Kakao (035720 KS ) Piccoma ’s surprise growth in Japan; Webtoon s alone could reach valuation of over W10tr Internet The power of K-webtoons: Piccoma’s transaction volume up 213% YoY in 2Q20 Company Report We believe Kakao Japan’s Piccoma, a webtoon service focused on original Korean July 3, 2020 comics, saw astonishing top-line growth in 2Q20. We estimate Piccoma’s transaction volume was W106bn (based on data from global market researcher Sensor Tower) in 2Q20 alone, which is equivalent to nearly half of our 2020 full-year forecast of W214bn. Piccoma’s monthly downloads also jumped 153% YoY in June, raising expectations on (Maintain) Buy future earnings. Sin ce June, the webtoon app has been locked in a tight battle with LINE Manga for the title of Japan’s top-grossing book app. Target Price (12M, W) ▲▲▲ 370,000 We estimate Piccoma’s transaction volume grew 242% YoY in June and 213% YoY in 2Q20 (+76% QoQ). Interestingly, nine out of the app’s top 10 titles are from Korean Share Price (07/02/20, W) 285,500 writers, and eight of them are adapted from novels. Expected Return 30% Meanwhile, NAVER’s LINE Manga has revealed that it will begin a webtoon originals service in Japan similar to Piccoma’s. LINE Manga is a digital platform that allows users to read existing publications on their smartphones. In the long term, we believe OP (20F, Wbn) 443 content competition between the two platforms will spur strong growth of the Consensus OP (20F, Wbn) 422 Japanese market, which generally has a higher paid user ratio and average spend per user, as well as a deeper understanding and appreciation of comics and animations. EPS Growth (20F, %) - Market EPS Growth (20F, %) 24.0 2Q20 earnings to beat consensus P/E (20F, x) 77.0 For 2Q20, we forecast Kakao to post revenue of W919bn (+25.3% YoY) and operating Market P/E (20F, x) 14.8 profit of W100bn (+147.5% YoY), with the latter being slightly above the consensus KOSPI 2,135.37 (W95bn). We believe 2Q20 earnings will show that new income models (pay, bank, Market Cap (Wbn) 25,067 mobility, and webtoons) are rapidly growing alongside traditional business models Shares Outstanding (mn) 88 (ads and e-commerce) on the back of rising demand for contactless services. Free Float (%) 68.9 Transformation into global webtoon platform to trigger re-rating; Raise TP to Foreign Ownership (%) 33.7 W370,000 Beta (12M) 0.49 52-Week Low 122,000 Kakao has two webtoon-related subsidiaries: Kakao Page (63.5% owned by Kakao) and 52-Week High 285,500 Kakao Japan (operator of Piccoma; 79.5% owned by Kakao and 19.9% by Kakao Page). We think the two companies have the potential to reach a combined valuation of (%) 1M 6M 12M around W10tr (based on a P/S ratio of 6x 2022F transaction volume) if: 1) the domestic Absolute 10.0 87.2 117.1 webtoon market continues stable growth; 2) market share in Japan rises further amid Relative 7.5 90.7 115.8 continued market growth; and 3) operations expand into other countries. 260 Kakao KOSPI Kakao Page and Kakao Japan plan to go public in Korea and Japan, respectively (with Nomura Securities as the lead manager for the latter’s IPO). We expect the IPOs of 210 these two companies to prompt a re-rating of Kakao. Reflecting Piccoma’s surprise 160 growth, we raise our target price on Kakao from W280,000 to W370,000. We derived 110 our target price using a SOTP analysis by revenue segment. 60 7.19 11.19 3.20 7.20 Mirae Asset Daewoo Co., Ltd. [ Internet ] 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 Chang -kwean Kim +822 -3774 -1614 OP (Wbn) 165 73 207 443 717 952 [email protected] 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 - 77.0 53.3 39.7 P/B (x) 2.3 1.7 2.5 4.5 4.1 3.8 Dividend Yield (%) 0.1 0.1 0.1 0.0 0.0 0.0 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 July 3, 2020 Kakao Figure 1. 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 2. Japan’s book app ranking (revenue) Source: Sensor Tower, Mirae Asset Daewoo Research Figure 3. Piccoma: Monthly transaction volume Figure 4. 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 Source: Sensor Tower, Mirae Asset Daewoo Research estimates Source: Sensor Tower, Mirae Asset Daewoo Research estimates Mirae Asset Daewoo Research 2 July 3, 2020 Kakao Figure 5. Piccoma’s top 10 titles Source: Piccoma, Mirae Asset Daewoo Research Mirae Asset Daewoo Research 3 July 3, 2020 Kakao Table 1. KakaoPage: Annual earnings estimates (Wbn, mn people, %, 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 value (Piccoma included) 160 290 429 574 733 Notes: All figures excluding annual revenue and operating profit are based on our estimates. Source: Kakao, Mirae Asset Daewoo Research Figure 6. 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 Mirae Asset Daewoo Research 4 July 3, 2020 Kakao Table 2. 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 27.0 24.7 22.5 Platform 34.8 30.2 38.6 46.6 41.1 46.3 42.3 28.1 38.0 38.6 30.5 Talk Biz 43.3 42.4 51.6 73.3 77.1 75.5 60.7 34.0 54.3 58.0 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 171.6 103.0 105.3 94.9 68.1 113.9 88.8 44.9 112.9 74.1 19.2 Content 21.7 20.2 24.9 8.9 8.5 8.4 8.1 25.2 18.7 12.5 13.8 Game -10.9 -11.9 -0.4 5.6 3.0 -0.5 10.7 3.9 -4.7 4.3 3.8 Music 8.7 10.8 11.4 9.4 9.8 4.7 1.2 1.7 10.1 4.2 3.9 Paid content 70.6 60.3 52.0 -22.3 30.0 31.3 22.0 140.0 36.1 46.1 21.4 IP business/other 83.7 81.8 78.7 42.8 -6.1 3.0 2.5 27.4 69.1 7.2 32.0 Operating profit 166.5 46.6 92.7 1751.6 218.9 147.5 86.7 81.9 183.7 114.4 61.7 Net profit 19.9 37.8 596.8 RR 354.9 127.3 49.5 TTB TTR TTB 44.8 Source: Company data, Mirae Asset Daewoo Research estimates Table 3. 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.