The Business Times

After US$50b wipeout, more pain ahead for Kakao investors

Published Mon, Oct 24, 2022 · 08:18 AM

After a US$50 billion wipeout in market value, more pain may be in store for investors in Kakao and its affiliates as the South Korean tech group’s monopoly-like status draws a steady stream of criticism.

Once hailed as a symbol of Korean innovation, Kakao’s market value reached a peak of over US$60 billion last year on a pandemic boost as a “stay-at-home” beneficiary and gains from the listing of several subsidiaries.

Its fall from grace mirrors moves to minimise the power of tech giants from the US to China. A recent data centre fire that caused an outage of South Korea’s No 1 messaging app added force to a public campaign since last year to curb Kakao’s influence. Lawmakers will question company founder Brian Kim in a hearing on Monday (Oct 24).

“Kakao has become a monopoly so the perception has changed,” said Hong Chunuk, chief executive at Frism Investment Advisory and former economist at National Pension Service. “It has become a target of public disdain.” 

The blackout of Kakaotalk, which is used by the nation’s central bank to announce rate decisions and by government officials to discuss national security issues, heightened calls for oversight. Rival Telegram said it saw a surge in downloads in South Korea as users sought alternatives.

The company’s recent fintech spinoffs have seen the steepest declines, with shares of Kakaopay plunging 80 per cent since the start of the year and KakaoBank down more than 70 per cent. 

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“They are some of the stocks that surged the most last year,” said Frism’s Hong. “There is also the issue of an increased number of stocks in the market after split-offs and listings of units, which also give a holding company discount to Kakao.”

Shares of Kakao and rival Naver, which has also been a target of criticism for market dominance, have fallen about 56 per cent each this year.

The sharp share-price losses appear to already have triggered margin calls for highly leveraged retail traders, as Kakao and its affiliates are popular among South Korean retail investors, Hong said.

Kakaopay and KakaoBank separately confirmed to Bloomberg that they took measures to help employees who may be facing margin calls after buying shares in the initial public offerings. Investors can sometimes be forced to sell shares to meet margin calls. 

A flurry of brokerages lowered their price targets on Kakao following the Oct 15 fire. JPMorgan analyst Stanley Yang slashed his target 39 per cent to 46,000 won, the lowest among 33 analysts polled by Bloomberg.

Credit Suisse lowered its rating to neutral from outperform last week, a rare downgrade for a stock that still has 27 buy ratings. Analysts are less sanguine on the listed units, with four sells on Kakaopay and three on KakaoBank.

In another bearish sign, daily short sales of on Kakao’s stock jumped to the highest on record last Monday and remained elevated through the rest of the week.

Kakao may struggle to gain new users as public opinion sours, said Gu Sungjoong, an analyst at DS Investment & Securities Co. “There’s potential concern about increased regulations on platform services that could limit its service expansion.” BLOOMBERG

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