[Korea] Internet February 26, 2021 NAVER Buy (035420 KS ) (Maintain) Global commerce platform to kick off in March TP: W490,000 Upside: 27.9% Mirae Asset Daewoo Co., Ltd. Chang-kwean Kim [email protected] HeeSeok Lim [email protected] Integration to be completed in NAVER Shopping to begin generating overseas revenue in 2021; a Shopify -like bu siness March, following Feb. 24 approval model NAVER GIO Lee Hae-jin will serve as co-head of A Holdings, effective Mar. 2. Once the LINE-Z Holdings integration is completed in March, NAVER and SoftBank will likely start joint operations, and more details on post-integration business plans should emerge. Through A Holdings, NAVER plans to accelerate its move into Japan and, more broadly, Asia. About 70% of Z Holdings’ revenue comes from e-commerce, including Yahoo Japan’s e- commerce segment and Zozotown. We believe the integration will create a global commerce platform similar to Shopify, with Z H oldings sharing its payment services, database, and customer data with NAVER Shopping. Shopify is a shopping platform that allows businesses to sell online across different channels and countries. Some financial/accounting Z Holdings equity -method profits to be booked from 1Q21 changes to come into effect in A W6-7tr one-off valuation gain related to LINE (book value of W221.3bn) will be re cognized in 1Q21; recognition of one-off 1Q21 earnings. valuation gain We estimate equity-method profits of around W100bn will be booked per quarter. March to mark the beginning of Poised to be re -rated as a global commerce/content platform in 2021 new business opportunities We reaffirm our Buy call and target price of W490,000 on NAVER. We believe the commerce, ad, and content segments will continue to demonstrate strong growth in 1Q21. In addition to the recent acquisition of global web novel platform Wattpad, NAVER is al so collaborating with entertainment firms like Big Hit Entertainment and YG Entertainment. We expect rival Coupang’s March IPO on the New York Stock Exchange to set off a revaluation of NAVER Shopping. We also view the direct listing of the game platform Roblox in March as supportive of the valuation of NAVER’s Zepeto. Key data Current price (2/25/21, W) 383,000 Market cap (Wbn) 62,913 260 NAVER KOSPI OP (20F, Wbn) 1,215 Shares outstanding (mn) 164 210 Consensus OP (20F, Wbn) 1,176 Free float (%) 78.4 160 EPS growth (20F, %) 44.5 Foreign ownership (%) 57.3 110 P/E (20F, x) 57.2 Beta (12M) 0.39 60 Market P/E (20F, x) 20.8 52-week low (W) 143,000 2.20 6.20 10.20 2.21 KOSPI 3,099.69 52-week high (W) 398,000 Share performance Earnings and valuation metrics (%) 1M 6M 12M (Dec.) 2017 2018 2019 2020F 2021F 2022F Absolute 9.7 17.8 101.0 Revenue (Wbn) 4,678 5,587 6,593 5,304 6,655 8,269 Relative 13.6 -10.0 36.4 OP (Wbn) 1,179 943 710 1,215 1,472 2,081 OP margin (%) 25.2 16.9 10.8 22.9 22.1 25.2 NP (Wbn) 773 649 583 840 1,437 1,859 EPS (W) 4,689 3,937 3,538 5,112 8,751 11,315 ROE (%) 18.5 13.0 10.6 13.6 19.7 20.9 P/E (x) 37.1 31.0 52.7 57.2 43.8 33.8 P/B (x) 4.8 3.1 4.3 6.0 6.7 5.6 Div. yield (%) 0.2 0.3 0.2 0.1 0.1 0.1 Notes: Under consolidated K-IFRS; NP is attributable to owners of the parent Source: Company data, Mirae Asset Daewoo Research estimat es Analysts who prepared this report are registered as research analysts in Korea but not in any other jurisdiction, including t he US. PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES AND DISCLAIMERS IN APPENDIX 1 AT THE END OF REPORT. February 26, 2021 NAVER Figure 1. A Holdings: Ownership structure NAVER SoftBank 50% A Holdings 50% 65% Z Holdings 100% 100% LINE Yahoo Japan Source: Mirae Asset Daewoo Research Figure 2. Daum: Share performance following announcement of merger with Kakao (W) 10/1 200,000 Merger completed 5/26 Merger announcement +113% 150,000 100,000 50,000 5/14 6/14 7/14 8/14 9/14 10/14 Source: Quantiwise, Mirae Asset Daewoo Research Figure 3. Daum: Market cap following announcement of merger with Kakao (Wtr) 10 10/1 5/26 Merger completed 9 Merger announcement 7.8 8 7 6 5 4 3 2 1.7 1 Listing of 0 new shares 5/14 6/14 7/14 8/14 9/14 10/14 Source: Quantiwise, Mirae Asset Daewoo Research Mirae Asset Daewoo Research 2 February 26, 2021 NAVER NAVER (035420 KS) Income statement (summarized) Balance sheet (summarized) (Wbn) 2019 2020F 2021F 2022F (Wbn) 2019 2020F 2021F 2022F Revenue 6,593 5,304 6,655 8,269 Current assets 5,644 5,895 6,676 7,811 Cost of revenue 0 0 0 0 Cash & equivalents 3,741 4,153 4,507 5,131 GP 6,593 5,304 6,655 8,269 AR & other receivables 0 199 249 310 SG&A expenses 5,883 4,089 5,183 6,188 Inventory 55 44 56 69 OP (adj.) 710 1,215 1,472 2,081 Other current assets 1,848 1,499 1,864 2,301 OP 710 1,215 1,472 2,081 Non-current assets 6,656 6,531 7,065 7,876 Non-operating profit 157 880 642 524 Investments in associates 1,558 1,254 1,573 1,954 Net financial income -18 -27 -22 -16 PP&E 1,596 1,674 1,815 1,930 Net income from associates -64 0 0 0 Intangible assets 341 348 367 626 Pretax profit 867 2,095 2,114 2,605 Total assets 12,300 12,426 13,742 15,686 Income tax 466 632 593 731 Current liabilities 3,773 3,247 3,052 3,042 Profit from continuing operations 400 1,132 1,496 1,863 AP & other payables 759 762 568 430 Profit from discontinued operations -4 -296 -65 -13 Short-term financial liabilities 729 646 411 287 NP 397 836 1,431 1,850 Other current liabilities 2,285 1,839 2,073 2,325 Attributable to owners 583 840 1,437 1,859 Non-current liabilities 2,022 1,894 2,029 2,189 Attributable to minority interests -186 -4 -7 -9 Long-term financial liabilities 1,358 1,366 1,366 1,366 Total comprehensive income 536 836 1,431 1,850 Other non-current liabilities 664 528 663 823 Attributable to owners 660 1,030 1,762 2,278 Total liabilities 5,796 5,141 5,081 5,231 Attributable to minority interests -124 -194 -331 -428 Equity attributable to owners 5,805 6,590 7,973 9,776 EBITDA 1,208 1,721 2,012 2,708 Capital stock 16 16 16 16 FCF 921 318 1,133 1,669 Capital surplus 1,575 1,575 1,575 1,575 EBITDA margin (%) 18.3 32.4 30.2 32.7 Retained earnings 5,712 6,498 7,880 9,683 OP margin (%) 10.8 22.9 22.1 25.2 Minority interests 699 695 688 679 Net margin (%) 8.8 15.8 21.6 22.5 Shareholders' equity 6,504 7,285 8,661 10,455 Cash flow statement (summarized) Key valuation metrics/ratios (Wbn) 2019 2020F 2021F 2022F 2019 2020F 2021F 2022F Operating cash flow 1,357 868 1,783 2,319 P/E (x) 52.7 57.2 43.8 33.8 NP 397 836 1,431 1,850 P/CF (x) 24.2 26.0 24.8 19.7 Non-cash income/expenses 873 1,015 1,109 1,348 P/B (x) 4.3 6.0 6.7 5.6 Depreciation 460 472 509 536 EV/EBITDA (x) 24.4 26.9 30.1 22.0 Amortization 38 34 31 91 EPS (W) 3,538 5,112 8,751 11,315 Other 375 509 569 721 CFPS (W) 7,702 11,265 15,458 19,467 Chg. in working capital 567 -473 -187 -158 BPS (W) 43,659 48,587 57,000 67,978 Chg. in AR & other receivables -56 0 0 0 DPS (W) 376 376 376 376 Chg. in inventory 0 11 -11 -13 Dividend payout ratio (%) 13.8 6.6 3.9 3.0 Chg. in AP & other payables 178 0 0 0 Dividend yield (%) 0.2 0.1 0.1 0.1 Income tax -478 -504 -568 -726 Revenue growth (%) 18.0 -19.6 25.5 24.3 Cash flow from investing activities -1,078 -623 -820 -1,134 EBITDA growth (%) 0.3 42.5 16.9 34.6 Chg. in PP&E -429 -550 -650 -650 OP growth (%) -24.7 71.1 21.2 41.4 Chg. in intangible assets -71 -40 -50 -350 EPS growth (%) -10.1 44.5 71.2 29.3 Chg. in financial assets 180 67 -70 -84 AR turnover (x) 22.5 0.0 0.0 0.0 Other -758 -100 -50 -50 Inventory turnover (x) 117.2 106.7 133.1 132.6 Cash flow from financing activities 52 -138 -290 -180 AP turnover (x) 0.0 0.0 0.0 0.0 Chg. in financial liabilities 925 -83 -235 -125 ROA (%) 3.6 6.8 10.9 12.6 Chg.