EUR 850.00 For Business Accounts Only

Morningstar | Improving User Engagement Will Drive Future Monetization; Lift Line’s FVE to JPY 5,400

We revise Line’s fair value estimate from JPY 5,000 to JPY 5,400 per share, and from $45 to $49 per U.S. ADR, as we consider its revenue growth will exceed our original forecasts. We acknowledge a strong network effect from Line’s ecosystem, which is covering more than 90% of smartphone users in Japan, Taiwan, and Thailand, and because of the impressive progress in user engagement, we are more confident that Line will succeed in monetizing. We view that Line’s share price will be volatile in the short run because of the lower profitability, owing to the larger promotion costs for its financial businesses including mobile payment. However, we will retain our view that the market is underestimating the strength of Line’s network effect, which is the source of our narrow moat rating.

Line’s monthly active users in Japan was 79 million in the December quarter, up 7.7% from the previous year, with an 85% of daily active user/monthly active user ratio suggesting that Line possesses the largest user base with the strongest engagement in Japan, which should be an attractive marketing platform for corporates. In fact, the number of Line accounts for businesses reached 9.2 million in the December quarter, up 36% from the previous year, and the number of Line ad platform impressions increased 47% from the previous year, which are the drivers for the growth of its advertisement revenue.

Meanwhile, Line is collaborating with major financial firms to provide financial services, working with Nomura Securities on investing, Sompo Japan Nipponkoa on insurance, and Mizuho Bank on banking businesses. Most of these services will be launched in 2019, and the company expects that financial services will start generating profits within the next three years. While up-front costs will be necessary, we believe that financial businesses, including mobile payment service, will contribute to enhancing user engagement of Line’s ecosystem in the longer run.

Line’s 2018 revenue from operation was JPY 207 billion, up 18.7% from the previous year, driven by 30.2% growth of the advertisement business. Meanwhile, excluding the onetime factor, Line recorded an operating loss of JPY 12 billion, as the company spent approximately JPY 30 billion for the promotion and investment mainly for mobile payment and fintech. We forecast 20.7% revenue growth in fiscal 2019, but expect larger operating loss of JPY 20 billion as the company intends to use JPY 60 billion for investments this year. While the larger promotion cost will drag down its profitability in the short term, it will help the company to achieve larger revenue growth in the longer run. Thus, we raised our organic revenue growth forecast for the next five years from 13% to 17%.