Naver Twice as Expensive as Google Sold by Funds: Korea Markets

Naver Corp. (035420), whose Line messaging service propelled shares to levels twice as expensive as Google Inc., is getting sold by overseas investors faster than any other South Korean stock amid concern the rally went too far.

Foreigners sold a net $638 million of the shares during the past month, the most among Kospi index members, according to data compiled by Bloomberg. Naver, which also operates the nation’s most-popular search engine, sank 13 percent from a record on March 10, after a 99 percent surge during the previous year that left it trading at 43 times estimated 12-month profit.

While Line’s expansion to 400 million users spurred analysts to give Naver the highest rating among the world’s major Internet companies, Shinhan BNP Asset Management says the stock is vulnerable to further losses as investors reassess valuations in the industry. Even after its drop, Naver trades at a more than 100 percent premium versus Google and is almost four times more expensive than South Korea’s benchmark Kospi (KOSPI) index.

“The stock price needs to be put in check after rallying so much, and this goes for other Asian Internet companies as well,” Im Jeong Jae, a Seoul-based money manager at Shinhan BNP Paribas, which oversees about $33 billion, said by phone on March 27. “The question comes down to whether the price of this expensive stock could be justified. It’s not easy for investors to have conviction on this.”

Tech Reversal

Technology companies had led gains in Asian equities during the past 12 months amid speculation that growing demand for social networking, e-commerce and online games would boost earnings and fuel takeovers in the industry.

Naver, South Korea’s seventh-biggest company by market capitalization, tumbled 6.5 percent yesterday to the lowest level since Feb. 25, amid a selloff in regional peers including Tencent Holdings Ltd. (700), operator of the WeChat messaging service, that sent the Bloomberg Asia Pacific Internet Index to its biggest one-day drop in two months. The Nasdaq Composite Index of U.S. technology stocks dropped 2.6 percent on April 4 to the lowest level in two months.

About $3.3 billion has been erased from Naver since March 10, leaving it valued at $23 billion, or just below the level of San Francisco-based microblogging service Twitter Inc.

“I sold the stock as investors were getting too excited,” Lee Jin Woo, a money manager at KTB Asset Management Co., which oversees about $7 billion, said by phone on April 3. “This is a time for investors to check up on the company.”

Foreign Outflows

Naver dropped 1.6 percent at 9:55 a.m. in Seoul, while the MSCI Asia Pacific Index slipped 0.6 percent.

Global money managers have sold Naver shares for the past 20 days, with the outflows since March 10 amounting to more than half the $1.03 billion of net inflows in the previous 12 months, according to data compiled by Bloomberg. Overseas investors have added about $262 million to South Korean shares since March 10. Won Yun Sik, a spokesman at Naver in Seongnam, declined to comment on why foreign investors sold the company’s shares.

“We don’t see the Internet companies in Korea and China being attractive enough in terms of returns to take the risk at current valuations,” David Gaud, a senior money manager who helps oversee about $120 billion at Edmond de Rothschild Asset Management in Hong Kong, said in an e-mail on April 4.

The Kospi index climbed 1.8 percent since March 10, paring its retreat this year to 1.1 percent. The won has weakened 0.5 percent against the dollar in 2014, while the yield on three-year government bonds climbed 3 basis points to 2.91 percent.

Line Growth

The long-term rally in Naver isn’t over, according to Heo Pil Seok, the chief executive officer at Midas International Asset Management in Seoul who bought the shares in the past six months. The company is expanding in Japan, Southeast Asia and Latin America, and the potential initial public offering of Line may give the stock a further boost, Heo said.

Naver’s Line unit has several possibilities for holding an IPO, though nothing has been decided, Chief Operating Officer Takeshi Idezawa said Feb. 26. The messaging service may be valued at as much as $14.9 billion, according to BNP Paribas SA. Facebook Inc., the world’s largest social network, agreed to buy mobile-messaging startup WhatsApp Inc. for as much as $19 billion in cash and stock in February.

Line is the most popular messaging service in Japan, Taiwan and Thailand, topping a similar offering from Facebook, Samsung Securities Co. said in a Feb. 20 report, citing data from researcher App Annie Ltd.

Naver said it reached 400 million global users for Line as of April 1. WhatsApp has about 450 million active users, Samsung Securities wrote in its February report. Revenue from the Line unit accounted for 21 percent of Naver’s sales in the final quarter of last year, up from about 8 percent a year earlier, according to a statement posted on its website Feb. 6.

Selling Pressure

The company’s per-share earnings, adjusted for certain items, will more than double this year and climb a further 43 percent in 2015, according to the average of more than 30 analyst estimates compiled by Bloomberg.

Naver is the highest-rated Internet stock among the industry’s 20 largest companies by market value, with a consensus analyst rating of 4.66 in a Bloomberg scale of 1 to 5. The stock has 35 recommendations equivalent to buy, versus five holds and one sell. The average price target of 922,364 won implies a 25 percent gain during the next 12 months.

“There is no need to head for the exit right now as catalysts like Line’s IPO are still on the way,” Heo, who oversees about $8.4 billion, said by phone on April 2. “It’s hard to say that the rally is over.”

Take Profit

There’s still selling pressure on Internet stocks after valuations increased, said Khiem Do, the head of Asian multi-asset strategy at Baring Asset Management, which oversees about $55 billion.

Naver’s current valuation of 39 times estimated earnings makes it the sixth-most expensive stock in the Kospi 200 Index of South Korea’s largest companies. That compares with a multiple of 25 for the Bloomberg’s regional index of Naver’s peers and a median ratio of 23 for the world’s 20 largest Internet companies by market value.

Taewon Kim, an analyst at Credit Suisse Group AG who has a neutral rating on Naver, cut earnings estimates for this year and next in a March 20 report. The positive impact of Line’s growth is diminishing as it gets priced into the stock, Kim said.

“In the short term, lots of investors have made a lot of money in this sector and the valuation has been high,” Baring Asset’s Do said by phone from Hong Kong on April 4. “It’s too tempting for investors not to take profit.”

To contact the reporter on this story: Sharon Cho in Seoul at ccho28@bloomberg.net

To contact the editors responsible for this story: Michael Patterson at mpatterson10@bloomberg.net Sandy Hendry

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