20170920-三星证券-Value_of_subsidiaries_on_the_rise_12页_497kb

Kakao (035720) Company Update Summary

Core Content Overview

This document provides an update on Kakao's performance and valuation as of 2017.9.20, highlighting the growth potential of its subsidiaries and the overall company's financial outlook.

Main Points

Subsidiary Value Growth

• Kakao Games: Expected to experience significant sales and operating profit growth in 2018 due to the domestic publishing rights for PlayerUnknown's Battlegrounds (Battlegrounds). The game has a global Steam user base exceeding 1.3 million and is projected to significantly boost Kakao Games' enterprise value.
• Kakao Bank: Showing robust deposit and loan growth, with recent recapitalization expected to further enhance its financial performance. Despite unproven risk management, the bank's rapid asset growth and potential expansion into other financial areas are positive signs.
• Kakao Mobility: Planning to expand into various transportation services, including in-app taximeters, corporate taxi services, and online vehicle distribution. This diversification is expected to create substantial growth potential, similar to Didi Chuxing's success in China.

Valuation and Investment Outlook

• The company has revised its 12-month target price for Kakao's stock up by 15.4% to KRW150,000 based on a sum-of-the-parts valuation.
• The BUY rating is reiterated, indicating strong confidence in the company's future performance.

Key Financial Data

Near-Term Earnings and Challenges

• Near-term operating profit miss: Increased labor and marketing costs due to hiring AI-related personnel and launching new businesses may lead to a temporary dip in operating profit.
• Advertising business normalization: The advertising business, which is the primary income source, is expected to stabilize.
• Subsidiaries' growth: Major subsidiaries (Kakao Games, Kakao Mobility, and Kakao Bank) are expected to see significant value increases, potentially leading to public offerings or investment opportunities.

Subsidiary Performance and Forecast

Kakao Games

• 2018E sales: KRW372,185 million
• PSR (x): 3.9
• Fair value: KRW1,441,209 million

Kakao Bank

• Asset target after 10 years: KRW30,000 billion
• BIS ratio (%): 10.0
• Required equity: KRW3,000 billion
• ROA (%): 1.1
• Expected net income: KRW336 billion
• P/E (x): 18.2
• Fair value: KRW6,119 billion
• Current value: KRW4,689 billion

Kakao Mobility

• Online VW dealerships: Partnering with Volkswagen Korea to replace offline dealerships, expected to enhance growth potential.

Summary of Key Financial Highlights

• Operating profit: Expected to increase in 2018, with a 13.5% growth in 2018E EPS compared to the previous estimate.
• Dividend yield: Maintained at 0.1% across all years.
• Market Cap: KRW9.3 trillion / USD8.2 billion
• Current Price: KRW137,000
• Target Price: KRW150,000
• Shares (float): 67,792,735 (55.6%)
• 52-week high/low: KRW137,000 / KRW71,300
• Avg daily trading (KRW): 86.4 billion
• Value (60-day) (USD): 76.4 million

Key Changes in Estimates

Samsung vs The Street

Games to be Published in 2H

Kakao Platform Valuation

Sum-of-the-Parts Valuation

Global Portals P/E Valuation

Forecast Revisions

Income Statement Highlights

Cash Flow Statement Highlights

Conclusion

Kakao is experiencing growth in its subsidiaries, particularly Kakao Games, Kakao Bank, and Kakao Mobility. Despite near-term challenges with operating profit due to increased costs, the company is expected to benefit from the success of its subsidiaries. The updated target price and BUY rating reflect confidence in the company's long-term potential.