Countering Slowdown in Market Growth with Investment Efficiency
The author is an analyst of KB Securities. She can be reached at leesunhwa@kbfg.com. -- Ed.
Initiating coverage with BUY and TP of KRW350,000
We initiate coverage of Naver with a BUY rating and target price of KRW350,000 (49.6% upside). We forecast 2022E-2024E OP CAGR of 20.7%. Derived using the DCF model, our TP is based on 8.79% WACC (9.21% COE, 2.09% after-tax COD, 0.93 52w adj. beta) and 3.22% TGR (3m avg. 30y KTB yield), and implies 49.1x 12m fwd P/E and 2.3x P/B.
Investment highlights
Investment highlights for Naver include: (1) profitability improvements upon the rise in revenue proportion of vertical commerce services; (2) accelerated push into Japan’s e-commerce market via launch of a new app for Yahoo! Shopping in partnership with Z Holdings in October 2022; (3) expansion of global business for Contents via diversification of its revenue model utilizing existing IP; and (4) restructuring of its loyalty program, the culprit behind declining margins (i.e., improvements to cost efficiency and circulation of reward points through Naver’s business ecosystem). Such efforts should lead to 2022E-2024E revenue CAGR of +18.1% and OP CAGR of +20.7%, higher than the +8.6% and +18.4% expected for the KRX300 Communication Service Index.
Countering slowdown in market growth with investment efficiency
Over the past three years (2019-2021), Naver has achieved marked growth in its top line with revenue registering +25.1% CAGR. OP, however, recorded just +7.1% CAGR, largely due to active investments, including the launch of Naver Plus Membership (aimed at gaining a solid footing in the e-commerce market amid the pandemic-driven boom) and the acquisition of global content platforms such as Wattpad and eBookJapan. A global economic recession is likely to lead to a slowdown in growth of related markets, but Naver plans to counter this with greater efficiency in investments.
Risks: Slowdown of advertising, commerce upon economic recession
Risks include: (1) the high base created during the pandemic; and (2) slowdown in growth of advertising and commerce markets upon an economic recession.