Kakao
The author is an analyst of NH Investment & Securities. He can be reached at jaemin.ahn@nhqv.com -- Ed.
While sluggish economic conditions were inescapable in 1Q23, we note that KakaoTalk is to be reorganized in 1H23. This initiative, along with anticipated ad market recovery, should spur sales growth from 2H23.
Focus on anticipated earnings recovery at core domains
Reiterating a Buy rating, we lower our TP on Kakao from W82,000 to W80,000. Our new SOTP-derived TP reflects: 1) EV deterioration stemming from share price drops for listed subsidiaries (Kakao Games, Kakao Pay and Kakao Bank); and 2) downward adjustments to our estimates for the ad business and Portal Biz. However, in calculating our new TP, we also reflected SM Entertainment’s EV (acquired on Mar 28; to be included in consolidated earnings from as early as 2Q23).
In the wake of the major event of acquiring SM Entertainment, it is time for Kakao to start experiencing earnings growth at its main businesses. Sluggish economic conditions and ad market off-seasonality (1Q) inevitably dampened 1Q23 earnings. That said, the expansion of ad slots at Friends Tab will should gradually translate into top-line growth, with an anticipated ad market recovery from 2Q23 to also push up sales figures. From 2H23, sales growth is to be helped by both the separation of the open-chat area and by profile area reorganization, with both initiatives scheduled for 1H23.
1Q23 preview: OP to arrive sluggish
We forecast consolidated 1Q23 sales of W1.85tn (+12.0% y-y, +4.3% q-q) and OP of W116.1bn (-26.8% y-y, +15.7% q-q), with OP to miss both our previous estimate of W165.8bn and consensus of W135.5bn. Amid the general economic slowdown, we believe that weak earnings at the ad business were inevitable in 1Q23, harming overall OP.
We estimate that Talk Biz sales amounted to W493.3bn (+7.0% y-y, -5.1% q-q), with its ad sales being limited to W258.9bn (+3.6% y-y, -5.3% q-q) by the economic slowdown, but its commerce sales upping to W234.3bn (+11.0% y-y, -4.9% q-q). Elsewhere, platform/other sales likely rose to W383.1bn (+23.2% y-y, +9.8% q-q), helped by both the expansion of the taxi/driver business and the acquisition of KM Park (parking lot player). Sales for Story should come in at W246.1bn (+2.3% y-y, +11.1% q-q)—while reduced marketing activity likely blunted the pace of its sales growth, Story should show OP improvement (q-q).