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Kakao plays long in SGX listing

Capital raising could dilute shares, but M&A potential is high
Dec 19,2017
Kakao’s move to raise overseas funds by listing on the Singapore Exchange (SGX) will likely narrow its research and development gap with rivals, analysts say, but stock dilution appears inevitable in the short term.

Last Friday, Kakao, which operates the country’s most widely used messaging app, announced a plan to issue global depositary receipts worth $1 billion to foreign investors and list them on the Singapore Exchange by Feb. 2.

The proceeds will be used to acquire app developers and further research into advanced technologies like artificial intelligence, Kakao said.

Shortly after the announcement, Mirae Asset Daewoo lowered its target price for Kakao from 190,000 won ($175) to 170,000 won, as the issuing of global depositary receipts will likely lead to dilution.

Kakao is currently listed on the Korean market’s main index, the Kospi.

“The possibility of stock dilution has been factored in,” said Moon Ji-hyeon, an analyst at Mirae Asset Daewoo, “but it can be adjusted when Kakao confirms the details of global depositary receipts being issued in Singapore and its M&A plans.” Until the company reveals more about its future buyouts and R&D direction, uncertainty will dominate, the analyst said.

Sung Jong-hwa, an analyst at eBEST Investment & Securities, expects the dilution will not be significant in the long run. “About 7.5 million shares in Kakao will be traded on the Singapore Exchange, which is 11 percent of the entire stock,” Sung said. “That could lead to a 10 percent dilution on earnings per share, but the long-term benefits of investment through the capital raising will outweigh the short-term effects.”

Shares of Kakao fell more than 5 percent on Monday to close at 134,500 won.

The raised capital could help Kakao overcome its weak points, particularly a poor global presence and low R&D investment. Last year, the R&D investment of Naver, one of its internet rivals in Korea, was 1 trillion won, according to Kim Min-jeong, a researcher at HI Investment & Securities, while Kakao’s was 104.8 billion won.

“The push to raise funds overseas is a positive move,” Kim said, “given that global ICT companies invest in new technologies like artificial intelligence, self-driving cars and robots, and the expansion in investment is necessary to dominate the new ecosystem.”

Kakao said that $900 million will go toward acquisitions of global content platform providers, while $100 million will be spent on development of new technology.

Analysts expect Kakao will be on the lookout for video platform companies and gaming companies to create synergy with its existing services.


BY PARK EUN-JEE [park.eunjee@joongang.co.kr]