4Q22 Preview: Profitability to Improve Step by Step
The author is an analyst of NH Investment & Securities. He can be reached at jaemin.ahn@nhqv.com. -- Ed.
Earnings at NHN’s web-board game business (the firm’s cash cow) are continuing to strengthen, and (escaping the sluggishness of the Covid-19 crisis) its Chinese commerce business earnings look set to recover. After having upped significantly over the past two years (2021~2022), NHN’s marketing costs look now to be normalizing, and its annual OP performance should also stabilize from this year.
With annual OP set to recover to at least 2021 level, shares appeal
We raise our TP on NHN from W26,000 to W36,000, upgrading our investment rating from Hold to Buy. In 2023, we expect annual OP to recover to as high as the pre-2021 level in line with an easing in marketing cost growth, with the firm’s marketing expenditure leveling off following a sharp climb since 4Q21.
In detail: 1) While transaction volume at PAYCO is on the rise, the amount of rewards is to be reduced in order to restore margins; 2) After being notably dampened by pandemic-related lockdowns in China, sales at NHN’s commerce domain are primed for a turnaround; 3) Having widened the gap with its rivals by conducting large-scale marketing, HanGame is expected to make stronger contributions to overall sales and OP growth, reflecting market share expansion and deregulation benefits; 4) Although their current sales portions are modest, NHN Doctor Tour and NHN Ticketlink should return to rapid sales growth in line with endemic status for Covid-19.
NHN’s shares are currently trading at a 2023E P/E of only 12.8x, an attractive level when considering that overall annual OP this year looks well situated to return to at least the 2021 level. Although external investment in NHN Cloud has been delayed due to recent financial market concerns, it should resume in the not too distant future. Moreover, we point out that NHN’s shares are currently trading at a 2023E P/B of merely 0.5x when taking note of the values of subsidiaries such as NHN KCP and NHN Bugs.
4Q22 preview: Profitability to improve step by step
We estimate consolidated 4Q22 sales of W579.3bn (+6.1% y-y, +10.9% q-q) and OP of W12.8bn (-48.9% y-y, +53.7% q-q), with OP to miss consensus of W15.0bn. NHN’s payment & ad and web-board game businesses should record healthy sales growth thanks to peak seasonality (4Q). While marketing costs likely remained stable q-q at around W34.1bn (+27.7% y-y, +0.7% q-q), we believe that the firm’s marketing costs to sales ratio shrank to 5.9% (versus 6.5% in 3Q22). Having undermined its bottom-line performance throughout 2022, NHN’s marketing cost execution now appears to be easing, a factor which should favorably contribute to profitability improvement from this year.