments in new LINE (3938 JP/CP: JPY3,740) businesses should significantly increase in 2H19, weighing on consolidated operating profit. For the domestic business, e-commerce-driven growth should drive continued earnings improvements in 2019. Quarterly earnings trends for NCsoft, NAVER, and Kakao (2018-19) (Wbn) NCsoft (L) NAVER (L) Kakao (R) NAVER (Wbn) Quarterly earnings trend 350 LINE's investments to be concentrated in 2H 100 forecasts NAVER net profit to grow 25% in Korea Kakao NCsoft: 2Q < 3Q < 4Q Revenue from KakaoTalk chat tab ads 300 Kakao: 2Q < 3Q < 4Q NCsoft recognized starting in 2Q 80 NAVER: 1Q > 2Q > 3Q > 4Q Earnings surprise in 2Q thanks to New business revenue growth > Cost growth Lineage M 250 Lineage II to be launched in 2H 60 200 150 40 100 20 50 0 0 1Q18 2Q18 3Q18 4Q18 1Q19F 2Q19F 3Q19F 4Q19F Source: Company data, Mirae Asset Daewoo Research estimates 4| 2H19 Outlook [Internet] Mirae Asset Daewoo Research II. Medium/long-term outlook All industries will • 2000-10: IPO of Amazon (AMZN US/CP: US$1,917); dot-com bubble; takeoff of the internet industry become internet • 2010-20: IPOs of Facebook (FB US/CP: US$189) and Alibaba (BABA US/CP: US$179); proliferation of mobile Improved convenience driven by the internet industries • 2020-30: IPOs of Uber and Airbnb Complete intertwining of the internet and everyday life Lifestyle changes led by advances in internet technology Mobile internet era 2030- -PC Smartphones -Web Apps (expansion) - Proliferation of social network services Uber’s Online ads: 70-80% IPO E-commerce: 30-40% Fax Mailbox Phased out Facebook’s Video IPO 2020 IoT era CD Online ads: 40-50% - Integration of the internet into all industries 2010 E-commerce: 10-20% -Smartphones All devices - 5G proliferation Dot-com - Individual devices Cloud (expansion) Alibaba’s bubble Online ads: 10-20% IPO E-commerce: 5-10% Fixed-line internet (PC) era 2000 - Proliferation of internet -Disks Web Amazon’s IPO Smartphones, social networks, Land lines, mail Wearables, VR calling video calling Start of paid services - Movies, digital music, comics Free content Proliferation of paid services (downloads) - Netflix and Spotify (streaming) Source: Mirae Asset Daewoo Research 5| 2H19 Outlook [Internet] Mirae Asset Daewoo Research III. Key factors/issues: Takeoff of cloud gaming market Cloud gaming = Mobile games > AR/VR games Global gaming market outlook Global cloud gaming market outlook (US$bn) (US$mn) VR 2019 Mobile 500 PC 2011 Cloud gaming has 450 Handheld Console Mobile gaming becomes strong potential 450 Arcade 2006 largest segment 140 400 Steam, CAGR: 120 350 307 downloads +46% 100 300 1994 250 209 1977 80 Play Station Atari 2600 200 60 143 150 97 40 100 66 20 50 0 0 1970 1980 1990 2000 2010 2020 2018 2019F 2020F 2021F 2022F 2023F Source: Financial Times, Mirae Asset Daewoo Research Source: WGR, ABC, Statista, Mirae Asset Daewoo Research M&A activities across global gaming industry Cloud gaming industry outlook (US$bn) Sep 2014 Jul 2016 Microsoft/Mojang Tencent/Supercell Feb. 2011 (2.5) 84.3% (8.6) Mobile games > AR/VR games Tencent/Riot Games, 70% Jan 2014 Nov 2015 (0.2) Jul. 2011 Zynga/Natural Activision - Mostly leveraging existing content (with proven track records) EA/PopCap Games Motion Games Blizzard/ - Convenient for both gamers and developers (1.3) (0.5) King Digital Mar 2012 (5.8) - Costs are borne by companies Zynga/OMGPOP (0.2) - Compatible with existing platforms, hardware and content ⇒ Cloud is now mainstream 2011 2012 2013 2014 2015 2017 Source: App Annie, Financial Times, Mirae Asset Daewoo Research Source: Mirae Asset Daewoo Research 6| 2H19 Outlook [Internet] Mirae Asset Daewoo Research III. Key factors/issues: Takeoff of cloud gaming market Global status of cloud gaming: 2019 marks the true beginning of the cloud gaming industry Company Product Release date Supporting devices No. of games Details • About 300,000 games (free and paid) are currently available in the App 300,000 games available Store iPhone, iPad, Mac, in the App Store; 100 Apple Apple Arcade Fall 2019 • 100 games to be added after launch Apple TV games to be added after • No ads or additional purchases; can be played offline; device shift launch feature available • Initial services to be offered via Google Chrome; can be accessed on all types of devices • Stadia is a platform for game players, developers, and YouTube Google Stadia 2019 All devices TBD streamers • Wi-Fi-enabled Stadia controller has been unveiled (directly connects to Google’s data center); capture button uploads gameplay directly to YouTube • Game streaming service that allows users to play Xbox games via PCs, consoles, or mobile devices Project PCs, consoles, phones, Microsoft 2019 More than 3,000 games • Building hardware for cloud services; testing various games within the xCloud tablets company; preparing kits for developers and users • Aiming to conduct Azure-based tests in October • Plans to allow global game players to enjoy tens of thousands of games Amazon TBD 2020 All devices TBD via Amazon Web Services • Already offering Twitch Prime to Amazon Prime subscribers • Released the Nvidia Shield version of GeForce Now in 2015 and the PC Shield TV, Shield version in 2017; currently in beta testing Portable, MAC • Likely to implement time-based scheme, rather than monthly 2015, 2017 Nvidia GeForce Now OS/Windows More than 500 games subscriptions, (US$25/20 hours for GTX 1060, 10 hours for 1080) (beta) OS/Android • 5G mobile service is currently undergoing internal testing; plans to offer devices an Android-based GeForce cloud gaming service through partnerships with LG Uplus and SoftBank PlayStation PS4, PS3, PS Vita, PS • Cloud gaming service PlayStation Now available since 2015 Sony 2014 More than 700 games Now console, PC • More than 700 game titles are available in 12 countries Source: Mirae Asset Daewoo Research 7| 2H19 Outlook [Internet] Mirae Asset Daewoo Research III. Key factors/issues: Battle between NAVER and Coupang NAVER’s C2C vs. Coupang’s • The Korean e-commerce market grew 21.2% YoY in 2018 and is likely to expand 19.8% YoY in 2019. B2C • Korea recorded the highest e-commerce penetration rate (24.1%) among major markets in 2018. • In 2018, the C2C and B2C e-commerce markets were dominated by NAVER and Coupang, respectively. • In 2018, Smartstore, NAVER’s online marketplace, delivered GMV growth of 58% YoY, while Coupang’s GMV expanded 70% YoY. GMV by Korean online shopping mall (2017-18) (Wtr) 20 2017 2018 C2C Smartstore GMV +50%, YoY 15 B2C 10 +70% YoY 5 0 NAVER eBay Korea 11th Street Coupang WeMakePrice TMON Notes: Striped areas represent Smartstore GMV; Smartstore is NAVER’s online marketplace for small/medium-sized shopping malls, offline retailers (e.g., SMEs, department stores, discount stores), and overseas direct purchase businesses. Source: Press reports, Mirae Asset Daewoo Research 8| 2H19 Outlook [Internet] Mirae Asset Daewoo Research III. Key factors/issues: Battle between NAVER and Coupang 24,000 vs. 300 • Coupang currently has about 24,000 employees (3,000 at the head office; 21,000 logistics employees). • In 2018, Coupang handled 5.21mn Rocket Delivery products, equivalent to 90% of its total GMV. • NAVER pursues C2C and offers optimal shopping experiences to consumers based on a massive product database with hundreds of millions of items. • NAVER is currently considering: 1) overhauling its mobile homepage to become more e-commerce-oriented; and 2) providing logistics warehouses. E-commerce overview by stage NAVER Coupang - Direct product viewing/browsing - Recommendation by salesperson or acquaintance Store visit Displays/ Purchase Transport showroom Customer Tangible goods like Cash/credit card or store books, appliances, etc. 1 2 3 <Internet> Clothing, cars, food, etc. Simplified Parcel delivery PC/mobile Financial and other services payment 4 5 <Product inspection> <Recommendation> <Delivery> VR/AR AI/Big Data Drones/autonomous cars Source: Mirae Asset Daewoo Research 9| 2H19 Outlook [Internet] Mirae Asset Daewoo Research III. Key factors/issues: Battle between NAVER and Coupang Rapid growth of NAVER • In 2019, we expect both NAVER and Coupang to continue to deliver robust growth in GMV. and Coupang to be • NAVER’s total GMV (including Smartstore and purchases made via the search function), which expanded 28% YoY in 2018, will likely grow 25% YoY in 2019.