Naver:Buy,Heading steadily in the right direction。Naver’s 2Q17 results announced today were broadly in line, despite LINE’s miss(excluding one-offs). We highlight Naver Shopping and N Pay’s strong transactiongrowth, which supports our e-commerce thesis (Naver – Buy: On solid track, 20 July).
Naver plans to bolster its e-commerce presence with further initiatives in 2H17.
2Q17 results highlights. Naver reported 2Q17 sales of KRW1.13trn ( 14% y-o-y)and OP of KRW285bn ( 18% y-o-y), the latter marginally short of our KRW298bnestimate. But if we were to take into account LINE’s c30% OP miss (excluding oneoffs),the domestic portal business actually beat our expectation led by brisk growthin display ads and e-commerce related sales. Key highlights were:Display ads beat expectations. Naver’s ad sales (i.e. display and video ads) grew22% y-o-y (ahead of our 16% forecast), led primarily by a rise in mobile ad inventory,such as the vertical tab expansion and further introduction of native ads. We believegrowth will remain brisk in 2H17 supported by the full impact of 2Q17’s ad price hikeand the firm’s continued efforts in launching complimentary services that enhanceuser customization/engagement (e.g. AiRs, Smart Lense, Smart Board).
E-commerce solid. Business platform (i.e. search ads) sales were up 13% y-o-y,driven by shopping revenues. N Pay transactions (which we consider a key metric fore-commerce) grew 93% y-o-y to KRW1.7trn, accounting for 9% of the e-commercemarket in Korea. We estimate the broader shopping gross merchandise volume(GMV) grew 38% y-o-y to KRW3.6trn. With Naver’s plans to expand ShoppingSearch categories in 2H17, add product search/purchase features to Smart Lense(image search), and further expand its SoHo merchant coverage, we expect it tocontinue gaining share within Korea’s competitive e-commerce industry.
Investments strategically sound despite losses at subsidiaries. While losses atsubsidiaries (e.g. SNOW, Naver Labs, Camp Mobile) widened, driving a 2.4ppt fall inthe consolidated OP margin, we stress these costs are strategic in nature, i.e. theywill enable Naver to better monetize new business initiatives and expand its presencebeyond the PC and mobile platforms in the longer term. We continue to believe theportal’s solid free cash flow will be sufficient to support the proposed investmentplans. We note the parent portal’s OP margin improved 1.8ppt y-o-y to 40.6%.
Maintain Buy and TP of KRW950,000. We value (1) the parent portal at KRW18trn at a2017e PE of 20x (peer average) and (2) the 73% stake in LINE (3938 JP, Hold,JPY3,845) at KRW6trn based on HSBC’s TP of JPY3,600 and a 10% holdco discount.