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Naver-Operating leverage effects from LINE starting to emerge in 2014

May 19, 2014 15:26|May 19, 2014 15:26
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Thanks to the solid performance of LINE, NAVER’s operating leverage is becoming more visible. Accordingly, we stick to our Buy rating and target price of W1,000,000, maintaining the play as our sector top pick.

1Q14 results: Operating profit grows 50.5% y-y

- NAVER announced 1Q14 consolidated sales of W638.0bn (up 23.9% y-y) and operating profit of W189.8bn (up 50.5% y-y), with both figures surpassing our estimates and consensus.

- LINE sales (net sales basis) rose 6.1% q-q in 1Q14 (W145.2bn), meeting our forecast of W148.2bn. Of note, an accounting principle change-related to users’ items (sticker and free coin) usage period-resulted in the delayed recognition of W8.6bn worth of sales. Excluding this accounting change, LINE sales would have grown by 12.3% q-q.

- Meanwhile, with the firm’s sales growth (23.9% y-y) exceeding its operating cost growth (15.2%y-y), NAVER experienced improved operating leverage during the quarter (operating margin of 29.8% in 1Q14 vs 24.5% in 1Q13). Although daily subscriber growth increased to 867,000 people (vs 641,000 in 4Q13), the firm’s marketing costs dropped by 49% q-q. Accordingly, we believe that the company effectively managed its costs in 1Q14.

Operating leverage effects from LINE starting to emerge in 2014

- Usually, LINE sales break down to around 80% for Japan and 20% for other countries. However, for recently published titles (eg, ‘Cookie Run’), sales in other countries have exceeded those in Japan, a trend which is encouraging. Thanks to the company’s localization efforts, we forecast that the sales portion of other countries (vs Japan) will continue to expand going forward.

- In 2014, we expect LINE sales (gross sales basis) to rise 95.2% y-y (sales portion: games 59%, ads 17%, stickers 15%, and others 9%) to W1.13tn. Accordingly, NAVER’s overall operating profit should climb by 59.6% y-y.

- We believe that NAVER’s earnings momentum will be bolstered by the roll out of ‘LINE Music’ in 2Q14, ‘LINE Creators Market’ (in-house sticker development platform) on May 8, and ‘Band Game Center’ on May 12.

*Source: Woori Investment & Securities Co.