Market cap. exceeds 20% of fair value; LINE’s 2H16 earnings a key variable
E-commerce is driving growth of the internet advertising market. Over the past several years, market growth has been led by a boom in mobile transactions. Mobile transactions have surpassed PC-based transactions starting this year, but the pace of growth has slackened from 65% last year to 37%.
NAVER recorded solid domestic ad sales (+21.1% YoY) this year thanks to increased display ad market share (58% in 2015 → 69% in 2016) amid growth of mobile banner ads. That explains why Kakao (035720 KS) reported relatively weak earnings. Domestic ad sales are projected to grow at a slower pace (+8.6% YoY) in 2017 as the low base effect disappears.
LINE’s sticker and game sales are expected to slump amid slowing traffic growth. Unlike Facebook (FB US), LINE is not likely to attract a lot of advertisers for its timeline ads. We expect LINE’s revenues to grow only 4.9% YoY to W1.5tr in 2017.
The sum of the domestic portal business value (W15.3tr, Google’s average PER of 20x applied to 2017F standalone net profit) and LINE stake value (W8.5tr, as of Sep. 8) is W24tr. The current market cap. is over 20% higher than the fair value.
We retain our HOLD rating on NAVER. The stock may continue to move in sync with global internet stocks in the short term if the liquidity-driven rally persists. However, NAVER’s 2017F PER of 33x is higher than that of Facebook (25x). The consensus for 2017F earnings could be revised down if expectations for LINE’s growth dissipate. LINE’s 2H16 earnings will be a key variable for NAVER.
Source: Shinhan Investment