Internet: Platform Revolution

Analysts who prepared this report are registered as research analysts in Korea but not in any other jurisdiction, including the U.S. PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES & DISCLAIMERS IN APPENDIX 1 AT THE END OF REPORT.

Internet

Platform revolution

Initiate coverage of internet sector with Overweight call We initiate our coverage of the internet sector with an Overweight call. In theinternet industry, the spotlight is shifting from mobile applications toward platforms based on robots and artificial intelligence (AI). Against this backdrop, we think internet companies with competitive platform services stand the best chance of becoming leaders in driving a new industrial revolution.

In particular, AI applications should enable internet companies to achieve furthergrowth in their existing businesses, as well as uncover new growth opportunities through new businesses. Backed by improvement in existing services (e.g., search, e-commerce, behavioral ads, and video streaming), internet use has been on the rise, creating fresh growth momentum for the internet market.

Over the medium and long term, we expect the internet business to evolve toward connected platforms consisting of both hardware and software. The ongoing “servitization” of manufacturing and of software should enable internet platform service providers to expand their businesses and secure new revenue sources.

2017 preview: Further monetization of mobile traffic, start of AI business For 2017, we expect to see additional monetization of mobile traffic and the emergence of new growth engines, such as AI. In the short term, we think the key variable is mobile revenue growth, driven by video on demand (VOD), online to offline (O2O), messenger services, and cameras. Over the medium term, expansion into AI platforms and Internet of Things (IoT) deserves attention. In addition, overseas expansion is likely inevitable, given the limited growth potential of the domestic market.

For internet companies, we think a balance between new and existing businesses is needed to avoid the kind of revenue plateau (or chasm) that tech companies often face in trying to take new services beyond early adopters to the masses.

In the short term, we recommend focusing on companies with earnings stability coupled with additional growth potential in existing businesses, or those with strong free cash flows to fund new investments. Over the medium to long term, we think companies with game-changing potential deserve attention.

Our top pick is NAVER; stocks to watch are Kakao and Interpark We initiate our coverage of NAVER (035420 KS) with a Buy rating and 12-month target price of W1,160,000, and recommend it as our top pick. We expect NAVER to continue rapid growth in existing businesses on the back of: 1) synergies between shopping, search, and payment services; 2) promising mobile video app services; 3) overseas expansion; and 4) improvement in service quality through the application of AI. Over the medium to long term, we expect NAVER to tighten its grip on the platform service market by investing in AI technologies and developing new services and products.

We initiate our coverage of Kakao (035720 KQ) with a Buy rating and 12-month target price of W105,000. We expect content revenue growth to bolster Kakao’s enterprise value. For 2H17, points to watch include stabilization of ad revenue, thecontribution of O2O services (e.g., Smart Mobility) to revenue, and progress in the AI business.

We initiate our coverage of Interpark (108790 KQ) with a Trading Buy rating and 12-month target price of W12,000. For 2017, we expect Interpark to display YoY earnings improvement, given its solid market share in the e-commerce segment (e.g., travel and ticket reservations) and easing cost pressures.

Overweight (Initiate)

Industry Report April 5, 2017

Mirae Asset Daewoo Co., Ltd.

[Internet/Game/Advertising]

Jee-hyun Moon +822-3774-1640 [email protected]

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Mirae Asset Daewoo Research

C O N T E N T S

I. Investment recommendation: Overweight 3 1. Initiate coverage with Overweight call 3 2. Top picks: Companies with earnings stability, coupled with additional growth potential 4

II. Internet sector analysis 5 1. Share-price variables 5 2. Business model 9 1. Korea’s internet market landscape 14 4. Cases of global internet firms 19

III. Internet industry outlook 22 1. Revolution of platform economy 22 2. Present: Business model development and monetization accelerating 23 3. Future: Gearing up for upcoming AI era 27 4. Key risk factors 38

IV. Key issues in internet industry 39 1. Changes in online shopping market 39 2. Full-swing competition in fintech market 43 3. Content business’ inflection points 50 4. Challenges of messenger business 55

V. Investment strategy & valuation 58 1. Investment strategy 58 2. Valuation comparison 60

NAVER (035420 KS) 61

Kakao Corp. (035720 KQ) 70

Interpark (108790 KQ) 78

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I. Investment recommendation: Overweight

1. Initiate coverage with Overweight call

We initiate our coverage on the internet sector with an Overweight recommendation. In the internet industry, the spotlight is gradually shifting from mobile applications to a connected platform. The development of AI is improving the quality of existing services and giving rise to a hyper-connected platform that encompasses both software and hardware. The technology is expected to provide new-found momentum to traditional businesses and present fresh opportunities for growth.

Korea’s internet sector index has experienced quantum leaps twice in the past with the emergence of new growth drivers. During 2017-2012, the index gained 35% from early-2007 to end-2012, in line with the expansion of the internet ad market from W1tr to W2tr. In 2013-2016, the index advanced 70% from early-2013 to end-2016, as the pick-up in mobile revenue pushed up the value of the internet ad market to W3tr. From 2017 onwards, sophistication of the monetization of mobile traffic on video, O2O, and messaging platforms, as well as the application of AI, should present new growth momentum.

Internet firms are expanding their business domain from PC and mobile applications to IoT and AI. For such firms, overseas expansion is likely inevitable, given the limited growth potential of the domestic market. In such an environment, top-tier players that are able to invest in human resources and M&As, based on robust cash flows and a strong capital base, should enjoy greater benefits and opportunities.

Figure 1. Korea internet index: Looking for growth through AI

Source: Thomson Reuters, Cheil Worldwide, PwC, Mirae Asset Daewoo Research

Figure 2. Entering era of ‘connected platforms’ from era of ‘mobile apps’

Source: Media reports, Mirae Asset Daewoo Research

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2. Top picks: Companies with earnings stability, coupled with additional growth potential

Our top picks for the sector include companies that are expected to exhibit strong future growth potential backed by robust earnings stability. Given the growing importance of investments for the sector, we recommend keeping an eye on internet names that have strong cash-generation capability backed by solid business models, and ease concerns over short-term margin erosion.

Internet companies need to achieve a balance between new and existing businesses in order to avoid a kind of revenue plateau (or chasm), as their businesses (currently focused on mobile apps) expand into Internet of Things (IoT).

Over the short term, we recommend focusing on companies with earnings stability coupled with additional growth potential in existing businesses, or those with strong free cash flows to fund new investments. Over the medium to long term, we think companies with game-changing potential deserve attention.

We initiate our coverage of NAVER (035420 KS) with a Buy rating and target price of W1,160,000, and recommend it as our top pick. Through its first management changes in eight years, we think the firm has improved its expertise, in terms of service offerings, technology investments, and BOD management, and achieved a balance. We expect NAVER to continue to achieve rapid growth in existing businesses, on the back of: 1) synergies between shopping, search, and payment services; 2) promising mobile video app services; 3) overseas expansion; and 4) improvement in service quality through the application of AI. Over the medium to long term, we expect NAVER to tighten its grip on the platform service market by investing in AI technologies and developing new services and products.

Figure 3. Short-term: Stable earnings, growth in existing businesses, and cash for investments

Note: Figures are consolidated basis, data after 2017F are our estimates Source: NAVER, Mirae Asset Daewoo Research

Figure 4. Mid- to long-term: Mobile-IoT to approach inflection point

Source: Ericsson, Softbank, Mirae Asset Daewoo Research

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II. Internet sector analysis

1. Share-price variables

1) Quantitative variables: User metrics

Based on the correlation between internet companies’ historical earnings and share performances, we have found that quantitative variables can serve as lead indicators for internet company shares. The internet is a two-sided market, i.e., a market in which two or more distinct groups of consumers are brought together via networks. In other words, internet companies first attract a sufficient number of users to their platforms and then generate ad revenue by securing advertisers, backed by their user base.

As an increase in user numbers is seen as equating upside in revenue growth, user number trends can serve as a lead indicator for shares of internet names. We view unique users and active users as valid user metrics for the sector.

For Korea’s leading internet names, Naver and Kakao, their market caps have historically moved largely in line with monthly unique user numbers. Notably, their unique users have increased sharply since 2012, thanks to improving service accessibility backed by greater numbers of LTE subscribers and increasing mobile-optimized service offerings. Global internet players, such as Facebook, Twitter, and Snap, have also seen their total market caps fluctuating sensitively to monthly active user growth trends.

Figure 5. NAVER’s market cap and MUV Figure 6. Kakao (Daum)’s market cap and MUV

Note: Monthly Unique Visitors (MUV) are sum of PC and mobile Source: Thomson Reuters, KoreanClick, Mirae Asset Daewoo Research

Note: Monthly Unique Visitors (MUV) are sum of Daum and Kakao’s PC and mobile; Daum and Kakao merged in Oct. 2014 Source: Thomson Reuters, KoreanClick, Mirae Asset Daewoo Research

Figure 7. Facebook’s market cap and MAU Figure 8. Twitter and SNAP’s market cap and MAU

Note: MAU refers to Monthly Active User Source: Facebook, Thomson Reuters, Mirae Asset Daewoo Research

Note: Monthly Active Users (MAU), SNAP market cap accounting for IPO offering price and opening price Source: Twitter, SNAP, Thomson Reuters, Mirae Asset Daewoo Research

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2) Qualitative variables: Profit indicators

Qualitative variables, especially profit indicators, are the most important share-price determinants of all companies. For internet companies, in particular, the expansion in user base carries significance only when it translates into profit increases. While the number of users is a lead indicator (just like valuation multiples), profit indicators are the key to share performances.

Indeed, Naver and Kakao (Daum, prior to the October, 2014 Daum-Kakao merger) have historically seen their shares moving largely in line with earnings per share (EPS) trends. For global internet players, such as Alphabet and Amazon, share prices and EPS have also been moving in similar directions.

Meanwhile, there were exceptions to these trends. For Naver and Amazon, shares moved out of sync with EPS in the mid-2000s and early 2010s, respectively. During both periods, strong share price rallies preceded actual profit growth, as shares moved first on robust revenue growth (double-digit) and expectations for profit increases.

In our view, investors can take any time gap between growth in user numbers (and subsequent growth in revenue) and actual profit growth as an opportunity to accumulate shares. Even when sluggish earnings lead to share pullbacks and overvaluation concerns, we think a steady increase in revenue, which points to a near-term rise in profit, should offer an entry point.

Figure 9. NAVER’s stock price and EPS Figure 10. Kakao (Daum)’s stock price and EPS

Note: Earnings per share (EPS) based on data from Thomson Reuters Source: Thomson Reuters, Mirae Asset Daewoo Research

Note: Earnings per share (EPS) based on data from Thomson Reuters and Daum Source: Thomson Reuters, Mirae Asset Daewoo Research

Figure 11. Alphabet’s stock price and EPS Figure 12. Amazon’s stock price and EPS

Note: EPS refers to earnings per share Source: Thomson Reuters, Mirae Asset Daewoo Research

Note: EPS refers to earnings per share Source: Thomson Reuters, Mirae Asset Daewoo Research

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3) Paradigm shift; a game changer

For internet companies, the most important share-price variable is the ability to implement major innovations. Innovative companies should emerge as new market leaders, leading to upswings in their enterprise value.

Portals search: In the early stages of the PC-internet era, most internet companies focused on the conventional portal business. However, Google turned the tide in its favor by shifting its focus to ‘search’. In the mobile era, the company expanded its internet business, by creating the relevant ecosystem (e.g., Android, app stores). Over the past 10 years, Google has also been investing in AI. As a result, the market cap of Alphabet (Google) has been on the rise since exceeding that of Yahoo in 2005.

Display ads search ads: In Korea’s internet ad market, we also note the change in its growth driver from display ads to search ads. Indeed, the search ad market began to surpass the display ad market in 2005, driven by Overture’s entry into Korea (in 2003) and Naver’s expansion of the search ad business. This has resulted in market cap growth for both Naver and Daum.

Offline retail e-commerce: The market cap of Amazon, the world’s largest online retailer, has topped that of Macy’s, the US’ leading offline-only retailer, since 2007. However, even in the US, online transactions now represent only 13% of the entire retail market, which we think points to ample upside for Amazon shares going forward. Moreover, Amazon has been reinforcing its digital content distribution business (e.g., e-books, video), as well as its online retail business. Recently, it has also been expanding into AI platforms (e.g. Echo) and IoT devices.

Text images and videos: We also note the shift in the key communication tool from text to photo/video. Recently, the market cap of Snap, whose flagship product is the image messaging and multimedia mobile application Snapchat, has exceeded that of Twitter, a text-based networking service provider.

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Figure 13. From ‘portal’ to ‘search’, and ‘expansion of ecosystem’: Yahoo Alphabet Figure 14. From ‘offline retail’ to ‘e-commerce’: Macy’s

Amazon

Source: Thomson Reuters, Mirae Asset Daewoo Research Source: Thomson Reuters, Mirae Asset Daewoo Research

Figure 15. From ‘display ads’ to ‘search ads’: Daum NAVER Figure 16. From ‘text’ to ‘video’: Twitter Snap

Source: Thomson Reuters, Mirae Asset Daewoo Research Source: Thomson Reuters, Mirae Asset Daewoo Research

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2. Business model

1) Indirect pricing: Ads

Key business model

The internet platform service market is a two-sided market that connects two or more distinct groups of customers via networks. Internet firms provide opportunities for their customer groups to reach deals with each other. A typical example is connecting website users with advertisers.

To be recognized as attractive advertising tools by advertisers, internet firms strive to attract as many subscribers as possible by providing them with a variety of free services, including search, community, messenger, email, and content distribution services. Internet firms generate revenue by charging for ads at rates that are based on their subscriber base. In other words, internet firms indirectly charge advertisers, instead of subscribers.

When users search via Google and NAVER’s search engines, they are exposed to ads, as well as search results. As ads related only to search words appear, advertisers can adjust their ad targets and ranges based on search words. A larger subscriber base would lead to higher ad exposure, thus presenting higher value to advertisers.

Figure 17. Internet platforms’ two-sided market structure: Connecting users and advertisers

Source: Fair Trade Commission, Mirae Asset Daewoo Research

Figure 18. Google (Alphabet) and NAVER’s business model: Internet ads a steady source of profits

Source: Business Model Generation (A. Osterwalder, Y. Pigneur), Mirae Asset Daewoo Research

[KA] Key activ ities

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Internet ads

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Size of ad market

In 2017, we estimate the domestic ad market will reach around W11tr: W3.7tr for internet ads; W3.7tr for TV ads; W1.8tr for print ads; W1.6tr for outdoor ad/production; and W290bn for radio ads. We expect the domestic ad market to grow by 3% YoY. The internet and TV ad markets will likely expand 9% and 1% YoY, respectively, while the radio ad market should remain flat YoY. The print and outdoor ad/production markets are likely to shrink by 2% YoY, respectively.

The domestic internet ad market can be divided into PC internet and mobile ads. In terms of value, mobile ads exceeded PC internet ads for the first time in 2016. In 2017, we project mobile and PC internet ads at W2.1tr and W1.5tr, respectively, widening the gap in value between mobile and PC internet ads. Of note, mobile traffic (the number of visitors, time spent, etc.) has long exceeded PC internet traffic. We think mobile ad revenue has been growing rapidly, in line with rising mobile traffic.

In the global internet ad market, the video ad segment will likely deliver the highest growth. In 2017, we expect the global internet ad market to grow by 10% YoY. The search ad market, which accounts for 46% of the global internet ad market, is likely to expand 5% YoY. The video ad market, which accounts for only around 10% of the global internet ad market, should grow 27% YoY this year.

Major internet firms are currently increasing investments in their video ad businesses, due to their high growth potential. Indeed, Facebook presented a “Video First” strategy in a conference call early this year. NAVER has also set out a strategy to bolster its video businesses (including Live broadcasts) by purchasing a stake in YG Entertainment and creating a private equity fund (investing in content).

Figure 19. Ads the most important business model for media: Internet ads account for 1/3 of total 2017F domestic ad market

Note: Internet is sum of PC and mobile; TV is sum of terrestrial, cable PP, general TV programming channel, IPTV, satellite, DMB, and SO Source: Cheil Worldwide, PwC, Mirae Asset Daewoo Research Figure 20. Domestic mobile ads exceed terrestrial TV ads in2016 Figure 21. Growth in global internet video ads exceeds that of

search ads

Source: Cheil Worldwide, Mirae Asset Daewoo Research Source: Bloomberg, MAGNA, Mirae Asset Daewoo Research

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2) Direct pricing: subscription fee, charging for content, service revenue

“Freemium “ model

Another business model for internet firms is to charge users directly via subscription fees, item sales, and service sales.

In internet or software services, a “freemium” business model has emerged. The freemium model is a business model that combines free and premium services. Under this business model, a majority of subscribers enjoy free services, while 10-20% of the subscribers use paid services. The business model is viable, as the cost of free services is low. The profitability of the model hinges on: 1) the average cost of free services; and 2) the ratio of customers switching from free subscribers into paid accounts.

The major premium services of NAVER and Kakao are mostly content-related services, including music, webtoons, and web novels. Melon, an online music service offered by LOEN Entertainment (which was acquired by Kakao in 2016), is a typical freemium model. Users can listen to music content from Melon free of charge for up to one minute, but they must make a payment to listen to or download the whole song, or to subscribe to a streaming service for a certain period.

In 2016, NAVER and Kakao saw direct pricing content revenues increase YoY. We believe subscription-based revenue complements ad revenue, as the former is less sensitive to economic conditions than the latter.

Figure 22. Subscription model: Kakao subsidiary, Loen Figure 23. Increase in subscriptions in mobile app market


Note: Excluding game app; data for 2016 are Jan. to Sep. Source: Activate, App Annie, Apple, Google, Mirae Asset Daewoo Research

Figure 24. NAVER’s content revenue Figure 25. Kakao’s content revenue

Note: Data are consolidated basis Source: NAVER, Mirae Asset Daewoo Research

Note: Data are consolidated basis Source: Kakao, Mirae Asset Daewoo Research

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As-a-Service model

The conventional manufacturing industry’s adoption of the “As-a-Service” model could offer a new revenue source for internet companies. The convergence of production and services could also provide newfound value to customers and new growth drivers for manufacturers.

The “As-a-Service” model comprises five components: business processes; applications & platforms; cloud; security; and infrastructure. Internet firms are focusing on applications & platforms and cloud, areas in which they have competitive advantages.

Most internet firms generate revenue by incorporating applications & platforms and cloud services into hardware, such as Amazon’s Kindle and Echo, Google’s Google Home, and NAVER and LINE’s Wave (an AI-embedded smart speaker). Cloud computing technology is the basis for the as-a-service model. NAVER subsidiary NAVER Business Platform carries out infrastructure-as-a-service (IaaS) businesses based on B2B cloud solutions, while also expanding its platform-as-a-service (PaaS) businesses.

The auto industry is emerging as a new land of opportunity. Internet-based firms, including Uber and Kakao, are driving the so-called “car-as-a-service” trend. Eventually, various “car-as-a-service” businesses will likely be integrated into a self-driving car network. NAVER LABS, a NAVER subsidiary developing autonomous driving solutions, recently added car-sharing services to its business portfolio. The “car-as-a-service” model - once considered a representative business of the sharing economy - is now expected to drive the overall mobility industry, and not merely serve as a niche market model.

Figure 26. Five components of As-a-Service: Internet company expands applications, platforms, and cloud business

Source: Accenture, Mirae Asset Daewoo Research

Figure 27. Urban driving: Cars-as-a-service to be connected to self-driving car network

Source: Wer kriegt die Kurve? (F. Dudenhöffer), Mirae Asset Daewoo Research

Past Current Future

Taxi

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Ride-sharing carpool center

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3) Commissions: Transaction commissions

E-commerce firms’ major revenue source is commissions. In Korea, Gmarket, Auction, 11st, Interpark, and several social commerce firms are leading the online shopping industry. If an online shopping company sells directly-purchased products or services (and takes responsibility for inventory), it recognizes the gross value of sales as revenue. Indeed, some online shopping malls ship products directly from their own warehouses.

In Korea, online shopping transaction value reached W65tr in 2016, accounting for 17% of total retail sales (versus 13% in the US). Of note, mobile transactions came in at W35tr last year, accounting for 54% of online shopping transactions. In 2017, online shopping transactions are projected to increase further to W78tr, with the percentage of mobile transaction rising to 61%.

The Korea Fair Trade Commission (KFTC) estimates that online open markets’ commission revenue accounts for 4% of total transaction value. Open market operators provide a marketplace in which sellers and buyers trade freely, and take a certain percentage of commissions from the sales amount.

In our view, revenue from advertising and ancillary services, rather than commissions, has the greatest impact on open markets’ profitability. Open markets provide a variety of services (namely, payments); in addition, advertising sales in open markets are believed to be driven by competition between sellers and efforts to maximize transaction value.

Figure 28. Domestic online shopping-mall billing: Mobile billing accounted for 54% of total online shopping in 2016

Note: Forecasts are our estimates Source: National Statistical Office, Mirae Asset Daewoo Research

Figure 29. E-commerce’s basic business model is fee revenue Figure 30. Additional ad-type revenue has more impact on profitability than fee revenue

Note: Based on fee revenue reported by fair trade open market in Sep. 2015 Source: Fair Trade Commission, Mirae Asset Daewoo Research

Note: Based on Auction and Gmarket’s ads/additional service revenue reported by fair trade open market in Sep. 2015 Source: Fair Trade Commission Mirae Asset Daewoo Research

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1. Korea’s internet market landscape

1) Total user traffic

Looking at current user traffic to both PC websites and mobile apps in Korea, portals, messengers, videos, e-commerce, and social networking sites occupy the top positions, in terms of user traffic.

As of 2017, Naver, Kakao, and Daum rank first through third, in terms of the number of monthly unique visitors. Global players, such as Google and YouTube (Alphabet), as well as Facebook, have also seen sharp rises in unique visitors in Korea, as smartphone penetration has increased. Currently, the number of monthly unique visitors to Facebook in Korea is nearly equivalent to that of Gmarket or 11st.

In 2017, Kakao ranks first, in terms of total time spent (TTS) in apps, followed by Naver and Daum (both portals), YouTube, and Facebook. Online shopping sites (e.g. 11st and Gmarket) tend to have relatively lower visit duration (time on site) than messaging and portal sites, because online shopping site visitors have a conspicuous purchase purpose.

Figure 31. MUV of major domestic domains: Increase in Kakao, Google, YouTube, and Facebook,after mobile penetration

Note: Based on 2000-2001 PC; data after 2012 based on sum of PC and mobile; MUV refers to Monthly Unique Visitors Source: KoreanClick, Mirae Asset Daewoo Research

Figure 32. Monthly average time of stay on domestic major domain (2017): Kakao > NAVER > Daum > YouTube > Facebook

Note: Data for 2000 and 2006 are based on PC, data for 2012 and 2017 are based on sum of PC and mobile Source: KoreanClick, Mirae Asset Daewoo Research

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2) Traffic by service category

Korea’s internet market can be divided into the search, e-commerce, social networks (SNS), and mobile video segments. While Korean players hold a competitive edge over global players in the search and e-commerce segments, global players (which have mobile-optimized apps) have topped Korean players in social networks and mobile videos (in terms of traffic).

Search: Naver currently represents a hefty 70% of Korea’s total monthly search queries, followed by Daum, Google, Bing, and Zum. Among the five search engines, local search engines - including NAVER, Daum, and Zum - collectively account for 92% of the market. This stands in contrast to Google’s high market shares in English-speaking countries.

E-commerce: 11st ranks the first in the e-commerce segment (in terms of monthly mobile unique visitors), with a 50% market share, followed by the Gmarket and Auction online open market sites. Social commerce sites, such as Coupang, WeMakePrice, and Ticket Monster, now stand in the fourth place, followed by home-shopping channel or department store-based apps. Naver’s e-commerce page is projected to rank in the top-10 in the segment.

Social networks: Facebook holds the largest share of Korea’s social network market, in terms of TTS per month, followed by portal-based service providers, such as Naver and Daum. Total time spent on Instagram, Kakao, and Twitter apps is only 20% that of Facebook.

Mobile videos: In terms of the number of monthly unique visitors, nearly 80% of total video consumers use YouTube, versus 24% for Naver, and 16% for SK Telecom’s Oksusu. As in the social network segment, Korea’s local players also lag behind their global counterparts in this segment.

Figure 33. Domestic top-5 search engines: NAVER dominates Figure 34. Domestic top-10 e-commerce apps: Open markets rank high, but usage is evenly spread

Note: Based on total PC search query, based on Feb. 2017 Source: KoreanClick, Mirae Asset Daewoo Research

Note: Based on total mobile e-commerce users, based on Feb. 2017 Source: KoreanClick, Mirae Asset Daewoo Research

Figure 35. Domestic top-10 social network services/communities: Facebook and NAVER stand out Figure 36. Domestic top-10 mobile video apps: YouTube

dominates

Note: Based on total time of stay on mobile communities, as of Feb. 2017 Source: KoreanClick, Mirae Asset Daewoo Research

Note: Based on total mobile video users, as of Feb. 2017 Source: KoreanClick, Mirae Asset Daewoo Research

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3) Traffic by user age

We have also analyzed user preference for mobile apps by age group in Korea, by selecting top-five mobile apps by service category (in terms of TTS on mobile apps) and thereafter identifying the app with the highest TTS share in each age group. The results of our analysis show that the lower the age of users, the greater the time spent viewing images/videos, or using entertainment, and global services. Details are as follows:

Generation Z (those born in the mid-1990s): Of all social networking sites, Generation Z spends the most time on Twitter and Facebook, while 11st ranks first among all e-commerce apps. Among video apps, Twitch (which specializes in game broadcasting) shows the highest TTS, followed by YouTube. In the camera app segment, Cymera ranks first, followed by Snow.

Millennials (born 1981-1996): Of all social networking apps, millennials spend the most time using Instagram and Facebook, which suggests a growing preference for image/video communication among young users. In this age group, Ticket Monster posted the highest TTS in the social commerce segment, while Naver TV, which specializes in short videos of TV content and web dramas, claims the highest TTS share in the video app segment. In addition, Naver-based Snow and B612 are the most popular camera apps in this age group.

Generation X (born 1965-1980): Of all social networking sites, Generation X spends the most time on Naver’s BAND. They prefer Gmarket in the e-commerce segment; Daum tvPot (integrated with Kakao TV after the Daum-Kakao merger) among mobile video apps; and KakaoTalk Cheez (which allows users to develop their own unique KakaoTalk profiles) among camera apps.

Baby boomers (born in 1946-1964): As with Generation X, baby boomers spend the most time on Naver BAND of all social networking sites. For reference, BAND (a closed networking service where members can join only via invitation) represents a hefty 46% of TTS on social networking apps by users aged 50 or over. Coupang has seized the top spot in the commerce segment, while Oksusu (operated by SK Telecom) and Photo Wonder rank first in the video app and camera app segments, respectively.

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Figure 37. Mobile apps preferred by Generation Z users (ages7-18) Figure 38. Mobile apps preferred by Millennial users (ages 7-

18)

Note: Proportion of 7-18 year-olds out of TTS for all age groups in each app’s usage, as of Feb. 2017 Source: KoreanClick, Mirae Asset Daewoo Research


Figure 39. Mobile apps preferred by Generation X users (ages 35-49) Figure 40. Mobile apps preferred by Baby Boomer users (ages

50-69)



Twitter

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The age distribution of NAVER and Kakao’s mobile app users varies, as: 1) the preferred service or communication mode differs by age group; and 2) users tend to build social networks with similarly-aged people. Typically, to attract users of diverse age groups, internet firms with web portals, like Kakao and Naver, leverage the brands of their flagship apps to launch individual service apps.

Of note, an increasing number of internet firms are utilizing individual service apps, rather than flagship apps, to attract non-major customer groups, such as young or overseas users. Such apps include NAVER’s Snow, LINE, and V Live.

Figure 41. MUV on NAVER’s major mobile apps Figure 42. Proportion of total time of stay on NAVER’s major mobile apps

Note: As of Feb. 2017 Source: KoreanClick, Mirae Asset Daewoo Research

Note: As of Feb. 2017 Source: KoreanClick, Mirae Asset Daewoo Research

Figure 43. MUV on Kakao’s major mobile apps Figure 44. Proportion of total time of stay on Kakao’s major mobile apps

Note: As of Feb. 2017; Daum tvPot and Kakao TV merged in Feb. 2017 Source: KoreanClick, Mirae Asset Daewoo Research

Note: As of Feb. 2017; Daum tvPot and Kakao TV merged in Feb. 2017 Source: KoreanClick, Mirae Asset Daewoo Research

Figure 45. NAVER’s mobile app favored by young age vs. elderly Figure 46. Kakao’s mobile app favored by young age vs. elderly

Note: Proportion of total time of stay for all ages, total time of stay, as of Feb. 2017 Source: NAVER, KoreanClick, Google Play, Mirae Asset Daewoo Research

Note: Proportion of total time of stay for all ages, total time of stay, as of Feb. 2017 Source: Kakao, KoreanClick, Google Play, Mirae Asset Daewoo Research

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4. Cases of global internet firms

1) Alphabet: Implementing “10x” strategy

Alphabet is a major US internet firm with a market cap of around W649tr. The company recorded revenue of W105tr and operating profit of W27.5tr in 2016. The company’s major business model is advertising via its subsidiary, Google. The company offers search, (Google.com), advertising (AdWords), and third-party content ad (AdSense) services through its search platform.

Google generates revenue from ad services, while offering free services to web users and content creators. The value that Google presents to advertisers hinges greatly on the number of its users. Therefore, Google is striving to attract more users by offering free email, map, and photo album services in addition to the search engine. In addition, Google has expanded the ad business scope by launching AdSense which allows Google ads to appear on other websites.

In August 2015, Google overhauled its governance structure by establishing the holding company Alphabet. Under the new governance structure, medium- to long-term projects have been placed under Alphabet, and major services units have been spun off to become individual firms. Of note, Alphabet’s CEO Larry Page promotes a philosophy of "10x”, which states that whatever products and services Google creates should be 10 times better than anything that is already available. Alphabet puts an emphasis on world-changing projects and ideas, and its acquisitions of other companies and experiments reflect this. We think Alphabet’s corporate governance and ambition is a model that can inspire other companies to realize their technological visions more boldly.

Figure 47. Alphabet’s main business model: Ads Figure 48. Current revenue breakdown: Ads dominant source


Note: Consolidated basis Source: Company data, Mirae Asset Daewoo Research

Figure 49. Major corporate/business structure Figure 50. Business expansion: Search media AI

Note: Describes only major companies and projects Source: Business Insider, Mirae Asset Daewoo Research

Source: What Google Really Wants (T. Schulz), Mirae Asset Daewoo Research

[KA] Key

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2) Amazon: Aims to provide best services for customers

Amazon is a US e-commerce company with a market cap of around W467tr. The company recorded revenue of W158tr and operating profit of W4.8tr in 2016. The company’s revenue sources include product sales commissions, subscription fees, and ads, which are the three major business models of internet firms. On a positive note, the company’s subscription fee model has recently begun to take root.

Amazon, which started as an online bookstore, now engages in a variety of businesses. We recently visited the company’s headquarters in Seattle and met with the head of its IR team. In the meeting, he emphasized that Amazon focuses only on customers, rather than a certain ecosystem or application. CEO Jeff Bezos defines Amazon as a platform that each serves its own customers in the best - and fastest - way possible.

Based on this customer-oriented service mindset, Amazon - which had been a purely online firm since its inception - has opened offline stores, and now supplies original video content via its Netflix-like streaming service Prime Video. In addition, the company is leading the AI-assistant voice recognition speaker and digital secretary service markets, with Echo and Alexa, respectively.

Amazon’s growth is currently being driven by: 1) Prime, a subscription-fee-based membership program; 2) offline bookstores, including Amazon Books and Amazon Go; and 3) cutting-edge logistics centers, called ‘Fulfillment Centers’, where humans and high-tech robots work together. The company’s CEO calls Prime a flywheel; just as a flywheel provides constant energy to an engine, Prime is both an accelerant for Amazon’s forward motion and a beneficiary of it.

Figure 51. Amazon’s main business model: Sales commissions, subscription fees, ads Figure 52. Current revenue breakdown: Merchandise sales

volume strong, but subscription-related sales also robust


Note: Estimates for media and AWS revenue are subscription-related revenue Source: Company data, Mirae Asset Daewoo Research

Figure 53. Amazon’s corporate structure Figure 54. Business expansion: E-commercemedia, cloudAI

Source: Bloomberg, Mirae Asset Daewoo Research Source: Fast Company, Mirae Asset Daewoo Research

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3) Tencent: Diversifying, based on dominance in communication services

Tencent is a China-based internet/game company with a market cap of W304tr. The company recorded revenue of W26tr and operating profit of W9.2tr in 2016. The company enjoys dominance in the communication services market, based on its messaging application, WeChat, and other social networking services. Its major revenue sources are the distribution of digital content, namely, games and ad sales. Tencent’s business model is similar to those of Kakao and LINE. It is also a major shareholder in Kakao and Netmarble Games and publishes the games of NCsoft, Nexon, and Netmarble Games in China.

Since the company began publishing 3D online games in 2003, online games have made the greatest contribution to revenue. In 2002, Tencent’s founder Ma Huateng said that while US internet firms mostly generate revenue through ads, that business model would not work well in China. Thus, the company has focused on generating revenue largely through value-added services (VAS), including online games.

Tencent allows the account holders of its instant messaging software service QQ to use the services of its various platforms by assigning unique QQ numbers to each account holder. Users pay for items via mobile phone bills, or with Tencent’s virtual currency, Q Coins. The payment methods have proven to be safe and user-friendly.

Benchmarking Korean mobile messaging services’ character business (e.g., KakakoTalk’s Kakao Friends and LINE’s LINE Friends), the company is now licensing its penguin character and operates Q-Gen stores that sell QQ branded merchandise. Recently, the company has seen an increase in revenue related to advertising (via social networking services’ corporate accounts and display ads) and from payment services (via TenPay). Tencent is considered to be one of the most successful examples of monetizing messenger services.

Figure 55. Tencent’s main business model: Content distribution, ads Figure 56. Current revenue breakdown: Games still majority,

but ad-related revenue also increasing


Source: Company data, Mirae Asset Daewoo Research

Figure 57. Tencent’s corporate structure Figure 58. Business expansion: Communication additionalservice

Source: Bloomberg, Mirae Asset Daewoo Research Source: Tencent Ma Huateng, Mirae Asset Daewoo Research

[KA] Key

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III. Internet industry outlook

1. Revolution of platform economy

1) Era of connected platforms

Internet firms generate revenue by creating a network that connects sellers and buyers via a wide array of products and services. Traffic tends to be concentrated on a very small number of strong and influential platforms, thanks to network effects, in which greater usage of the product by any user increases the product's value for other users. The effects also benefit customers pursuing higher value and reasonable prices.

In the internet industry, the spotlight is gradually shifting from mobile applications to a connected platform. We are now witnessing the establishment of the fourth industrial revolution, which is characterized by: 1) ubiquitous mobile internet; 2) cheaper and stronger sensors; and 3) AI and machine learning.

Meanwhile, AI technology should accelerate internet firms’ efforts to improve the quality of existing services and develop new products and services. Competition among industry players to enhance the clout of their own platforms should intensify going forward.

Figure 59. Evolution from ‘mobile app’ to ‘connected platform’ era


Figure 60. Among companies with global top-15 market caps, seven are platform-centric

Note: Stock price as of Mar. 23, 2017 Source: Bloomberg, Mirae Asset Daewoo Research

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2. Present: Business model development and monetization accelerating

1) Monetization of mobile traffic

Progress in the monetization of mobile traffic on video, O2O, and messaging platforms should serve as a near-term earnings variable. In Korea, mobile traffic - which is measured by data usage, search ad usage, and time spent on messaging apps - is on a steady upswing. However, we think that revenue has further upside, in light of the slow pace of growth.

Over the past few years, internet firms have focused on developing business models that could narrow revenue gap between PC and mobile platforms. With regard to search ads, NAVER’s mobile search queries are about twice as high as those on PCs. However, the company’s parent-based (excluding LINE) mobile ad revenue was smaller than PC revenue in 2016.

In Korea, total internet search page views from mobile devices now approaches 60% of those from PCs. However, growth in the mobile search ad market is not catching up with the pace of mobile search traffic’s uptrend. To narrow the gap, internet companies will likely improve mobile ad offerings, increase the number of ad slots, and raise ad prices. Through the use of AI technology, including deep-learning algorithms, they should also be able to enhance the qualities of search services and effectiveness of ads.

In addition, many mobile messengers, O2O platforms, and camera applications have yet to generate revenue, despite robust traffic growth, due to a lack of business models. If applications with a sufficient number of active users begin to generate revenue, based on effective business models, they could provide added momentum to earnings.

Figure 61. Domestic mobile data traffic and mobile ad market Figure 62. Domestic mobile search ads have room to monetize, considering traffic versus PC

Source: MSIP, Cheil Worldwide, Mirae Asset Daewoo Research Source: Bloomberg, MAGNA, KoreanClick, Mirae Asset Daewoo Research

Figure 63. Kakao platform revenue has room to increase,considering traffic growth Figure 64. Quarterly consecutive increase in number of

camera apps since 2016

Note: Traffic and revenue based on Kakao platform, excluding Daum Source: Company data, KoreanClick, Mirae Asset Daewoo Research

Note: Including Instagram, SNOW, Kakao Talk Cheez, B612, Cymera, Candy Camera, PhotoWonder, and Camera 360; sum of top 5 users in each period Source: KoreanClick, Mirae Asset Daewoo Research

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2) Business model adoption and monetization

Not all internet services have their respective profit models. Internet companies still provide a variety of services (e.g. search, communication, and content) free of charge. They typically focus on expanding user traffic and total time spent (TTS) in their apps in the initial business stage, before monetizing the traffic (e.g. ads). As such, for internet companies, increases in traffic heighten expectations for monetization.

Search engine companies, such as Naver and Daum, have added a variety of features to their respective flagship platforms (with most of the features included in search databases), offering an opportunity for revenue generation from search ads. Another opportunity for revenue generation is the addition of display ads on content web pages (e.g. news, information, and entertainment).

However, due to the fast-paced shift into the mobile platform, existing business models are seldom appropriate for mobile apps. Even when existing business models are adopted, it usually takes a while to optimize the model to fit the new platform. For messaging and social media platforms, accumulated search data are difficult to use for search ads or other marketing purposes, due to concerns over the potential for disclosure of personal information. In addition, PC-based ads are often incompatible with mobile apps, due to the smaller display size.

Next monetization target should be camera apps and O2O apps. Naver’s leading camera app, Snow, deserves attention. Snow recorded monthly active users of 25mn in 2016, within only one year of its September 2015 launch. We note that for Snapchat, a comparable app to Snow, monetization (e.g. ads) began in 2014 (in three years of its 2011 launch), when the number of daily active users stood at 50mn levels.

In the offline to online (O2O) business segment, Kakao also provides a wide range of services (e.g. Smart Mobility, Kakao Hair Shop, Kakao Order). Kakao expects full-fledged monetization of Kakao Taxi to kick off in 2H17.

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Figure 65. NAVER stock price and time of major service launches

Note: KnowledgeiN service launched in Oct. 2002; Hangame spin-off launched in Apr. 2013; LINE listed in Jul. 2016 Source: Company data, Thomson Reuters, Mirae Asset Daewoo Research

Figure 66. Kakao stock price and time of major service launches

Note: Merger of Daum and Kakao announced in May 2014; Daum Kakao launched in Oct. 2014 Source: Company data, Thomson Reuters, Mirae Asset Daewoo Research

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Launchedshopping,blog, and cafe

Launched local information search and webtoonsections

Startedreal-timesearch rankings

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LaunchedShoppingCast and mobile app

Launched LINE

Launched NAVER tvcastand Band

Spin-off ofHangame,changed companyname to NAVER

LaunchedShopping Window

PHOLAR;NAVER Pay;V Live; Snow; Talk Talk

Launched Papago,shopping search ads, and WhaleLINE IPOSpin-off of Snow

Spin-off of NAVER LABS and Webtoon;

Appointed CEO Han Seong-Sook

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Launched Kakao Taxi;Acquired Path/Kimgisanavigation;Launched Kakao TV and Brunch beta; Acquired podotree

Acquired Loen; LaunchedKakao Driver

Launched Daum tvPot;Developed search engine;Acquired Tistory

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3) Growing adoption of spin-off strategy

Internet companies, such as Google (Alphabet), Naver, and Kakao, have recently decided to spin off businesses into separate companies. Spin-offs entail significant benefits, in terms of both operations and share prices/enterprise value.

From an operational perspective, spin-offs enable companies to: 1) implement independent management to fit each business; 2) speed up decision making; and 3) minimize conflicts of interest with headquarters, thus increasing business opportunities.

In terms of enterprise value (share prices), spin-offs should allow companies to carry out separate assessment of individual spun-off entities, which could potentially lead to improvement in the total enterprise value. In addition, spun-off companies can raise capital on their own through either the securing of investments or IPOs, thus easing their financial burden on headquarters.

In August 2015, Google restructured its operations, creating Alphabet, a holding company of which Google became one of its subsidiaries. Through the massive corporate overhaul, the internet giant uncoupled its self-driving technology research arm, medical research arm, Google’s search engine/maps, YouTube, Android smartphone software, and some of its projects. The company believes that its efforts have clarified its long-term direction.

In a bid to focus on the mobile business, over the past several years, Naver has spun off its flagship business units (e.g., Camp Mobile, LINE, and Snow) or launched new brands. In 2017, the company has spun off a number of business segments into companies that specialize in R&D and global operations. For example, Naver spun off its part of R&D division into an independent entity (Naver Laps) to develop future technologies, including self-driving vehicles and robotics. The company also plans to spin off Naver Webtoon to expand its global operations and content business.

In February, Kakao announced a spin-off of its simplified payment business into a separate entity, Kakao Pay. At the same time, the company formed a partnership with China’s Ant Financial, the financial affiliate of e-commerce juggernaut Alibaba Group Holding. Under the deal, Ant Financial will invest US$200mn in Kakao Pay and expand business cooperation.

Figure 67. Alphabet’s major spin-offs: Decision to spin off for the sake of long-term future business

Note: Only major examples of spin-offs shown; Alphabet is currently a holding company of Google Source: Alphabet, Google, media reports, Mirae Asset Daewoo ResearchFigure 68. NAVER’s major spin-offs: Business organization mobile-specialized organization change business purpose to future and global business

Note: Only major examples of spin-offs shown Source: NAVER, NHN Entertainment, media reports, Mirae Asset Daewoo Research

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3. Future: Gearing up for upcoming AI era

1) AI and direction of development

AI is the simulation of human intelligence processes by machines, especially computer systems. Based on intelligence, humans can infer, decide, and act in given circumstances. Robert J. Sternberg, Professor of Human Development at Cornell University, formulated the triarchic theory, which distinguishes three aspects of intelligence: 1) analytic skills, such as the ability to think abstractly and evaluate information; 2) inference and judgment, or the ability to invent creative solutions or ideas; and 3) practical skills, which enable one to cope with concrete situations.

Machine learning is the science of getting computers to learn without being explicitly programmed. The most prevalent types of machine learning are: supervised learning, deep learning, and reinforcement learning. Supervised learning always has a specific preset outcome that is determined by a human before the machine begins to learn. As for unsupervised learning, however, the algorithm does not receive clear determination on input data. The technology is mainly used for clustering. In reinforcement learning, a machine’s actions and the rewards they produce affect the subsequent data it receives. Therefore, it continues to complete the task in a way that maximizes rewards.

Deep learning is a subfield of machine learning that is concerned with algorithms inspired by the structure and function of the brain, called artificial neural networks. The technology refers to either 1) the formation of multiple layers of neural networks for more successful learning and prediction, or 2) a machine’s in-depth learning to find a pattern of input data.

In many fields, AI has already reached or even exceeded human intelligence. Among cognitive activities, AI has reached human levels in speech and visual recognition. For complex calculation and strategic inference, AI surpassed human intelligence. Going forward, the development of the technology is expected to give rise to the emergence of super-intelligence.

Figure 69. Advent of IoT/AI era

Source: Softbank, Kakao, Mirae Asset Daewoo Research

Figure 70. AI has already exceeded human abilities in speech and visual recognition rate

Source: Softbank, Mirae Asset Daewoo Research

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Figure 71. Forecasts of global AI market size

Note: McKinsey includes ripple effect Source: Respective companies data, Digieco, media reports, Mirae Asset Daewoo Research

Figure 72. Revenue forecasts by AI technology: Deep learning revenue to soar

Note: API refers to Application Programming Interface Source: Tractica, ETRI, Mirae Asset Daewoo Research

Figure 73. Revenue forecasts by AI-adopting field: Bright prospect for ads Figure 74. Domestic AI market size forecast

Source: Tractica, ETRI, Mirae Asset Daewoo Research Note: 2013 data mostly based on AI-applied robots, forecasts include service fieldSource: MSIP, Digieco, KIRIA, Mirae Asset Daewoo Research

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2) AI improves the utilization of existing platforms

Through the adoption of AI technology, internet companies are able to improve the quality of existing platform services. Higher quality services should lead to an increase in customer’s service usage and growth in revenue, resulting from greater satisfaction for advertisers, as well as a reduction in processing time and costs.

As a core area of cognitive science, various subfields of AI, encompassing machine learning, deep learning, voice recognition/synthesis, translation, and multimedia recognition/processing technologies, are being applied to a wide array of existing services, namely search and news services.

Indeed, NAVER provides news clustering, image grouping and local information search services based on AI technology. For image search services, NAVER uses unsupervised learning algorithms to provide information on images (called “photo summary”). In addition, by grouping similar and related images (“image timeline”), the company further improved customer satisfaction on search results (see Figure 76).

As for NAVER’s local search services, deep learning algorithms are able to extract information on a certain subject, based on a vast pool of data, including blog reviews. Thus, the service can offer results that match the theme of users’ queries (e.g., good places to go with kids, must-see places in New York, etc.). The search service based on deep learning is also believed be applied to NAVER LABS’s in-vehicle infotainment (IVI) navigation system (see Figure 77).

Figure 75. Improved quality of search results, thanks to adoption of AI (machine learning, deep learning)

Source: NAVER, Mirae Asset Daewoo Research

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Figure 76. Improved quality of search results: Adoption of deep learning in image search improved user interface


Figure 77. Improved quality of search results: Adoption of deep learning in local context search increase in exposure and clicks

Note: CTR refers to click-through rate that is number of clicks divided by number of disposals Source: NAVER, NAVER LABS, Mirae Asset Daewoo Research

Note: CTR level is higher than level of exposure; weekend

exposure and clicks are more than double weekday levels

Note: Local context search adopted by NAVER Labs’ IVI (In-

Vehicle Infotainment), GPS-based navigation search

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A customized recommendation service is one of the major examples of applying AI to content services. Customized recommendation can drive up content consumption, leading to higher revenue. For example, if customized recommendation is applied to news content, the page views of a news article will increase and display ads placed near the article will be better targeted, thus boosting revenue.

Since March 2017, AIRS, NAVER’s AI-based recommendation system, has been available for its logged-in users. AIRS automatically recommends content by analyzing users’ interest and content consumption patterns. Of note, since the introduction of AIRS, per-capita consumption of news content has increased by 30-40%. In addition to mobile news, AIRS is also applied to NAVER TV and webtoon services. We expect the applications of AIRS to expand going forward.

Figure 78. Analyzing patter and recommending content through collaborative filtering Figure 79. Improving content recommendation level through

recurrent neutral network technology (deep learning)

Source: NAVER, Mirae Asset Daewoo Research Source: NAVER, Mirae Asset Daewoo Research

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Since June 2015, Kakao has applied RUBICS, a real-time user behavior-based interactive content recommendation system, to its Media Daum service. The AI system analyzes users’ social trends and personal interests in real time, and places customized news content for them. RUBICS developers account for around 70% of the Media Daum service staff. Daum news traffic appears to have increased since the introduction of RUBICS.

Figure 80. Mobile Daum news (Media Daum) traffic increased after adopting RUBICS

Note: Media Daum’s mobile web monthly page views every quarter-end Source: Koreanclick, Mirae Asset Daewoo Research

Chatbots are a mixture of AI and messenger services. Chatbots offer convenience to mobile users, in particular, as they allow users to gain information via chatting without the need to open a website or mobile app. Companies that provide services - including order placement and customer response - via chatbots can enjoy benefits, such as increased platform utilization, higher purchase volume, and labor cost reduction.

NAVER introduced a chatbot order service to NAVER Talk Talk (a chatting service) in February 2017. In addition, NAVER applied a chatbot to its NAVER Shopping in July 2016. Of note, the company found that 12% of the users that were responded to by the chatbot actually purchased the products.

LINE introduced a chatbot to its part time job offering service in July 2014. Currently, about 7,000 chatbot accounts operate on LINE.

Kakao has made the application programming interface (API) for KakaoTalk’s chatbot program available for developers. As chatbots added to Kakao Plus Friend now include such features as shopping, food ordering, and purchase consulting, Kakao Talk users can use such services.

Going forward, Kakao plans to add the chatbot program to its new “KakaoTalk Order” feature (launched in March), which allows users to order food from local food franchise brands by clicking a button within each brand’s “Plus Friends” chat room. This should lead to an increase in TTS in the app, thus driving up the value of the platform.

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3) AI to help internet firms to strengthen influence of their platforms

In our view, internet firms’ medium- to long-term target for their AI investments is the expansion of their influence in platforms. Their ultimate goal is believed to be changing the world with technology. Alphabet’s CEO Larry Page asked employees to live by the 10x philosophy: While other companies may aim to improve a product, service, or situation by 10%, employees at Google and Alphabet should aim to improve by 10 times. NAVER LABS presented a concept of ambient intelligence, declaring that the era of technology that is sensitive and responsive to people and the environment has begun.

For now, most internet firms are largely focused on PC and mobile platforms. As the two platforms have already penetrated deeply in daily life, companies are now turning their eyes to unclaimed areas – living rooms and cars on the road. To make forays into these areas, they are developing voice-recognition speakers, car infotainment, and autonomous driving systems based in AI technology. They are expected to eventually bring about the era of the connected platform.

The breakdown of device usage by time and location well illustrates the reasons why internet firms should pay attention to audio devices and cars. TV dominates the living room space in homes, while telephones and audio devices have the greatest influence on the space inside cars. Analyzing device usage by time, TV, and audio device usage is noteworthy. In particular, audio device usage tends to increase in the middle of night and mornings.

By location, audio usage was greatest in automobiles, following smartphones, as drivers cannot use smartphones while behind the wheel. According to Hyundai Marine & Fire Insurance, smartphone use was the top cause of traffic violations in Korea in 2017, rising by 8%p from the level of four years ago. The fact also suggests that users’ demand for smartphones’ various functions remains high even while they are driving.

Figure 81. Proportion of media usage by time: Apart from computer/phone, noteworthy usage on audio and TV Figure 82. Increase in mobile usage contrast to decrease in PC

usage vs. 2010

Note: Based on 2016 Source: KISDI, Mirae Asset Daewoo Research

Source: KISDI, Mirae Asset Daewoo Research

Figure 83. Proportion of media usage by place: Apart from mobile, noteworthy usage on TV at home and audio in transportation

Figure 84. Increase in audio usage in transportation vs. 2010

Note: Based on 2016 Source: KISDI, Mirae Asset Daewoo Research

Source: KISDI, Mirae Asset Daewoo Research

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Meanwhile, AI is also increasingly being applied for translation and interpretation services. Based on voice recognition and synthesis technology, the translation and interpretation of natural language has become possible.

NAVER developed a translation and interpretation application Papago, which relies on a deep learning model known as neural machine translation (NMT).

NMP is different from the phrase-based approaches of statistical machine translation (SMT), which uses separately engineered subcomponents. By converting and interpreting the subcomponents in the entire sentence, the NMP method can reflect differences in meaning of words depending on their order and context, enabling translation in a more accurate and efficient way.

As recognition and expression technology adopted for NMP concerns the input and output of texts, machine translation technology (combined with other services) could also be applied to other AI areas, in our view. If the technology is integrated into wearable devices, robots, driverless taxis, and VR devices, it could give rise to the formation of new markets.

Figure 85. NAVER’s interpretation/translation app, ‘Papago’,now in beta (official launch planned for June) Figure 86. Three technologies needed for interpretation and

translation: Recognition, machine translation, voice synthesis

Source: NAVER, Mirae Asset Daewoo Research Source: NAVER, Mirae Asset Daewoo Research

Figure 87. Machine translation technology trend: Neural network translation on the rise Figure 88. Increase in quality with neural network translation

versus existing translation

Note: MT and SMT refer to Machine Translation and Statistical Machine Translation, respectively Source: NAVER, Mirae Asset Daewoo Research

Note: GNMT refers to Google Neural Machine Translation Source: Google Research Blog, Mirae Asset Daewoo Research

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Voice-recognition speakers and platforms have already become a battlefield for global IT players. Currently, Amazon is leading the segment on the back of the Echo and Alexa devices introduced in November 2014. Amazon opened up Alexa to third-party developers to establish an ecosystem. As of February 2017, Alexa smart assistant has achieved 10,000 skills. In Korea, telcos also introduced virtual assistance services: SKT’s Nugu in September 2016 and KT’s GIGA Genie in January 2017. Among internet firms, NAVER and Kakao are also scheduled to launch AI-powered digital assistance platforms in 1H and 2H17, respectively.

The development of voice-recognition speakers and platforms should benefit internet firms in the following ways:

1) Hardware device sales: Sales of hardware equipped with voice-recognition AI should increase. Membership and exclusive services for long-term customer retention should constantly generate replacement demand on top of initial demand.

2) E-commerce revenue: The development of voice-recognition technology should boost revenue from product sales and transaction commissions. The technology could increase traffic to internet firms’ e-commerce websites, food delivery chains, and local information search services

3) Cloud services: AI improves recognition capabilities by securing data via voice recognition and learning them for itself. Thus, cloud storage is an essential element of AI technology. Cloud storage space is also necessary for providing new and customized functions to users.

4) Sales through partnership: If a company opens up the ecosystem of its platform, the number of partners, and hence sales through partnership, should increase. Eventually, a platform itself could play a role as an application store.

AI-powered voice-recognition speakers will likely pave the way for forays into the automotive market by internet firms. As drivers tend to consume audio content heavily while they are driving, voice-recognition technology should be useful.

Figure 89. Amazon’s Echo speaker with Alexa virtual assistant Figure 90. Acceleration in number of Amazon’s Alexa skills

Source: Amazon, Mirae Asset Daewoo Research Source: Amazon, Voicebot.ai, Mirae Asset Daewoo Research

Figure 91. NAVER/LINE’s voice recognition speaker, WAVE Figure 92. NAVER/LINE’s AI platform, Clova

Source: LINE, Mirae Asset Daewoo Research Source: NAVER, Clova.ai, Mirae Asset Daewoo Research

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IT has not been fully utilized in an in-car environment. To overcome IT’s limitations and search for new business opportunities, internet firms are pushing ahead with self-driving car projects.

IT firms, including internet companies, appear to view self-driving cars as a post-smartphone device, as cars are expected to serve an independent platform. The development of autonomous driving technology should offer greater opportunities to internet firms.

Self-driving cars require technologies for: 1) location awareness; 2) environment recognition; and 3) vehicle control. Internet firms’ recognition technology and data could spur the development of location awareness and environment recognition technologies. Vehicle control technology, which is directly related to safety, will require cooperation with carmakers.

Alphabet is carrying out the self-driving car project via Waymo. Digital map data is essential for the development of navigation system and self-driving cars. About 20% of Google’s search queries are related to location. Accordingly, the search service unit is in charge of developing street views and maps at Google. Google Maps extracts information by applying image algorithms to street view images. For example, the program recognizes traffic signs and adjusts Google Maps’ navigation system.

Alphabet is also utilizing its Android operating system for the operation of digital features. The operating system is expected to serve as a platform for the development of automotive applications. By combining data from automotive sensors and applications, internet firms should be able to offer various services, including voice guide for travelers based on driving routes, and applications for reserving parking spaces based on data culled from various sources (e.g., digital calendars, etc.). Waze, a traffic information application acquired by Alphabet in 2013, specializes in providing information on traffic conditions and accidents. Such data could also be used to improve the functions of self-driving vehicles.

Figure 93. Self-driving levels of Society of Automotive Engineers (SAE)

Source: NAVER Labs, Mirae Asset Daewoo Research

Figure 94. Alphabet’s autonomous car technology company,Waymo Figure 95. Waymo’s prototype autonomous car

Source: Waymo, Mirae Asset Daewoo Research Source: Waymo, What Google Really Wants (T. Schulz), Mirae Asset Daewoo Research

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Naver Labs, Naver’s research and development arm (specializing in self-driving vehicle technology), is currently focusing on “driving-environment monitoring (sensing)” technology, which enables the vehicle to monitor a range of variables surrounding the traffic (e.g. obstacles) and combine data from high-definition maps. This technology should also help the firm to expand into other businesses in a variety of areas.

Under the standard of the US-based Society of Automotive Engineers (SAE), Naver Lab’s self-driving ability currently stands at Level 3, which means that while drivers are still necessary, they are able to shift “safety-critical” functions to the vehicle under certain conditions. The firm is now developing Level 4 self-driving vehicles. Due to the lack of its proprietary manufacturing unit, it plans to forge a partnership with manufacturing companies.

Naver Labs has applied self-driving technology to its M1 automated indoor mapping robot, which is capable of 3D image processing based on its laser sensors and cameras. With the M1 robot, the firm aims to create the service platform that provides detailed 3D imagery of an indoor space, including shopping malls and airports.

Based on the technology, the firm will provide wayfinding services in complex buildings (e.g. COEX Mall and IFC Mall) and attempt to either develop or advance property-information services and AR games/content. The firm should also expand into new platforms to offer regional ads/information, thanks to the easy reprocessing of graphic images in maps.

Figure 96. NAVER Labs aims to develop products and services based on ambient intelligence Figure 97. NAVER Labs’ autonomous car

Source: NAVER Labs, Mirae Asset Daewoo Research Source: NAVER Labs, Mirae Asset Daewoo Research

Figure 98. NAVER Labs robotics team’s mid- to long-termkeywords Figure 99. NAVER Labs’ M1 robot produces 3D detailed indoor

map

Source: NAVER Labs, Mirae Asset Daewoo Research Source: NAVER Labs, Mirae Asset Daewoo Research

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4. Key risk factors

Key risk factors facing Korean internet companies are as follows;

Competitive risks: Changes in the operating environment, such as the emergence of new technologies and services (e.g. the shift to the mobile platform from PC web), may pose a threat to the market leadership of existing players. For example, in the mobile era, global players, such as YouTube, Facebook, and Instagram, overtook Korean players, such as Naver and Kakao, in the video and social network segments. Notably, the emergence of the IoT and connected platforms will trigger cut-throat competition across industries and nations.

Economic slowdown: As the advertising business is the key revenue source for internet companies, an economic slowdown could lead to a contraction in companies’ ad spending. However, we think internet ads have stronger future growth potential than conventional (e.g. TV and newspaper) ads. Among internet ads, display ads are more affected by seasonality and economic conditions, due to the high portion of large-sized branded companies. Search ads are less sensitive to economic conditions, thanks to a high share of small to medium-sized advertisers and user convenience (direct link to online shopping sites).

Security risks: Internet companies are also facing growing risks of personal information leakage, caused by hacking attempts and an information security failure. Leading examples of massive data breaches in Korea include customer data leaks at Korea’s major online shopping sites, such as eBay Korea’s Auction (2008), and Interpark (2016), and With Innovation’s mobile accommodation reservation app, Yeogi-Eoddae (2017). Among global companies, Yahoo suffered from the world’s biggest-ever data breaches in 2013 and 2014. A breach of customer data, including personal details and even purchase/payment information, could result in significant legal and financial damages for internet service providers, with the subsequent deterioration in reputation potentially resulting in customer defections.

Technology risks: Technological advancements may have unintended side effect, or result in a backlash, as evidenced by a recent advertising boycott of YouTube. The issue was caused by YouTube’s automated system that places 15-30 second ads before videos. Recently, some of the UK’s largest corporations have stopped advertising on YouTube, after their ads appeared next to extremist videos, which they feared could tarnish their reputations. Application of advanced technology (e.g. AI) entails a growing need for tighter monitoring of content.

Regulatory risks: The expansion of ad revenue at Korean internet service providers is attracting attention from regulatory authorities. In early 2017, the Korea Communications Commission hinted at plans to overhaul the legal framework for the internet ad market. The commission also raised such issues as: 1) whether online video services can be subject to conventional broadcasting laws and regulations; and 2) whether it is fair to force internet users to pay for data used to view unwanted mobile ads. In addition, regulatory authorities (e.g., the Korea Fair Trade Commission) may review whether dominant players in the online search (e.g. Naver) and mobile messaging (e.g. Kakao) markets have excessive market control or are in compliance with fair trade practices.

Short-term margin erosion possibility: Over the short term, expansion into the AI and IoT businesses could lead to a sharp increase in spending for internet companies. While growing competition for top talent (specializing in internet technology) has driven up fixed costs, aggressive marketing of new products and services has led to a pickup in variable costs. When a company starts a new business, it can suffer from margin erosion over the short term, as it may take a while for the new business to generate revenue.

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IV. Key issues in internet industry

1. Changes in online shopping market

1) Return of open-market business model

Although Korea’s online shopping market has been expanding at a double-digit CAGR over the past 10 years, competition in the market has also been intensifying. As of 2016, the value of Korea’s total online transactions reached W65tr (roughly 17% of its total retail transaction value), with the share of mobile transactions in its total online shopping transaction value, at 54%, exceeding the 50%-mark for the first time ever.

The analysis of Korea’s online shopping market growth by retail format as of 2016 suggests the return of the open-market business model. The combined value of transactions at Korea’s three major social commerce sites, i.e., Coupang, Ticket Monster, and WeMakePrice, grew by only 13.5% YoY in 2016, versus 72.9% in 2014, and 46.6% in 2015, while growth (YoY) in the combined value of transactions at open-market sites (eBay Korea, 11st, and Interpark) rebounded to 21.5% in 2016.

For 2017, we expect Korea’s online shopping market to exhibit open market-driven growth, backed by accelerating growth of existing open-market shopping sites and social-commerce sites’ adoption of the open-market business model. In 2017, Korea’s three major social commerce sites have been transforming into open-market sites, by either reducing or discontinuing regional-based sales and group purchases, and soliciting open-market type sellers.

Figure 100. Domestic online shopping market size

Source: National Statistical Office, Mirae Asset Daewoo Research

Figure 101. Growth rate of domestic shopping by type: Open market rebound

Note: Open market includes 3 companies: eBay Korea (including Gmarket and Auction), 11st, and Interpark; social commerce includes 3 companies: Coupang, Ticket Monster, and Wemakeprice; total distribution complex includes 7 companies: online Emart, Shinsegae, AK Mall, Homeplus, Galleria Mall, Lotte.com, and Lotte Mart Mall Source: MOTIE, Mirae Asset Daewoo Research

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The marketplace is the key to the open-market business model. Once sellers register their products with the marketplace, buyers (who log on to the marketplace) make payments for their purchases. Then open-market operators remit sellers the payment minus commissions.

Open-market operators provide product registration, advertising, and payment services for sellers, and generate profits by charging fees for each service.

The open-market business model is now projected to represent roughly 30% of all online shopping transactions. We think the recent rapid growth of the open-market business is due mainly to the fact that it now offers extensive choices for customers, having expanding its seller base to include conventional retail channels, including department stores, hypermarkets, and home shopping malls. Notably, online open-market operators have recently been expanding their business reach through launches of private brands and the joint development of new products; moving away from simply being an intermediary for transactions.

With mobile transactions accounting for over 50% of total online transaction value, as of end-2016, we think growing mobile transactions should continue to drive up the value of online shopping transactions as a whole. Major online shopping site operators are likely to expand their mobile-optimized services (e.g., push notifications that offer deals and discounts, subscription services) going forward, as evidenced by the recent increase in chatbot-based services.

Figure 102. Open market structure Figure 103. Open market’s traffic still firm

Source: Fair Trade Commission, Mirae Asset Daewoo Research Note: MUV is based on the sum of PC and mobile; Open market includes 3 companies: eBay Korea (including Gmarket and Auction), 11st, and Interpark; social commerce includes 3 companies: Coupang, Ticket Monster, and Wemakeprice; total distribution complex includes 7 companies: online Emart, Shinsegae, AK Mall, Homeplus, Galleria Mall, Lotte.com, and Lotte Mart Mall; portal shopping page includes NAVER and Daum Source: KoreanClick, Mirae Asset Daewoo Research

Figure 104. Importance of mobile shopping: 1) increase in mobile for place to purchase Figure 105. Importance of mobile shopping: 2) Strong traffic

and transactions compared with PC

Source: DMC Media, Mirae Asset Daewoo Research Note: Traffic (MUV, total time of stay) and transaction value as of Dec. 2016 Source: National Statistical Office, KoreanClick, Mirae Asset Daewoo Research

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2) Deteriorating balance sheets of online shopping sites

We believe the balance sheet deterioration of major online shopping sites is another key factor behind the broader shift to open markets. Unlike social commerce sites and general online malls, open markets can generate ad revenue, which boosts their overall profitability. Sellers on open markets often purchase ads in order to better compete with other vendors selling similar products within the marketplace and to maximize their sales. On the other hand, general online malls and the location-based offerings of social commerce sites are structured in a way that provides little incentive to place such ads.

In 2016, the top three social commerce sites recorded a combined operating loss of over W600bn. SK Planet, the operator of 11th Street, also booked an operating loss of W365.1bn last year. These social commerce sites need to achieve sustainable growth in revenue (transaction value) if they are to raise funds from outside sources.

We believe the adoption of the open market model is inevitable from two perspectives. From a market point of view, the growth of transaction value is shifting from social commerce sites to open markets. From a financial standpoint, there is a strong need to generate additional revenue streams (such as ads) aside from sales commissions.

Looking forward, we expect competition to increasingly revolve around products and services, rather than promotion-driven marketing tactics, given the increasing financial stress of online commerce companies. We think more and more companies will focus on expanding categories (like the recent expansion of traditional retail channels into open markets), introducing subscription-based services and faster delivery (as in the case of Amazon), providing a distribution platform for O2O services, and broadening ordering systems linked to intelligent voice assistants.

Figure 106. Social commerce’s transaction value increasing, but sustaining operating losses

Note: Based on Coupang, Wemakeprice, and Ticket Monster Source: Media reports, Mirae Asset Daewoo Research

Figure 107. SK Planet 11st: Transaction value increasing, but operating loss worsening

Source: SK Telecom, SK Planet, Mirae Asset Daewoo Research

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3) The virtuous cycle of NAVER’s shopping/search ad/payment ecosystem

Amid the ongoing paradigm shift of online shopping sites to open markets, we believe NAVER’s e-commerce business deserves particular attention.

NAVER currently offers price comparison results on its shopping page (shopping.naver.com) using the database of major online shopping sites. NAVER Shopping is essentially a larger marketplace that brings together a variety of open markets. Indeed, portal shopping sites like NAVER Shopping have seen their online traffic steadily grow in tandem with that of open markets. It is estimated that around 30% of visitors to online commerce sites are redirected from NAVER Shopping, which recognizes a portion of the transaction value as revenue.

NAVER is also working to bring in offline stores, SOHO malls (small merchants), and personal bloggers, who have been largely excluded from existing open markets and social commerce sites. These sellers have the potential to grow NAVER’s commerce business, while having very few conflicts of interest with the major commerce sites included in NAVER’s price comparison service. Most small merchants are featured on NAVER’s Shopping Window series. As of January 2017, Shopping Window had around 12,000 sellers, and total transaction value was estimated at approximately W600bn in 2016.

What’s impressive is NAVER’s ability to create a virtuous cycle across the ecosystem by providing a wide range of solutions to its sellers. Key examples of such solutions include NAVER login (which allows users to make purchases using their NAVER ID), NAVER Pay (simplified payment), TalkTalk (a chat service that connects buyers to sellers), shopping search ads (which increase the exposure of individual products), and Booking (available for hair salons and restaurants).

Shopping search ads began to pop up on NAVER’s search ad results in November 2016. If a user clicks a shopping ad placed by a seller and makes a purchase, he or she can earn points with NAVER Pay. For advertisers and NAVER, the points serve as a useful tool to encourage users to make repeated purchases. For users, the points can be spent not only on the relevant shopping site, but also on other items found on NAVER sites, including digital content (webtoons, music, etc.).

NAVER’s shopping/search ad/payment ecosystem offers net benefits to its various players. For the online shopping market, it facilitates the migration of traffic from offline to online stores, fueling the growth of the market. From the sellers’ perspective, it provides a broader range of distribution channels and helps enhance their business efficiency through an array of solutions. From the buyers’ point of view, it offers a wider set of search results, greater convenience (by letting users skip the sign-up process), and monetary benefits via NAVER Pay points. For NAVER, it allows the company to collect data from its platform users and increase its sales commissions and search ad revenue.

Figure 108. NAVER shopping search ads pay: Virtuous cycle


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2. Full-swing competition in fintech market

1) Direction of the fintech industry

The financial technology (fintech) industry has been gaining attention this year, with an increasing number of internet companies separating their payment service divisions. On April 1st, NHN Entertainment split its simplified payment service and advertising divisions into a new wholly owned subsidiary, NHN Payco. And in February, Kakao announced a strategic partnership with Alibaba affiliate Ant Financial Services Group, which will invest US$200mn in Kakao Pay, the company’s spun-off digital payment system subsidiary. Notably, Ant Financial is the operator of China’s leading digital payment service Alipay.

Fintech involves digital innovation in the financial sector, and is characterized by the convergence of technologies and finance, dramatic improvement in the efficiency of existing services, and the emergence of new financial services. The fintech revolution is leading non-financial companies (e.g., internet companies) to carry out tasks of conventional financial institutions, accelerating the unbundling of the financial industry. Notably, we expect the launch of internet-only banks to bring digital innovation in the financial sector to a higher level in 2017.

Figure 109. Non-financial companies, including internet companies, act as financial companies;accelerating unbundling of financial industry

Source: BOK, Mirae Asset Daewoo Research

Table 1. Fintech market outlook: Likelihood of replacing conventional financial players Likelihood Financial service Outlook Related companies

High ↓ Low

Payment & transfer

Fintech services are likely to make significant inroads into the payment service market, currently dominated by banks and card issuers. Consumer experience (e.g., low fees and convenience) is a key factor in choosing service providers. The payment and transfer segment has a relatively low entry barrier and weak customer loyalty.

NAVER, Kakao, NHN Entertainment

Wealth mgmt.

Market division between high-end and low-end segments is possible. The wealth management market is likely to be divided between fintech companies (low-cost robo-advisor services for the mass-affluent section) and conventional financial institutions (high value-added services for high net worth individuals).

Deposit & lending

Status quo will likely be maintained: Conventional banks will continue to serve their function in the deposit-taking and lending segment. Deposit-taking: Bank checking accounts and deposit protection schemes offer convenience. Lending: Ex-post credit risk assessment is marked by high knowhow and reliability.

Kakao

Virtual currency There is only a slim chance of virtual currencies growing to the point of replacing conventional money and payment methods. Virtual currencies suffer from high price volatility and vulnerability to hacking, theft, and loss.

Note: Kakao has Kakao Bank, an internet-only bank Source: Bank of Korea, Mirae Asset Daewoo Research

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Table 2. Types of fintech financial services Level of

innovation Low → High

Example Internet banking Mobile banking

Simplified payment/transfer

Peer-to-peer lending /robo-advisors Bitcoin

Note: Internet companies will likely expand beyond simplified payment to lending and robo-advisors Source: Bank of Korea, Mirae Asset Daewoo Research

Table 3. Information protection policy directions for meeting the expansion of fintech Policy direction Details

Minimize ex-ante regulation Abolish security review and implement principles-based regulation (rather than rules-based regulation)

Enhance ex-post monitoring Reduce ex-ante regulation but enhance ex-post review; minimize personal information collection

Clarify accountability Revise laws to ensure greater legal accountability of non-financial companies

In-house security system Encourage and support financial institutions to establish a fraud detection system (FDS) Source: Why Fintech Matters Today (Connecting Lab), Mirae Asset Daewoo Research

2) A new chapter: Beyond simplified payment to more sophisticated financial services

We believe fintech service providers will replace conventional banks and card issuers in the payment service market, which requires a comparatively low level of innovation.

In the simplified payment segment, consumer experience (e.g., low fees and convenience) is a key factor in choosing service providers. Due to the segment’s lower entry barrier and weak customer loyalty, simplified payment service providers acted aggressively in the initial stage to build customer awareness and make their services more attractive via marketing campaigns and various benefits. In early 2017, the domestic simplified payment market is consolidating around high-ranking apps such as NAVER Pay, Samsung Pay, Kakao Pay, and Payco.

We expect simplified payment services to penetrate into traditional markets and convenience stores, where cash is used for 79% and 60% of all means of payment, respectively. The Seoul Metropolitan Government is looking to introduce, on a pilot basis, a mobile payment system to Dongdaemun Market and Namdaemun Market from May, and expand the application to other traditional markets and street vendors in Seoul beginning in 2H17. The Bank of Korea is pushing ahead with the Coinless Society initiative, under which convenience store customers can, starting in April, elect to have their change credited to a prepaid traffic card; the option of depositing to a bank account will also be available later. We expect the government’s initiative to promote the use of simplified payment services.

Internet companies’ fintech business activities have occurred in stages, which can be summarized as follows: start of simplified payment services in 2015 marketing competition in 2016 separation of simplified payment service divisions and attraction of investment in 1Q17 launch of internet-only banks in 2Q17. Considering increasing innovation levels and the growing feasibility of replacing conventional financial service providers, we think it is time for fintech services to move beyond simplified payment to more sophisticated financial services (e.g., money transfer, wealth management, and deposit-taking and lending).

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Figure 110. Payment methods in Korea: Mobile card usage improving

Note: Based on survey of 2,500 persons in Korea Source: BOK, Mirae Asset Daewoo Research

Figure 111. Monthly UV of domestic major simplified financial service: NAVER, Samsung, and Payco leaders

Note: NAVER pay based on sub domain data, others based on app; impossible to track individual traffic trend for Kakao Pay, as it does not have independent sub domain or app; MAU is around 5mn persons Source: KoreanClick, Mirae Asset Daewoo Research

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Simplified payment - NAVER Pay

Simplified payment - Samsung Pay

App card - Shinhan

App card - Hyundai

Simplified payment - Payco (NHN)

App card - KB

Simplified transfer - Toss

Simplified payment - Paynow (LG Uplus)

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Given usage patterns of major simplified payment solutions, we think customer awareness and preferences have reached a tipping point. In our view, fintech players should differentiate themselves by extending service coverage beyond simplified payment—which is an introductory or warming-up phase—towards money transfer and wealth management.

1) Importance of money transfer: We expect the introduction of money transfer to catapult the fintech industry to a higher plane. Money transfer is one of the most frequently used financial services, enabling service operators to raise a deposit base and expand to lending and insurance services. Kakao Pay added a money transfer solution in 2Q16 and a bill payment service in 1Q17. NHN Entertainment’s Payco also introduced a money transfer function in 2Q16.

Leading P2P money transfer app Toss has processed more than W3tr in transactions on a cumulative basis since its release in 1Q15, and commands a 95% share of the simple money transfer market. In 1Q17, Toss raised W55bn from a PayPal-led consortium and plans to expand its services to include bank account balance checking and credit rating management.

2) Service differentiation: Kakao Pay is integrated with KakaoTalk, negating the need for a new app. We think Kakao Pay is well positioned to offer an extensive network of related services, given 1) the partnership with and investment from Ant Financial, operator of China’s leading online payment solution Alipay; 2) its ties with Kakao Bank (Kakao’s internet-only bank); and 3) the digital content subsidiaries LOEN and Podotree.

3) Potential expansion of customer base through payment interface: When NHN split into NAVER and NHN Entertainment (previously the Hangame division), the latter needed to expand its platform beyond an online game portal to other services. We expect NHN Payco (a payment service) to help NHN Entertainment expand its customer base.

4) Use of payment data: Identifying and creating synergy effects with related businesses is essential. NAVER Pay, linked to NAVER Shopping and NAVER Search Ads, plays a key role in NAVER’s shopping-search-payment ecosystem. Meanwhile, Alibaba is using user data to provide a credit rating service.

Figure 112. Kakao Pay spun off, attracted $0.2bn from Ant Financial service group, parent of China’s Alipay

Note: As of Feb. 21, 2017 Source: Kakao, media reports, Mirae Asset Daewoo Research

Figure 113. NHN Payco spun off, secured cashable W50bn from NHN Entertainment

Note: As of Apr. 23, 2017 Source: NHN Entertainment, FSS, Mirae Asset Daewoo Research

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3) Rise of internet-only banks

Korea’s first internet-only bank, K-Bank, began operation in April, to be followed by Kakao Bank (slated to open before end-2Q17). KT-led K-Bank recorded over 15,000 account openings on its first business day, exceeding 16 domestic commercial banks’ monthly average account openings (12,000) recorded since the introduction of non-face-to-face account opening in December 2015.

Internet-only banks operate primarily through non-face-to-face channels, and boast price competitiveness by reducing fixed costs such as office rent and labor expenses and offering high deposit rates, low lending rates, and fee waivers. The drivers behind the establishment of internet-only banks are declining yields on financial service products and deregulation.

We think the domestic internet-only banking industry needs further deregulation.

1) Relaxation of the separation of banking and commerce: The Banking Act is being revised to ease restrictions on non-financial ownership of internet-only banks. Successful cases abroad (e.g., Japan) show the potential of internet-only banks to take root and grow, leveraging the characteristics of parent companies (industrial capital) to offer distinctive services.

2) Approval for universal banking: We expect that mis-selling risks associated with non-face-to-face transactions will be reduced through customer management and information provision. As of now, customers have to visit different financial institutions to buy different categories of financial products. In contrast, internet-only banks provide cost-effective, convenient access to a broad selection of products through a single channel.

Table 4. Milestones in development of domestic internet-only bank market Notes

June 2015 Government announces introduction of internet-only banks October 2015 Kakao Bank, K-Bank and I-Bank file for preliminary approval November 2015 Kakao Bank and K-Bank win preliminary approval

September 2016 K-Bank files for main approval December 2016 Financial Services Commission awards main approval to K-Bank

January 2017 Kakao Bank files for main approval April 2017 K-Bank begins operation; Kakao Bank files for main approval June 2017 Kakao Bank aims to begin operation in 1H17

2H17 Two revisions to Banking Act and three bills on special act on internet-only banks are pending Source: Financial Services Commission, news reports, Mirae Asset Daewoo Research

Table 5. Summary of applications for main approval: Kakao Bank and K-Bank Kakao Bank K-Bank

Registered name Kakao Bank Corp. K-Bank Corp. Shareholders' equity W300bn W250bn

Shareholders

Korea Investment Holdings, Kakao, Kookmin Bank, Netmarble Games, Seoul Guarantee Insurance Company, Korea Post, eBay Korea, YES24, and Skyblue (Tencent); (9 shareholders in total)

KT, Woori Bank, NH Investment & Securities, GS Retail, Hanwha Life Insurance, KG Inicis, KG Mobilians, 8 Percent, Danal, Posco ICT, Korea Tourism Organization, Yap, DGB Capital, Mobile Leader, Ezwelfare, Bridgetec, Korea Information, Infovine, Alipay (Hong Kong) Investment Limited, Smilegate Entertainment, and Minwise; (21 shareholders in total)

Characteristics

Unique as a “mobile bank” Offers all services through One Mobile App Offers an option to receive deposit interest in the form of digital content Offers reasonable pricing for mid-rate loans, based on credit risk assessment using broad database (Kakao/shareholders) Makes money transfer as easy as using KakaoTalk

Emphasizes 100% non-face-to-face transactions, emphasizingoffline customer touch point Reduces time spent opening an account to 10 minutes (vs. 30 minutes at a conventional bank) Enables product conversion and money transfer within a single page Reduces credit risks on mid-rate loans by assessing risks based on big data Able to use ATM/CD machine at GS25 convenience stores

Employees About 210 (Lee Yong-woo & Yun Ho-young, co-CEOs) About 200 (Shim Seong-hun, CEO) Notes: Kakao Bank filed for main approval on January 6, with FSC approval pending; K-Bank won main approval on December 14, 2016; number of employees subject to change Source: Financial Services Commission, Mirae Asset Daewoo Research

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For internet companies, we think the introduction of internet-only banks will have a limited impact on shares or earnings in the near term, given that: 1) the government has yet to relax the separation between banking and commerce; and 2) conventional financial institutions (e.g., commercial banks) have an established market presence, with widely used mobile apps and subsidiaries/affiliated savings banks that cover the mid-rate loan segment.

Besides further deregulation, other points to watch regarding internet-only banking are: 1) its potential proliferation among young “millennial” consumers, who are heavy mobile users and prefer non-face-to-face transactions; 2) the development of distinctive services capitalizing on the characteristics of non-banking shareholders; 3) convenient around-the-clock customer service using chatbots; and 4) highly efficient marketing.

Table 6. Japanese internet-only banks: Distinctive services capitalizing on characteristics of non-banking shareholders Internet-only bank (Ranking)

Establishment /Opening Equity structure Core business Scope of businesses

Japan Net Bank September 2000 Present: Sumitomo Mitsui Banking Corp.

(SMBC, 41.16%) & Yahoo (41.16%)

Payment service • Retail deposit-taking & lending (excluding mortgage loans)

October 2000 • Credit card Total deposits • Money transfer/payment service: JPY569bn (6th) • Investment trust/insurance Business model & key characteristics

• Offers transaction service for Yahoo Auction and cycling/horse racing games (based on payment service) • Enhances profitability through high-interest-rate consumer loans (guaranteed by non-banking lenders) • Combines Yahoo Japan’s customer base and payment platform with SMBC’s competitiveness in banking - Yahoo Portal (new customer attraction) & SMBC (risk control/customer DB management) • Enhances international money transfer and foreign currency deposit-taking businesses (16 currencies, 12 countries)

Sony Bank April 2001 Present: Sony Financial Holdings (100%)

Online wealth management • Retail deposit-taking & lending

June 2001 Loans (mortgage loans) • Brokerage services (securities products)

Total deposits Business model & key characteristics : JPY1.8tr (3rd) • Achieves business growth via Sony Communication Network customers, leveraging its ties with Sony

• Specializes in retail banking targeting salaried workers in major cities in Japan • Offers a wide range of financial services including foreign currency deposit (real-time transaction around the clock) and investment trust • MONEY kit – Personalized online wealth management service • Maximizes synergy through cross-selling with subsidiaries (e.g., auto insurance, pension)

Rakuten Bank January 2001

Present: Rakuten (100%)

Payment service • Consumer banking (mortgage)July 2001 Full-range financial service • F/X transaction/money transfer

Total deposits • Brokerage services (securities products)

: JPY1.2tr (4th) Business model & key characteristics

• Leverages Rakuten’s shopping mall platform to expand the banking business (channeling shopping mall customers to banking service)• Uses related companies to offer a wide range of services (e.g., deposit-taking and lending, FX, investment trust, international money transfer, credit card, “bancassurance,” lottery, cycling and horse racing settlement and brokerage) • Offers membership scheme (Rakuten Super Points) • Has the largest number of accounts among Japanese internet-only banks

SBI Net Bank April 2006 Present: Sumitomo Mitsui Trust Group (50%) & SBI Holdings (50%)

Loans (mortgage loans) • Consumer banking

September 2007 • F/X transaction

Total deposits Business model & key characteristics : JPY3.5tr (1st) • Japan’s no. 1 internet-only bank, a joint venture between SBI Holdings (a financial holding company related to SoftBank) and Sumitomo

Mitsui Bank • Expands the banking business by pursuing “high deposit rates and low lending rates” • Focuses on retail mortgage and card loan businesses (to differentiate itself from the parent business) • Delivers rapid growth by expanding the customer base to include SBI Securities’ customers (a checking account linked with a brokerage account) and offers free-of-charge services • Establishes unique services such as SBI hybrid deposits and Visa payWave (a debit card with retail transaction options in two currencies)

Jibun Bank May 2006 Present: Bank of Tokyo-Mitsubishi UFJ (BTMU, 50%) & KDDI (50%)

Mobile money transfer • Consumer banking (mortgage)June 2008 • F/X transaction

Total deposits Business model & key characteristics : JPY662bn (5th) • Consolidating its position as a mobile bank through “bank-communication service” convergence

• Combines KDDI’s customer base and knowhow in the mobile business with BTMU’s expertise in the banking business • Provides mobile-based foreign currency deposit service, international money transfer, other F/X-related services, and F/X rate information (11 currencies, 8 countries) • Delivers the fastest growth among six internet-only banks in Japan

Daiwa Next Bank April 2010 Present: Daiwa Securities Group (100%) Marketable securities • Deposit taking and lending April 2011 • Financial advisory serviceTotal deposits Business model & key characteristics : JPY2.9tr (2nd) • Uses high-interest-rate deposits to help expand customer base for the securities business

• Enhances the link with securities accounts and leverages the parent company’s strength in marketable securities Note: Total deposits as of end-March 2015, Source: KISDI, KOFIA, Bankscope, Why Fintech Matters Today (Connecting Lab), Mirae Asset Daewoo Research

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Figure 114. Annual deposit size of Japanese internet banks

Note: Financial year ends in Mar. Source: Bankscope, Mirae Asset Daewoo Research

Table 6. Restrictions on non-financial ownership of banks impede development of internet-only banks Banking Act Key paragraph

Article 15 (Limits on Stock-Holding by Same Person, etc.)

No same person shall hold stocks of a bank in excess of 10/100 of the total number of its outstanding voting stocks, provided that this shall not apply to cases under any of the following subparagraphs and cases under paragraph (3) and Article 16-2 (3):

Article16-2 (Restrictions, etc. on Stockholding by Non-Financial Business Operators)

No non-financial business operator (including a person who is excluded from a cross-shareholding-restricted business group under Article 14-2 of the Monopoly Regulation and Fair Trade Act and so ceases to be a non-financial business operator, but for whom a period prescribed by Presidential Decree has not yet elapsed passed since the date of the exclusion; hereafter in paragraph (2) the same shall apply) may not hold more than 4/100 of the total number of outstanding voting stocks of a bank (15/100 in cases of a regional bank), notwithstanding Article 15 (1). <Amended by Act No. 12101, Aug. 13, 2013>

Source: National Assembly, Mirae Asset Daewoo Research

Table 7. Summary of proposed bills for IT companies’ active participation in internet-only bank market Proposed bill Date of proposal Proposer Key paragraph

Revisions to the Banking Act

June 16, 2016 11 lawmakers, including Rep. Kang Seok-jin (Saenuri Party)

(3) Provided that a non-financial business operator (excluding a cross-shareholding-restricted business group, in which the same person is a natural person, under the Monopoly Regulation and Fair Trade Act) holds not more than 50/100 of the total outstanding voting stocks in an internet-only bank, the equity ownership shall be permitted according to an approval procedure regarding the ownership of a bank (Addition of subparagraph 3 of paragraph 3 of Article16-2).

July 8, 2016

12 lawmakers, including Rep. Kim Yong-tae (Saenuri Party)

(3) Provided that a non-financial business operator holds not more than 50/100 of the total outstanding voting stocks in an internet-only bank, the equity ownership shall be permitted according to an approval procedure regarding the ownership of a bank (Addition of subparagraph 3 of paragraph 3 of Article16-2)

Special Act on Internet-only Banks

November 4, 2016 11 lawmakers, including Rep. Jung Jae-ho (Minjoo Party)

(3) Provided that a non-financial business operator (excluding a cross-shareholding-restricted business group, in which the same person is a natural person, under the Monopoly Regulation and Fair Trade Act) holds not more than 34/100 of the total outstanding voting stocks in an internet-only bank, the equity ownership shall be permitted according to an approval procedure regarding the ownership of a bank (Article 5 of the proposed bill).

November 11, 2016 12 lawmakers, including Rep. Kim Gwan-yeong (People's Party)

(2) Provided that a non-financial business operator (excluding a cross-shareholding-restricted business group, in which the same person is a natural person, under the Monopoly Regulation and Fair Trade Act) holds not more than 34/100 of the total outstanding voting stocks in an internet-only bank, the equity ownership shall be permitted according to an approval procedure regarding the ownership of a bank (Article 5 of the proposed bill).

November 16, 2016 11 lawmakers, including Rep. Yu Eui-dong (Saenuri Party)

(3) Provided that a non-financial business operator holds not more than 50/100 of the total outstanding voting stocks in an internet-only bank, the equity ownership shall be permitted according to an approval procedure regarding the ownership of a bank (Article 5 of the proposed bill)

Note: Political party affiliation is based on when the bills were submitted Source: National Assembly, Mirae Asset Daewoo Research

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(JPYtr)

2011 2012 2013 2014 2015

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3. Content business’ inflection points

1) Efforts to optimize video service for mobile users and investments in content production on the rise

In 2017, internet companies are changing strategies for their video content business, putting a greater focus on mobile platforms and expanding content investment. Their shift in strategies is based on the projection that the percentage of video ads in the entire internet ad market will surge 38% YoY to 16% in 2017.

In 1Q17, both NAVER and Kakao rebranded their video services. NAVER simplified the name of its video services from NAVER TV Cast to NAVER TV. Kakao integrated Daum’s tvPot into Kakao TV. In effort to optimize services for mobile platforms, they introduced live TV services and adopted the vertical format for video content.

In our view, NAVER is taking bolder steps, compared with domestic peers. In addition to NAVER TV, the company is also operating an independent video application, V Live, which specializes in real-time mobile streaming and hallyu content. Since launching the V Live application in September 2015, NAVER has been steadily monetizing the service, by introducing V Live+ for paid content, and a virtual currency, V Coin, in June 2016. The application has also inserted video ads since December 2016.

The company is increasing the production of internet- and mobile-only content. The number of web dramas produced by NAVER TV increased sharply from eight in 2013 to 95 in 2016. We believe that NAVER TV has become a major platform for internet- and mobile-exclusive content in Korea.

NAVER is also expanding investments in content. In November 2016, the company launched the SB Next Media Innovation Fund, worth W50bn, partnering with Softbank Ventures to invest in digital content. In March 2017, the company also announced a total of W100bn investments in YG Entertainment and YG Investment Fund. Through the investments, the company should be able to develop entertainment content and secure original content for its video platforms, like V Live. In addition, the company plans to spin off NAVER Webtoon, which is also expected to be involved in the production and distribution of video content, including films, video files, and broadcast content.

Meanwhile, Kakao is providing Kakao TV’s video content and subsidiary LOEN Entertainment’s music content (provided by the Melon streaming service) via the Kakao Talk platform. As a result, Kakao TV’s video content can be shared in Kakao Talk’s chatting rooms without opening applications. By connecting Kakao Talk’s account to Melon, Kakao Talk users can add music to their profiles. Melon has also launched a joint marketing campaign with Kakao Friends. Kakao plans to expand the portfolio of LOEN to include the provision of video content based on its artist line-up and content production staff. The company already provides content, such as music videos and concert footage.

Figure 115. NAVER’s video content business flow Figure 116. Kakao’s video content business flow

Source: Mirae Asset Daewoo Research Source: Mirae Asset Daewoo Research

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Figure 117. Low usage of NAVER TV and V Live among NAVER content apps Figure 118. Low usage of Daum tvPot and Kakao TV among

Kakao content apps

Note: Based on total time of stay on mobile app per month Source: KoreanClick, Mirae Asset Daewoo Research

Note: Based on total time of stay on mobile app per month; Kakao acquired Loen (Melon) in Mar. 2016; Daum tvPot and Kakao TV merged on Feb. 18, 2017 Source: KoreanClick, Mirae Asset Daewoo Research

Figure 119. Uptrend in number of NAVER TV web drama series Figure 120. Increasing need for investment in video in line with high growth in domestic video ads

Source: NAVER, Etnews, Mirae Asset Daewoo Research Source: Korea Online Ad Association, Nasmedia, Mirae Asset Daewoo Research

Figure 121. Mobile optimized video: Real time live broadcasting Figure 122. Mobile optimized video: Vertical screen play

without tilting phone

Source: Kakao TV Live, NAVER TV, Video Mug, Facebook, Mirae Asset Daewoo Research

Source: V Live, Dingo, Mirae Asset Daewoo Research

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In the global media market, internet firms’ investments in original content are driving the growth of the entire broadcast content market. In the US, the amount of content produced by online services providers, including Netflix and Amazon, doubled YoY in 2016. Excluding online service firms’ content, the amount of broadcast content has decreased from 2015 levels. In the past, online service providers had expanded their market shares based on low prices; now, they are attracting subscribers based on original content, and thus enhancing their brand values.

Launching the Facebook Live service, Facebook is promoting real-time broadcasts as its key mobile content. Facebook’s attempt was new to internet firms, as well as traditional media firms. Internet firms’ video content services and mobile applications are providing content on an on-demand, not real-time, basis (Netflix). Even if they provide real-time broadcast services (AfreecaTV), the content is designed and choreographed in advance by independent broadcasters. Mark Zuckerberg talked up the 'video first' strategy during Facebook's earnings call earlier this year.

Korea’s leading cable TV channel operator, CJ E&M, shifted the real time content (aired in Korea) of its online/mobile broadcasting service, Tving, into free services. In our view, the company’s decision to change Tving’s pricing scheme was a response to the strong growth of the video ad market and an attempt to appeal to more users at the same time. CJ E&M plans to launch the Tving service in the global market based on both subscription- and ad-based models.

Figure 123. Increase in production of US original broadcast content: Online services, such as Netflix, have driven growth over past 3 years

Note: Online service includes Amazon Prime, Crackle, Hulu, LouisCK, Netflix, PlayStation, Seeso, Vimeo, Yahoo, and YouTube Red, excluding daily drama, one-act play, non-English drama, and content of less than 15 minutes Source: FX Networks Research, Bloomberg, Mirae Asset Daewoo Research

Figure 124. Remarkable growth in global online video ad market

Source: MAGNA, Bloomberg, Mirae Asset Daewoo Research

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2) Music content to be linked to video content and voice recognition technology

Internet firms are increasingly establishing or acquiring online music service providers, as well as expanding their investments in audio content and technology.

As a subscription-based business model, the online music service business is complementary to internet firms’ ad-oriented business structure. In the domestic music content market, streaming services have gained the upper hand, due to the profusion of real-time music charts. This environment is optimized for subscription-based models, rather than download models.

In the short term, music content will likely be linked to video content, given that it can generate additional content, including the artists’ music videos, interviews, and live broadcasts.

In the medium term, music content is likely to take root as a service related to AI-based voice recognition technology. Indeed, telcos are expanding partnerships with online music service providers. SKT is in partnership with Melon and Bugs. LG Uplus has acquired a stake in Genie Music. SKT’s NUGU (an AI-based voice recognition speaker) offers a music streaming service via Melon, while KT’s Giga Genie (an AI-based set-top box) has Genie Music services available. Going forward, music content services should be also adopted by NAVER or Kakao’s voice recognition speakers, or the infotainment systems of autonomous cars.

Figure 125. Total monthly time of stay on domestic major music apps: Internet companies’ affiliated apps have recovered since 2016

Note: Based on total monthly time of stay at quarter-end; Kakao owns Melon (Loen) and Kakao Music; Genie Music is KT’s subsidiary, but LG Uplus invested in Mar. 2017; NHN Entertainment owns Bugs; CJ E&M owns Mnet Source: KoreanClick, Mirae Asset Daewoo Research

Figure 126. High usage rate of playing music among AI-powered speaker functions

Source: Respective companies’ data, Business Insider, Mirae Asset Daewoo Research

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3) Webtoon business emerging as a global service

The webtoon services of internet portals, including NAVER and Kakao, were initially based on an ad-based business model, as they generated ad revenue based on the inflow of traffic arising from webtoon content. Recently, revenue sources from webtoon services have been diversified through online communities and business partnerships. In addition, Freemium models (e.g. KakaoPage’s webtoon service model) have been introduced to webtoon services, basically offering each episode free of charge, but charging for the three most recent episodes.

Internet portals’ webtoon businesses will likely go increasingly global in 2017. NAVER will spin off its webtoon business unit to create NAVER Webtoon Corp. in May 2017. NAVER’s webtoon business unit, which began overseas services in 2014, currently offers content in various foreign languages, including English, Thai, Mandarin Chinese, and Indonesian. Since August 2016, overseas users have outnumbered domestic users. After its spinoff, NAVER Webtoon Corp. will likely focus on searching for superior webtoon content in overseas markets and improving its service quality. Of note, we think the webtoon subsidiary is likely to engage in auxiliary businesses based on intellectual property rights, given that its business purposes include the video content production/distribution/intermediary and entrainment businesses.

Kakao operates KakaoPage and Daum Webtoon via its subsidiary, Podotree. In early 2017, Kakao signed a contract to offer 20 webtoons to Chinese users via Tencent. Of note, Tencent has recently announced an IPO plan for its e-book subsidiary, China Reading. We believe this is a typical example of internet portals diversifying their game-oriented digital content businesses via webtoons and web novels. In our view, internet firms’ content investments, particularly in overseas markets, will boost enterprise value, going forward.

Figure 127. NAVER webtoon provides overseas service through ‘LINE webtoon’, number of overseas users exceeded domestic users in Aug. 2016

Note: Introduction image of LINE webtoon mobile app Source: LINE webtoon, media reports, Mirae Asset Daewoo ResearchFigure 128. Kakao/Daum webtoons’ overseas service platform (left); service contract of 20 webtoons with Tencent in early 2017 (right)

Source: Kakao Page, Podotree, media reports, Mirae Asset Daewoo Research

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4. Challenges of messenger business

1) Difficulty of monetizing messenger traffic

In the early stage of smartphone proliferation, the mobile messenger business grew rapidly, thanks to: 1) increased mobile chatting; and 2) social game publishing via mobile messengers. Recently, however, mobile messenger revenue has been weakening, as: 1) mobile messengers have become widespread, leaving their usage stagnant; 2) mobile games have become more sophisticated, encompassing social games to RPG and strategy genres; and 3) major game developers have bypassed a messenger platform for game distribution and pursued simultaneous game launches in the domestic and overseas markets.

Furthermore, a comparison of revenue and traffic shows that Kakao generates low revenue relative to its robust traffic.

As such, the cases of internet firms that have successfully monetized their messenger services (including Tencent) deserve attention. In the early stage of their messenger services, revenue was generated via short text messages and stickers/emojis. In the middle stage and beyond, messenger services expanded to include daily-life features, such as messaging payment and e-commerce services.

Figure 129. Kakao: Lower revenue vs. traffic on total time of stay

Note: Revenue is based on 2016; NAVER, Netmarble Games, and NHN Entertainment on non-consolidated basis; Daum is Daum ad revenue; Kakao is ads, mobile game, and music revenue; total time of stay based on Dec. 2016 Source: Respective companies’ data, FSS, KoreanClick, Mirae Asset Daewoo Research

Figure 130. Key background of messenger monetization

Source: Activate, Mirae Asset Daewoo Research

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2) Messaging platform’s growth potential

“Bots are the new apps,” said Microsoft’s CEO Satya Nadella during a keynote speech at the Microsoft Build 2016 conference.

This implies immense growth potential for the messaging platform. While the number of smartphone apps installed by an average smartphone user on a monthly basis tops 80 in the US and surpasses 40 in Korea, the average number of apps actually used monthly remains at 10-20 levels. In contrast to the limited number of apps that are actually used on a daily or monthly basis, total time spent (TTS) on messaging apps has been on the rise.

Notably, the younger generation (e.g. millennials) prefers texting over calling. Meanwhile, apps have their own limitations, as they consume mobile data, affect battery life, take up a significant amount of storage space, and clutter a smartphone’s main screen. As a single app, messengers are apps in which average users spend the most time. Messaging apps are increasingly being transformed into a platform.

Figure 131. Monthly usage of apps vs. number of installations Figure 132. Sustained increase in time of stay on messenger apps

Note: US age: over 18 in 2016; Korea age: 12-59 in 2015 Source: Video Watch, KISA, Mirae Asset Daewoo Research

Note: Based on domestic user standard every Jan. Source: KoreanClick, Mirae Asset Daewoo Research

Figure 133. Sustained service expansion for LINE and Tencent WeChat messengers: Both recently adopted ‘chatbots’

Source: Company data, Activate, Mirae Asset Daewoo Research

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Amid the rising flood of apps, the introduction of bots to messaging services should drive improvement in user convenience, leading to a further increase in TTS in messaging apps.

In particular, companies have recently made chatbot APIs available for developers to create the relevant ecosystems, with the aim of developing “personal assistant chatbots” to implement concierge services. Messaging apps should continue to transform into a portal/platform that integrates a wide variety of apps (e.g. news, maps, search, shopping, payment), thus eliminating the need for the separate downloading of search, shopping, and payment apps.

Under the existing platform, users are simply connected with chatbots of a variety of companies and brands via messengers. Going forward, however, technological advancements should allow for the emergence of virtual concierge chatbots. If chatbots evolve into a one-stop service platform, we believe that the companies that secure first mover advantage in this new market will gain dominant positions in the mobile commerce market and mobile services market as a whole.

Table 8. Cases of introduction of chatbots to messaging apps Company & messengers Chatbots/ AI assistants

LINE Kakao, KakaoTalk

Naver TalkTalk Clova Naver i Clova

Facebook messenger Pancho Google Allo Allo

Tencent WeChat Xiaobing Microsoft Skype Cortana

Telegram Kik

Luka Assist Magic

Operator Quartz

Source: Mobile Trend 2017, media reports, Mirae Asset Daewoo Research

Table 9. E-commerce companies’ introduction of conversation features: Conversational commerce, and concierge commerce E-commerce companies Chat services Interpark Talk Jipsa 11st Baro Shinsegae SSG Talk Amazon Alexa Source: Mobile Trend 2017, media reports, Mirae Asset Daewoo Research

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V. Investment strategy & valuation

1. Investment strategy

For 2017, we see three potential upside catalysts for shares of internet companies:

1) Enterprise value contribution from new mobile businesses

In the event of a mobile business adopting a profit model backed by strong user traffic, the enterprise value could be boosted by: 1) an IPO of the business; 2) a capital injection from external investors; or 3) IPOs of comparable companies. For example, the IPO of LINE Corp drove up the shares of Naver, while the IPO of Snap helped boost the value of the Snow app.

2) Commercialization of AI business

The expected commercial launches by internet companies of a variety of AI services and devices (e.g., AI platform, voice-controlled speakers, interpretation/translation apps, chatbot, self-driving vehicles) should serve as an upside catalyst for internet company shares. Indeed, Amazon’s launch of the Echo voice-controlled speaker and Alexa, AI-powered service prompted a P/E rerating for internet companies as a whole.

3) Global business expansion

Korea’s leading internet companies, Naver and Kakao, have already gained dominant shares of their respective domestic market segments (search and messaging). Given the limited growth potential for such companies in Korea, we think global market expansion should give additional traction to shares of Korean internet companies going forward. Indeed, we believe that shares of Naver gained traction by reflecting the value of Snow’s overseas user base, while Amazon shares also received a boost from the global success of Amazon Prime Video.

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Figure 134. Example of new service contributing to enterprise value: NAVER’s SNOW, LINE

Source: Thomson Reuters, Mirae Asset Daewoo Research

Figure 135. Example of commercialization of AI adopted business: Amazon’s Echo and Alexa

Note: In 1H15, EPS was negative, but rise in stock price continued, so describe P/E about 1,000x alternatively Source: Thomson Reuters, Mirae Asset Daewoo Research

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2. Valuation comparison

Internet companies are usually classified as growth stocks, and thus receive higher valuations than the market as a whole. In particular, strong profitability, thanks to robust top-line growth and low fixed costs, justifies the valuation premium of internet companies.

If internet companies report were to weak operating profits, but strong revenue growth for the year, the heightened prospects for operating leverage improvement for the following year would boost expectations for profit improvement and drive up their valuations. Leading examples of this phenomenon include e-commerce companies, such as Amazon and JD.com, which are expected to improve profit in 2018. Messaging app companies, such as Kakao, LINE, and Snap, are also enjoying high valuations, as their monetization of mobile traffic remains in the early development phase.

Table 10. Global major internet companies’ earnings forecasts (Wbn)

Company name Marketcap.

Revenue Operating profit Net profit 17F 18F 17F 18F 17F 18F

NAVER (KR) 28,018 4,696 5,448 1,371 1,645 941 1,135 Kakao 5,800 1,866 2,054 166 214 106 138 Interpark 362 510 530 22 23 15 16 Alphabet (US) 658,206 98,064 114,735 40,583 47,246 32,209 37,799 Amazon 478,123 184,572 222,810 6,575 10,930 6,916 10,065 Facebook 462,145 42,223 53,769 22,767 28,876 17,765 22,488 Yahoo 49,913 3,995 3,937 359 411 696 696 SNAP 29,455 1,154 2,266 -2,035 -962 -1,618 -729 Twitter 12,124 2,629 2,790 191 206 255 344 Yahoo Japan (JP) 30,237 8,609 9,325 2,060 2,292 1,383 1,524 Rakuten 16,390 8,890 9,892 1,204 1,417 703 843 LINE 9,457 1,701 1,954 321 435 196 270 Tencent (CH) 308,711 34,085 42,970 11,607 14,769 9,393 11,968 Alibaba 303,140 25,314 33,371 7,588 10,494 9,877 12,537 Baidu 68,347 13,840 16,789 1,870 2,781 2,140 2,970 JD.com 51,240 55,917 70,331 -88 532 320 1,037 Meitu 8,026 579 1,439 -90 198 -62 188 Momo 7,513 1,249 1,687 296 430 315 434 Sina 5,723 1,538 1,955 325 521 196 311 Note: Korean companies are our estimates, others are market consensus Source: Bloomberg, Mirae Asset Daewoo Research

Table 11. Global major internet companies’ valuation (x, %)

Company name PER EV/EBITDA PBR ROE

17F 18F 17F 18F 17F 18F 17F 18FNAVER (KR) 30.2 25.0 16.1 13.2 4.8 4.0 23.0 22.2Kakao 61.6 47.6 21.4 18.6 1.6 1.6 2.7 3.4Interpark 26.0 23.5 7.6 6.6 2.1 1.9 8.2 8.5Alphabet (US) 20.9 17.7 11.5 9.9 3.6 3.0 16.1 16.1Amazon 70.8 49.1 21.6 16.8 17.1 12.2 20.1 24.1Facebook 26.2 21.1 16.1 12.6 5.5 4.4 23.1 24.7Yahoo 69.7 70.2 42.5 41.7 1.4 1.5 1.8 1.7SNAP - - - - 9.2 11.8 -43.7 -18.8Twitter 54.2 40.0 15.4 13.4 2.3 2.3 5.9 8.3Yahoo Japan (JP) 21.6 19.6 11.1 10.0 3.2 2.8 15.1 15.1Rakuten 22.5 18.6 2.7 2.3 2.2 2.0 10.1 11.2LINE 48.9 35.3 21.4 16.4 5.2 4.6 11.3 13.5Tencent (CH) 32.5 25.7 23.1 18.4 8.6 6.6 28.2 27.5Alibaba 31.2 25.0 24.8 19.7 6.7 5.4 19.4 19.5Baidu 31.8 22.6 22.4 16.2 3.8 3.2 12.6 14.6JD.com 161.3 57.6 71.0 33.0 7.5 6.7 -7.0 4.9Meitu - 43.3 - - 8.8 7.3 -8.6 18.6Momo 25.8 18.4 20.4 14.1 8.3 5.9 32.6 33.2Sina 32.5 19.4 10.8 7.0 1.7 1.6 5.4 7.7Average 37.9 29.9 21.2 15.9 5.5 4.7 9.3 13.5Note: Korean companies are our estimates, others are market consensus; outliers excluded when calculating average Source: Bloomberg, Mirae Asset Daewoo Research

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Initiate with Buy and 12-month TP of W1,160,000; Recommend as top pick We initiate our coverage of NAVER with a Buy rating and target price of W1,160,000. In the internet industry, the spotlight is shifting from mobile apps to connected platforms combining both hardware and software. Given the likely need for larger investments in the near term, we recommend focusing on companies that are generating steady earnings and poised to enjoy further growth. We select NAVER as our top pick in the internet sector; in particular, we note the company’s progress in the monetization of its mobile businesses, its full-fledged entry into the AI business with the spin-off of NAVER Labs, and its plans to increase platform utilization. In our view, NAVER’s market power is poised to expand further.

Investment points: Mobile business, synergy in shopping-search-payment, and growth of global businesses 1) Growth of mobile business: Consolidated revenue from mobile ads exceeded that from PC ads for the first time in 2016, thanks to LINE’s large earnings contribution. At NAVER (parent), the volume of mobile search queries now nearly doubles PC search queries, but mobile ad revenue has yet to catch up with PC ad revenue. In 2017, both NAVER and LINE should report further growth thanks to an increased number of mobile ads and ASP improvement. We also expect to see visible growth for camera and mobile video apps in the near term. 2) Virtuous cycle in shopping-search-payment: NAVER has built a virtuous cycle through NAVER Window (introducing smaller sellers to online buyers), the release of shopping search ads, and the offer of NAVER Pay membership points to users who click on shopping search ads. It is encouraging that NAVER’s own shopping business is managing to maintain growth without running into conflict with its open market partner. In addition, we expect to see clear synergy between search ads and NAVER Pay going forward. 3) Growth of global businesses: NAVER is making visible progress in content investments and the camera/video app businesses. By establishing a fund with Softbank Ventures, investing in YG Entertainment and funds, and spinning off NAVER Webtoon, the company should be able to secure ample original content. Going forward, platforms such as Snow, V Live, Webtoon, and NAVER TV are likely to expand globally, backed by content momentum and mobile optimization.

Catalyst vs. risk: Visible progress in AI businesses vs. concerns over growing investment Among domestic internet companies, NAVER is likely to emerge as the first to achieve commercialization of AI-based businesses. The company's AI platform Clova is slated for release in Korea and Japan in 1H in the form of an app and accompanying voice-recognition speaker named Wave. The company's translator app Papago will be officially released in June. The increased investments in these new ventures could lead to rising concerns over the possibility of financial burden or a dip in profitability, but we expect the company's steady earnings and ample cash flow backed by its solid business model to help offset the concerns.

NAVER (035420 KS)

Evolving into a connected platform

FY (Dec.) 12/14 12/15 12/16 12/17F 12/18F 12/19FRevenue (Wbn) 2,758 3,254 4,023 4,696 5,448 6,265OP (Wbn) 758 830 1,102 1,371 1,645 1,891OP margin (%) 27.5 25.5 27.4 29.2 30.2 30.2NP (Wbn) 454 519 749 929 1,120 1,282EPS (W) 13,787 15,737 22,732 28,184 33,979 38,884ROE (%) 27.8 26.5 26.2 23.0 22.2 20.7P/E (x) 51.6 41.8 34.1 30.2 25.0 21.9P/B (x) 8.7 6.8 5.2 4.8 4.0 3.4Dividend yield (%) 0.1 0.2 0.1 0.1 0.2 0.2Note: All figures are based on consolidated K-IFRS; NP refers to net profit attributable to controlling interests Source: Company data, Mirae Asset Daewoo Research estimates

Internet

(Initiate) Buy

Target Price (12M, W) 1,160,000

Share Price (04/04/17, W) 850,000

Expected Return 36%

OP (17F, Wbn) 1,371Consensus OP (17F, Wbn) 1,338

EPS Growth (17F, %) 24.0Market EPS Growth (17F, %) 19.8P/E (17F, x) 30.2Market P/E (17F, x) 9.7KOSPI 2,161.10

Market Cap (Wbn) 28,018Shares Outstanding (mn) 33Free Float (%) 76.8Foreign Ownership (%) 61.4Beta (12M) 0.4252-Week Low 649,00052-Week High 900,000

(%) 1M 6M 12MAbsolute 5.1 -0.9 30.6Relative 1.1 -5.8 19.6

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Investment points

We expect Naver’s existing business to demonstrate growth potential in the short term. At the search ads business, Shopping Search Ads (released in November 2016) will likely drive growth momentum by generating synergy effects with NAVER Shopping and NAVER Pay. We expect both NAVER (parent) and LINE to deliver revenue growth in the mobile ads and content businesses. We expect NAVER’s earnings stability and ample cash flow to be highlighted with the expansion of investments.

Figure 136. Virtuous cycle: NAVER Shopping search ads payment

Source: Mirae Asset Daewoo Research

Figure 137. Mobile business to drive revenue growth

Note: Describes mobile revenue data available for use from 2014 Source: Company data, Mirae Asset Daewoo Research

Figure 138. During investment expansion period, earnings stability, existing business growth, and cash generating ability are key


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In the medium to long term, we expect NAVER to secure greater business opportunities by expanding the global business through content investments, and widening the scope of platform services through technology developments. We project the overseas business will enable NAVER to overcome the limitations of the small domestic market, and voice-controlled AI speakers will give NAVER a breakthrough in the mobile app market, which is in a maturing stage. Given that AI-powered smart speakers have yet to be commercialized in Japan and are in the introductory stage in Korea, we think a key development to watch is how NAVER’s entry changes the market dynamics.

Figure 139. Video service to evolve into overseas business through content investments


Figure 140. Seeking to expand leadership in platform through expansion into new areas


Figure 141. NAVER’s business to change to ‘connected platform’ embracing hardware and software


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Earnings outlook and organizational changes

For 2017, we expect NAVER’s revenue and operating profit to increase 16% YoY and 24% YoY, driven by the mobile ads and content businesses. We expect Shopping Search Ads (released in November 2016) to make positive earnings contributions throughout 2017. NAVER Pay’s transaction value reached W4tr in 2016. We expect NAVER Pay to generate synergy with NAVER Shopping and the search ad business in 2017.

In March 2017, NAVER announced a reshuffle of top management, as well as organizational changes. We expect the company to closely oversee both the existing and new businesses. Byun Dae-kyu, chairman of Humax Holdings, replaced Hae-Jin Lee, co-founder of NAVER, as the board chairman. Vice president Han Seong-sook was promoted to CEO, succeeding Kim Sang-hun, a lawyer-turned-businessman, who had led the company since 2009. Kim Tae-woong was named to head the technology platform division and Song Chang-hyun (CEO of NAVER Labs) to lead the self-driving car and robotics division.

Table 12. NAVER earnings forecasts (Wbn, %) 1Q16 2Q16 3Q16 4Q16 1Q17F 2Q17F 3Q17F 4Q17F 2015 2016 2017FRevenue 937 987 1,013 1,085 1,091 1,170 1,174 1,260 3,254 4,023 4,696 1) Ads 673 723 750 822 804 873 903 949 2,323 2,968 3,530 1-1) PC 337 347 330 362 333 347 323 344 1,381 1,375 1,348 1-2) Mobile 337 376 420 460 471 526 580 605 941 1,593 2,182 2) Content 237 236 228 224 250 259 231 270 848 925 1,009 2-1) PC 21 19 21 20 22 20 21 26 59 81 89 2-2) Mobile 216 217 207 204 229 239 210 243 789 844 920 3) Other 27 29 36 39 37 38 40 41 83 131 157 Operating profit 257 273 282 290 306 334 342 388 830 1,102 1,371 OP margin 27.4 27.6 27.9 26.7 28.1 28.5 29.2 30.8 25.5 27.4 29.2

Net profit 165 213 198 183 213 232 238 258 517 759 941 Net margin 17.6 21.6 19.5 16.9 19.5 19.9 20.3 20.4 15.9 18.9 20.0

YoY Revenue 26.6 26.3 20.5 21.7 16.4 18.6 15.9 16.2 18.0 23.6 16.71) Ads 27.0 29.3 27.8 27.1 19.5 20.8 20.4 15.5 15.0 27.8 18.91-1) PC -2.3 0.1 -1.4 1.7 -1.0 0.0 -2.0 -4.8 -3.9 -0.5 -2.01-2) Mobile 81.4 77.0 66.4 58.1 40.0 40.0 38.0 31.4 61.9 69.2 37.02) Content 22.8 15.1 -2.6 3.8 5.6 9.6 1.2 20.3 23.6 9.1 9.12-1) PC 57.9 31.6 25.3 33.5 1.0 5.0 3.0 31.3 8.2 36.3 10.02-2) Mobile 20.2 13.9 -4.7 1.6 6.0 10.0 1.0 19.2 25.0 7.1 9.03) Other 50.0 70.6 89.5 38.9 36.9 32.5 12.1 6.3 55.4 57.5 20.0Operating profit 32.1 44.0 27.6 28.9 19.3 22.5 21.3 33.7 9.5 32.7 24.4Net profit 22.7 71.8 69.5 29.6 29.3 9.0 20.3 40.5 14.4 46.8 24.0QoQ Revenue 5.1 5.3 2.6 7.1 0.6 7.3 0.3 7.3 1) Ads 4.1 7.4 3.7 9.6 -2.1 8.6 3.4 5.1 1-1) PC -5.4 3.1 -4.9 9.6 -7.9 4.2 -6.8 6.4 1-2) Mobile 15.6 11.7 11.7 9.6 2.4 11.7 10.1 4.4 2) Content 9.7 -0.4 -3.4 -1.7 11.6 3.4 -10.8 16.9 2-1) PC 41.1 -11.5 8.7 -1.7 6.8 -8.0 6.6 25.4 2-2) Mobile 7.4 0.7 -4.4 -1.7 12.1 4.5 -12.3 16.1 3) Other -3.6 7.4 24.1 8.1 -5.0 4.0 5.0 2.4 Operating profit 14.0 6.2 3.5 2.8 5.6 9.1 2.5 13.4 Net profit 16.6 29.2 -7.1 -7.4 16.3 9.0 2.5 8.2 Note: NP refers to net profit attributable to controlling and non-controlling interests Source: Company data, Mirae Asset Daewoo research

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Valuation

We derived our 12-month target price of W1160,000 for NAVER based on a sum-of-the-parts method. We applied a P/E of 37.7x (global peer average: Alphabet, Amazon, and Baidu) to the 2017F net profit attributable to controlling interests. We conservatively estimated the value of investment assets (e.g., available-for-sale securities and stakes in related companies), based on the fair or book values. Our valuation has yet to reflect SNOW, a Snapchat-like service. However, given the recent increase in SNOW users and the IPO of a comparable service provider overseas, chances are high that SNOW will gain in value and then be included in the valuation.

Table 13. NAVER 12-month target price calculation (Wbn, x, W) Category Appraised Note Operating value (1) 35,037

2017F net profit xConsolidation 929 37.7 35,037 Average of benchmark (Alphabet, Amazon, Baidu) Investment asset value (2) 498 AFS financial asset 316 As of end-2016, fair value, including unlisted shares Investment in affiliates 182 As of end-2016, book value Total asset value (1+2 =3) 35,535 Net debt (4) -2,975 As of end-2016, consolidated basis Net asset value (3-4) 38,510 Number of shares outstanding (‘000 shares) 32,963 Number of shares issued including treasury stock of 3,825,639 shares Target price (W) 1,160,000 Rounded Note: Net profit is attributable to controlling interests Source: Mirae Asset Daewoo Research

Figure 142. NAVER’s 12-month forward P/E band and stock price


Figure 143. NAVER’s 12 month forward P/B band and stock price


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Company overview

Established as NAVER Com in June 1999, the company started as a portal service provider. Currently, the company has the largest share of the domestic search engine and search ads markets. In October 2002, the company developed a unique search DB, with the release of Knowledge IN, and has been expanding its DB through new service releases, such as Knowledge Shopping, blog and online cafe (2003), video search (2006), and real-time road traffic service (2007).

The company began mobile service in earnest in 2010, with the launch of NAVER App, and has expanded the scope of its mobile service business by releasing individually branded apps. In June 2011, LINE was released in Japan, and has since become the No.1 messenger in Japan.

After Hangame’s separation in April 2013, NHN was renamed NAVER. In 2015, the company introduced mobile-specialized services, such as NAVER Pay (online transaction service) in June, and V Live (real-time video streaming mobile app) and SNOW (camera app) in September.

In July 2016, its subsidiary LINE went public in Japan, as well as the US. The AI business has taken shape since 2H16. NAVER released a beta version of Papago Translate app in August and a beta test version for its web browser Whale in December 2016. In 2017, NAVER plans to spin off NAVER Webtoon and NAVER Labs.

Currently, NAVER’s equity ownership includes: Hae-Jin Lee, co-founder of NAVER (4.6%); the National Pension Fund (10.6%); treasury stocks (11.4%); and foreign investors (61%). In March 2017, Hae-Jin Lee was replaced by Byun Dae-kyu, chairman of Humax Holdings as board chairman, and Han Seong-sook was named the new CEO.

Figure 144. NAVER business history and stock price trend

Note: Knowledge iN service launched in Oct. 2002; Hangame spun off in Apr. 2013; LINE listed in Jul. 2016 Source: Company data, media reports, Thomson Reuters, Mirae Asset Daewoo Research

Figure 145. NAVER equity structure Figure 146. NAVER’s consolidated revenue breakdown

Note: As of Mar. 2017 Source: Bloomberg, Mirae Asset Daewoo Research

Note: As of 2016 Source: Company data, Mirae Asset Daewoo Research

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Launchedshopping,blog, and cafe

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NAVER Phone; video search;major news

NAVER Video;real-time trafficinformation

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LaunchedShoppingCast and mobile app

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Spin-off ofHangame,changed companyname to NAVER

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PHOLAR;NAVER Pay;V Live; Snow; Talk Talk

Launched Papago,shopping search ads, and WhaleLINE IPOSpin-off of Snow

Spin-off of NAVER LABS and Webtoon;

Appointed CEO Han Seong-Sook

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Figure 147. NAVER corporate structure: 1) NAVER-centric

Note: Based on 2016 audit report; NAVER LABS spun off on Jan. 2, 2017; plan to spin off NAVER Webtoon on May 1, 2017; ownership stake in SNOW planned for May 2017 Source: Mirae Asset Daewoo Research

Figure 148. NAVER corporate structure: 2) LINE-centric

Note: Based on 2016 audit report; ownership stake in SNOW planned for May 2017 Source: Mirae Asset Daewoo Research

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Financial structure

NAVER has a top-notch financial structure. The company reports double-digit OP margin and EBITDA margin, displaying high and steady profitability over the past three years. The company has enhanced its financial stability, lowering its net debt to EBITDA and debt-to-equity ratios and improving cash flows. After surging to 15% in 2015, the total debt to total asset ratio has declined to 5.9% on a consolidated basis, thanks to the proceeds from LINE’s IPO in 2016. NAVER has ample cash holding to finance investments in the AI, content and global businesses.

Table 14. NAVER major financial ratio (%, x) 2014 2015 2016OP margin 27.5 23.4 27.4EBITDA margin 32.7 28.2 31.5Net debt/EBITDA -1.1 -1.5 -2.6Debt ratio 88.9 93.3 54.3Dependency on debt 13.4 15.2 5.9Note: Consolidated basis Source: Korea Ratings, Mirae Asset Daewoo Research

Risk factors

Competitive risks: We think changes in the operating environment may pose a threat to NAVER’s market-leading position. For instance, with the proliferation of smartphones, user preferences are diversifying across mobile video (e.g., Google and YouTube), social media (e.g., Facebook and Instagram) and mobile messenger services (e.g., KAKAO). The key variable to watch is whether NAVER’s mobile-optimized camera and video apps (e.g., SNOW, V Live and NAVER TV) will be able to expand their user bases to bolster the company’s competitiveness. In addition, we expect the securing of global competitiveness to provide a boost to Naver’s enterprise value, as was seen with LINE.

Economic slowdown: The advertising business accounts for as much as 74% of NAVER’s consolidated revenue. Even if advertising demand weakens, due to an economic slowdown, we expect NAVER’s ad business to remain solid on the back of a high revenue mix of search ads. Search ads are less sensitive to economic conditions, thanks to a high share of small to medium-sized advertisers and user convenience (direct link to online shopping sites)

Regulatory risks: The expansion of ad revenue at Korean internet service providers is attracting attention from regulatory authorities. In early 2017, the Korea Communications Commission hinted at plans to overhaul the legal framework for the internet ad market. In addition, regulatory authorities (e.g., the Korea Fair Trade Commission) may review whether NAVER, as a dominant player in the online search market, has excessive market control, or is in compliance with fair trade practices.

Technology risks: Full-fledged investments in AI technologies and recent progress in commercializing AI-related services may have unintended side effects, or result in a backlash, as evidenced by a recent advertising boycott of YouTube (the automated program placed ads alongside unsavory videos). However, in the case of video ads on NAVER TV Cast, the ad server is directly operated by Smart Media Rep (SMR), which consists of seven big media outlets in Korea.

An AI-powered personalized news recommendation system may create a “filter bubble” (the phenomenon of being fed news and social media that reflects one’s existing point of view). As such, there are growing public calls for internet service providers to introduce ombudsman schemes, and bring more transparency to what information they are collecting and what they intend to do with that information. Against this backdrop, CEO Han Seong-sook recently announced plans to restructure the real-time search word system, and underlined the importance of transparency and fairness for platforms. This is a move to ease market concerns, in our view.

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NAVER (035420 KS/Buy/TP: W1,160,000)

Comprehensive Income Statement (Summarized) Statement of Financial Condition (Summarized) (Wbn) 12/16 12/17F 12/18F 12/19F (Wbn) 12/16 12/17F 12/18F 12/19FRevenue 4,023 4,696 5,448 6,265 Current Assets 4,200 5,426 6,839 8,406Cost of Sales 0 0 0 0 Cash and Cash Equivalents 1,726 2,554 3,527 4,597Gross Profit 4,023 4,696 5,448 6,265 AR & Other Receivables 694 806 914 1,051SG&A Expenses 2,921 3,325 3,803 4,374 Inventories 10 12 14 16Operating Profit (Adj) 1,102 1,371 1,645 1,891 Other Current Assets 1,770 2,054 2,384 2,742Operating Profit 1,102 1,371 1,645 1,891 Non-Current Assets 2,171 2,154 2,188 2,259Non-Operating Profit 30 11 21 16 Investments in Associates 182 212 245 282Net Financial Income 30 44 58 75 Property, Plant and Equipment 863 735 633 553Net Gain from Inv in Associates -9 0 0 0 Intangible Assets 112 95 83 73Pretax Profit 1,132 1,382 1,666 1,907 Total Assets 6,371 7,581 9,028 10,665Income Tax 361 441 531 608 Current Liabilities 1,804 2,058 2,352 2,670Profit from Continuing Operations 771 941 1,135 1,299 AP & Other Payables 425 493 572 658Profit from Discontinued Operations -12 0 0 0 Short-Term Financial Liabilities 227 227 227 227Net Profit 759 941 1,135 1,299 Other Current Liabilities 1,152 1,338 1,553 1,785Controlling Interests 749 929 1,120 1,282 Non-Current Liabilities 437 483 537 595Non-Controlling Interests 10 12 15 17 Long-Term Financial Liabilities 150 150 150 150Total Comprehensive Profit 724 941 1,135 1,299 Other Non-Current Liabilities 287 333 387 445Controlling Interests 733 1,034 1,246 1,426 Total Liabilities 2,241 2,542 2,888 3,265Non-Controlling Interests -9 -92 -111 -127 Controlling Interests 3,595 4,492 5,577 6,822EBITDA 1,265 1,516 1,759 1,981 Capital Stock 16 16 16 16FCF (Free Cash Flow) 1,010 1,257 1,466 1,605 Capital Surplus 1,217 1,217 1,217 1,217EBITDA Margin (%) 31.4 32.3 32.3 31.6 Retained Earnings 3,810 4,707 5,793 7,037Operating Profit Margin (%) 27.4 29.2 30.2 30.2 Non-Controlling Interests 535 547 562 579Net Profit Margin (%) 18.6 19.8 20.6 20.5 Stockholders' Equity 4,130 5,039 6,139 7,401

Cash Flows (Summarized) Forecasts/Valuations (Summarized) (Wbn) 12/16 12/17F 12/18F 12/19F 12/16 12/17F 12/18F 12/19FCash Flows from Op Activities 1,164 1,257 1,466 1,605 P/E (x) 34.1 30.2 25.0 21.9Net Profit 759 941 1,135 1,299 P/CF (x) 18.5 18.9 16.3 14.6

Non-Cash Income and Expense 624 538 583 618 P/B (x) 5.2 4.8 4.0 3.4Depreciation 146 128 102 80 EV/EBITDA (x) 18.2 16.1 13.2 11.0Amortization 17 17 13 9 EPS (W) 22,732 28,184 33,979 38,884

Others 461 393 468 529 CFPS (W) 41,966 44,879 52,105 58,161Chg in Working Capital 88 171 217 217 BPS (W) 150,192 177,402 210,332 248,080Chg in AR & Other Receivables -56 -77 -88 -96 DPS (W) 1,131 1,200 1,300 1,400Chg in Inventories 0 -2 -2 -2 Payout ratio (%) 4.3 3.7 3.3 3.1

Chg in AP & Other Payables 11 0 0 0 Dividend Yield (%) 0.1 0.1 0.2 0.2Income Tax Paid -339 -441 -531 -608 Revenue Growth (%) 23.6 16.7 16.0 15.0Cash Flows from Inv Activities -942 -368 -425 -461 EBITDA Growth (%) 28.3 19.8 16.0 12.6Chg in PP&E -97 0 0 0 Operating Profit Growth (%) 32.8 24.4 20.0 15.0Chg in Intangible Assets -21 0 0 0 EPS Growth (%) 44.4 24.0 20.6 14.4Chg in Financial Assets -662 -368 -425 -461 Accounts Receivable Turnover (x) 9.1 9.1 9.1 9.1Others -162 0 0 0 Inventory Turnover (x) 311.2 420.0 419.8 418.1Cash Flows from Fin Activities 698 -32 -35 -37 Accounts Payable Turnover (x) 0.0 0.0 0.0 0.0Chg in Financial Liabilities -290 0 0 0 ROA (%) 14.1 13.5 13.7 13.2

Chg in Equity 1,084 0 0 0 ROE (%) 26.2 23.0 22.2 20.7Dividends Paid -32 -32 -35 -37 ROIC (%) 169.2 402.0 -3,357.9 -449.1Others -64 0 0 0 Liability to Equity Ratio (%) 54.3 50.4 47.0 44.1Increase (Decrease) in Cash 913 828 973 1,070 Current Ratio (%) 232.8 263.6 290.9 314.8Beginning Balance 813 1,726 2,554 3,527 Net Debt to Equity Ratio (%) -73.1 -81.6 -87.9 -91.9Ending Balance 1,726 2,554 3,527 4,597 Interest Coverage Ratio (x) 181.5 292.5 351.1 403.6Source: Company data, Mirae Asset Daewoo Research estimates

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Initiate with Buy and 12-month TP of W105,000 We initiate our coverage of Kakao with a Buy rating and target price of W105,000. The focus of internet services is currently shifting from apps to bots. Kakao, in an effort to develop into a next-generation platform, has been adopting AI in its mobile messenger KakaoTalk and fusing a wide variety of services. As a result, we expect to see growth in content revenue in the near term, improvement in ad revenue in the medium term, and opportunities for revenue growth from new services in the long term.

Investment points: Growth in content revenue, stabilization of ad revenue, and expectations for expansion into new businesses 1) Growth in content revenue: We expect Kakao to post 35% YoY growth in consolidated revenue from content in 2017. 1) With the acquisition of Loen completed in March 2016, the added impact of music content on annual revenue will likely be felt in full from 2017 onwards. 2) User traffic for KakaoPage (operated through subsidiary Podotree) should see marked growth with the expansion into a wider variety of non-video content, such as web toons, web novels, and literary works. In addition, overseas exports of content are on the rise. 3) For games, a near-term earnings rebound is likely. Casual games are gaining ground once again with the recent addition of the Game Star tab on KakaoTalk. For Kakao Game, Netmarble Games' Penta Storm is slated for release within 2Q. Developed by a Tencent subsidiary, Penta Storm has been described as the mobile version of League of Legends.

2) Stabilization of ad revenue: After falling by 11% YoY in 2016, ad revenue should improve by 5% YoY in 2017, backed by a slower decline in PC ads and further growth in mobile ads. Kakao is continuing to release mobile search and display ads optimized for brand advertisers, and may see improvement in ad-related revenue from the revamp of corporate accounts, including the adoption of a chatbot.

3) Progress of new businesses: Kakao Pay recently secured investment from Ant Financial and announced plans to spin off from Kakao. Kakao Taxi will adopt auto-settlement systems and aims to expand into the B2B taxi business in 2H. Meanwhile, Kakao Brain and the parent's AI unit will focus on developing key technologies.

Catalyst vs. risk: Upbeat on messenger-content synergy, but possible delay in profitability improvement is concerning Tencent, the Asian market leader in the messenger business, recently announced plans for an IPO of its e-book subsidiary China Reading. We see this as clear confirmation that messenger-based content businesses—following diversification from games into all types of digital content, including web novels—are starting to contribute toward growth in enterprise value. At Kakao, the upturn in game revenue and increase in traffic for KakaoPage should help to drive up enterprise value going forward. However, concerns remain over possible delays in profitability improvement due to sizable initial set-up costs for new business ventures and slow progress in the stabilization of ad revenue.

Kakao Corp. (035720 KQ)

Potential of messenger-based content and services

FY (Dec.) 12/14 12/15 12/16 12/17F 12/18F 12/19FRevenue (Wbn) 499 932 1,464 1,866 2,054 2,136OP (Wbn) 176 89 116 166 214 246OP margin (%) 35.3 9.5 7.9 8.9 10.4 11.5NP (Wbn) 150 76 58 94 122 142EPS (W) 6,116 1,269 874 1,392 1,801 2,095ROE (%) 11.4 3.0 1.9 2.7 3.4 3.8P/E (x) 20.2 91.2 88.1 61.6 47.6 40.9P/B (x) 2.9 2.7 1.5 1.6 1.6 1.5Dividend yield (%) 0.1 0.1 0.2 0.2 0.2 0.3Note: All figures are based on consolidated K-IFRS; NP refers to net profit attributable to controlling interests Source: Company data, Mirae Asset Daewoo Research estimates

Internet

(Initiate) Buy

Target Price (12M, W) 105,000

Share Price (04/04/17, W) 85,700

Expected Return 23%

OP (17F, Wbn) 166Consensus OP (17F, Wbn) 191

EPS Growth (17F, %) 59.3Market EPS Growth (17F, %) 19.8P/E (17F, x) 61.6Market P/E (17F, x) 9.7KOSDAQ 625.49

Market Cap (Wbn) 5,800Shares Outstanding (mn) 68Free Float (%) 55.6Foreign Ownership (%) 24.3Beta (12M) 0.7252-Week Low 71,30052-Week High 106,300

(%) 1M 6M 12MAbsolute -0.1 5.5 -13.7Relative -4.1 15.7 -3.8

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Investment point

We expect Kakao to post notable growth in content revenue, backed by the YoY increase in music revenue booked from Loen, rise in user traffic for KakaoPage, and rebound in game revenue. Kakao Taxi, part of the company's smart mobility business, will adopt auto-settlement systems within 1H and expand into the B2B taxi business in 2H.

Figure 149. High growth in content revenue, stable ads; other revenue to grow steadily

Note: All figures on consolidated basis; Loen included in consolidated content revenue after its March 2016 acquisition Source: Company data, Mirae Asset Daewoo ResearchFigure 150. Increasing time of stay in KakaoPage; noteworthy on Tencent’s intention of China Reading IPO

Note: Based on mobile monthly total time of stay Source: KoreanClick, Mirae Asset Daewoo ResearchFigure 151. Kakao Taxi to adopt automatic payment function and planning B2B taxi business in 2H

Note: Kakao entered into business agreement for Kakao Taxi’s automatic payment with Korea Smart Card in Feb. Source: Company data, Mirae Asset Daewoo Research

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Earnings outlook and business outline

We expect Kakao to record 27% YoY growth in consolidated revenue and 42% YoY growth in operating profit for 2017. Rising earnings contribution from Loen should drive notable improvement in profitability. Stabilization of ad revenue and the introduction of a business model for the mobility business, which enjoys large traffic but has yet generate profits, are also key factors likely to drive further earnings growth.

Kakao's three major businesses are media (advertising), content, and O2O (others). The media business is reporting improvement in media impact from the rise in user traffic, and gradual increase in advertisers from the development of new ad products. The content business is expanding its connection with KakaoTalk, with Loen's music app Melon offering interlinked services for KakaoTalk users and KakaoPage reporting improvement in user traffic. For the O2O business, Kakao is limiting directly-managed operations to mobility services such as Kakao Taxi, Kakao Driver (driver-for-hire service), and Kakao Parking, and focusing on its role as a platform for other indirect services in a strategic shift toward selection and concentration on key businesses.

Table 15. Kakao earnings and forecasts (Wbn, %) 1Q16 2Q16 3Q16 4Q16 1Q17F 2Q17F 3Q17F 4Q17F 2015 2016 2017FRevenue 242 377 391 454 443 465 467 491 932 1,464 1,866 1) Ads 129 136 127 141 137 146 136 143 601 534 562 1-1) PC 71 74 62 68 70 74 62 66 362 275 272 1-2) Mobile 58 63 65 74 67 72 74 77 239 259 290 2) Content 92 190 198 222 219 232 241 254 274 702 947 2-1) Game 70 78 78 93 85 86 85 92 232 320 348 2-2) Music 3 91 96 107 111 121 130 135 15 296 496 2-3) Other 18 22 24 21 23 25 26 28 26 85 102 3) Other 22 50 66 91 86 87 90 93 58 228 356 Operating profit 21 27 30 38 33 37 40 56 89 116 166 OP margin 8.7 7.1 7.7 8.4 7.4 8.0 8.5 11.3 9.5 7.9 8.9 Net profit 11 13 14 29 22 23 23 37 79 65 106 Net margin 4.5 3.5 3.5 6.5 4.9 5.0 4.9 7.6 8.4 4.5 5.7 YoY Revenue 3.5 66.2 70.5 87.8 82.5 23.5 19.3 8.2 3.8 57.1 27.41) Ads -11.1 -12.1 -13.5 -7.9 6.2 6.9 7.2 1.3 0.9 -11.1 5.31-1) PC -22.3 -22.2 -29.3 -23.8 -1.0 0.0 -1.0 -2.1 -14.7 -24.0 -1.01-2) Mobile 8.2 3.7 10.3 14.1 15.0 15.0 15.0 4.4 39.8 8.4 12.02) Content 19.3 215.2 187.2 228.7 138.9 22.0 21.6 14.9 -0.8 156.5 34.92-1) Game 0.5 45.0 52.7 63.4 21.0 9.8 8.5 -1.2 -9.8 37.8 8.72-2) Music 42.7 3350.7 1251.9 3100.6 3181.6 34.0 35.8 25.9 219.7 1824.7 67.52-3) Other 306.2 469.1 129.7 204.3 27.9 16.5 8.4 30.1 91.5 229.9 20.03) Other 76.8 349.1 377.6 337.9 301.2 74.6 35.8 2.4 111.3 294.6 56.0Operating profit -47.7 132.8 87.0 84.9 55.8 40.6 31.9 45.8 -57.6 31.1 42.8Net profit -64.5 -38.0 -7.7 149.2 100.0 76.5 68.7 27.1 -44.3 -16.9 61.3QoQ Revenue 0.3 55.3 3.9 15.9 -2.5 5.1 0.4 5.1 1) Ads -15.7 5.3 -6.8 11.5 -2.9 6.0 -6.6 5.4 1-1) PC -20.1 3.4 -15.4 9.2 3.7 4.4 -16.3 8.0 1-2) Mobile -9.7 7.6 3.3 13.7 -9.0 7.6 3.3 3.2 2) Content 35.9 107.9 4.2 11.7 -1.2 6.2 3.8 5.5 2-1) Game 23.3 11.3 0.2 18.8 -8.7 1.0 -0.9 8.1 2-2) Music 1.1 2578.8 5.5 12.0 3.7 9.3 7.0 3.8 2-3) Other 154.5 20.8 12.8 -12.3 7.0 10.0 5.0 5.2 3) Other 3.7 132.0 32.4 37.4 -5.0 1.0 3.0 3.6 Operating profit 2.3 26.2 13.7 26.0 -13.8 13.9 6.7 39.2 Net profit -7.1 20.9 2.9 115.5 -25.4 6.7 -1.6 62.3 Note: Music (2-2) in content revenue includes Loen, acquired in Mar. 2016; Other (2-3) includes webtoon, fiction, emoticon; other (3) revenue includes Kakao Friends, O2O (mobility) business; net profit attributable to controlling and non-controlling interests Source: Company data, Mirae Asset Daewoo Research

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Valuation

Our 12-month target price of W105,000 is based on the sum-of-the-parts method. The operating value assessment for the company is based our 2017 net profit (controlling interest) estimate and the second peak in 12-month forward P/E recorded since 2016, reflecting the earnings potential of new mobile services that started operations in earnest from 2015 and are seeing visible growth in traffic. For our assessment of investment value, we maintained a conservative approach and included the company's available-for-sale financial assets at fair value and investment in affiliates at book value. Factors likely to drive further improvement in valuation include the possible IPO of Kakao Games, rise in business value of Podotree from the increase in user traffic for KakaoPage, and additional evaluation of KakaoPay as the company has secured a large investment and is planning to spin off from Kakao.

Table 16. Kakao 12 month target price calculation (Wbn, x, W) Category Appraised Note Operating value (1) 7,162

2017F net profit xConsolidation 93 77.0 7,162 Second upper band of 12M P/E since 2016 Investment asset value (2) 82 AFS financial asset 55 As of end-2016, fair value, including unlisted shares Investment in affiliates 27 As of end-2016, book valueTotal asset value (1+2 =3) 7,244 Net debt (4) 118 As of end-2016, consolidatedNet asset value (3-4) 7,127 Number of shares outstanding (‘000 shares) 67,525 Number of shares issued including treasury stock of 5,188 sharesTarget price (W) 105,000 Source: Mirae Asset Daewoo Research

Figure 152. Kakao’s 12 month forward P/E band and stock price


Figure 153. Kakao’s 12 month forward P/B band and stock price


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Company overview

Daum Communications was established first in 1995. The company continued to expand its foothold in PC-based online services, launching Hanmail.net in 1997, Daum Café in 1999, and Daum Search in 2000.

Meanwhile, Kakao launched KakaoTalk in March 2010 and started off as a smartphone-based mobile service provider. The company continued to expand its footing in mobile services with the launch of KakaoTalk Gift Shop in December 2010, Kakao Story and Kakao Game in 2012, and Kakao Group and Kakao Music in 2013.

The two companies announced their merger in May 2014 with the merger date set in October 2014. In September 2015, the merged company changed its name to Kakao from Daum Kakao.

Fintech services Kakao Pay and BankWallet Kakao were launched in 2014. The company's internet-only bank Kakao Bank received preliminary approval in November 2015, final approval in 1H17, and is scheduled to initiate services within 1H.

For mobility services, the company launched Kakao Taxi and acquired Loc&All, a startup known for its navigation app Kimgisa, in 2015, and launched Kakao Driver (driver-for-hire service) in 2016. In 2017, the company plans to introduce auto-settlement systems for Kakao Taxi and expand into the B2B taxi business.

Kakao is currently held by founder Kim Beom-su (18%) and K-Cube Holdings (15%), which is 100% owned by the founder. Maximo, an affiliate of Tencent holds 8%, and Star investment, a former shareholder of Loen Entertainment, also holds 8%.

Figure 154. Kakao business history and stock price trend

Note: Merger of Daum and Kakao announced in May 2014; Daum Kakao launched in Oct. 2014 Source: Daum, Kakao, media reports, Thomson Reuters, Mirae Asset Daewoo Research

Figure 155. Kakao equity structure Figure 156. Kakao’s consolidated revenue breakdown

Note: Based in Mar. 2017 Source: Bloomberg, Mirae Asset Daewoo Research

Note: Based in 2016 Source: Company data, Mirae Asset Daewoo Research

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Figure 157. Kakao corporate structure: 1) Kakao

Note: Based on 2016 audit report Source: FSS, company data, Mirae Asset Daewoo Research

Figure 158. Kakao corporate structure: 2) Loen (acquired in Mar. 2016); Kakao Games (plan for IPO)


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Financial structure

Kakao's debt visibly increased in the process of acquiring Loen in March 2016. Amid the dip in ad revenue, increase in workforce and marketing spending for aggressive expansion into new business areas such as fintech and mobility led to a decline in profitability.

Going forward, we expect to see improvement in the company's profit structure, backed by the increase in high-margin earnings contribution from Loen, operational synergy between the mobile messenger and content business, gradual improvement in ad revenue, and additional earnings from new businesses. Meanwhile, we expect to see limited growth in financial burden from the fintech business in the near term, following the spin-off of Kakao Pay and restrictions remaining on increasing ownership in Kakao Bank. For the O2O business, Kakao is limiting direct operations to mobility services and focusing on its role as a platform for other indirect operations in a strategic shift toward selection and concentration on key businesses. In all, the company's plans to improve its financial structure may lead to a decline in debt going forward.

Table 17. Kakao’s major financial ratios (%, x) 2014 2015 2016

OP margin 35.4 9.5 7.9EBITDA margin 40.0 17.6 15.7Net debt/EBITDA -3.2 -3.4 0.5Debt ratio 12.4 23.3 48.1Dependence on debt 0.0 7.0 18.2Note: Consolidated basis Source: Korea Ratings, Mirae Asset Daewoo Research

Risk factors

Market competition: Kakao's new businesses in fintech and mobility services face fierce competition in the market coming from online rivals as well as offline competitors. The company will need to increase its market share while facing stiff competition in an emerging market without clear business models in place.

Possible delays in profitability improvement: For new businesses, investment and marketing spending should remain high as the company focuses on securing a solid foothold in each service. However, overall financial burden should decline with ad revenue to stabilize backed by a solid business model, investment to continue from external sources, and funding to improve from the IPO of a subsidiary.

Regulatory risks: Kakao remains on the radar of regulatory authorities, with KakaoTalk maintaining a dominant market share in mobile messengers. The company was fined by the Korea Communications Commission in December 2016 for sending out notification messages that can incur mobile data usage fees without sufficiently informing users, and failing to notify that website URL addresses shared between users through its messenger service were used in search query results on the company's portal; Kakao responded by informing users about its notification message policy and halting the collection of URL addresses. Meanwhile, for Kakao Bank, the company needs to see further removal of regulatory restrictions regarding the separation of banking and commerce.

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Kakao Corp. (035720 KQ/Buy/TP: W105,000)

Comprehensive Income Statement (Summarized) Statement of Financial Condition (Summarized) (Wbn) 12/16 12/17F 12/18F 12/19F (Wbn) 12/16 12/17F 12/18F 12/19FRevenue 1,464 1,866 2,054 2,136 Current Assets 1,217 1,469 1,748 2,001Cost of Sales 0 0 0 0 Cash and Cash Equivalents 642 847 1,067 1,292Gross Profit 1,464 1,866 2,054 2,136 AR & Other Receivables 251 272 295 307SG&A Expenses 1,348 1,700 1,841 1,890 Inventories 13 14 15 16Operating Profit (Adj) 116 166 214 246 Other Current Assets 311 336 371 386Operating Profit 116 166 214 246 Non-Current Assets 4,267 4,175 4,107 4,038Non-Operating Profit -16 -10 -11 -10 Investments in Associates 117 127 139 145Net Financial Income -5 -5 8 21 Property, Plant and Equipment 254 205 169 141Net Gain from Inv in Associates -10 0 0 0 Intangible Assets 3,733 3,668 3,609 3,556Pretax Profit 100 156 203 236 Total Assets 5,484 5,644 5,855 6,039Income Tax 35 50 65 76 Current Liabilities 806 856 922 950Profit from Continuing Operations 65 106 138 160 AP & Other Payables 263 285 313 326Profit from Discontinued Operations 0 0 0 0 Short-Term Financial Liabilities 211 212 213 214Net Profit 65 106 138 160 Other Current Liabilities 332 359 396 410Controlling Interests 58 94 122 142 Non-Current Liabilities 975 990 1,009 1,018Non-Controlling Interests 8 12 16 19 Long-Term Financial Liabilities 796 796 796 796Total Comprehensive Profit 65 106 138 160 Other Non-Current Liabilities 179 194 213 222Controlling Interests 58 92 119 139 Total Liabilities 1,781 1,845 1,931 1,968Non-Controlling Interests 7 14 18 21 Controlling Interests 3,433 3,517 3,626 3,755EBITDA 230 280 309 327 Capital Stock 34 34 34 34FCF (Free Cash Flow) 236 256 285 263 Capital Surplus 3,105 3,105 3,105 3,105EBITDA Margin (%) 15.7 15.0 15.0 15.3 Retained Earnings 304 388 498 626Operating Profit Margin (%) 7.9 8.9 10.4 11.5 Non-Controlling Interests 270 282 298 316Net Profit Margin (%) 4.0 5.0 5.9 6.6 Stockholders' Equity 3,703 3,799 3,924 4,071

Cash Flows (Summarized) Forecasts/Valuations (Summarized) (Wbn) 12/16 12/17F 12/18F 12/19F 12/16 12/17F 12/18F 12/19FCash Flows from Op Activities 317 256 285 263 P/E (x) 88.1 61.6 47.6 40.9Net Profit 65 106 138 160 P/CF (x) 23.1 21.2 20.0 19.5

Non-Cash Income and Expense 155 168 153 136 P/B (x) 1.5 1.6 1.6 1.5Depreciation 56 48 37 28 EV/EBITDA (x) 24.3 21.4 18.6 16.9Amortization 58 65 59 54 EPS (W) 874 1,392 1,801 2,095

Others 41 55 57 54 CFPS (W) 3,339 4,051 4,295 4,385Chg in Working Capital 115 36 52 21 BPS (W) 50,777 51,976 53,597 55,491Chg in AR & Other Receivables -28 -14 -19 -8 DPS (W) 148 180 200 240Chg in Inventories -8 -1 -1 -1 Payout ratio (%) 15.3 11.5 9.8 10.1

Chg in AP & Other Payables 105 8 10 5 Dividend Yield (%) 0.2 0.2 0.2 0.3Income Tax Paid -54 -50 -65 -76 Revenue Growth (%) 57.1 27.5 10.1 4.0Cash Flows from Inv Activities -1,000 -31 -42 -18 EBITDA Growth (%) 40.2 21.7 10.4 5.8Chg in PP&E -80 0 0 0 Operating Profit Growth (%) 30.3 43.1 28.9 15.0Chg in Intangible Assets -24 0 0 0 EPS Growth (%) -31.1 59.3 29.4 16.3Chg in Financial Assets 61 -31 -42 -18 Accounts Receivable Turnover (x) 11.1 10.3 10.4 10.1Others -957 0 0 0 Inventory Turnover (x) 163.5 142.8 144.0 140.0Cash Flows from Fin Activities 924 -9 -11 -13 Accounts Payable Turnover (x) 0.0 0.0 0.0 0.0Chg in Financial Liabilities 777 1 1 1 ROA (%) 1.5 1.9 2.4 2.7

Chg in Equity 835 0 0 0 ROE (%) 1.9 2.7 3.4 3.8Dividends Paid -11 -10 -12 -14 ROIC (%) 2.6 3.1 4.5 5.1Others -677 0 0 0 Liability to Equity Ratio (%) 48.1 48.6 49.2 48.3Increase (Decrease) in Cash 244 205 220 226 Current Ratio (%) 151.0 171.7 189.7 210.6Beginning Balance 397 642 847 1,067 Net Debt to Equity Ratio (%) 3.3 -2.7 -8.9 -14.4Ending Balance 642 847 1,067 1,292 Interest Coverage Ratio (x) 8.1 2.9 3.7 4.2Source: Company data, Mirae Asset Daewoo Research estimates

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Initiate with Trading Buy and 12-month TP of W12,000

We initiate our coverage of Interpark with a Trading Buy rating and 12-month target price of W12,000.

Interpark holds a dominant market share in e-commerce for specialized categories such as tickets for flights (Tour division) and concerts (ENT division). In each category, the company has been expanding into related business areas. However, in 2016, Interpark suffered a dip in profitability from stiffening competition in the tour category and was hit by a customer data leak from a hacking incident. Following the replacement of its CEO and key management personnel in 2017, Interpark is likely to focus on the revamp of business strategies going forward.

Investment points: Leader in vertical e-commerce, improvement in profitability, and expansion of concierge commerce services

1) Leader in vertical e-commerce: Interpark's key strengths come from its tour and ENT divisions. The tour division started off by selling flight tickets and has expanded into overseas package tours and domestic hotel bookings. The ENT division holds a 70% market share among domestic concert ticketing services. Backed by accumulated data and knowhow, the division has been expanding into concert production and investment. The ENT division holds a vertically integrated value chain, covering concert production, ticket sales, and concert hall management. The division is expanding into ticket sales for a wider variety of genres including concerts of artists managed by the company such as Guckkasten and Kim Yoon-ah, pro sports games, and the Pyeongchang Winter Olympics.

2) Improvement in profitability: Reinstated as CEO in 2017, Lee Sang-kyu was the one that had led Interpark to the top in e-commerce for specialized categories. Lee is expected to focus on reinforcing the company's fundamentals, centering on improving profitability. The company offered guidance for 2017 consolidated earnings at gross merchandise volume (GMV) of W4tr and operating profit of W20-25bn, translating into 21% and over 2x growth on a YoY basis, respectively.

The tour division is likely to focus on higher margin overseas package tours than flight tickets or hotel bookings in order to pull up profitability. Market conditions look favorable for the division with long holidays set in May and October. The ENT division is expected to focus on driving up sales of concert merchandise while reviewing business plans for a musical academy.

Interpark (108790 KQ)

Return of the leader in vertical e-commerce

FY (Dec.) 12/14 12/15 12/16F 12/17F 12/18F 12/19FRevenue (Wbn) 407 402 466 510 530 546OP (Wbn) 17 23 9 22 23 25OP Margin (%) 4.2 5.7 1.9 4.3 4.3 4.6NP (Wbn) 11 17 2 14 15 16EPS (W) 335 516 73 421 465 484ROE (%) 8.5 10.5 1.4 8.2 8.5 8.3P/E (x) 68.6 44.3 140.4 26.0 23.5 22.6P/B (x) 4.8 4.4 2.1 2.1 1.9 1.8Dividend Yield (%) 0.4 1.1 1.0 0.9 0.9 0.9Note: All figures are based on consolidated K-IFRS; NP refers to net profit attributable to controlling interests Source: Company data, Mirae Asset Daewoo Research estimates

Internet Shopping

(Initiate) Trading Buy

Target Price (12M, W) 12,000

Share Price (04/04/17, W) 10,950

Expected Return 10%

OP (17F, Wbn) 22Consensus OP (17F, Wbn) 22

EPS Growth (17F, %) 479.8Market EPS Growth (17F, %) 19.8P/E (17F, x) 26.0Market P/E (17F, x) 9.7KOSDAQ 625.49

Market Cap (Wbn) 362Shares Outstanding (mn) 33Free Float (%) 31.0Foreign Ownership (%) 12.5Beta (12M) 0.9152-Week Low 8,10052-Week High 20,400

(%) 1M 6M 12MAbsolute 28.8 -19.5 -44.1Relative 23.7 -11.7 -37.7

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3) Expansion of concierge commerce services: Interpark has taken a step ahead of domestic e-commerce peers on the introduction of a chatbot service. In May 2016, the company launched ‘TalkJipsa,’ a chatbot service capable of finding the cheapest option for a specific product including shipping costs, and offering recommendations for products based on past purchases. The company plans on raising the chatbot portion in total customer consultation services from current 30% to 70% by end-2017. We expect the adoption of AI to lead to improvement in service quality and purchase volume going forward.

Catalyst vs. risk: Improvement in profitability vs. increase in market competition

Profitability improvement should act as a major catalyst for Interpark's shares. Earnings guidance released after the replacement of top personnel indicates a shift toward responsible management to improve profitability. Meanwhile, key risks include the shift in focus of the e-commerce market to the open market format and the increase in competition in online sales of concert tickets and tour products.

Investment points

Reinstated as CEO in 2017, Lee Sang-kyu was the one that had led Interpark to the top in e-commerce for specialized categories in the past. Lee is expected to focus on reinforcing the company's fundamentals, centering on improving profitability. The company offered guidance for 2017 consolidated earnings at GMV of W4tr and operating profit of W20-25bn, translating into 21% and 2x growth on a YoY basis, respectively.

The tour division is expected to report improvement in profitability. The division started off by selling flight tickets and has expanded into overseas package tours and domestic hotel bookings. We expect the tour division to focus on higher margin overseas package tours than flight tickets or hotel bookings in order to pull up profitability. The division is likely to reduce its focus on hotel bookings after seeing its profitability drop in 2016 from the increase in costs incurred in the process of defending its market share. Meanwhile, market conditions look favorable for the tour division with long holidays set in May and October this year.

The ENT division holds a 70% market share among domestic concert ticketing services. Backed by accumulated data and knowhow, the division has been expanding into concert production and investment. The ENT division holds a vertically integrated value chain, covering concert production, ticket sales, and concert hall management. The division is expanding into ticket sales for a wider variety of genres including concerts of artists managed by the company such as Guckkasten and Kim Yoon-ah, pro sports games, and the Pyeongchang Winter Olympics.

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Figure 159. Interpark’s billing by business division and operating profit


Figure 160. Interpark Tour’s number of outbound travelers is top-2 among domestic travel agencies

Source: Respective companies’ data, National Statistical Office, Mirae Asset Daewoo Research

Earnings outlook and valuation

We expect Interpark to post 10% YoY growth in GMV and notable improvement in profitability for 2017. Most of the improvement should come from the YoY decline in marketing costs and removal of one-offs such as the payment of fines from the customer data leak incident.

The tour division is expected to lead overall growth in 2017. The increase in sales of overseas package tours targeting the long holidays in May and October should drive up GMV and profitability. The ENT division should generate most of its earnings during the latter half of the year with most concerts scheduled in 2H. The book division is currently considering the acquisition of major book distributor Song-In Books. Once finalized, we plan to factor in the acquisition into our earnings forecasts for Interpark.

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Table 18. Interpark annual earnings and forecasts (Wbn, %) 2014 2015 2016 2017F 2018FBilling 2,627 2,953 3,316 3,674 3,996 Tour 1,247 1,482 1,730 1,990 2,229 ENT 527 566 603 634 659 Shopping 621 721 802 874 935 Book 232 183 180 177 173Revenue 407 402 466 510 530 Tour 61 81 93 107 120 ENT 87 81 115 120 125 Shopping 71 78 80 87 94 Book 189 162 178 194 191Operating profit 17 23 9 22 23 OP margin 4.2 5.8 2.0 4.2 4.4Net profit 11 17 3 15 16 Net margin 2.7 4.1 0.5 2.9 3.0YoY Billing 14.3 12.4 12.3 10.8 8.8 Tour 35.3 18.9 16.7 15.0 12.0 ENT -1.3 7.4 6.6 5.0 4.0 Shopping 4.2 16.1 11.2 9.0 7.0 Book -6.1 -21.1 -1.6 -2.0 -2.0Revenue 5.6 -1.3 16.0 9.2 3.9 Tour 52.4 33.5 14.7 15.3 12.0 ENT 39.0 -6.7 42.6 4.3 4.0 Shopping 26.9 10.0 3.1 9.2 7.0 Book -17.1 -14.3 9.6 9.3 -2.0Operating profit -16.3 37.0 -60.3 132.2 7.6Net profit -15.6 50.8 -84.9 486.6 8.1Note: Consolidated basis; revenue recognized on gross basis only for Book; other divisions based on net value; net profit attributable to controlling and non-controlling interests Source: Company data, Mirae Asset Daewoo research

Table 19. Interpark 12 month target price calculation (Wbn, x, W) Category Appraised Note Operating value (1) 326

2017F net profit x

Consolidation 14 23.8 326 Benchmark: e-commerce, online travel agency

Investment asset value (2) 10

AFS financial asset 7 As of end-2016, fair value, including unlisted shares

Investment in affiliates 3 As of end-2016, book value Total asset value (1+2 =3) 336 Net debt (4) -64 As of end-2016, consolidated basis Net asset value (3-4) 400 Number of shares outstanding(‘000 shares) 33,031 Number of shares issued

Target price (W) 12,000 Note: Benchmarks are Alibaba, eBay, Rakuten, Priceline, and Expedia Source: Mirae Asset Daewoo research

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Company overview

Interpark was established in 2006. Before the reshuffle of the group's corporate structure, the company was the operating company, Interpark INT. The company was listed on the KOSDAQ in February 2014.

The company operates four business divisions: tour, ENT, shopping, and books. In terms of GMV, the tour division accounted for 52%, shopping 25%, ENT 18%, and books 6% in 2016.

Tour and ENT divisions currently hold large market shares in their respective categories, and have been driving growth in GMV through expansion into relevant business areas.

The shopping division focuses on the open market format, offering indirect and direct sales of electronics, apparel, and beauty products.

The book division operates its own logistics center and records revenue based on gross sales amount.

At present, Interpark Holdings has a 68% stake in Interpark. Foreign investors including FMR LLC account for 12% and NPS 4%.

Figure 161. Interpark business history and stock price

Source: Company data, media reports, Thomson Reuters, Mirae Asset Daewoo Research

Figure 162. Interpark equity structure Figure 163. Interpark consolidated revenue breakdown

Note: Based in Mar. 2017 Source: Bloomberg, Mirae Asset Daewoo Research

Note: Billing based in 2016, all others are recognized at net value basis, apart from book at total value Source: Company data, Mirae Asset Daewoo Research

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(W) Interpark stock price

Listed on KOSDAQ

Entry into musicalproduction business

Revision to book pricing system(discount rate limited to 15%)

Changed company name to Interpark from Interpark INT

Expansion of ticket booking categories→ sports, exhibitions

Launch of Talk Butler, an e-commerce voice assistant service

Dual-CEO system(Kang Dong-hwa +Park Jin-young)

Dual-CEOsystem(Lee Ki-hyung + Kim Dong-ub)

Confirmed customer information leak

W4.5bn penalty for customer information leak

Launch of Interpark Pet

Tour's profitability worsened; 2Q16 operating loss

MERS outbreak

2015Revenue: +12%OP: + 37%

Appointment of CEO Lee Sang-kyu

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Financial structure

As typical of online travel agencies, Interpark records high debt ratios with deposits received for tours and other accounts payable added to current liabilities. In 2016, the company suffered from a decline in OP margin from the increase in marketing costs, and a dip in net profit from fines imposed by the Korea Communications Commission for the customer data leak incident.

Interpark offered guidance for 2017 consolidated earnings at GMV of W4tr and operating profit of W22.5bn (average), translating into 21% and 141% growth on a YoY basis, respectively. Management of marketing costs, reinforced focus on profitability, and removal of one-offs such as fines should lead to visible improvement in profitability.

Table 20. Interpark major financial ratio (%, x) 2014 2015 2016OP margin 4.2 5.8 2.0EBITDA margin 6.4 8.2 4.0Net debt/EBITDA -1.8 -2.1 -3.4Debt ratio 178.3 174.5 184.0Dependency on debt 9.4 7.9 8.1Note: Consolidated basis Source: Korea Ratings, Mirae Asset Daewoo Research

Risk factors

Security risks: In 2016, Interpark was hit by a massive customer data leak from a hacking incident. The security incident was a blow to the company's reputation and resulted in financial losses from the payment of fines. To prevent similar incidents, the company has reinforced its security systems.

Market competition: Competitors expanding into new categories pose a risk to Interpark. Among major rivals, 11st has been reinforcing its tour and concert ticket business, eBay Korea's Gmarket has expanded into tours and flight ticket sales, Auction is focusing on driving up concert ticket sales, and Loen's Melon is seeking to expand its concert ticket business. In response, Interpark is focusing on improving offerings for tour packages in addition to flights, while reinforcing its vertically integrated value chain in concert ticket sales.

Figure 164. Interpark corporate structure


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Interpark (108790 KQ/Trading Buy/TP: W12,000)

Comprehensive Income Statement (Summarized) Statement of Financial Condition (Summarized) (Wbn) 12/16F 12/17F 12/18F 12/19F (Wbn) 12/16F 12/17F 12/18F 12/19FRevenue 466 510 530 546 Current Assets 354 402 436 469Cost of Sales 245 265 275 284 Cash and Cash Equivalents 75 96 118 141Gross Profit 221 245 255 262 AR & Other Receivables 96 106 110 113SG&A Expenses 213 223 232 238 Inventories 39 43 45 46Operating Profit (Adj) 9 22 23 25 Other Current Assets 144 157 163 169Operating Profit 9 22 23 25 Non-Current Assets 146 138 129 120Non-Operating Profit -5 -2 -1 -2 Investments in Associates 5 6 6 6Net Financial Income 0 0 0 0 Property, Plant and Equipment 39 34 29 24Net Gain from Inv in Associates 0 0 0 0 Intangible Assets 80 76 71 67Pretax Profit 4 20 22 23 Total Assets 500 540 565 589Income Tax 2 6 6 6 Current Liabilities 303 332 344 355Profit from Continuing Operations 3 15 16 17 AP & Other Payables 64 70 73 75Profit from Discontinued Operations 0 0 0 0 Short-Term Financial Liabilities 4 4 0 0Net Profit 3 15 16 17 Other Current Liabilities 235 258 271 280Controlling Interests 2 14 15 16 Non-Current Liabilities 33 33 33 33Non-Controlling Interests 0 1 1 1 Long-Term Financial Liabilities 33 33 0 0Total Comprehensive Profit 3 15 16 17 Other Non-Current Liabilities 0 0 33 33Controlling Interests 3 15 16 17 Total Liabilities 337 365 378 388Non-Controlling Interests 0 0 0 0 Controlling Interests 164 175 187 199EBITDA 18 31 32 34 Capital Stock 16 16 16 16FCF (Free Cash Flow) 23 31 29 29 Capital Surplus 102 102 102 102EBITDA Margin (%) 3.9 6.1 6.0 6.2 Retained Earnings 50 61 73 85Operating Profit Margin (%) 1.9 4.3 4.3 4.6 Non-Controlling Interests 0 0 1 2Net Profit Margin (%) 0.4 2.7 2.8 2.9 Stockholders' Equity 164 175 188 201

Cash Flows (Summarized) Forecasts/Valuations (Summarized) (Wbn) 12/16F 12/17F 12/18F 12/19F 12/16F 12/17F 12/18F 12/19FCash Flows from Op Activities 23 31 29 29 P/E (x) 140.4 26.0 23.5 22.6Net Profit 3 15 16 17 P/CF (x) 25.3 12.3 11.5 11.2

Non-Cash Income and Expense 11 15 15 16 P/B (x) 2.1 2.1 1.9 1.8Depreciation 5 5 5 5 EV/EBITDA (x) 13.5 7.6 6.6 5.6Amortization 4 4 4 4 EPS (W) 73 421 465 484

Others 2 6 6 7 CFPS (W) 404 888 951 978Chg in Working Capital 11 7 3 3 BPS (W) 4,958 5,278 5,644 6,028Chg in AR & Other Receivables -6 -4 -2 -2 DPS (W) 100 100 100 100Chg in Inventories -5 -4 -2 -1 Payout ratio (%) 132.2 22.8 20.6 19.8

Chg in AP & Other Payables 4 3 1 1 Dividend Yield (%) 1.0 0.9 0.9 0.9Income Tax Paid -2 -6 -6 -6 Revenue Growth (%) 15.9 9.4 3.9 3.0Cash Flows from Inv Activities -9 -6 -3 -2 EBITDA Growth (%) -45.5 72.2 3.2 6.3Chg in PP&E 0 0 0 0 Operating Profit Growth (%) -60.9 144.4 4.5 8.7Chg in Intangible Assets 0 0 0 0 EPS Growth (%) -85.9 476.7 10.5 4.1Chg in Financial Assets -9 -6 -3 -2 Accounts Receivable Turnover (x) 11.1 10.8 10.5 10.5Others 0 0 0 0 Inventory Turnover (x) 12.7 12.4 12.1 12.0Cash Flows from Fin Activities -8 -3 -3 -3 Accounts Payable Turnover (x) 9.5 9.1 8.9 8.8Chg in Financial Liabilities - - - - ROA (%) 0.5 2.8 2.9 2.9

Chg in Equity 0 0 0 0 ROE (%) 1.4 8.2 8.5 8.3Dividends Paid -8 -3 -3 -3 ROIC (%) 8.4 35.9 56.3 102.4Others - - - - Liability to Equity Ratio (%) 205.7 208.8 201.5 193.2Increase (Decrease) in Cash 4 21 22 23 Current Ratio (%) 116.8 121.2 126.6 132.1Beginning Balance 71 75 96 118 Net Debt to Equity Ratio (%) -59.0 -70.5 -78.9 -86.1Ending Balance 75 96 118 141 Interest Coverage Ratio (x) 0.0 0.0 0.0 0.0Source: Company data, Mirae Asset Daewoo Research estimates

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APPENDIX 1

Important Disclosures & Disclaimers 2-Year Rating and Target Price History

Company (Code) Date Rating Target Price Company (Code) Date Rating Target PriceNAVER(035420) 04/04/2017 Buy 1,160,000 05/12/2016 Buy 135,000 No Coverage 01/26/2016 Buy 150,000 08/30/2016 Buy 1,050,000 08/16/2015 Buy 170,000 04/28/2016 Buy 900,000 05/14/2015 Buy 130,000 07/30/2015 Buy 820,000 04/01/2015 Buy 138,000 05/04/2015 Buy 890,000 Interpark(108790) 04/04/2017 Trading Buy 12,000 04/03/2015 Buy 1,050,000 No CoverageKakao(035720) 04/04/2017 Buy 105,000 08/10/2016 Hold - No Coverage 02/14/2016 Buy 27,000 10/13/2016 Buy 100,000 08/04/2015 Buy 30,000 08/11/2016 Buy 110,000 04/01/2015 Buy 25,000 07/15/2016 Buy 120,000

Equity Ratings Distribution

Buy Trading Buy Hold Sell 75.13% 13.99% 10.88% 0.00%

* Based on recommendations in the last 12-months (as of December 31, 2016) Disclosures As of the publication date, Mirae Asset Daewoo Co., Ltd. and/or its affiliates do not have any special interest with the subject company and do not own 1% or more of the subject company's shares outstanding. Analyst Certification The research analysts who prepared this report (the “Analysts”) are registered with the Korea Financial Investment Association and are subject to Korean securities regulations. They are neither registered as research analysts in any other jurisdiction nor subject to the laws and regulations thereof. Opinions expressed in this publication about the subject securities and companies accurately reflect the personal views of the Analysts primarily responsible for this report. Mirae Asset Daewoo Co., Ltd. (“Mirae Asset Daewoo”) policy prohibits its Analysts and members of their households from owning securities of any company in the Analyst’s area of coverage, and the Analysts do not serve as an officer, director or advisory board member of the subject companies. Except as otherwise specified herein, the Analysts have not received any compensation or any other benefits from the subject companies in the past 12 months and have not been promised the same in connection with this report. No part of the compensation of the Analysts was, is, or will be directly or indirectly related to the specific recommendations or views contained in this report but, like all employees of Mirae Asset Daewoo, the Analysts receive compensation that is determined by overall firm profitability, which includes revenues from, among other business units, the institutional equities, investment banking, proprietary trading and private client division. At the time of publication of this report, the Analysts do not know or have reason to know of any actual, material conflict of interest of the Analyst or Mirae Asset Daewoo except as otherwise stated herein.

Stock Ratings Industry Ratings Buy : Relative performance of 20% or greater Overweight : Fundamentals are favorable or improving Trading Buy : Relative performance of 10% or greater, but with volatility Neutral : Fundamentals are steady without any material changes Hold : Relative performance of -10% and 10% Underweight : Fundamentals are unfavorable or worsening Sell : Relative performance of -10%

Ratings and Target Price History (Share price (─), Target price (▬), Not covered (■), Buy (▲), Trading Buy (■), Hold (●), Sell (◆)) * Our investment rating is a guide to the relative return of the stock versus the market over the next 12 months. * Although it is not part of the official ratings at Mirae Asset Daewoo Co., Ltd., we may call a trading opportunity in case there is a technical or short-term material development. * The target price was determined by the research analyst through valuation methods discussed in this report, in part based on the analyst’s estimate of future earnings. * The achievement of the target price may be impeded by risks related to the subject securities and companies, as well as general market and economic conditions.

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Disclaimers This report is published by Mirae Asset Daewoo, a broker-dealer registered in the Republic of Korea and a member of the Korea Exchange. Information and opinions contained herein have been compiled in good faith and from sources believed to be reliable, but such information has not been independently verified and Mirae Asset Daewoo makes no guarantee, representation or warranty, express or implied, as to the fairness, accuracy, completeness or correctness of the information and opinions contained herein or of any translation into English from the Korean language. In case of an English translation of a report prepared in the Korean language, the original Korean language report may have been made available to investors in advance of this report. 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The report is not to be relied upon in substitution for the exercise of independent judgment. Information and opinions contained herein are as of the date hereof and are subject to change without notice. The price and value of the investments referred to in this report and the income from them may depreciate or appreciate, and investors may incur losses on investments. Past performance is not a guide to future performance. Future returns are not guaranteed, and a loss of original capital may occur. Mirae Asset Daewoo, its affiliates and their directors, officers, employees and agents do not accept any liability for any loss arising out of the use hereof. Mirae Asset Daewoo may have issued other reports that are inconsistent with, and reach different conclusions from, the opinions presented in this report. The reports may reflect different assumptions, views and analytical methods of the analysts who prepared them. 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Tel: 82-2-3774-2124 Tel: 852-2845-6332 Tel: 44-20-7982-8000

Mirae Asset Securities (USA) Inc. Mirae Asset Wealth Management (USA) Inc. Mirae Asset Wealth Management (Brazil) CCTVM810 Seventh Avenue, 37th Floor New York, NY 10019 USA

555 S. Flower Street, Suite 4410, Los Angeles, California 90071 USA

Rua Funchal, 418, 18th Floor, E-Tower Building Vila Olimpia Sao Paulo - SP 04551-060 Brasil

Tel: 1-212-407-1000 Tel: 1-213-262-3807 Tel: 55-11-2789-2100

PT. Mirae Asset Sekuritas Indonesia Mirae Asset Securities (Singapore) Pte. Ltd. Mirae Asset Securities (Vietnam) LLCEquity Tower Building Lt. 50 Sudirman Central Business District Jl. Jend. Sudirman, Kav. 52-53 Jakarta Selatan 12190 Indonesia

6 Battery Road, #11-01Singapore 049909 Republic of Singapore

7F, Saigon Royal Building 91 Pasteur St. District 1, Ben Nghe Ward, Ho Chi Minh City Vietnam

Tel: 62-21-515-3281 Tel: 65-6671-9845 Tel: 84-8-3911-0633 (ext.110)

Mirae Asset Securities Mongolia UTsK LLC Mirae Asset Investment Advisory (Beijing) Co., Ltd Beijing Representative Office

#406, Blue Sky Tower, Peace Avenue 171 Khoroo, Sukhbaatar District Ulaanbaatar 14240 Mongolia

2401B, 24th Floor, East Tower, Twin TowersB12 Jianguomenwai Avenue, Chaoyang District Beijing 100022 China

2401A, 24th Floor, East Tower, Twin TowersB12 Jianguomenwai Avenue, Chaoyang District Beijing 100022 China

Tel: 976-7011-0806 Tel: 86-10-6567-9699 Tel: 86-10-6567-9699 (ext. 3300)

Shanghai Representative Office Ho Chi Minh Representative Office

38T31, 38F, Shanghai World Financial Center 100 Century Avenue, Pudong New AreaShanghai 200120 China

7F, Saigon Royal Building91 Pasteur St. District 1, Ben Nghe Ward, Ho Chi Minh City Vietnam

Tel: 86-21-5013-6392 Tel: 84-8-3910-7715