20080717-Daiwa-Korea Internet and Online-Game Sector

Where is Korea’s paid search heading now?
• We believe Korea’s paid-search market will continue to expand and will position itself
as a powerful advertising platform in Korea, as we have begun to see incremental
strength in advertising inventory and the advertiser base. We view this as a positive
combination for the market’s long-term growth. Despite our concerns about the
slowdown in search queries and search-page views in 1Q08, we think that the industry
will rebuild its growth momentum by offering advanced web-search services and
proprietary advertising models. We forecast Korea’s paid-search sales will increase at
a CAGR of 20.6% over 2007-12.
• In our view, Korea’s Internet and online-gaming industry revenue probably bottomed
in 2Q08, as shown by web traffic data for June. Given the strong demand for online
gaming and more working days in 3Q08, we believe the companies are likely to
increase their revenue and earnings materially in 2H08. We expect the revenue of the
larger companies to show anaemic growth for 2Q08, though profitability should
remain robust due to disciplined cost management. For 2Q08, we estimate the revenue
for our universe of online-service companies to have expanded 1.2% QoQ in 2Q08.
• We are convinced that this industry will continue to defy the slowdown that we have
seen in many other sectors in Korea. With increasing online activity and digitalcontent
spending, we expect the brighter growth outlook for Korea’s Internet and
online-game sector to re-invigorate online-advertising sales and digital-item
commerce in 2H08. We forecast sales for our Korea Internet and online-game
universe to increase by 14.5% HoH and 26.8% YoY for 2H08.
• In an economic downturn and a bear stock market, the greatest determinants of
Korean online companies’ stock performance have been market dominance, high
profitability, and valuation, in our view. We have upgraded NHN Corp (NHN)
(035420 KS, W160,000, 1) and Megastudy (072870 KS, W225,100, 1) to 1 (Buy)
from 2 (Outperform), given their overlooked fundamentals and attractive valuations.
Given their lowered valuation multiples and still-undisputed market leadership, we
think that NHN and Megastudy provide good investment opportunities, due to their
strong service platforms, very loyal users, and well-diversified service offerings.