20170621-三星证券-Structural_growth_awaits_from_2H_61页_2mb

Sector Update Summary

Core Content Overview

This document provides an analysis of the Korean internet and gaming sector, focusing on the second half of 2017. It highlights the expected recovery of the domestic ad market, the growth of commerce ecosystems, the commercialization of AI, and the divergence of gaming stocks based on performance and regulatory changes. The report also identifies top investment picks for the second half of the year.

Main Points

1. Domestic Ad Market Recovery

• The Korean ad market is expected to improve in 2H 2017 due to government stimulus measures aimed at boosting consumption.
• The Korea Advertising Index (KAI) has remained above 100, indicating rising ad spending.
• Naver and Kakao are likely to benefit from this growth, as their ad sales are expected to accelerate.

2. Commerce Ecosystem Growth

• Traditional online ad sales growth is slowing, but the expansion of commerce ecosystems by Korean platform companies is expected to drive growth.
• Naver's commerce ecosystem, powered by Naver Pay, has seen rapid growth in transaction value and is expected to offset declining ad sales.
• Kakao is integrating its messaging platform with commerce tools, such as Plus Friends and Kakao Talk Order, to expand its influence in the O2O market.

3. AI Commercialization

• AI is increasingly being integrated into chatbots and voice-assistant services by Korean companies.
• Naver and Kakao plan to launch AI-driven smart speakers in 2H 2017, leveraging their AI platforms (Clova and Kakao Brain).
• The success of AI platforms depends on ecosystem openness and platform integration with existing services.

4. Gaming Stock Divergence

• Netmarble Games is facing a potential correction due to declining sales of Lineage II: Revolution and weak performance of new titles.
• The launch of Lineage Mobile is expected to drive growth in the mobile MMORPG market and boost NCsoft's earnings.
• Gaming regulations are expected to ease, particularly those on web-board games, which could significantly improve earnings for companies like NHN Entertainment and NCsoft.

5. Regulatory Easing

• The new administration is expected to ease regulations in the gaming sector, which had previously restricted certain aspects of game play and sales.
• Regulations from 2014, such as monthly and betting limits, had a major impact on the market, and potential easing could stimulate growth.

6. Top Picks for 2H 2017

• NCsoft: Likely to benefit from the success of Lineage Mobile and strong IP value.
• NHN Entertainment: Expected to see improved earnings due to regulatory easing and reduced marketing costs.
• Naver: Strong potential for ad sales growth and continued expansion of its commerce ecosystem.

Key Information

• Naver (035420 KS, KRW880,000): Target price KRW1,100,000 (25% upside).
• Kakao (035720 KS, KRW98,800): Target price KRW120,000 (21.5% upside).
• NCsoft (036570 KS, KRW365,000): Target price KRW570,000 (56.2% upside).
• Netmarble (251270 KS, KRW153,000): Not rated.
• NHN Entertainment (181710 KS, KRW81,600): Target price KRW97,000 (18.9% upside).
• Webzen (06980 KS, KRW22,550): Target price KRW28,000 (24.2% upside).

Conclusion

The internet sector is expected to maintain an OVERWEIGHT rating due to the anticipated growth in ad sales, expanding commerce ecosystems, and the commercialization of AI. Gaming stocks, however, are expected to diverge based on new game launches, IP strength, and regulatory changes. NCsoft, NHN Entertainment, and Naver are highlighted as top picks for 2H 2017.