Korea/Asia, Events, IPOs, Douglas Research Advisory

Douglas Kim

Korea/Asia, Events, IPOs

Equity Capital Markets

<ul><li>Our base case one year target price valuation for <a href="https://www.smartkarma.com/entities/22772" target="_blank" data-smartkarma-citation="entities:22772">LINE Corp</a> is 3,676 Yen (implied market cap of 772 billion Yen or US$7.6 billion), representing a 31% upside from the estimated IPO offer price of 2,800 Yen. Our base case valuation is based on applying a 25.4x EV/EBIT multiple (based on a 15% discount to the median EV/EBIT multiple of its eight comps in 2016)  on the company's 2017 estimated EBIT.</li><li>Four major reasons why we like <a href="https://www.smartkarma.com/entities/22772" target="_blank" data-smartkarma-citation="entities:22772">LINE Corp</a> are as follows:</li></ul>1) Attractive valuations (explained in detail in our report)2) Pure play in social mobile app with market dominance in key countries- <a href="https://www.smartkarma.com/entities/22772" target="_blank" data-smartkarma-citation="entities:22772">LINE Corp</a> is a pure play, social mobile app with proven ability to monetize its business with market dominance in Japan, Taiwan, Thailand, and very strong presence in Indonesia.3) Improvement in operating margins - We estimate the company to improve its operating margins from 1.6% in 2015 to 6.9% in 2016, and 14.3% in 2017, driven by higher revenue and lower operating costs as percentage of revenue, including labor.4) Huge market potential -  The global 3G &amp; 4G mobile market is expected to grow from 3.6 billion subscribers at end of 2015 to 7.4 billion at end of 2020. At end of 2015, LINE had 215 million MAU, representing 6.1% of the global 3G &amp; 4G subscribers. If the company is able to maintain the same market share in 2020, that would be 446 million MAU by 2020, representing a 15.4% CAGR in LINE's MAU from 2015 to 2020.<ul><li>We estimate <a href="https://www.smartkarma.com/entities/22772" target="_blank" data-smartkarma-citation="entities:22772">LINE Corp</a> to generate revenue of 149.6 billion Yen in 2016 and 188.4 billion Yen in 2017, representing a 24.9% CAGR growth from 2015 to 2017. This is lower than the 39% YoY growth in revenue in 2015, but higher than the 21% YoY growth in 1Q 2016.</li><li>The decline in marketing expense has been the biggest driver of the company's ability to generate positive operating profit in the past three years. Marketing expense as a percentage of revenue declined from 43.4% in 2013 to 13.7% in 2015 and 6.7% in 1Q 2016. Post the IPO, we believe the marketing cost is likely to increase again as compared to the low levels of spending in 1Q 2016 as the company tries to revitalize growth in key countries around the world. </li><li>If you are a board member of Alibaba, Softbank, or Microsoft, what would you buy? Let's say you are a board member at one of the three companies mentioned above. As the global users of 3G &amp; 4G connections increase to 7 billion + over the next few years and you see WhatsApp and WeChat threatening the mobile business model, what would you recommend on buying among the following choices? (LINE, Kakao, SnapChat, BBM, Telegram, Youni, Nimbuzz, Kik, Tango) If you want to reach a massive scale that can compete with WhatsApp and WeChat on a global basis, a best choice could be LINE. Not only does LINE have a global presence, but it is also dominant in several major countries. This is a claim that would be difficult to match for the other competing companies listed above. </li></ul>

Our base case one year target price valuation for LINE Corp is 3,676 Yen (implied market cap of 772 billion Yen or US$7.6 billion), representing a 31% upside from the estimated IPO offer price of 2,800 Yen. Our base case valuation is based on applying a 25.4x EV/EBIT multiple (based on a 15% discount to the median EV/EBIT multiple of its eight comps in 2016)  on the company's 2017 estimated EBIT.Four major reasons why we like LINE Corp are as follows:1) Attractive valuations (explained in detail in our report)2) Pure play in social mobile app with market dominance in key countries- LINE Corp is a pure play, social mobile app with proven ability to monetize its business with market dominance in Japan, Taiwan, Thailand, and very strong presence in Indonesia.3) Improvement in operating margins - We estimate the company to improve its operating margins from 1.6% in 2015 to 6.9% in 2016, and 14.3% in 2017, driven by higher revenue and lower operating costs as percentage of revenue, including labor.4) Huge market potential -  The global 3G &amp; 4G mobile market is expected to grow from 3.6 billion subscribers at end of 2015 to 7.4 billion at end of 2020. At end of 2015, LINE had 215 million MAU, representing 6.1% of the global 3G &amp; 4G subscribers. If the company is able to maintain the same market share in 2020, that would be 446 million MAU by 2020, representing a 15.4% CAGR in LINE's MAU from 2015 to 2020.We estimate LINE Corp to generate revenue of 149.6 billion Yen in 2016 and 188.4 billion Yen in 2017, representing a 24.9% CAGR growth from 2015 to 2017. This is lower than the 39% YoY growth in revenue in 2015, but higher than the 21% YoY growth in 1Q 2016.The decline in marketing expense has been the biggest driver of the company's ability to generate positive operating profit in the past three years. Marketing expense as a percentage of revenue declined from 43.4% in 2013 to 13.7% in 2015 and 6.7% in 1Q 2016. Post the IPO, we believe the marketing cost is likely to increase again as compared to the low levels of spending in 1Q 2016 as the company tries to revitalize growth in key countries around the world. If you are a board member of Alibaba, Softbank, or Microsoft, what would you buy? Let's say you are a board member at one of the three companies mentioned above. As the global users of 3G &amp; 4G connections increase to 7 billion + over the next few years and you see WhatsApp and WeChat threatening the mobile business model, what would you recommend on buying among the following choices? (LINE, Kakao, SnapChat, BBM, Telegram, Youni, Nimbuzz, Kik, Tango) If you want to reach a massive scale that can compete with WhatsApp and WeChat on a global basis, a best choice could be LINE. Not only does LINE have a global presence, but it is also dominant in several major countries. This is a claim that would be difficult to match for the other competing companies listed above. 

<ul><li>This is Part 2 of our three parts reports on <a href="https://www.smartkarma.com/entities/22772" target="_blank" data-smartkarma-citation="entities:22772">LINE Corp</a> IPO. This report provides an in-depth analysis of the company's three major revenue sources, including games, Stickers, and advertising. </li><li>In addition, we analyze the potential market disruptor of LINE's MVNO business in Japan as well as the competitive dynamics of LINE in major geographical regions around the world. </li><li>If you look at the MPUs (monthly paying user) data of LINE, it had 8.4 million MPUs in March 2016 (representing just 4% of its MAU!) This is revealing since while many doubters of LINE point to the lack of MAU (monthly active user) growth in other countries (excluding Japan, Thailand, Taiwan, and Indonesia), there is an enormous opportunity for the company to increase sales by increasing the MPUs within its own MAU. If just 10% of its MAUs become MPUs, it would increase its regularly paying users by nearly 160%! Therein lies the enormous potential of LINE.  </li><li>Sometimes, a "picture is worth a thousand words." Among the many roles/values that Stickers have in mobile apps, the most important is its ability to convey more meaning and feelings than words can.</li><li>In our view, <a href="https://www.smartkarma.com/entities/22772" target="_blank" data-smartkarma-citation="entities:22772">LINE Corp</a> 's MVNO business, which is expected to start in Japan in 2H 2016, is neutral to positive. We believe that LINE Mobile MVNO could potentially be a market disruptor in Japan's mobile sector by enhancing the overall consumer value proposition with bundled services that are heavily used and lower smartphone service prices. </li><li>In addition to its strong presence in Japan, Thailand, Taiwan, and Indonesia, in what other countries are LINE likely to become more aggressive in marketing using its IPO proceeds? Post the IPO, we believe that the company is likely to take a "balanced growth" strategy in key selective countries to further deploy its IPO proceeds into marketing. The company may try to de-emphasize growth in regions such as South America, Africa, and Europe but put greater emphasis on key countries, including the US, Korea, and India.   </li><li>Although LINE could have fetched a much higher valuation if the IPO was completed in 2014, the recent postponement of the Hotel Lotte IPO coupled with Microsoft's purchase of LinkedIn could only help the LINE IPO. </li></ul>

This is Part 2 of our three parts reports on LINE Corp IPO. This report provides an in-depth analysis of the company's three major revenue sources, including games, Stickers, and advertising. In addition, we analyze the potential market disruptor of LINE's MVNO business in Japan as well as the competitive dynamics of LINE in major geographical regions around the world. If you look at the MPUs (monthly paying user) data of LINE, it had 8.4 million MPUs in March 2016 (representing just 4% of its MAU!) This is revealing since while many doubters of LINE point to the lack of MAU (monthly active user) growth in other countries (excluding Japan, Thailand, Taiwan, and Indonesia), there is an enormous opportunity for the company to increase sales by increasing the MPUs within its own MAU. If just 10% of its MAUs become MPUs, it would increase its regularly paying users by nearly 160%! Therein lies the enormous potential of LINE.  Sometimes, a "picture is worth a thousand words." Among the many roles/values that Stickers have in mobile apps, the most important is its ability to convey more meaning and feelings than words can.In our view, LINE Corp 's MVNO business, which is expected to start in Japan in 2H 2016, is neutral to positive. We believe that LINE Mobile MVNO could potentially be a market disruptor in Japan's mobile sector by enhancing the overall consumer value proposition with bundled services that are heavily used and lower smartphone service prices. In addition to its strong presence in Japan, Thailand, Taiwan, and Indonesia, in what other countries are LINE likely to become more aggressive in marketing using its IPO proceeds? Post the IPO, we believe that the company is likely to take a "balanced growth" strategy in key selective countries to further deploy its IPO proceeds into marketing. The company may try to de-emphasize growth in regions such as South America, Africa, and Europe but put greater emphasis on key countries, including the US, Korea, and India.   Although LINE could have fetched a much higher valuation if the IPO was completed in 2014, the recent postponement of the Hotel Lotte IPO coupled with Microsoft's purchase of LinkedIn could only help the LINE IPO. 

Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

Pan-Asia Catalysts/Events

Event-Driven

After the close today, the Nikkei newspaper revealed the results of the annual review of the various 'traditional' Nikkei indices/averages, including for the Nikkei 225 Average.The results are published&nbsp;<a href="http://indexes.nikkei.co.jp/en/nkave/archives/news/20150904E_1.pdf" target="_blank">here</a>&nbsp;on the Nikkei website.In the Nikkei 225, the additions are DeNA (2432 JP) and Haseko Corporation (1808 JP). The deletions are Heiwa Real Estate (8803 JP) and Nitto Boseki (3110 JP).How much impact Nikkei inclusions and exclusions have is often difficult to know because the&nbsp;Nikkei 225 Average is a price-weighted index, not market-cap or float-cap-weighted.Here I make a quick stab at the numbers. The short and sweet is that based on outstanding ETFs and open-ended mutual funds in Japan (there is almost no pension money in Nikkei 225 so little money in non-listed funds), these funds should hold 17,651 Nikkei baskets worth of stock (or 17.651mm shares of each 50-yen par value stock). I expect the cash&amp;carry position is north of 4 trillion yen.&nbsp;&nbsp;The impact on the EXclusions should be bigger than for the INclusions in this situation but in the grand scheme of things, it is not a huge trade. Probably something like US$180mm to buy on the two inclusion names and it likely will end up being &lt;US$150mm to sell on the close for the two deletion names.More for subscribers&nbsp;below the fold...

After the close today, the Nikkei newspaper revealed the results of the annual review of the various 'traditional' Nikkei indices/averages, including for the Nikkei 225 Average.The results are published&nbsp;here&nbsp;on the Nikkei website.In the Nikkei 225, the additions are DeNA (2432 JP) and Haseko Corporation (1808 JP). The deletions are Heiwa Real Estate (8803 JP) and Nitto Boseki (3110 JP).How much impact Nikkei inclusions and exclusions have is often difficult to know because the&nbsp;Nikkei 225 Average is a price-weighted index, not market-cap or float-cap-weighted.Here I make a quick stab at the numbers. The short and sweet is that based on outstanding ETFs and open-ended mutual funds in Japan (there is almost no pension money in Nikkei 225 so little money in non-listed funds), these funds should hold 17,651 Nikkei baskets worth of stock (or 17.651mm shares of each 50-yen par value stock). I expect the cash&amp;carry position is north of 4 trillion yen.&nbsp;&nbsp;The impact on the EXclusions should be bigger than for the INclusions in this situation but in the grand scheme of things, it is not a huge trade. Probably something like US$180mm to buy on the two inclusion names and it likely will end up being &lt;US$150mm to sell on the close for the two deletion names.More for subscribers&nbsp;below the fold...

Japan

DeNA Co., Ltd. operates social media site, auction and shopping web site such as Mobage-town and Bidders.  DeNA also provides mobile-related services such as mobile game and community site.

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DeNA (2432 JP)

LINE: Biggest Tech IPO in 2016 (Part 3)

Our base case one year target price valuation for LINE Corp is 3,676 Yen (implied market cap of 772 billion Yen or US$7.6 billion), representing...

Douglas Kim

LINE: Biggest Tech IPO in 2016 (Part 2)

This is Part 2 of our three parts reports on LINE Corp IPO. This report provides an in-depth analysis of the company's three major revenue...

Douglas Kim

2015 Annual Nikkei 225 Rebalance

After the close today, the Nikkei newspaper revealed the results of the annual review of the various 'traditional' Nikkei indices/averages,...

Travis Lundy

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