EUR 850.00 For Business Accounts Only

Morningstar | Steady Progress on User Engagement Will Drive LINE’s Ad Revenue in the Future; Shares Undervalued

Our impression of LINE’s March quarter results is mixed. On the positive side, we believe that LINE’s improving indicators suggest the strength of its ecosystem, to which we cannot find any competitors in Japan. On the negative side, the revenue growth of ad business is slightly lower than our expectation. However, we are not concerned about the long-term growth of the company, as we are impressed with LINE’s strategy to expand its ad revenue by leveraging its ecosystem. We thus retain our view that LINE will succeed in monetizing its ecosystem, which covers more than 90% of smartphone users in Japan, Taiwan, and Thailand, and maintain our fair value estimate of JPY 5,400, along with our narrow moat rating. Because of the larger marketing expense on mobile payment business, we forecast that LINE will continue to be unprofitable, and as a result, its share price will be volatile in the short run. However, we believe that the market is underestimating the strength of LINE’s network effect.

LINE’s monthly active users in Japan was 80 million, which is 6.7% above the previous year, with an 86% of daily active user/monthly active user ratio, suggesting the strong engagement of LINE’s user base. We continue to believe that LINE’s ecosystem should be attractive for corporates as a marketing platform. In fact, other indicators are also impressive: 1) the number of LINE accounts for business purposes increased to 9.7 million, a 33% increase from the previous year; 2) the number of LINE ad impressions increased 49% from the previous year; and 3) monthly active users of LINE Pay reached 4.3 million, an 85% increase from the previous quarter.  Overall, we are satisfied with the steady progress of LINE’s user engagement, which will drive LINE’s advertisement revenue in the longer run.