[MarketING] Naver-Kakao Hits Bottom, Only Way Is Up

[Image source=Yonhap News]

[Asia Economy Reporter Song Hwajeong] Naver (NAVER) and Kakao showed strong performance following news of China's easing of platform regulations. Both stocks have demonstrated favorable price trends since the beginning of the new year, overcoming last year's sluggishness. As concerns over poor earnings this year are also expected to ease, a positive momentum is anticipated to continue.

Kakao Rises for Third Consecutive Day, Moves Up to 9th in Market Cap... Naver Also Gains for Two Days Straight

On the 5th, Kakao closed at 57,700 KRW, up 2.59% from the previous day. It had risen 4.5% the day before, marking three consecutive days of gains and reclaiming the 57,000 KRW level. Its market capitalization ranking also rose one notch to 9th place. Naver also rose nearly 2% on the day following a more than 2% increase the previous day, touching 190,000 KRW during intraday trading.

The news of China's easing of platform regulations acted as a positive catalyst. The China Banking and Insurance Regulatory Commission (CBIRC) recently approved Ant Consumer Finance, an affiliate of Ant Group, to increase its registered capital and adjust its shareholding structure. Ant Group is Alibaba's fintech affiliate. With the approval of the adjustment plan, Ant Consumer Finance can increase its registered capital by 10.5 billion yuan (approximately 3.41 trillion KRW) to 18.5 billion yuan. The authorities allowed certain companies to acquire shares in Ant Consumer Finance and specified the investment amounts and ratios for the investing companies.

In 2020, after Alibaba and Ant Group founder Jack Ma criticized government financial regulations, the Chinese government halted Ant Group's initial public offering (IPO). Since then, Ant Group and Alibaba Group have been targets of the Chinese government's stringent reforms.

This recent approval by Chinese financial authorities has been interpreted optimistically as a sign that regulations on Chinese big tech companies will be relaxed, leading to significant gains in Chinese tech stocks listed in New York such as Alibaba, Baidu, and JD.com. Alibaba and Baidu's stock prices rose by more than 12% and 10%, respectively.

This positive sentiment has been directly transmitted to the domestic stock market, contributing to the strong performance of Naver and Kakao. Jinwoo Kim, a researcher at Daol Investment & Securities, said, "After Ant Group's IPO failure, the Chinese government has been striving to establish a capital structure similar to that of regulated banks. It is important to note that the government has approved the much-needed capital raising plan through this event. Along with the recent issuance of game licenses (approval for game services in China), the Chinese government's easing of regulations on internet companies has been reaffirmed."

He also expressed the view that this will have a positive impact on domestic internet companies. Researcher Kim said, "Following this event, the multiples (enterprise value relative to profitability) of Chinese internet companies rebounded. As the Chinese government's regulatory easing expands, a rebound in multiples of the closest domestic peer internet companies is expected."

Recovery in Earnings Expected from Second Half of the Year

Naver and Kakao suffered from declining profitability and sluggish stock prices last year.

Last year, Naver's stock price plunged 53.10%, and Kakao's stock price was halved. According to financial information provider FnGuide, Naver's estimated annual operating profit last year was 1.3226 trillion KRW, a 0.22% decrease from the previous year. Kakao's operating profit is expected to have increased by only 3.33% to 614.7 billion KRW.

This year is expected to be better than last year. Profitability is expected to improve in the second half, and since stock prices are already at bottom levels, there is growing opinion that mid- to long-term investment appeal has increased. Sohe Kim, a researcher at Hanwha Investment & Securities, said, "The downward trend in profitability of domestic internet companies will continue until the first half of this year but will improve from the third quarter. In the second half of this year, fundamental improvements from a bottom-up perspective will become more apparent." She added, "Current investment levels reflect the worst-case scenario, so the bottom level has increased mid- to long-term investment attractiveness."