should you invest in Korean online banking?

South Korean online lender Kakao Bank filed its prospectus to launch an initial public offering (IPO) on the Korea Exchange (KRX) in August.

The $ 2.2 billion listing could make the company South Korea’s third most valuable lender, after KB Financial Group (105560) and Shinhan Financial Group (055550). The IPO is the latest in a series of South Korean companies that have gone public, following the IPO of e-commerce company Coupang (CPNG) in New York City in March and ahead of several major transportation companies and of technology.

This analysis of the Kakao IPO gives an overview of the company’s track record and all the details you need to know about the listing to decide whether or not to invest when the stock starts trading next month.

Kakao Bank benefits from the switch to online banking

Founded in 2016, Kakao Bank is owned by South Korean internet company Kakao Corp. (035720), which holds 31.62% of the capital. Korea Investment Value Asset Management holds 26.97% of the shares, KB Kookmin Bank 9.30% and Korea Investment Holdings 4.65%.

Kakao Bank launched its mobile banking service in July 2017 and opened 1 million accounts in its first five days of operation, the company said in an official statement. declaration on its website. It exceeded 10 million customer accounts in July 2019 and had 16.53 million at the end of May 2021.

The company is now expanding its demographics to include older customers, as 30% of customers who opened a new account in the past year were over 50.

The number of monthly active users (MAU) of the company’s mobile app reached 13.35 million at the end of March 2021.

The company has been profitable since 2019, generating net profit of KRW 113.6 billion (Korean won) ($ 98.4 million) in 2020. The company’s operating profit increased at a compound annual growth rate. average (CAGR) of at least 120% over the four periods from 2017 to 2020.

According to his IPO filing with the Korea Stock Exchange, Kakao’s turnover was KRW 224.91 billion in the first quarter of 2021, compared to KRW 192.64 billion in the first quarter of 2020. The annual turnover of the company reached KRW 804.16 billion in 2020, compared to KRW 664.94 billion in 2019 and KRW 375.58 in 2018.

Kakao Bank reported operating profit of KRW 53.98 billion for the first quarter of 2021, compared to KRW 18.38 billion in the same period of 2020. Its net profit more than doubled to 46.66. billion KRW in the quarter, compared to KRW 18.47 billion in the quarter. first three months of 2020.

The company’s cash and deposits stood at KRW 858.68 billion at the end of the first quarter. This was down from KRW 1.2 billion at the end of 2020.

Kakao's selected financial results;  in millions of South Korean won (KRW)

In the first quarter of 2021, Kakao Bank’s earnings-to-income ratio was 48.3 percent, which is lower than the average for major domestic South Korean banks, the company said in its statement.

At the end of the quarter, the deposit balance was KRW 25.39 billion and the loan balance KRW 21.65 billion, reflecting a CAGR of 67.1% and 63.8%, respectively from the end of 2017 to the end of last year.

During the same period, the growth rates of deposits and loans of South Korean banks were 9.0% and 8.0% respectively.

Kakao Bank is the last of Kakao Corp’s subsidiaries to be publicly traded. Its games division Kakao Games (293490) went public in September 2020, while its mobile payment business Kakao Pay received preliminary approval from the Korean financial regulator for its next listing.

Online transportation services company Kakao Mobility and media company Kakao Entertainment are also considering public offerings.

Kakao IPO: all you need to know

Kakao Bank IPO: key information

Unlike South Korean internet company Coupang, which is listed in the United States, Kakao is listed on the Korea Stock Exchange. Kakao’s IPO date is slated for the first week of August, with the stock debuting on August 6. The company announced on June 28 that it had submitted its securities declaration to the Financial Services Commission for listing of the shares.

The company is offering a total of 65.45 million shares. Kakao’s IPO price was announced on July 22 at KRW 39,000 per share, the top of the previously suggested KRW 33,000 to KRW 39,000 range, which in US dollars equates to $ 33.86 per share. This would give the IPO a value of KRW 2.55 billion, or the equivalent of $ 2.22 billion.

KB Securities, Credit Suisse and Citigroup Global Market Securities are the financial institutions that organize the listing.

Kakao Bank was last valued at around KRW 8.6 billion in November 2020, when it issued 31.9 million new shares at a price of KRW 23,500 per share to investors for a total of 749.65 billion KRW.

This included a KRW 250 billion investment from US hedge fund TPG Capital, which also owns stakes in Chinese company Ant Financial, US ridesharing service Uber (UBER) and music streaming service Spotify (SPOT).

Based on Kakao Bank’s current stock issuance of 409.65 million shares, with the additional 65.45 million shares, the IPO more than doubles Kakao’s valuation to KRW 18 , 5 billion.

Valuation issues

The Financial Times reported earlier this month there were concerns about the high valuation of Kakao Bank. South Korea’s Financial Supervisory Service (FSS) probed the IPO ratings of several companies – including games company Krafton and COVID-19 test kit maker SD Biosensor – and asked them to re-file their prospectuses with lower offer prices.

Kakao Pay, which is South Korea’s largest online payments company, has also been required by the regulator to revise its IPO prospectus.

Product use

Kakao Bank said it plans to use the proceeds of the IPO to provide capital support for new products and services, such as expanding credit lending for low to medium credit customers and mortgage loans. It plans to invest KRW 350 billion in the following areas:

Product use

In the medium to long term, the company said it plans to expand into international markets through joint ventures.

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David A. Albanese

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