Korea / Special Situations, Clepsydra Capital

Sanghyun Park

Korea / Special Situations

Korea / Special Sits, Pairs, Index Rebalancing

Clepsydra Capital

Investigate special situations, pairs, and index rebalancing trades in Korea.

Event-Driven

<p>Today's drop in Kakao's share price has a different meaning than yesterday. Yesterday too, Kakao fell more than Naver, but it was not as much of a difference as today. Kakao is currently down 6.5%, while Naver is stopping the decline at 2.32%.</p><section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/228/799/original/Screen+Shot+2021-09-08+at+11.33.00+PM.png?1631161467" class="editor-image img-responsive" data-smartkarma-image-id="228799"></figure><p></p></section><p>Yesterday, a rather abstract view emerged that government-level regulations on big tech had begun in Korea, similar to China. Therefore, the market focused on understanding the short-term impact of the actual application and interpretation of the Financial Consumer Protection Act announced by the Financial Services Commission on big tech financial platform businesses.</p><p>So yesterday, the stock prices of Kakao and Naver, two of Korea's major big tech companies, fell together with a modest difference. This is because they all provide financial platform services that are highly likely to violate the Financial Consumer Protection Act in the immediate term.</p><div class="content-highlight"><ul>
<li><strong>But today, other concerns are spreading in the market. The FSC's decision is not to tame big tech in the Chinese style but to publicize big tech regulations externally as a political tool that can greatly benefit the ruling party ahead of the presidential election scheduled for March 9 of next year.</strong></li>
<li><strong>The important point here is that the local market speculates that the ruling party specifically targets Kakao as a political scapegoat.</strong></li>
</ul></div>

Today's drop in Kakao's share price has a different meaning than yesterday. Yesterday too, Kakao fell more than Naver, but it was not as much of a difference as today. Kakao is currently down 6.5%, while Naver is stopping the decline at 2.32%.Yesterday, a rather abstract view emerged that government-level regulations on big tech had begun in Korea, similar to China. Therefore, the market focused on understanding the short-term impact of the actual application and interpretation of the Financial Consumer Protection Act announced by the Financial Services Commission on big tech financial platform businesses.So yesterday, the stock prices of Kakao and Naver, two of Korea's major big tech companies, fell together with a modest difference. This is because they all provide financial platform services that are highly likely to violate the Financial Consumer Protection Act in the immediate term.
But today, other concerns are spreading in the market. The FSC's decision is not to tame big tech in the Chinese style but to publicize big tech regulations externally as a political tool that can greatly benefit the ruling party ahead of the presidential election scheduled for March 9 of next year.
The important point here is that the local market speculates that the ruling party specifically targets Kakao as a political scapegoat.


Concerns Are Growing that Kakao Becomes a Political Scapegoat Ahead of the Presidential Election

Head of Research, IPOs & Placements, Aequitas Research

Sumeet Singh

Head of Research, IPOs & Placements

IPOs and Placements coverage across Asia Pacific

Aequitas Research

We cover all listing across the Asia Pacific along with follow-up placements. As of Dec 2020, our team had covered 539 IPOs with a hit rate of 73.5% and 685 placements with a hit rate of 66.8%.

We combine fundamental bottom-up views with our proprietary quantitative framework to provide a holistic coverage across new listings and placements. Our coverage includes pre-IPO notes before the deal is launched, follow-up analysis once the deal is live and post-listing trading analysis as well.

Equity Capital Markets

<div><p>Kakao Pay (KP), one of South Korea’s largest payment and financial services apps, aims to raise up to US$1.3bn in its South Korean IPO. Kakao held a 55% stake prior to listing, with Ant Financial holding the balance 45% stake.</p></div><div><p>As of 1H21, KP had a total of 36m users and around 20m monthly active users (MAU). It processed a total GMV of KRW66.9tn in 2020 and it had already generated KRW47.9tn GMV in 1H21 itself. As of the end of 1H21, it had dealings with more than 610,000 affiliated stores and 100 financial institutions.</p></div><div><p>Since spinning out from Kakao in 2017, the number of MAUs have grown 14x from 2Q17 to 2Q21, while the quarterly transaction amount grew 61x from KRW0.4tn in 2Q17 to KRW24.5tn in 2Q21. </p></div><div><p>Over the past few years the company has been expanding its offering beyond payment processing to include other financial products. On the back of this, its revenue has been growing faster than its GMV.</p></div><div>
<p>We have covered most aspects of the deal in our earlier notes, <a href="https://www.smartkarma.com/insights/kakao-pay-ipo-guided-by-ant-financial-to-be-a-mini-ant" target="_blank" rel="noopener">Kakao Pay IPO - Guided by Ant Financial to be a mini Ant </a>and  <a href="https://www.smartkarma.com/insights/kakao-pay-ipo-peer-comparison-local-and-international" target="_blank" rel="noopener">Kakao Pay IPO - Peer comparison - local and international</a>.</p>
<p>In this note we will talk about valuations and the latest announcement by the regulators.</p>
</div>

Kakao Pay (KP), one of South Korea’s largest payment and financial services apps, aims to raise up to US$1.3bn in its South Korean IPO. Kakao held a 55% stake prior to listing, with Ant Financial holding the balance 45% stake.As of 1H21, KP had a total of 36m users and around 20m monthly active users (MAU). It processed a total GMV of KRW66.9tn in 2020 and it had already generated KRW47.9tn GMV in 1H21 itself. As of the end of 1H21, it had dealings with more than 610,000 affiliated stores and 100 financial institutions.Since spinning out from Kakao in 2017, the number of MAUs have grown 14x from 2Q17 to 2Q21, while the quarterly transaction amount grew 61x from KRW0.4tn in 2Q17 to KRW24.5tn in 2Q21. Over the past few years the company has been expanding its offering beyond payment processing to include other financial products. On the back of this, its revenue has been growing faster than its GMV.
We have covered most aspects of the deal in our earlier notes, Kakao Pay IPO - Guided by Ant Financial to be a mini Ant and  Kakao Pay IPO - Peer comparison - local and international.
In this note we will talk about valuations and the latest announcement by the regulators.


Kakao Pay IPO - Valuation and Likely Impact of Latest Announcement

Korea/Asia, Events, IPOs, Douglas Research Advisory

Douglas Kim

Korea/Asia, Events, IPOs

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<div>There have been a lot of concerns in the past year about the two Internet giants in Korea - Naver and Kakao becoming too powerful and dominant in Korea. Most of the discussions have been just talk without concrete actions. However, this is about to change materially as several senior members of the Korean government have provided strong indications that greater levels of restrictions could be placed on these two Internet giants and their affiliates in terms of their business operations.</div>
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<div>The Korean government which is trying to crack down on the two key Internet giants in Korea is similar to how the Chinese government is trying to crack down on the Internet giants in China. <a href="https://www.smartkarma.com/entities/naver-corp" target="_blank" data-smartkarma-citation="entities:16029:1" rel="noopener">Naver Corp (035420 KS)</a> and <a href="https://www.smartkarma.com/entities/kakao-corp" target="_blank" data-smartkarma-citation="entities:15002:1" rel="noopener">Kakao Corp (035720 KS)</a> shares declined by 7.9% and 10.1%, respectively today following concerns about greater amount of regulatory restrictions on the company and its affiliates' operations. </div>
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<div>All in all, investors generally despise excessive uncertainty and higher potential for government meddling. These have been key factors that have driven the share prices of the major Chinese Internet tech stocks lower in the past several months.</div>
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<ul>
<li>Although it remains to be seen how much the Korean government will try to crack down on the Korean Internet giants, the timing of their meddling over the next 3-6 months as we draw closer to the Presidential election in March 2022 is likely to become GREATER, not LESS.</li>
<li>Consequently, we believe that investors should take into consideration the potential for greater government regulations surrounding major business operations of Kakao and Naver and their affiliates in the next 3-6 months, especially on the financial sector.</li>
<li>The higher likelihood is for greater clarity in what they can or cannot do could become more specific after the Presidential election in March 2022. </li>
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There have been a lot of concerns in the past year about the two Internet giants in Korea - Naver and Kakao becoming too powerful and dominant in Korea. Most of the discussions have been just talk without concrete actions. However, this is about to change materially as several senior members of the Korean government have provided strong indications that greater levels of restrictions could be placed on these two Internet giants and their affiliates in terms of their business operations.

The Korean government which is trying to crack down on the two key Internet giants in Korea is similar to how the Chinese government is trying to crack down on the Internet giants in China. Naver Corp (035420 KS) and Kakao Corp (035720 KS) shares declined by 7.9% and 10.1%, respectively today following concerns about greater amount of regulatory restrictions on the company and its affiliates' operations. 





All in all, investors generally despise excessive uncertainty and higher potential for government meddling. These have been key factors that have driven the share prices of the major Chinese Internet tech stocks lower in the past several months.


Although it remains to be seen how much the Korean government will try to crack down on the Korean Internet giants, the timing of their meddling over the next 3-6 months as we draw closer to the Presidential election in March 2022 is likely to become GREATER, not LESS.
Consequently, we believe that investors should take into consideration the potential for greater government regulations surrounding major business operations of Kakao and Naver and their affiliates in the next 3-6 months, especially on the financial sector.
The higher likelihood is for greater clarity in what they can or cannot do could become more specific after the Presidential election in March 2022. 





The Korean Government Could Follow the Chinese Government in Cracking Down on the Internet Giants

Equity Analyst, LightStream Research

Oshadhi Kumarasiri

Equity Analyst

Long-Short Analysis on Japan, Asia and the World

LightStream Research

LightStream conducts quantitatively rigorous and data-driven analysis with a focus on Japan and Asia.

We consistently cover the Tech, Consumer and Industrial sectors, and provide ECM and Events coverage more broadly.

We supplement traditional qualitative insights from company relationships with a robust quantitative foundation that examines as much historical data as is available.
We further refine the accuracy of our insights and calls through the use of alternative data to flesh out current trends, and through a valuation framework that emphasises non-superficial peer group selection and a proper attempt to understand the metrics and changes that have driven security valuations in the past.

<p><a href="https://www.smartkarma.com/entities/kakao-pay-corp" target="_blank" data-smartkarma-citation="entities:29675:1" rel="noopener">Kakao Pay (377300 KS)</a> filed a revised prospectus on 31<sup>st</sup> August 2021 to restart the IPO process with a new offer price range of 60,000-90,000 won. The new offer price range is 4.8-6.3% below the previous price range of 63,000-96,000 won, implying a revised market cap of 8.1-12.2trn won.</p><p>The revised IPO valuation does not make Kakao Pay appear cheap compared to peers and the company’s core payments business is likely to decelerate rapidly after exhausting most of the growth avenues available. Despite the fragilities of the payment business, we continue to like Kakao Pay as we see long term value in its financial services business which is still at very early stages.</p>

Kakao Pay (377300 KS) filed a revised prospectus on 31st August 2021 to restart the IPO process with a new offer price range of 60,000-90,000 won. The new offer price range is 4.8-6.3% below the previous price range of 63,000-96,000 won, implying a revised market cap of 8.1-12.2trn won.The revised IPO valuation does not make Kakao Pay appear cheap compared to peers and the company’s core payments business is likely to decelerate rapidly after exhausting most of the growth avenues available. Despite the fragilities of the payment business, we continue to like Kakao Pay as we see long term value in its financial services business which is still at very early stages.

Kakao Pay IPO: Payments Business Is Running Out of Payments to Process

<p>From now on, for financial platforms such as Kakao Pay and Naver Financial to compare and recommend customized financial products, they must register with the Financial Services Commission in accordance with the Financial Consumer Protection Act.</p><p>So far, they have been able to stay under the regulation radar, insisting that they were advertising, not brokering financial products.</p><div class="content-highlight"><p><strong>The FSC held a meeting in this regard yesterday. Through this meeting, the FSC concluded that financial platforms such as Kakao Pay should be viewed as intermediaries if they intended to sell financial products rather than simply provide product information.</strong></p></div><section class="figure"><section class="figure"><p>The specific business cases of the financial platform are specified below, and all of these actions are categories as brokerage, so business registration is required with the FSC. (The original press release document is attached below.)</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/228/447/original/Screen+Shot+2021-09-07+at+10.31.24+PM.png?1631068565" class="editor-image img-responsive" data-smartkarma-image-id="228447"></figure></section></section><hr><p>The tightening of regulations on financial platforms by the Financial Services Commission is the cause of the sharp decline in the stock prices of Kakao and Naver today.</p><section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/228/445/original/Screen+Shot+2021-09-07+at+10.26.48+PM.png?1631068024" class="editor-image img-responsive" data-smartkarma-image-id="228445"></figure></section>

From now on, for financial platforms such as Kakao Pay and Naver Financial to compare and recommend customized financial products, they must register with the Financial Services Commission in accordance with the Financial Consumer Protection Act.So far, they have been able to stay under the regulation radar, insisting that they were advertising, not brokering financial products.The FSC held a meeting in this regard yesterday. Through this meeting, the FSC concluded that financial platforms such as Kakao Pay should be viewed as intermediaries if they intended to sell financial products rather than simply provide product information.The specific business cases of the financial platform are specified below, and all of these actions are categories as brokerage, so business registration is required with the FSC. (The original press release document is attached below.)
The tightening of regulations on financial platforms by the Financial Services Commission is the cause of the sharp decline in the stock prices of Kakao and Naver today.

FSC's Sudden Action on Local Financial Platforms: A Fatal Blow to Kakao Pay's IPO Valuation

South Korea

Kakao Pay Corp. operates financial businesses. The Company provides online payment, currency encryption, and other services. Kakao Pay conducts businesses in South Korea.

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Kakaopay (377300 KS)

Concerns Are Growing that Kakao Becomes a Political Scapegoat Ahead of the Presidential Election

This post discusses the newly emerging concern that Kakao may have become a political scapegoat ahead of the presidential election.

Sanghyun Park

Kakao Pay IPO - Valuation and Likely Impact of Latest Announcement

Kakao Pay, one of South Korea’s largest payment and financial services apps, aims to raise up to US$1.3bn in its South Korean IPO. Kakao held a 55%...

Sumeet Singh

The Korean Government Could Follow the Chinese Government in Cracking Down on the Internet Giants

The Korean government which is trying to crack down on the two key Internet giants in Korea is similar to how the Chinese government is trying to...

Douglas Kim

Kakao Pay IPO: Payments Business Is Running Out of Payments to Process

Kakao Pay’s payment business could experience a rapid deceleration in the next few years as it is quickly running out of room for growth....

Oshadhi Kumarasiri

FSC's Sudden Action on Local Financial Platforms: A Fatal Blow to Kakao Pay's IPO Valuation

This post details the FSC's surprising action on the business practices of local financial platforms and discusses why a major correction in Kakao...

Sanghyun Park

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