Investors remain bullish over Line IPO, while doubting over Kakao’s profit model

2014-03-17 16:09

SNS services seeking growth drivers

Investors remain bullish over Line IPO, while doubting over Kakao’s profit model
By Kim Yoo-chul

The nation’s top two free mobile messaging app services ― Line by Naver and KakaoTalk by Kakao ― have reached the point where they will decide whether or not to expand territories.
That’s why both are seeking to prepare for an initial public offering (IPO) to secure more capital while trying to further diversify their business portfolios.
The outcome of their efforts to tap the capital market is crucial to determining their futures. All indications are that they will each pursue a different direction.
Simply put, Naver’s Line is making bullish moves, encouraged by investors’ belief in the messenger’s potential for expansion to other countries with diversified and highly organized applications.
In contrast, investors are questioning Kakao’s business model.
“A recent Naver road show for investors in Singapore and Hong Kong showed that Line is becoming a new mobile platform,” said Chung Jae-woo, an analyst at Woori Investment & Securities in Seoul, Monday.
“Naver’s management vowed to improve the quality of Line applications and to add content that’s localized according to regions and countries,” he added. The brokerage house set its target for Naver stocks at 1 million won.
Line is preparing for an IPO that could be worth up to $30 billion. The IPO might take place in either the Tokyo Stock Exchange or the NASDAQ, according to Naver officials.
Stanley Yang, an analyst at JPMorgan Securities, advised investors to steadily buy Naver stocks on the Seoul bourse as the U.S. investment bank believes there are many “favorable conditions,” meaning that the Line IPO plan will draw huge attention.
Justin Lee at BNP Paribas was also optimistic about a successful IPO considering the number of Line messenger users and its unique and attractive business models.
Line has over 370 million registered users across the world. By riding on the “hallyu” or the Korean cultural wave, Line aims to become the top mobile messaging service in Indonesia, Malaysia, India and South America this year.
It’s no surprise that Line is gaining significant traction in Asia as it’s a platform that delivers a host of services including games, multimedia and advertising, said Kim Il-tae, chief investment officer at Mido Investment in Seoul.
“Some investors worry about a potential bubble on Naver stocks in Korea. But Line is clearly growing into a mobile-first social platform. Line also generates revenue from advertisements and dramas,” said Kim.
Naver spokesman Lee Seung-jin said Line’s business model will be expanded and diversified in order to meet the rising demand for applications in countries in which the firm operates.
Kakao’s profit model in doubt
Unlike Line, Kakao, another Korean mobile messaging firm, faces a bumpy road ahead as its simple business model has failed to impress investors, raising concerns that its planned IPO will receive lukewarm attention, according to industry analysts and Kakao officials.
A lack of transparency in a company’s management creates a sense of insecurity among investors regarding its business models. Kakao generates profit mostly in Korea, and its profit from outside the Korean Peninsula is negligible.
Kakao Founder Kim Bum-soo still holds a 55.4 percent stake in the company. The current CEO, Lee Sir-goo, is just a publicity figure. Kim still wants to control the company, said an official at Kakao, requesting anonymity.
Besides, its focus is not to expand its businesses overseas, but rather to invite more investors in order for its IPO to proceed.
“Kakao has recently hired Morgan Stanley and Samsung Securities to file for an IPO in Korea. Kakao is only one of many players providing mobile messaging apps. It has no differentiating factor,” said a fund manager at a U.S.-based investment bank in Seoul by telephone, requesting anonymity.
Kakao is well known for KakaoTalk, which has over 140 million users. The company’s revenue comes mostly from its mobile gaming platform. Korean developers use Kakao as a platform for their games.
Kakao officials admit that its simple business model isn’t that competitive enough to attract “big investors” and added it’s likely that Kakao’s IPO plan will be delayed until it finds new businesses.
“Kakao employees expect that they can secure money from the IPO. But you should keep in mind that competition in free mobile messaging applications is getting fiercer,” said Chung at Woori Investment.
“The application market becomes more saturated as more players join. Kakao won’t be able to compete against Line and Chinese company Tencent’s WeChat,” he added.
Kakao recently said that it plans to run a test of a money transfer service next month in cooperation with banks in order to diversify its revenue sources. But it did not provide specific details on how the new system will function.
“This is not a good idea. Korean consumers are highly sensitive about issues over data leakage. I don’t believe Kakao has the technology to guarantee the safety of personal information in its service users. Those attempts won’t be paid,” said Choi Jae-ho, a 37-year-old software engineer in Seoul, by telephone.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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