Top Picks: Kakao, NCSOFT and Neowiz
The author is an analyst of NH Investment & Securities. He can be reached at jaemin.ahn@nhqv.com. -- Ed.
The year 2022 has been tough for Korean Internet and game companies. However, we forecast that these stocks will attempt a rebound going forward. Expecting a return of more reasonable consumption patterns (focused on online) next year, we anticipate that domestic Internet and game stocks will exhibit a gradual earnings and share price recovery in 2023. Through the steep price correction, the portion of stakes owned by institutional investors and foreigners has declined sharply. Given that their current valuations are at 10-year lows, we believe that Internet and game stocks will rebound easily upon the emergence of even minor positives. Moreover, assuming an economic recovery in 2H23, we expect Internet firms to be at the forefront of the growth stock rebound.
Looking at game companies, after the drought of new titles in 1H23, new game momentum should begin to recover from 2H23. In addition, domestic game companies’ advance into the console game market deserves close attention.
Weighing all of the above-mentioned factors, we maintain a Positive rating on the Internet and game sector in 2023. We recommend Kakao & NCSOFT and Neowiz as top picks for the Internet and game sectors, respectively.
I. Internet: Looking towards next leveling-up
In 2022, global Internet platform shares, including NAVER and Kakao, have plunged sharply, ending the 10-year-long rally based on high growth momentum and low interest rates.
However, NAVER and Kakao remain as dominant platforms in Korea. With the economy expected to recover from 2H23, the interest rate upcycle should come to an end by end-1H23. When this happens, growth stocks (eg, Internet) should be the first to move.
II. Turnaround expected in 2023
Despite their high earnings sensitivity to external environments, we forecast that NAVER and Kakao’s share prices and earnings will gradually recover from 2023. In our view, the past two-year-long downcycle for earnings growth, share prices, and valuations should come to an end, and a recovery cycle should set in gradually.
1) Major cash-cow businesses (ad, commerce) should regain growth momentum; 2) new businesses (mobility, fintech, webtoon, content) should deliver robust sales growth and OP turnarounds; and 3) labor and marketing expense increase should slow.
III. Game: To escape dark tunnel in 1H23
Changes are to be seen at game companies next year. Now calm following excitement over P2E games, sector plays are taking a wait-and-see approach. However, having agonized over the change in strategies between P2E games and existing genres, game firms have been slow in preparing for new titles launches, which is to result in a lack of new game momentum in 1H23. But, a number of new titles are set to hit the market in 2H23. Having witnessed a growth slowdown in the domestic game market, game firms are now looking to the global console segment.
IV. Top picks
We maintain our Positive stance on the Internet/game sector. While the offline market has expanded in 2022 with Covid-19 entering the endemic phase, Internet sector share prices and earnings should rebound gradually in 2023. After an eventful 2022, Kakao is to attempt a recovery next year. We view the firm as being in an advantageous position over peers in terms of earnings growth. NCSOFT and Neowiz are to enter the global console market with new titles TL and Lies of P, respectively. Upon success, their share prices are forecast to level up.