Talking About Kakao

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Includes: EMQQ
by: Kevin Carter
Summary

Kakao runs South Korea's top instant messaging application - KakaoTalk.

Kakao has been growing its internet content and financial services businesses.

South Korea is one of the most connected countries in the world.

Kakao is a South Korean internet company best known for its KakaoTalk mobile instant messaging application, which is the leading instant messaging platform in South Korea. The company also has growing businesses in internet content and financial services. Kakao has experienced solid growth and is operating in one of the world’s most connected countries.

Investors can purchase shares of Kakao directly under stock symbol 035720 on the Korea Exchange. Or they can buy funds which hold Kakao such as EMQQ – the Emerging Markets Internet and Ecommerce ETF – which held Kakao as of 9/7/18.

Business Description

Kakao, in its current form, was founded in 2014 as the result of a merger between Daum Communications and Kakao Corp. After the merger, the company changed its name to Daum Kakao. In September 2015, the company changed its name back to Kakao.

Kakao’s businesses span messaging, mail, search, advertising, gaming, ecommerce, music and more. It is probably best known for its Talk application. According to the company’s investor relations presentation, Talk had over 43 million users in Korea and over 50 million users worldwide. Talk is the largest messaging app in Korea with a 95% market share and an 83% population penetration, according to the company.

In addition, the company’s communications groups include apps for taking and posting pictures, telling stories, creating blogs, email, and team communication platforms.

The company’s content business includes platforms for content such as novels, movies, music, television, gaming along with an app to create and distribute your own content. The company has an ecommerce business offering everything from gifts to fashion to groceries. The company’s mobility division includes ride and taxi-hailing as well as navigation services.

Future Growth Platforms

Kakao is also looking to build out its artificial intelligence platform, Kakaoi. Additionally, in 2017 the company received approval to become Korea’s first Internet-only bank. The company offers traditional banking services, such as deposits, checking, and wiring money, online. According to BankingTech, Kakao Bank attracted 820,000 clients in the four days after its launch with $477 million in deposits and loans.

In February 2017, Alibaba (BABA) affiliate Ant Financial made a $200 million investment in Kakao Pay. The deal allowed Ant Financial to offer its financial services through Kakao Pay in Korea and help expand its business from online payments into offline, banking and financing services.

Strong Financial Results

Revenues increased nearly 35% during 2017 over 2016 while operating profit increased over 42%. This strong trajectory continued into 2018 with second quarter revenue increasing over 26% from the second quarter of 2017. Advertising and content revenue grew 10% and 29%, respectively. The company’s other segment which includes its mobility (ride & taxi-hailing), ecommerce and payment businesses grew 42%, although these segments only account for 20% of the company’s revenue. Operating income declined 38% due to an increase in bad debt expense, but net income doubled in the quarter.

Highly Connected Country

With 45 million Internet user and an online penetration rate above 90%, South Korea ranks as one of the most connected online markets, according to Statista. The country also boasts one of the highest internet connection speeds. As a result, ecommerce sales are growing rapidly, reaching KRW 92 trillion in 2017from KRW 65 trillion in 2016, according to Statista. This should serve as a strong backdrop for continued growth in Kakao’s online payment platform as well as its growing banking and ecommerce businesses.

Summary

Kakao is a leading internet company in South Korea. It operates the country’s largest instant messaging applications. It also has a growing business in content, communications, and finance. Kakao is operating in one of the world’s most connected countries, providing a strong basis for continued growth.

EMQQ – the Emerging Markets Internet and Ecommerce ETF – held Kakao as of 10/12/18.

Disclosure: I am/we are long KKMMY, BABA. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.