NHN Corp ( KS / KS)

Transcription

1 Asia Pacific/South Korea Equity Research Consumer Internet (Internet) / OVERWEIGHT Rating OUTPERFORM* Price (1 May 12, W) 245, Target price (W) 28,¹ Upside/downside (%) 14.3 Mkt cap (W bn) 11,835.7 (US$ 1.4) Enterprise value (W bn) 11,186 Number of shares (mn) Free float (%) week price range 274, ,. *Stock ratings are relative to the relevant country benchmark. ¹Target price is for 12 months. Research Analysts Jeff Kahng jeff.kahng@credit-suisse.com Jihong Choi jihong.choi@credit-suisse.com (3542.KS / 3542 KS) EARNINGS 1Q12 results Enough to get excited 1Q12 results in line with expectation: NHN reported 1Q12 results that are in line with expectation. Total revenue grew 14.2% YoY to W55 bn on the back of strong search ad (SA) and display ad (DA) revenue that grew 2.3% and 11.1% YoY, respectively. The operating profit margin declined to 28.1% from 33.3% in 1Q11, but still in line with expectation, given the company s conservative guidance. Key positives: More importantly, we see number of key positives in 1Q12 that would lead to stronger growth towards the latter-end of the year. They include: (1) strong mobile search queries, (2) faster proliferation of its mobile messenger, Line, and (3) modest monetisation of Japan traffic. Potential earnings surprise: If the company maintains current earnings and operational momentum in both mobile and desktop SA, we see potential earnings upside with NHN exceeding its 212 revenue guidance of W tn and operating profit margin guidance of 28%. Maintain OUTPERFORM: We maintain our OUTPERFORM rating with a 12-month target price of W28,. Although NHN trades at 12 13E PER of 22x and 18x stretched multiple relative to global peers such as Google, we believe the company s growth upside from mobile would justify higher earnings multiples for That said, based on our new target price of W28,, NHN s PEGR trades at roughly 1.x on 3-year EPS CAGR. Share price performance Price (LHS) Rebased Rel (RHS) The price relative chart measures performance against the KOREA SE KOSPI IDX which closed at on 1/5/12 On 1/5/12 the spot exchange rate was W1141.7/US$1 Performance Over 1M 3M 12M Absolute (%) Relative (%) Financial and valuation metrics Year 12/11A 12/12E 12/13E 12/14E Revenue (W bn) 2, , , ,226.4 EBITDA (W bn) ,127.3 EBIT (W bn) ,35. Net profit (W bn) EPS (CS adj.) (W) 9, , , , Change from previous EPS (%) n.a. Consensus EPS (W) n.a. 12,151 14,716 17,691 EPS growth (%) P/E (x) Dividend yield (%) EV/EBITDA (x) P/B (x) ROE (%) Net debt/equity (%) net cash net cash net cash net cash, Thomson Reuters, Credit Suisse estimates. DISCLOSURE APPENDIX CONTAINS ANALYST CERTIFICATIONS AND THE STATUS OF NON-US ANALYSTS. U.S. Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS BEYOND INFORMATION Client-Driven Solutions, Insights, and Access

2 Focus tables and charts Figure 1: 1Q12 earnings results (K-IFRS consolidated) 1Q12 Previous Quarterly 212E (W bn) Actual CS est. Cons. 4Q11 QoQ 1Q11 YoY CS est. Cons. Total rev % % 2,474 2,475 Display ads % % 346 Search ads % % 1,281 Games % % 696 Others % % 151 Op. profit % % Pretax profit % % Net profit % % OP margin 28.1% 29.% 29.4% 25.6% 33.3% 28.4% 31.%, Bloomberg, Credit Suisse estimates Figure 2: quarterly earnings estimates (K-IFRS consolidated) (W bn) 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12E 3Q12E 4Q12E Total revenue Display ads Search ads Games Others Op. profit Pretax profit Net profit OP margin 33.2% 28.9% 28.2% 25.8% 28.1% 29.% 28.% 28.7%, Credit Suisse estimates Figure 3: Daily mobile search ad revenue 4, 35, 3, 25, 2, 15, 1, 5, () 3, ,327 16,615 21,311 3,84 26,73 34, Jun-11 Oct-11 Jan-12 Mar-12 May-12 Figure 4: LINE No. of registered users (W mn) Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Figure 5: Korea Internet comps valuation table Current Target Up/down P/E (x) P/B (x) ROE % Company Ticker Rating price (W) price (W) (%) 211A 212E 213E 211A 212E 213E 211A 212E 213E NHN 3542.KS O 245, 28, Daum 3572.KQ O 11,7 17, SK Comms 6627.KQ U 8,3 11, (337.6) (.5) 1.4, Credit Suisse estimates (3542.KS / 3542 KS) 2

3 Key highlights of 1Q12 Search ads (SA) The company reported 1Q12 SA revenue of W3 bn (up 2% YoY) on the back of higher price per click (PPC) and strong revenue contribution from mobile SA. The company sees persistent growth of SA revenue given: (1) continuous inflow of new advertisers, (2) higher click-thru rate (CTR), and (3) improving monetisation of mobile search queries. Figure 6: Search ad quarterly revenue Figure 7: PC registered search advertisers K ) n2 b (W Q11 2Q11 3Q11 4Q11 1Q12 4Q1 1Q11 2Q11 3Q11 4Q11 1Q12, Credit Suisse estimates Growth of mobile ads, Credit Suisse estimates The mobile-to-desktop search queries (SQ) rose to 6% in 1Q12 from 4% in 4Q11 whilst mobile-to-desktop page view (PV) rose to 48% from 3% during the same period. The company expects such strong growth to continue as mobile-to-desktop SQ expects to reach 1% by end of 212. The mobile search ad revenue is currently 7% of desktop revenue that will rise to 9 1% of desktop by end of the year. Figure 8: Daily mobile search ad revenue 4, 35, 3, 25, 2, 15, 1, 5, () 3, ,327 16,615 21,311 3,84 26,73 34, Jun-11 Oct-11 Jan-12 Mar-12 May-12 Figure 9: Monthly mobile SQ versus desktop SQ trend 5,, 4,, 3,, 2,, 1,, () 1Q11 2Q11 3Q11 4Q11 1Q12 Mobile monthly search queries Desktop monthly search queries Mobile to desktop ratio % 7% 6% 5% 4% 3% 2% 1% % (3542.KS / 3542 KS) 3

4 Figure 1: Monthly mobile UV versus desktop UV trend 35, 3, 25, 2, 15, 1, 5, () 1Q11 2Q11 3Q11 4Q11 1Q12 Mobile monthly UV Mobile to desktop ratio % Growth of Line Desktop monthly UV 7% 6% 5% 4% 3% 2% 1% % Figure 11: Monthly mobile PV versus desktop PV trend 3,, 25,, 2,, 15,, 1,, 5,, () 6% 5% 4% 3% 2% 1% % 1Q11 2Q11 3Q11 4Q11 1Q12 Mobile monthly PV Desktop monthly PV Mobile to desktop ratio % The company announced that its mobile messenger, Line, has exceeded 34 mn user base. Line, developed by NHN Japan, has closer to 5% user base from Japan (5% of Japan s smartphone users currently use Line). The company expects total user base to reach 1 mn by end of 212. Although NHN is still struggling to find business model for its free app service, it opens window of opportunities for NHN to finally crack the Japanese market. Figure 12: LINE Number of registered users 4, 35, 3, 25, 2, 15, 1, 5, () 3, ,327 16,615 21,311 3,84 26,73 34, Jun-11 Oct-11 Jan-12 Mar-12 May-12 Figure 13: LINE service snapshot NHN Japan s rights issue NHN announced that it would invest W214 bn for its 1% owned subsidiary NHN Japan. The rights offering would help: (1) NHN Japan to pay down maturing debt financed for Livedoor acquisition in 21 (JPY6.3 bn) and (2) conduct more aggressive marketing in Japan ahead of its monetisation plan in 2H12. (3542.KS / 3542 KS) 4

5 Figure 14: 212 Japan sales outlook 25 (JPY bn) Figure 15: Japan business segments Web services Onilne games E (3542.KS / 3542 KS) 5

6 212 outlook We believe the strong growth of SA is a key to earnings surprise. For 212, the company expects its SA revenue to showcase YoY growth of 15 2%. However, with stronger-thanexpected growth of mobile SA revenue (the company guidance of W1 bn versus CS estimate of W15 bn), the company is likely to achieve growth rate of 2% rather than 15% for its SA revenue. In such case, we expect NHN s operating profit margin to possibly exceed 3% from the company guidance of 28%. Figure 16: 1Q12 earnings results (K-IFRS consolidated) 1Q12 Previous Quarterly 212E (W bn) Actual CS est. Cons. 4Q11 QoQ 1Q11 YoY CS est. Cons. Total rev % % 2,474 2,475 Display ads % % 346 Search ads % % 1,281 Games % % 696 Others % % 151 Op. profit % % Pretax profit % % Net profit % % OP margin 28.1% 29.% 29.4% 25.6% 33.3% 28.4% 31.%, Bloomberg, Credit Suisse estimates Figure 17: quarterly earnings estimates (K-IFRS consolidated) (W bn) 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12E 3Q12E 4Q12E Total revenue Display ads Search ads Games Others Op. profit Pretax profit Net profit OP margin 33.2% 28.9% 28.2% 25.8% 28.1% 29.% 28.% 28.7%, Credit Suisse estimates Figure 18: quarterly traffic trend ( ) 1Q11 2Q11 3Q11 4Q11 1Q12 Mobile monthly UV 12,179 13,398 15,922 17,55 2,13 Desktop monthly UV 31,227 31,157 31,22 31,259 3,789 Mobile to desktop ratio % 39% 43% 51% 56% 65% Mobile monthly PV 2,497,66 3,699,142 5,21,89 7,115,688 1,634,63 Desktop monthly PV 24,976,599 24,66,946 23,99,946 23,718,959 22,154,299 Mobile to desktop ratio % 1% 15% 21% 3% 48% Mobile monthly search queries 492, ,376 1,26,333 1,591,85 2,177,666 Desktop monthly search queries 4,475,671 4,129,868 4,21,19 3,979,625 3,629,443 Mobile to desktop ratio % 11% 18% 3% 4% 6%, Credit Suisse estimates (3542.KS / 3542 KS) 6

7 Key highlights from conference call Search ad (SA) - 1Q12 SA revenue of W3 bn (up 2% YoY) due to higher revenue from PPC and strong revenue contribution from mobile SA. - New advertisers are the key drivers of growth. - Higher CTR (Click-thru Rate) is the key driver of search ad revenue rather than PPC (Price Per Click). - High upside in terms of mobile monetisation given NHN s lack of focus in increasing mobile PPC or mobile CTR. Display ad (DA) - 1Q12 DA revenue of W73 bn (up 11% YoY) on strong time board sales (time based product) and upward adjustment in front page prices. Online Game - 1Q12 game revenue to W164 bn (down 11 YoY) due to base effect from TERA launching in 1Q11. - However, maintained stable operation of web board games and solid growth in Japan publishing operation. Line (NHN s mobile messenger) - Exceed 34 mn with closer to 5% users coming from Japan. - Released interworking apps such as Line Camera and Line Card that are both popular in key Asia markets. - Opened Line Sticker Shop in April that s starting to generate revenue (Line is top grossing app in Taiwan and Thailand). - Will consider various options for business models including game channelling service. - Targets 1 mn subs by end of 212. Mobile service - Mobile search query is 6% of desktop query that will rise to 1% by end of Mobile search ad revenue is currently 7% of desktop revenue that will rise to 9 1% of desktop by end of Mobile UV is 65% of desktop UV and mobile PV is 48% of desktop PV - Changes in mobile search algorithm in February has led to strong pick up in daily revenue (daily mobile SA revenue of W28 mn in February from W19 mn in Jan). However, the daily revenue is more flattish in March and April due to higher revenue base of Feb. - 7% of desktop advertisers plan to conduct mobile SA according the company survey. Mobile Game - Release 2 titles in Korea and 155 titles in Japan in Plan to release 2 3 games in Korea and more than 4 games in Japan in Plans to release games through Line s service platform (cross-selling). - Recent regulatory concerns for Japan mobile game is more to do with card games which has gambling characteristics that are not focus of NHN s game strategy. (3542.KS / 3542 KS) 7

8 Mobile apps - Will launch Naver App store that will sell video, music and other contents - Has launched Naver Book store that sells magazine and books New game launch - Will start 1st CBT for Winning Eleven on 1 May. Received 3, applications for selecting 6, testers. - Dungeon Striker CBT in Apr. Good feedback from 5, testers. - Kreetica CBT planned for 2Q12. E-commerce - Currently boasts 4,8 N-shops with NHN adding 5 shops a week (service launched in 22 Mar) - N-Shop revenue is recognised net of commissions so still very small in terms of total revenue. Japan operation - Rights issue of W214 bn in Japan is mostly to pay down NHN Japan s debt level. - Will pay down maturing debt issued to finance Livedoor acquisition in 21 (JPY6.3 bn). - Stronger financial position would help push aggressive strategy in Japan - Currently boasts Japan UV of 36 mn whilst PV rose 7% compare to same period last year. - Monetization in Japan will begin in 2H12 with ads on Matome s front page and DA in other Japan services. Operating profit margin trend - Expects 212 operating profit margin to reach similar level of 211 (211 operating profit margin of 28.9%) due to focus on new services such as mobile and Line - Expects margin improvement from 213. (3542.KS / 3542 KS) 8

9 Financial summary Figure 19: Operating assumptions Year-end 31 Dec E 213E 214E Internet users Internet users (mn) % growth Internet penetration (%) Naver desktop traffic assumptions Naver monthly UV avg (mn) Naver monthly PV avg (mn) 24,279 24,317 23,57 22,152 21,476 Naver monthly search queries avg (mn) 4,273 4,152 3,88 3,636 3,43 Naver UV per Internet user (%) Naver PV per Naver UV Naver search queries per Naver UV Smartphone users Smartphone users (mn) % growth Smartphone to total mobile subs (%) Naver mobile traffic assumptions Naver monthly UV avg (mn) Naver monthly PV avg (mn) 4,62 9,476 13,725 16,644 Naver monthly search queries avg (mn) 1,28 2,196 3,452 3,646 Naver mobile to desktop UV (%) Naver mobile to desktop PV (%) Naver mobile to desktop search queries (%) Hangame operating assumptions Game UV avg () 6,675 6,775 6,877 6,98 7,84 Game UV per Internet user (%) Pricing assumptions Average revenue per search query (W) Desktop Mobile Monthly display ad rev per million view (W) Desktop 816, ,36 1,13,53 1,24,796 1,387,42 Mobile 11,353 17,61 242, ,879 Revenue breakdown (W bn) Search ads ,81.8 1, , ,727. Domestic desktop ,33.8 1, ,29. 1,284.5 Domestic mobile Overseas Display ads Domestic desktop Domestic mobile Overseas Games Domestic web board Domestic publishing Overseas , Credit Suisse estimates (3542.KS / 3542 KS) 9

10 Figure 2: Income statement Year-end 31 Dec (W bn) E 213E 214E Total revenue 1,79.6 2, , , ,226.4 % YoY Display ads Search ads ,81.8 1, , ,727. Games Others Operating costs (1,2.4) (1,527.) (1,77.5) (1,992.2) (2,191.4) % YoY Labour costs (273.2) (446.8) (529.1) (617.8) (664.9) Commission (39.1) (342.9) (462.4) (544.3) (642.3) Marketing (34.7) (48.3) (94.2) (18.9) (128.5) Depreciation (77.8) (93.2) (88.3) (89.6) (9.9) Telecommunications (57.) (67.8) (81.4) (93.8) (18.2) Employee benefits. (48.4) (7.7) (84.2) (92.4) Other opex (82.3) (121.5) (139.1) (157.8) (179.4) Other revenue (expenditure). (31.5) (61.9) (74.2) (85.6) Operating income ,35. % YoY Operating margin EBITDA ,127.3 EBITDA margin (%) Non-operating items Net interest Gain (loss) from equity method Other (6.4) (1.4) (8.) (8.) (8.) Pre-tax profit ,49.2 Pre-tax margin (%) Income taxes (155.1) (18.) (182.8) (223.4) (267.3) Effective tax rate ex-equity method (%) Net income before minority % YoY Net margin (%) Minority interests (3.8).... Majority interests Basic EPS (W) 9,822 9,394 11,111 13,575 16,246 Fully diluted EPS (W) 9,822 9,394 11,111 13,575 16,246, Credit Suisse estimates (3542.KS / 3542 KS) 1

11 Figure 21: Balance sheet Year-end 31 Dec (W bn) E 213E 214E Cash & deposits Marketable securities Accounts receivable Other current assets Total current assets 1, ,431. 1, , ,663.6 Long-term investments ,3. Net PP&E Intangibles Deferred assets Total fixed assets , , ,474.7 Total assets 1,967. 2, , , ,138.3 Acct. payable Accrued expenses Other current liabilities Total current liabilities Long-term debt..... Other long-term liabilities Total long-term liabilities Total liabilities ,27.8 Paid-in capital Capital surplus Retained earnings 1, ,172. 2, ,271. 3,974.6 Capital adjustment (659.6) (811.6) (892.8) (982.1) (1,8.3) Minority interests (1.8).3 (2.) (2.) (2.) Total shareholders equity 1,322. 1, ,99. 2,55. 3,11.5 Total liabilities & sh. equity 1,967. 2, , , ,138.3, Credit Suisse estimates Figure 22: Cash flow statement Year-end 31 Dec (W bn) E 213E 214E Cash flow from operations Net income Depreciation/amortisation Equity method valuation loss (gain) (4.1) (.6) (.6) (.7) (.8) Stock option compensation Other non-cash items (8.5) (8.6) (8.8) (9.) (9.2) Change in working capital (34.) (16.9) 36.9 (1.9) (1.7) Net operating cash flow Cash flow from investment Capex (17.1) (182.5) (197.9) (214.1) (225.8) Disposal of PP&E Other investment (net) 87.2 (68.1) (399.9) (432.6) (538.8) Net investment cash flow (73.) (239.1) (583.) (628.2) (742.2) Cash flow from financing Dividend paid.. (25.8) (4.1) (49.) Change in share capital (117.) (171.4) (81.2) (89.3) (98.2) Net financing cash flow (218.) (171.4) (17.) (129.4) (147.2) Cash equivalents (begin) Cash equivalents (end) Net change in cash (5.9).., Credit Suisse estimates (3542.KS / 3542 KS) 11

12 Companies Mentioned (Price as of 1 May 12) Daum Communications Corp (3572.KQ, W11,7, OUTPERFORM, TP W17,) (3542.KS, W245,, OUTPERFORM, TP W28,) SK Communications Co Ltd (6627.KQ, W8,3, UNDERPERFORM [V], TP W11,) Disclosure Appendix Important Global Disclosures Jeff Kahng & Jihong Choi each certify, with respect to the companies or securities that he or she analyzes, that (1) the views expressed in this report accurately reflect his or her personal views about all of the subject companies and securities and (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report. See the Companies Mentioned section for full company names. 3-Year Price, Target Price and Rating Change History Chart for 3572.KQ 3572.KQ Closing Target Price Price Initiation/ Date (W) (W) Rating Assumption Jul Oct O 12-Jan N May O 4-Aug Feb Jun Mar W 7 75 O 9 N 99 O Closing Price Target Price Initiation/Assumption Rating O=Outperform; N=Neutral; U=Underperform; R=Restricted; NR=Not Rated; NC=Not Covered 3-Year Price, Target Price and Rating Change History Chart for 3542.KS 3542.KS Closing Target Price Price Initiation/ 28 Date (W) (W) Rating Assumption 26 2-Jun N 3-Sep O Nov N 2-Mar O W N 25 O N 28 O Closing Price Target Price Initiation/Assumption Rating O=Outperform; N=Neutral; U=Underperform; R=Restricted; NR=Not Rated; NC=Not Covered (3542.KS / 3542 KS) 12

13 3-Year Price, Target Price and Rating Change History Chart for 6627.KQ 6627.KQ Closing Target Price Price Initiation/ Date (W) (W) Rating Assumption 23-Aug Feb N 23-Nov U 2-Mar N 125 U W75 Closing Price Target Price Initiation/Assumption Rating O=Outperform; N=Neutral; U=Underperform; R=Restricted; NR=Not Rated; NC=Not Covered The analyst(s) responsible for preparing this research report received compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities. Analysts stock ratings are defined as follows: Outperform (O): The stock s total return is expected to outperform the relevant benchmark* by at least 1-15% (or more, depending on perceived risk) over the next 12 months. Neutral (N): The stock s total return is expected to be in line with the relevant benchmark* (range of ±1-15%) over the next 12 months. Underperform (U): The stock s total return is expected to underperform the relevant benchmark* by 1-15% or more over the next 12 months. *Relevant benchmark by region: As of 29 th May 29, Australia, New Zealand, U.S. and Canadian ratings are based on (1) a stock s absolute total return potential to its current share price and (2) the relative attractiveness of a stock s total return potential within an analyst s coverage universe**, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. Some U.S. and Canadian ratings may fall outside the absolute total return ranges defined above, depending on market conditions and industry factors. For Latin American, Japanese, and non-japan Asia stocks, ratings are based on a stock s total return relative to the average total return of the relevant country or regional benchmark; for European stocks, ratings are based on a stock s total return relative to the analyst's coverage universe**. For Australian and New Zealand stocks, 12-month rolling yield is incorporated in the absolute total return calculation and a 15% and a 7.5% threshold replace the 1-15% level in the Outperform and Underperform stock rating definitions, respectively. The 15% and 7.5% thresholds replace the +1-15% and -1-15% levels in the Neutral stock rating definition, respectively. **An analyst's coverage universe consists of all companies covered by the analyst within the relevant sector. Restricted (R): In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances. Volatility Indicator [V]: A stock is defined as volatile if the stock price has moved up or down by 2% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward. Analysts coverage universe weightings are distinct from analysts stock ratings and are based on the expected performance of an analyst s coverage universe* versus the relevant broad market benchmark**: Overweight: Industry expected to outperform the relevant broad market benchmark over the next 12 months. Market Weight: Industry expected to perform in-line with the relevant broad market benchmark over the next 12 months. Underweight: Industry expected to underperform the relevant broad market benchmark over the next 12 months. *An analyst s coverage universe consists of all companies covered by the analyst within the relevant sector. **The broad market benchmark is based on the expected return of the local market index (e.g., the S&P 5 in the U.S.) over the next 12 months. Credit Suisse s distribution of stock ratings (and banking clients) is: Global Ratings Distribution Outperform/Buy* 47% (59% banking clients) Neutral/Hold* 41% (57% banking clients) Underperform/Sell* 1% (51% banking clients) Restricted 2% *For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, and Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdings, and other individual factors. Credit Suisse s policy is to update research reports as it deems appropriate, based on developments with the subject company, the sector or the market that may have a material impact on the research views or opinions stated herein. (3542.KS / 3542 KS) 13

14 Credit Suisse's policy is only to publish investment research that is impartial, independent, clear, fair and not misleading. For more detail please refer to Credit Suisse's Policies for Managing Conflicts of Interest in connection with Investment Research: Credit Suisse does not provide any tax advice. Any statement herein regarding any US federal tax is not intended or written to be used, and cannot be used, by any taxpayer for the purposes of avoiding any penalties. See the Companies Mentioned section for full company names. Price Target: (12 months) for (3572.KQ) Method: Our target price of W17, for Daum is based on 213E target P/E multiple of 16x-a 2% discount to NHN's target P/E multiple. Daum has historically traded at a discount to NHN, the leading Internet portal in Korea in generating page views and search queries. Risks: The following risks could impede achievement of our target price of W17, for Daum Communications: (1) any unforeseen regulatory action from the government on major Internet portals, (2) sudden slowdown in the macro economy, and (3) direct competition posed by peer NHN in terms of operations. Price Target: (12 months) for (3542.KS) Method: Our target price of W28, for NHN is based on 213E target P/E multiple of 2x-in line with the company's two-year P/E trading range during Risks: The following risks could impede achievement of our W28, target price for NHN: (1) regulation on game revenue, (2) any failure in overseas operations, and (3) the emergence of new search services in the market. Price Target: (12 months) for (6627.KQ) Method: Our W11, target price for SK Communications is based on 211 PEG of 1.x with target three-year EPS CAGR Risks: Potential risks to our W11, target price for SK Communications include: (1) Execution risks: SK Comm's integration and execution of a longer-term strategy remains a risk, particularly given that running Internet companies may be trickier for larger conglomerates such as the SK Group. (2) Lower free float of 35.2% with total number of shares of W43.2 mn. (3) Valuation concern: With valuation of global Internet players such as Google and Yahoo! still trading at an expensive level from an average market perspective, any sharp fall in global valuations would negatively impact SK Comm's share price performance. (4) Weakness in paid search: Despite its acquisition of Empas, SK Comm still faces a massive challenge in terms of increasing its current market share in the search business dominated by NHN. Please refer to the firm's disclosure website at for the definitions of abbreviations typically used in the target price method and risk sections. See the Companies Mentioned section for full company names. Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (3572.KQ) within the next 3 months. Important Regional Disclosures Singapore recipients should contact a Singapore financial adviser for any matters arising from this research report. The analyst(s) involved in the preparation of this report have not visited the material operations of the subject company (3572.KQ, 3542.KS, 6627.KQ) within the past 12 months. Restrictions on certain Canadian securities are indicated by the following abbreviations: NVS--Non-Voting shares; RVS--Restricted Voting Shares; SVS--Subordinate Voting Shares. Individuals receiving this report from a Canadian investment dealer that is not affiliated with Credit Suisse should be advised that this report may not contain regulatory disclosures the non-affiliated Canadian investment dealer would be required to make if this were its own report. For Credit Suisse Securities (Canada), Inc.'s policies and procedures regarding the dissemination of equity research, please visit As of the date of this report, Credit Suisse acts as a market maker or liquidity provider in the equities securities that are the subject of this report. Principal is not guaranteed in the case of equities because equity prices are variable. Commission is the commission rate or the amount agreed with a customer when setting up an account or at anytime after that. Taiwanese Disclosures: This research report is for reference only. Investors should carefully consider their own investment risk. Investment results are the responsibility of the individual investor. Reports may not be reprinted without permission of CS. Reports written by Taiwan-based analysts on non-taiwan listed companies are not considered recommendations to buy or sell securities under Taiwan Stock Exchange Operational Regulations Governing Securities Firms Recommending Trades in Securities to Customers. To the extent this is a report authored in whole or in part by a non-u.s. analyst and is made available in the U.S., the following are important disclosures regarding any non-u.s. analyst contributors: The non-u.s. research analysts listed below (if any) are not registered/qualified as research analysts with FINRA. The non-u.s. research analysts listed below may not be associated persons of CSSU and therefore may not be subject to the NASD Rule 2711 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account. Jeff Kahng, non-u.s. analyst, is a research analyst employed by Credit Suisse Securities (Europe) Limited, Seoul Branch. Jihong Choi, non-u.s. analyst, is a research analyst employed by Credit Suisse Securities (Europe) Limited, Seoul Branch. For Credit Suisse disclosure information on other companies mentioned in this report, please visit the website at or call +1 (877) Disclaimers continue on next page. (3542.KS / 3542 KS) 14

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