Internet
The author is an analyst for Shinhan Securities. He can be reached at sokang@shinhan.com --- Ed.
1Q23 review: Record-high platform service sales, recovery in costs AfreecaTV registered operating profit of KRW18.4bn (-20.5% YoY, +19% QoQ, operating margin of 25.3%) on sales of KRW72.7bn (-3.4% YoY, -9% QoQ) in 1Q23. Sales from platform services hit an all-time high on a simultaneous rise in the number of paying users and the average revenue per paying user. Advertising services delivered weak performance, hit by marketing spend cuts by domestic game developers. Meanwhile, one-off expenses related to the reversal of provisions for bonuses, World Cup broadcasting rights, and the BJ Award Ceremony were removed. The company has recently increased the number of users that can join a live stream up to 100,000 users, and adopted BJ recommendation algorithms to enable platform personalization. This goes to show that it is working to accommodate requests made by users, BJs, and live streamers recently transferred to the AfreecaTV platform.
Stronger fundamentals, growth of cash-cow business
We believe the growth in both the number of paying users and the average revenue per paying user is attributable to Twitch’s decision to downsize its live streaming business. The viewer count for the 2023 League of Legends Champions Korea Spring jumped 85% YoY, and the portion of new users who signed up in relation to the online game competition rose to 5.8% from 2.3% in 2022. The number of active BJs also grew 3.5% YoY. The retention rate seems to be high as star balloons donated to live streamers who have moved to the AfreecaTV platform in 4Q22 surged by more than 40% QoQ in 1Q23. The star balloon business, which has been a stable cash cow for the company, is now back on the growth track owing to increases in domestic market share, payment by existing users, and retention rate. AfreecaTV’s market standing should strengthen further in light of Twitch’s global restructuring and unfavorable terms for Twitch Partner streamers renewing contracts starting from May-June. Star balloon donations in April likely came in solid based on online data.
The advertising service business is projected to turn upward after hitting bottom in 1Q23. Although domestic game developers are cutting down on marketing due to sluggish earnings, demand from overseas game developers and non-game advertisers should be able to fully make up for the losses. Some Chinese game developers carried out promotions for their new releases in partnership with BJs in March and April. The expansion of below-the-line advertising by big conglomerates should also have a positive impact on the company’s earnings.
Retain BUY for a target price of KRW140,000
We maintain our BUY rating on AfreecaTV for a target price of KRW140,000. Contrary to market concerns, the star balloon donation business is unaffected by the economic slowdown. The ad market is now shifting its focus to efficient ad products. Amid structural market changes, AfreecaTV’s continued growth with highly efficient ad products should make it look relatively more attractive vs. internet/advertising sector peers with sluggish earnings. All in all, we continue to recommend AfreecaTV as our internet sector top pick.