Foreign investors divest from Kakao Group stocks on weak earnings, overvaluation

Kakaopay’s Chief Executive Officer Shin Won-keun speaks at a press conference held in Seoul on May 15. [Photo by Yonhap]

Foreign investors are pulling back on Kakao Group stocks as the South Korean tech giant continues to face the consequences of interest rate hikes and an economic slowdown that began last year. The investment sentiment towards the group has worsened due to a series of service failures and concerns about overvaluation in addition to recent sluggish performance.

Data from the Korea Exchange on Tuesday revealed that the average proportion of foreign investments in four Kakao Group stocks, including the group’s holding company Kakao Corp., KakaoBank Corp., Kakaopay Corp., and Kakao Games Corp., dropped to 22.88 percent on Monday from 26.05 percent at the beginning of last year. Kakaopay Corp., the online payment unit with the highest proportion of foreign investments among Kakao Group stocks, saw its foreign ownership fall from 42-43 percent last year to 40 percent. Kakaopay’s shares have suffered the most, declining by 68.37 percent since last year.

In the first quarter of this year, Kakaopay reported a consolidated operating loss of 13 billion won ($9.72 million), which likely prompted foreign investors to sell off its shares due to earnings concerns. “Kakaopay’s expected earnings growth through financial services is being delayed, as illustrated by lower-than-expected stock transaction fees. The recent sharp decline in household loans from the second-tier financial sector is also burdensome for the company as the loan service is one of its main financial services,” said Jung Kwang-myeong, an analyst at DB Financial Investment Co.

Since its listing in November 2021, Kakaopay’s shares have been fluctuating around 50,000 won, only half of its public offering price of 90,000 won. Kakaopay’s Chief Executive Officer Shin Won-keun acknowledged the challenges, saying during a press conference held on Monday that “Dividend payment or share buybacks and retirement is still structurally impossible due to our accumulated losses. We will take more active measures to boost our share prices once we swing into the black.” However, shortly after the press conference, Kakaopay experienced a service malfunction for about two hours, causing controversy.

Kakao and Kakao Games also reported lower-than-expected earnings for the first quarter due to the economic slowdown, leading foreign investors to divest from their stocks. Foreign investments in Kakao dropped from over 30 percent early last year to 26 percent, while the figure for Kakao Games fell from 14 percent to 12 percent.

Although KakaoBank posted record first-quarter earnings thanks to loan growth and rising interest income, foreign investments in the bank decreased from 17 percent to 14 percent. Its share price gains seem to be limited due to higher valuation compared to other financial holding companies.

Kakao Group companies have also become targets for short sellers who perceive them as overvalued, seeking to drive down their stock prices. As of May 11, KakaoBank ranked 15th among KOSPI-listed companies with a short selling balance of 2.62 percent.

In contrast, individual investors are betting on the rise in stock prices of certain Kakao Group companies. Retail investors have purchased a net worth of 251.2 billion won in Kakao shares and 27.1 billion won in Kakao Games shares this year. However, market prospects for the group’s holding company remain mixed.

“There is a possibility that Kakao’s operating profit will greatly improve in the second quarter of this year after bottoming out in the first quarter, and the corporate value of its subsidiaries may also be highlighted in the second quarter,” said Kim Ha-jung, an analyst at Daol Investment & Securities Co. “We also expect the holding company to make a turnaround in the artificial intelligence (AI) platform market.”

However, Seo Jung-yeon, an analyst at Shinyoung Securities Co., said that “the company, for the time being, will have to endure the slowdown in the growth of its high-margin businesses and the increase in investment losses in major affiliates such as Kakao Healthcare and Kakao Brain.”