Naver, More Hope Than Concern Over COVID-19... Thanks to Untact Activation

As confirmed cases of the novel coronavirus infection (COVID-19) surge worldwide, a deterioration in the second-quarter earnings of major domestic listed companies this year is inevitable. The Yeouido securities community estimates that the net profit of major listed companies in the second quarter will decrease by more than 10% compared to the same period last year. Despite the COVID-19 aftermath leading to a global economic recession, companies related to non-face-to-face (untact) services are performing relatively well. We looked into companies expected to see improved earnings due to increased untact consumption.

[Asia Economy Reporter Yoo Hyun-seok] Although the economy is freezing due to COVID-19, Korea's absolute leader in the internet industry, Naver (NAVER), shines even in a non-face-to-face (untact) society. This is because related businesses are growing as consumers increase their online activities due to COVID-19.

◆ Naver Smiles at Changing Consumer Habits Due to Untact = Naver recorded sales of 1.7321 trillion KRW and operating profit of 221.5 billion KRW in the first quarter of this year. Compared to the same period last year, sales increased by 14.6% and operating profit by 7.4%. Operating profit was 14% higher than the securities firms' consensus of 194.2 billion KRW. A significant factor was the reduction in operating losses in the Line and other business segments from 140.7 billion KRW in the fourth quarter of last year to 86.0 billion KRW in the first quarter of this year.

The impact of COVID-19 varied by business division, but the positive aspects outweighed the negatives. This was thanks to the activation of consumers' online activities. The advertising segment was adversely affected by COVID-19. It recorded sales of 144 billion KRW in the first quarter, which was a 1.2% increase year-on-year but a 16.2% decrease quarter-on-quarter.

Other sectors continued to grow. Sales in the business platform segment reached 749.7 billion KRW, up 12.0% year-on-year and 0.4% quarter-on-quarter. The business platform is divided into CPC (Cost Per Click) and CPS (Cost Per Sale) products such as search and shopping search. CPC charges a fee per ad click, while CPS charges per sale. The expansion of online shopping needs and the increase in Smart Store transaction volume were cited as major factors for sales growth.

Along with this, IT platform sectors such as Naver Pay and cloud services also grew. Sales amounted to 148.2 billion KRW, up 49.4% year-on-year and 8.9% quarter-on-quarter. This was due to increased online payments and the activation of remote work and online education amid COVID-19. In fact, Naver's subsidiary Works Mobile revealed that the number of companies adopting Line Works, a messenger-based work collaboration tool, increased more than tenfold in March compared to the same period last year. Also, Naver Pay's transaction volume surpassed 5 trillion KRW, a 46% increase year-on-year.

In the content sector, including webtoons, music, and V LIVE, sales reached 55.4 billion KRW. This was a 58.0% increase year-on-year but a 20.8% decrease quarter-on-quarter. However, Naver Webtoon saw its global monthly active users (MAU) exceed 62 million, with transaction volume growing more than 60% year-on-year, showing growth in online consumption.

The common factor in the improved performance areas was growth driven by increased online activities. As COVID-19 continues, consumers have shifted from consumption through external activities to shopping and content consumption online. According to the Ministry of Trade, Industry and Energy, major online retailers' sales in March reached 5.441 trillion KRW, a 16.9% increase year-on-year. However, offline retailers' sales were 5.445 trillion KRW, a 17.6% decrease. In other words, COVID-19 became an opportunity for Naver.

Seong Jong-hwa, a researcher at Ebest Investment & Securities, explained, "COVID-19 has a significant negative impact on the advertising segment, but Naver Pay, online shopping, shopping search, and cloud services are receiving considerable benefits. In Naver's case, COVID-19 overall provides a differentiated opportunity in responding to the untact business environment."

◆ Profitability 'Burden' Line Declines... New Products Added = According to financial information provider FnGuide, securities firms' forecasts for Naver's sales and operating profit this year are 7.2829 trillion KRW and 978.5 billion KRW, respectively, down 2.2% and 2.3% from one month ago. This downgrade reflects concerns that the advertising market will remain sluggish due to budget cuts by major advertisers.

However, compared to the previous year, sales and operating profit are still expected to increase by 10.4% and 37.8%, respectively, indicating the possibility of double-digit growth. This is because Naver's upcoming products are expected to benefit from increased online consumption.

Naver plans to expand its 'Brand Store,' which allows brands to directly enter Naver Shopping, to 200 stores within the year and is set to beta launch a new advertising product called 'Smart Channel' this month. Smart Channel adds an advertising area just below the search bar at the top of the mobile screen. Especially if the advertising market recovers in the second half of the year, Smart Channel is expected to become one of Naver's key weapons.

Naver's financial condition is stable. Its debt ratio, which was 51.2% in 2017, rose to 89.1% at the end of last year but remains below 100%, and its reliance on borrowings is around 17%. Cash equivalents exceed 4 trillion KRW. However, the declining operating profit margin was a blemish. The operating profit margin, which was 25.2% in 2017, dropped to 16.9% in 2018 and 10.8% last year. This was due to continued losses from Line, which reduced Naver's operating profit margin.

However, as early as this year or by next year at the latest, Line is expected to be excluded from Naver's earnings, improving operating profit. This is because a joint venture will be established with SoftBank. In November last year, Naver decided to integrate management with SoftBank and Z Holdings, the operator of Line and Yahoo Japan. Accordingly, Naver and SoftBank will form a joint venture that holds all shares of Line. This joint venture will control Z Holdings. An Jae-min, a researcher at NH Investment & Securities, explained, "If Line, Naver's loss-making business, is excluded from consolidated earnings, a significant increase in operating profit will occur. Also, the net profit of Z Holdings, which is currently profitable, will be recognized by the equity method, leading to an even greater increase in net profit."

This content was produced with the assistance of AI translation services.