Naver, Korea's No. 1 Internet portal, is expected to post a sluggish performance in the third quarter due to continued aggressive investment by itself and its subsidiary Line.
NH Investment & Securities expects Naver's earnings to remain sluggish until the new businesses generate meaningful results. The brokerage estimates the company's third-quarter sales at 1.4 trillion won, up 16.7% from a year ago and a 2.8% gain from the second quarter. Its operating profits in the third quarter are projected at 239.8 billion won, down 23.2% from the same period last year and a drop of 4.3% from the previous quarter.
With investment in new businesses ongoing, the brokerage notes that the firm’s labor and marketing expenses have been on the rise since last year, a trend that appears set to persist in the third quarter of 2018. Moreover, as aggressive investment continues not only at the company’s domestic businesses but also at subsidiary LINE, earnings growth is likely to be held back over the short term.
The brokerage expects LINE to record sluggish third quarter sales of 49.9 billion yen, a gain of 12.6% from a year ago but a drop of 1.4% from the previous quarter, and an operating loss of 21.8 billion yen.
While striving to become the number-one mobile messenger service in Japan, LINE is also aiming to become an influential Internet player in arenas such as web portals, news, and webtoons. It is also aggressively investing in its fintech business. Accordingly, LINE’s primary focus at this juncture remains investment rather than profitability, according to the brokerage.
Thanks to ample funding from issuing convertible bonds worth 1.47 trillion won, with 751.7 billion won purchased by NAVER, LINE is anticipated to maintain its aggressive investment strategy and enjoy resulting growth. However, in light of NAVER’s existing 73.5% stake in LINE, such a sizeable investment in zero-interest-rate bonds appears to ignore opportunity costs.
The brokerage notes that the impact of NAVER’s upcoming stock split on Oct. 12 will be limited owing to the company’s high proportion of foreign and institutional investors.