Description

Summary

I think NHN has good downside protection from:

• Balance-sheet: large collection of assets including VC, PE, cash, listed shares, and their HQ

• Hangame: Korea’s dominant online poker platform

I believe this pile of “hard” assets and their mature cash-cow accounts for value substantively greater than NHN’s current market cap. 

NHN also has large potential upside from their fast-growing online marketplaces and digital services (with plans for numerous near-future IPOs), including: 

• fashiongo.net: growing American wholesale B2B marketplace (planned IPO)

• Toast: fast-growing local player in cloud computing, storage & hosted services (planned IPO)

• Commerce: cross-border (Korea to China) marketplace and store-hosting (planned IPO)

• PAYCO: controlling interest in 3rd largest Korean mobile wallet (planned IPO)

• Japanese mobile games: historically strong, currently weak (maybe IPO)

• Collection of other assets: enterprise groupware, web-comics, etc. (loss-making, some promise) 

Due to NHN’s legacy market perception as a gaming business, and an income statement burdened by growth investments (loss-making segments) – I believe they suffer from a “double discount” (depressed earnings comped to a lower-multiple sector).

That may change as i) their growthiest higher-quality businesses further eclipse the gaming assets, and ii) the IPOs of those businesses highlights value and either negligibly impact (or even raise) the earnings of RemainCo.

History

Hangame was launched by Beom-Soo Kim (subsequently built Kakao) in 1999 and, as the dominant casual gaming-portal, was one of the early internet firms to become profitable. In 2000, the site merged with Naver to create NHN (“Next Human Network”). Hangame’s cash-flow arguably helped build the Korean internet, as Naver fought-off Google in search while simultaneously crafting new services (such as Line – the dominant Japanese messaging app) from scratch.

Fast-forward to 2013 and Naver’s gaming division was under scrutiny for being gambling-adjacent, prompting them to spin out “New NHN” seeded with the Hangame desktop platform (overwhelmingly poker) and a collection of mobile games. Following the spin, Naver’s co-founder and former COO bought huge quantities of stock and spurred the group to reinvest gaming’s prodigious pretax earnings towards “spawning” new digital businesses. I believe they’ve created substantive value in the process, but the stew of digital ventures and difficult to parse consolidated financials has not done the stock any favors. For this reason and others, they’ve now decided it’s logical to start pushing birds out of the nest which may (or may not) meaningfully unlock shareholder value.

Most important Assets:

Balance Sheet

NHN has substantial embedded value on its balance sheet, for which I feel they receive little credit.  I believe net cash, listed stocks, and private equity or venture investments account for approx. 2/3rd of NHN’s market cap.  Their owned headquarters may be worth a large portion of the remainder.  While not core to the investment thesis, these assets may provide some additional margin-of-safety to the investment at current prices. 

Hangame

In 2013, NHN’s gaming division was under scrutiny for being gambling-adjacent (users purchase “gold” not redeemable for real currency).  Naver spun out New NHN ahead of regulations (max-spending per day, etc.) which dampened the business for multiple years. 

In recent years regulation has loosened, Hangame has integrated mobile players onto their platform, and the business has returned to very modest growth (very mature).  It’s not broken down explicitly, but I believe Hangame generates nearly ~₩200bn in revenue and perhaps ₩115bn in pretax earnings.  While that would represent an enormously high margin business, it’s worth considering that:

• The game of poker hasn’t changed - so development costs are low

• They sell virtual goods (no costs) to mostly desktop players (no app-store “taxes”)

• Online poker has some light network effects (game “liquidity” to get desired table, friends on the platform, etc.).  Hangame seems to control most of the poker market and have lower customer-acquisition-costs and churn than in comparable games.

• Minor switching costs for customers who’ve likely had an account for a long-time (with associated familiarity, purchased digital goods/avatars, etc.).

If my assumptions regarding Hangame’s economics are correct and this business was worth ~10x pretax earnings, this segment would account for about ~90% of NHN’s market capitalization.

Source: Youtube/AfreecaTV stream – Hangame - https://www.youtube.com/watch?v=lIp3WYQvP5w&t=469s

Fashiongo.net

FashionGo (“FG”) may be a huge hidden-in-plain-sight source of unappreciated value. The Los Angeles based company operates a wholesaling B2B online marketplace.  Buyers (store owners) shop for wholesale fast-fashion products to resell.  Sellers (fashion manufacturers, designers, and importers) place their goods in the marketplace to access aggregated demand, principally from many small physical and online shops around the United States. 

This business has a meaningful tailwind from shop owners moving their merchandising offline-to-online (from a week-long trade-fair across the country towards an online marketplace offering seller reviews and mediated digital transactions).  FG’s TAM is enormous and, in addition to their already impressive organic growth, could expand both horizontally (new geographies or categories) and vertically (additional services for their buyers).  Comparable B2B wholesale marketplaces in private markets have recently raised funds at nosebleed valuations (albeit those funds are enabling faster growth).

GMV is run rating over ~$1bn and FG has expressed the goal of growing that to $10bn in the coming decade.  Considering the division is planning to IPO in a few years (possibly in the U.S.) and the comparable multiples such assets can command, this asset could conceivably be worth a “whole bunch” (number of years out in an upside scenario).

Source: FashionGo Youtube Channel - https://www.youtube.com/watch?v=LGOa4e9UZyQ

Toast (Cloud, Toast.com)

 “Toast” is NHN’s cloud division offering computing, storage, and hosted services.  Korean public-sector institutions are rapidly converting their IT systems to the cloud as part of their Digital New Deal.  Unlike private companies, government entities use cloud providers with a security certification that seems most accessible to domestic providers.  Major players in this market are Naver, NHN, and KT (telco). 

NHN is currently constructing one of the Korea’s largest data-center facilities (multiple-hundred billion won) which will likely accelerate their cloud capabilities, progress, and growth.  Divisional sales have increased ~6x in the past ~3-4 years (albeit form a very small base), and this division recently became profitable - helping to pave the way for it’s intended future seperation. 

In a related field, NHN has built Dooray - a SAAS Enterprise solution seemingly gaining traction (Slack-type collaboration tool / groupware that’s quickly grown to claim 100,000 users).  While still very small, NHN has large ambitions for this service.

Commerce

NHN Commerce operates an online B2B wholesale marketplace for Chinese merchants (buyers) and Korean sellers (including multi-national firms).  They additionally manage a TMall store selling Korean brands and an online shop design-hosting platform for Korean SMBs. 

GMV in this division has grown to exceed ~₩3tn in 2020 (admittedly not well detailed) and (were it separately listed), might fairly comp against local firms selling at attractive multiples.  The division seems likely to IPO in a couple years.  While certainly subject to geopolitical (China) and competitive threats, this division seems to offer an important source of additional upside.

Source: NHN Subsidiary Websites – Jamy

Payco & KCP

NHN owns ~2/3rd of Payco – Korea’s 3rd largest digital wallet (trailing Kakao & Naver). Their transacted volume, active users, data-exhaust, and network of offline merchants are considerable – with the business model premised upon eventually i) earning a higher spread on growing transaction volumes, ii) offering ancillary services such as sponsored coupons, and iii) serving as an affiliate sales channel for financial products such as credit cards. I’m worried Payco is competing against players with very unfair advantages, so am personally cautious regarding this service’s value.

However, in addition to their millions of active users and impressive offline merchant network, Payco also controls separately listed NHN KCP (ticker 060250) – one of Korea’s largest online payment gateways that generates substantial profits on high-quality, and growing recurring revenues.

Payco itself seemingly intends to IPO in the medium term, which may further highlight shareholder value. During a 2019 fundraising, a smaller Payco was valued at about ~₩730bn.

Source: NHN Company Presentation

Other

NHN also has a stable of other businesses that may be individually interesting and jointly worthwhile, but in aggregate generate meaningful P&L losses (further complicating their amalgamated financial statements).  The most notable such divisions are probably: 

Japanese mobile games: An important asset at the spin-off, the mobile-game division was unable to replicate its early success on the Line messaging platform (not surprising - they created Line).  They’ve pivoted from the casual puzzle genre to mid-core games, but the division has plenty to prove.  While still possessing attractive cash-flow characteristics, I value this business conservatively.  NHN may want to separate this business via IPO over the next few years.

Comico: Web-comic app with meaningful scale (~₩100bn LTM revenue), but competitors should have better customer-acquisition and monetization via existing relationships (messaging app or portal). 

Catalyst

NHN celebrated their 8th anniversary as a public company by laying out their corporate goal of becoming a “global top-tier tech company by 2030.”  The controlling shareholder was part of the Seoul National University team that cofounded Naver (ending as its COO) and, since their spinoff, NHN has grown consolidated revenue from ~₩600bn to ~₩1,800bn despite starting with very “mature” gaming assets. (Admittedly this figure consolidates revenue which is not wholly-owned – most notably in the payments division – however NHN’s proportional revenue growth has still been impressive.)

Despite this, the Korean market still categorizes NHN as a gaming firm. I believe that may change as other sources of value percolate through their continued growth and IPOs (many of which may occur between 2023 and 2025) that could serve as a reasonably firm catalyst for the market to recognize value in NHN.

Source: NHN Anniversary Presentation - Youtube

Summary / Valuation

I feel NHN is very cheap, with downside seemingly protected by a fortress balance-sheet, a cash-cow poker-franchise independently representing an attractive earnings yield, and a plethora of growing online marketplaces or digital services (FashionGo, JAMY, Toast, Payco, etc.) that have the potential to be worth multiples of the current valuation over time. I don’t know if or which of these businesses will ultimately be particularly valuable, but in my opinion it’s a much cheaper-than-free basket of options.

NNH Illustrative Valuation:

Source: Author Analysis

Sum-of-the parts certainly has a mixed reputation – but I’d say its relevant here considering stuff may be about to get pulled apart to some degree.

The majority shareholder (Co-founder of Naver & self-made billionaire) has led NHN from a spun-out mature gaming asset to effectively “spawn” many valuable digital services in 8 years, is still young, and could control his spawned Eaglets with very fair separation structures and behaviors. 

Recent actions point to good general governance (buyback stock, quarterly conference calls with English translation, helpful English disclosures, and highly accessible multi-lingual IR).

Additionally, I feel they’ve created more value than the earnings they’ve retained, and that there may be the potential for valuable new businesses to be created in the coming years (through reinvestment of Hangame’s pretax income).

The most extreme bull scenario would be for NHN to follow an IAC model – whereby the mature cash-cow (Hangame) enables the growth of new ventures which are then pushed-out of the nest, catalyzing value to shareholders.  That analogy is wildly optimistic, but considering NHN may be targeting as many as ~9 IPOs in a 3-year period (per above slide) – perhaps there are some similarities. 

In any case, I believe the current value for their collection of assets is considerably above its ~$1.1bn USD market cap, and that the multiple pillars of value, the company’s active share buybacks, and the medium-term catalysts of subsidiary IPOs seems to create a highly favorable risk-reward proposition. 

Risks: I don’t speak Korean and I didn’t grow up around these businesses.  Corp governance takes a turn for the worse.  FashionGo gets run-over by Faire.  Bad regulatory developments. Etc.

Disclosure: Have ownership interest in NHN Corporation at the time of this write-up that can change at any time without notice. There are no plans to provide future updates on the authors buying or selling activities for this or other stocks. The author may buy or sell shares of NHN Corporation without notice for any reason at any time.

Catalyst

Maybe IPOs