The author is an analyst at NH Investment & Securities. He can be reached at email@example.com. -- Ed.
OP growth generated by Kakao Talk’s high user traffic is to become visible in 2020. The value of Kakao’s mobile messenger service is becoming more prominent, with subsidiaries’ earnings and EVs growing in synch.
Ads sales growth to usher in profit leverage phase
Maintaining a Buy rating, we recommend Kakao as our top pick for the Internet industry. We believe that 2020 will represent a re-rating period for the firm’s mobile messenger service business, expecting its ad sales to pick up notably in 2020 in response to KakaoTalk’s robust user traffic, in turn making substantial contributions to overall sales and OP improvement. Further supporting earnings growth, earnings at major subsidiaries Kakao Mobility, Kakao Pay, Kakao Bank, Kakao Page, and Kakao M look set to improve in earnest.
We expect Kakao to deliver 2020 sales of W3.75tn (+21.3% y-y) and OP of W371.1bn (+79.6% y-y), with its OPM recovering to 9.9% (vs a low point of 3.0% in 2018).
Reflecting these positives, we raise our TP from W210,000 to W240,000. Of note, we have upped our value estimates for: 1) Kakao Talk in light of operating leverage effects stemming from higher sales for Talk Biz; and 2) Kakao Bank (IPO scheduled for 2021).
▶ 4Q19 review: Earnings beat estimates and consensus
On a consolidated basis, Kakao posted 4Q19 sales of W867.3bn (+28.8% y-y, +10.7% q-q) and OP of W79.4bn (+1,749.6% y-y, +34.4% q-q), with OP topping both our estimate of W70.4bn and consensus of W69.3bn.
Talk Biz sales climbed sharply to W221.6bn (+73.3% y-y, +36.4% q-q), helped by: 1) positive seasonality (4Q); 2) stronger-than-expected sales growth at Talk Biz Board (commercialized in October); and 3) historical-high commerce business transaction value. Daily sales at Talk Biz Board clocked at W500mn in December, with its total sales for the quarter hitting W38bn. Given such, we boost our 2020 sales forecast for Talk Biz Board from W149.3bn to W185.1bn.