[ANALYST REPORT] NAVER: LINE share price hike to bolster NAVER‘s shares

LINE’s IPO is fast approaching. Noting the recent increase in LINE’s IPO price band to JPY2,900~3,300, it appears that the LINE book building process garnered a positive response.

2Q16 results to confirm domestic portal growth

Our predictions place NAVER’s consolidated 2Q16 sales at W992.5bn (up 27.1% y-y, up 5.9% q-q) and operating profit at W261.6bn (up 56.5% y-y, up 1.9% q-q), with operating profit likely meeting consensus of W266.4bn.

NAVER’s 2Q16 domestic advertising sales (which rallied 21.2% y-y in 1Q16) should reach W572.8bn (up 16.5% y-y) thanks to expanding search advertising (up 18.2% y-y) and display advertising (up 10.8% y-y).

The anticipated search advertisement growth is attributed to: 1) seasonal effects (2Q); 2) rising mobile advertising; and 3) accelerating growth at Naver Shopping.

Turning to LINE, we forecast 2Q16 sales of W331.1bn (up 46.5% y-y, up 1.2% q-q). In particular, spurred by the launch of new services from June (eg, LINE News, LINE Timeline, and programmatic ads (wherein ad software automatically offers personalized ads based on big data analysis)), we believe that LINE’s advertising sales rose 112.3% y-y and 5.5% q-q. Meanwhile, we predict that game business sales fell slightly (down 4.2% q-q).

LINE IPO book building process garners positive response—expect share price rise after IPO NAVER’s share price is currently moving in sync with LINE IPO news.

With LINE’s book building process slated to be wrapped up by Jul 8, the company recently raised its IPO price band to JPY2,900~3,300, which has led the market to believe that the book building process garnered a positive response.

It is possible that demand (especially among foreign investors) for NAVER’s shares will soften following the IPO (slated for Jul 15), as investors might choose to directly purchase LINE’s shares in Japan. 

However, we predict that NAVER’s enterprise value (including LINE) will continue to climb, based on our expectations that: 1) LINE’s share price will rise from its initial offering price; and 2) NAVER’s domestic portal business will post strong growth momentum. Of note, our target price of W900,000 is based on NAVER’s post-LINE IPO enterprise value of W30.0tn (domestic portal value of W15tn and LINE value of W15tn).

Source: NH Investment & Securities