Earnings Outperform Consensus in Q1
The author is an analyst of NH Investment & Securities. He can be reached at jaemin.ahn@nhqv.com. -- Ed.
While the ad market downturn due to Covid-19 is inevitably to weigh upon NAVER’s earnings in 1H20, the firm’s efforts to turn crisis into opportunity should bear meaningful results from 2H20.
Taking aggressive bets in anticipation of recovery
Adhering to a Buy rating on NAVER, we raise our TP from W240,000 to W250,000. Having weighed upon the firm’s 1Q20 earnings, the sluggish ad market conditions due to Covid-19 should inevitably have a negative impact on its 2Q20 earnings as well. However, if the ad market recovers in 2H20, NAVER should see its sales rise beyond the levels predicted prior to the outbreak of Covid-19, thanks to the introduction of new services such as Smart Channel and Brand Store.
NAVER’s Smart Channel is a new offering that provides ad exposure on the top of the mobile theme board (news, sports, entertainment, etc). The service, which is similar to Kakao’s Talk Biz Board, promises to maximize sales by taking full advantage of NAVER’s robust user traffic.
Having started with 30 brands, Brand Store aims to expand to 200 brands this year. Recently, the Brand Store has entered into a logistics fulfillment service partnership with CJ Logistics, a factor that should strengthen NAVER’s competitiveness in the commerce market by enabling delivery within 24 hours. Going forward, competition is expected to begin in earnest with Coupang and Emart, and GMV is predicted to climb on collaborations with a variety of brands and logistics players. Synergies with NAVER Pay, NAVER Shopping, and NAVER search ads are also anticipated.
1Q20 review: Earnings outperform consensus
NAVER logged 1Q20 sales of W1.73tn (+14.6% y-y, -3.1% q-q) and OP of W221.5bn (+7.4% y-y, +27.7% q-q), with OP outperforming both our estimate of W170.3bn and the market projection of W194.2bn.
In 1Q20, ad sales slowed to W144bn (+1.2% y-y, -16.2% q-q). But, the company recorded healthier-than-expected 1Q20 earnings, as: 1) business platform sales climbed to W749.7bn (+12.0% y-y, +0.4% q-q) on the back of increased online shopping demand; and 2) operating losses at subsidiary LINE shrank considerably.