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Kakao (035720) Company Update Summary

Core Content

This document provides an update on Kakao's business performance, financial status, and future outlook as of October 18, 2017. It highlights the company's expansion in the AI ecosystem, growth of its subsidiaries, and financial metrics.

Main Points

• AI Ecosystem Expansion: Kakao is expanding its AI ecosystem through partnerships with major Korean conglomerates such as Samsung Electronics, Hyundai Motor, Kia Motors, GS E&C, and Posco E&C. The AI chatbot platform Kakao i is being integrated into various consumer products, enhancing Kakao's reach and generating more ad income, content sales, and commerce.
• Subsidiary Growth:
  • Kakao Games: The game "Playerunknown's Battlegrounds (PUBG)" has reached over 2 million concurrent users on Steam and has a 23% share in PC cafes. It is expected to generate KRW60b-80b in sales in Korea. Kakao Games is set to go public in 2H18.
  • Kakao Bank: The bank has shown rapid asset growth, with loans exceeding KRW1.5t in the first month and KRW2.5t in the second. Despite not yet proving its risk management capabilities, the bank's asset growth and expansion into other financial areas suggest continued value increase.
• Revenue Growth and Valuation:
  • Kakao's revenue is expected to grow from KRW1,464b in 2016 to KRW2,783b in 2019.
  • Adjusted EPS is projected to rise from KRW891 in 2016 to KRW2,768 in 2019.
  • The company's P/E ratio is expected to decrease from 175.1 in 2016 to 56.4 in 2019.
• Market Performance:
  • Kakao's stock has seen a significant increase in value, with a 1-year return of 96.7%.
  • The current price is KRW156,000, with a target price of KRW170,000, reflecting a 13.3% increase.
• Valuation Metrics:
  • The enterprise value is projected to be KRW13,914b by 2019.
  • The fair value per share is estimated at KRW165,529, with a target price of KRW170,000.
• Key Partnerships:
  • Samsung Electronics: Integration of Kakao i into consumer electronics and compatibility with Bixby.
  • Hyundai Motor/Kia Motors: Use of Kakao's voice recognition in connected cars.
  • GS E&C: Control of home appliances via Kakao Talk.
  • Lotte Data Communication: Ordering and payment through Kakao Talk in offline stores.

Key Financial Data

Summary of Financial Performance

• Revenue Growth: Steady growth is expected across all business segments, with a 1-year growth of 96.7%.
• Earnings Growth: Adjusted EPS is expected to increase by 122.5% in 2017 and 7.6% in 2018.
• Valuation Outlook: The company's enterprise value is expected to continue rising due to growing subsidiary values and transactional revenue.

Key Insights

• Despite recent share price surges, there may be short-term corrections, but long-term value is expected to increase due to growing subsidiary values.
• Kakao's AI platform is central to its ecosystem strategy, aiming to enhance consumer access and drive growth in ad, content, and commerce.
• Kakao Games is a key driver of growth with strong performance and potential for IPO.
• Kakao Bank is growing rapidly, with strong asset growth and potential for expansion into other financial services.

Strategic Highlights

• Kakao is building a comprehensive lifestyle AI ecosystem, with Kakao i integrated into multiple products.
• The company is leveraging its partnerships to enhance platform value and consumer engagement.
• The integration of Kakao i into various sectors is expected to increase revenue streams and improve profitability.

Conclusion

Kakao is on a growth trajectory, with its AI platform and subsidiaries playing a crucial role in driving value. The company's financial performance and valuation metrics indicate a positive outlook, with continued growth expected in the medium to long term. The stock is recommended as a BUY with a target price of KRW170,000.