Government-led Growth Momentum in Play
The author is an analyst of NH Investment & Securities. They can be reached at jaemin.ahn@nhqv.com. -- Ed.
Covid-19 has facilitated the spread of Industry 4.0 throughout our daily lives. Today, many of us are truly living our lives online. Evolving from the O2O model, an online-oriented world is presently unfolding in which NAVER and Kakao are leading industry growth in such arenas as commerce, fintech, advertising, and content. With their sales and OP figures also expanding, valuation re-rating is just a matter of time.
Recently, the government announced its Digital New Deal policy. Over the past 20 years, Internet industry growth has mainly been led by the private sector, with the government sometimes hindering growth via its implementation of regulations. However, for the upcoming decade, government-led growth momentum should be in play as well.
Major global Internet players (such as Amazon, Facebook, Google, and Netflix) have enjoyed robust earnings and strong share prices over the past ten years. Noting such, with earnings at domestic Internet companies having just entered a structural growth phase, we expect such firms to enjoy valuation re-rating moving ahead.
The fact that the offerings of Internet firms are now increasingly used in daily life (eg, shopping, content, payment, and mobility services) also serves as justification for valuation re-rating. We present NAVER as our sector top pick, with Kakao and NCSOFT as preferred plays.
I. Internet: Covid-19 accelerates shift towards online arena
With many months now having passed since the outbreak of Covid-19, people are getting increasingly used to non-face-to-face living. The early days of Internet life (eg, the beginnings of communication via SNS) are now long behind us, and the second phase of living online, in which all of our daily activities are driven by the Internet—including shopping, consuming content, purchasing financial products, and handling work-related affairs—has now become mainstream. While an O2O model has represented a key pillar of the Fourth Industrial Revolution in recent years, with our daily lives moving further online, online-for-offline (O4O) services, or even online-only services, are increasingly coming under the limelight.
II. NAVER and Kakao diversify business models, backed by growing user traffic
Internet companies have established profit-generating business models based on growing user traffic. In particular, NAVER, and Kakao are now monetizing their services. In the ad segment, the focus is shifting from TV to Internet. We expect the Internet ad portion to rise further over the long term. Online penetration is expanding in the commerce market at a rapid clip. With online shopping taking up only 37% of total retail sales, growth potential for e-commerce appears strong. We believe that the commerce market will bloom, led by Internet companies.
III. Game: Global market to center on console games; domestic firms to further concentrate on new games
In Nov 2020, two next-generation consoles, Sony’s PlayStation 5 and Microsoft’s Xbox Series X/S, were released. In 2021, we expect growth in the global game industry to be led by console game-focused firms. In Korea, however, given that there are few console-dedicated game companies, the game market is likely to continue revolving around PC and mobile games next year. We advise focusing on firms which are poised to release new titles.
IV. Preferred picks
We maintain our Positive rating towards the Internet sector. The fact that Internet companies have been offering an increasing number of services that are widely used in our daily lives justifies valuation re-rating for domestic Internet companies, in our view.
We offer NAVER as our sector top pick and present Kakao and NCSOFT as preferred picks.