NAVER (035420 KS) Focus on shifts in online shopping trends Internet February data confirm NAVER-Coupang duopoly Company Report The spread of COVID-19 is spurring faster-than-expected growth of the online April 16, 2020 shopping market. While the virus outbreak has dampened demand for performances, travel, leisure, and apparel, it has fueled demand for consumer staples (e.g., F&B). Spending on performances and travel will eventually resume, while newer categories, such as (Maintain) Buy financial services, should benefit from consumers’ increasing experience with online shopping. Target Price(12M, W) 241,000 Consumer preferences regarding online shopping malls are also becoming clearer. In terms of gross merchandise volume (GMV), NAVER and Coupang were the only online Share Price (04/14/20, W) 168,500 shopping malls that outperformed the market (+24.5% YoY) in February. We think NAVER is replacing department stores, while Coupang is supplanting hypermarkets Expected Return 43% and supermarkets. E-commerce to drive earnings momentum in 4Q20 OP (20F, Wbn) 951 We expect NAVER to report below-consensus 1Q20 earnings (scheduled to be released Consensus OP (20F, Wbn) 967 on April 23rd) and issue conservative guidance for 2Q20, as growth in display/search EPS Growth (20F, %) 33.0 ads has been slowing since mid-February due to the impact of COVID-19. Market EPS Growth (20F, %) 40.5 We look for 1Q20 revenue of W1.73tr (+14.6% YoY) and operating profit of W180bn P/E (20F, x) 35.8 (-12.5% YoY; vs. current consensus of W198bn). We see earnings improving heading Market P/E (20F, x) 11.4 into 2H20 and anticipate sharper improvement in 2021. KOSPI 1,857.08 Notably, the e-commerce segment is likely to drive earnings momentum in 4Q20, aided Market Cap (Wbn) 27,678 by market share gains, a pickup in consumer demand, peak-season effects, and an Shares Outstanding (mn) 164 easy YoY comparison. Free Float (%) 76.2 Foreign Ownership (%) 57.7 High premiums of top-tier online shopping firms could also apply to NAVER Beta (12M) 0.54 We expect NAVER’s e-commerce business to be re-rated higher. Top-tier online 52-Week Low 108,500 shopping malls trade at high premiums because their GMV (which is largely made up 52-Week High 191,500 of repeat transactions) is more than just a source of commissions and ad revenues; it is (%) 1M 6M 12M also the foundation for big data accumulation and income model expansion. Absolute 1.5 8.0 41.0 P/S based on GMV is one metric that explains the high valuations of Amazon (AMZN Relative -3.2 20.2 69.6 US/CP: US$2,307.68) and Alibaba (BABA US/CP: US$208.17). On average, Amazon has traded at a P/S of around 1.5x its GMV, while Alibaba has traded at 0.52x. Applying 170 NAVER KOSPI 150 these multiples to NAVER’s 2019 GMV estimate puts the company’s market value at 130 W10-29tr. 110 Conditions for contactless online businesses should become more favorable in the 90 70 wake of COVID-19. In addition, we see significant growth momentum coming from 50 NAVER Financial and NAVER Webtoon’s global services in 2H20. We reaffirm our Buy 4.19 8.19 12.19 4.20 rating and target price of W241,000 on NAVER. Mirae Asset Daewoo Co., Ltd. [Internet] FY (12) 12/17 12/18 12/19 12/20F 12/21F 12/22F Revenue (Wbn) 4,678 5,587 6,593 7,601 8,704 10,272 Chang-kwean Kim +822-3774-1614 OP (Wbn) 1,179 943 710 951 1,657 1,840 [email protected] OP Margin (%) 25.2 16.9 10.8 12.5 19.0 17.9 NP (Wbn) 773 649 583 773 1,745 1,869 EPS (W) 4,689 3,937 3,538 4,704 10,625 11,378 ROE (%) 18.5 13.0 10.6 12.5 23.7 20.5 P/E (x) 37.1 31.0 52.7 35.8 15.9 14.8 P/B (x) 4.8 3.1 4.3 3.5 2.9 2.4 Dividend Yield (%) 0.2 0.3 0.2 0.2 0.2 0.2 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 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. April 16, 2020 NAVER I. Online shopping goes mainstream 1. Korea’s online retail sales up 34.2% YoY in February 2020 Key data on February retail sales are now available following the release of: 1) the Ministry of Trade, Industry and Energy’s (MOTIE) survey of major retailers (i.e., offline discount stores, department stores, convenience stores, and online shopping malls); and 2) Statistics Korea’s monthly online shopping figures. According to the MOTIE survey, major retailers saw a 7.5% YoY decline in offline sales but a 34.2% YoY increase in online sales in February <Figure 1>. Overall, online sales as a percentage of total retail sales expanded to 49% in the month. Notably, offline department store sales fell 21.4% in February. We believe this trend has important implications for NAVER, given that NAVER Shopping—with its high exposure to durable goods—is well-positioned to take significant share from the department store channel <Figure 2>. Figure 1. February retail sales growth: Offline vs. online Figure 2. February offline retail sales growth by channel (%) (%) 40 10 7.8 8.2 34.2 5 30 Hypermarket Department store 0 Convenience store SSM 20 -5 9.1 10 -10 -10.6 Offline -15 0 Total Online -20 -10 -21.4 -7.5 -25 Source: MOTIE, Mirae Asset Daewoo Research Source: MOTIE, Mirae Asset Daewoo Research Figure 3. February 2019 retail sales breakdown Figure 4. February 2020 retail sales breakdown 4% 4% 16% 16% E-commerce E-commerce 41% Hypermarket Hypermarket Department store 49% Department store 13% 18% Convenience store Convenience store SSM SSM 18% 21% Source: MOTIE, Mirae Asset Daewoo Research Source: MOTIE, Mirae Asset Daewoo Research Mirae Asset Daewoo Research 2 April 16, 2020 NAVER 2. February e-commerce penetration reached 35%, but travel/leisure saw sharply lower transaction volume We also see several implications for NAVER in Statistics Korea’s online shopping data. In February, Korea’s e-commerce transaction volume reached W11.96tr, up 24.5% YoY—the largest increase since October 2018 (+30.7% YoY). We believe e-commerce transaction volume expanded further in March, as the rapid spread of COVID-19 prompted consumers to stay home and embrace the contactless trend in earnest. By category, February e-commerce transaction volume increased 71% YoY (to W1.48tr) for grocery products, 52.8% YoY for household goods, and 82.2% (to W1.12tr) for food delivery services. The robust growth of online grocery shopping and food delivery services benefited players like Coupang, Market Kurly, and Baedal Minjok rather than NAVER. Meanwhile, travel/transportation (e.g., hotels and flights) and culture/leisure (e.g., concert tickets)— categories to which NAVER has high exposure—saw sharply lower transaction volume in February (-46.2% and -60% YoY, respectively). Figure 5. E-commerce transaction value and e-commerce penetration by month (Wtr) (%) 14 E-commerce transaction value (L) E-commerce penetration (R) 35 35 12.9 12.7 33 12.3 11.9 +19%, 12.0 12 YoY 31 11.3 11.3 11.2 11.3 11.3 +14%, YoY +25%, 10.7 10.7 10.6 30 YoY 29 28 29 29 10 27 9.6 27 28 25 8 23 1/19 3/19 5/19 7/19 9/19 11/19 1/20 Source: Statistics Korea, Mirae Asset Daewoo Research Figure 6. February e-commerce transaction volume growth: Figure 7. February e-commerce transaction volume growth: Biggest gainers Biggest losers (%) (%) Fashion Culture/leisure Travel/transport Apparel Bags accessories 120 0 104 103 100 82 -10 80 71 -20 60 53 -30 40 20 -40 0 -50 -60 -70 Source: Statistics Korea, Mirae Asset Daewoo Research Source: Statistics Korea, Mirae Asset Daewoo Research Mirae Asset Daewoo Research 3 April 16, 2020 NAVER 3. Domestic e-commerce market charting a new path We believe the COVID-19 pandemic is providing a boost to e-commerce market growth. In 2019, the domestic e-commerce market’s growth slowed slightly to 19.4% (from 20.3% in 2018), but we see growth recovering to 20.0% in 2020, despite a likely contraction in overall consumer spending <Figure 8>. We forecast e-commerce penetration, which rose from 24.4% in 2018 to 28.6% in 2019, to reach 34.3% in 2020, up from our previous estimate of 31%. In 2018, Korea already had the highest e-commerce penetration rate among major markets, reflecting the rapid encroachment of online stores/marketplaces into the retail sector <Figure 10>. Amid the spread of COVID-19, there are reports of shipping delays at US retailers (even at Amazon), and American consumers are cutting back on non-essential spending. Meanwhile, we have yet to observe shipping delays in Korea, despite a recent spike in delivery volumes. Figure 8. Domestic e-commerce market size/growth Figure 9. Domestic e-commerce penetration (Wtr) (%) (Wtr) Offline retail sales (L) (%) 180 E-commerce market size (L) YoY (R) 600 Online retail sales (L) 38 E-commerce penetration (R) 34.3 21 33 20.3% 20.0% 120 400 19.4% 28 28.6 19 60 113.3 135.3 162.3 200 24.4 23 0 17 0 18 2018 2019 2020F 2018 2019 2020F Source: Statistics Korea, Mirae Asset Daewoo Research Source: Statistics Korea, Mirae Asset Daewoo Research Figure 10.