LINE Renewal In FY 2025 Will Improve User Engagement Through Generative AI

Key Takeaways

• The acquisition of BEENOS is set to enhance cross-border e-commerce and the Reuse segment's growth trajectory, potentially increasing revenue.
  
• Strategic focus on PayPay and cost control measures aim to boost revenue, net margins, and EPS by enhancing financial services and operational efficiency.
  
• Weak demand in some industries, delayed LINE renewal, and uncertain AI impact pose revenue and profitability challenges, while relying on risky profit growth strategies.

Catalysts

Engages in the online advertising and e-commerce businesses in Japan.

• The acquisition of BEENOS, a leader in intermediary cross-border e-commerce, is expected to drive a 10% CAGR over four years in cross-border EC transaction value, potentially increasing revenue and enhancing the Reuse segment's growth trajectory.
  
• The strategic focus on PayPay, with plans to strengthen its integration with PayPay Bank, aims to expand financial services through deposits, loans, and remittances, which should boost both revenue and net margins due to increased transaction volumes and efficiency gains.
  
• Planned phased implementations of LINE renewal in FY 2025, leveraging generative AI and optimizing profitability, could provide a future boost to user engagement and advertising revenue, thereby enhancing earnings.
  
• The ongoing cost control measures, including internalizing previously outsourced work and utilizing in-house resources, suggest potential for improved net margins and EBITDA growth driven by increased operational efficiency.
  
• The company's clear capital allocation strategy, including a potential share buyback program using its capital allocation buffer through FY 2026, is likely to enhance EPS by reducing share count and signaling strong financial health and confidence in future cash flows.

LY Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming LY's revenue will grow by 6.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 6.2% today to 8.7% in 3 years time.
• Analysts expect earnings to reach ¥196.8 billion (and earnings per share of ¥29.02) by about April 2028, up from ¥118.4 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting ¥220.9 billion in earnings, and the most bearish expecting ¥166.0 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 20.4x on those 2028 earnings, down from 31.8x today. This future PE is lower than the current PE for the JP Interactive Media and Services industry at 20.7x.
• Analysts expect the number of shares outstanding to decline by 5.07% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.29%, as per the Simply Wall St company report.

LY Future Earnings Per Share Growth

Risks

• Display ad revenue showed negative growth in the third quarter due to weak demand in certain industries like Cosmetics and Health Food, which could impact media revenue if not reversed.
  
• The LINE renewal has been postponed to FY 2025 due to ongoing reviews with generative AI and profitability in mind, potentially delaying anticipated improvements in media revenue and profitability until 2026.
  
• The impact of AI initiatives like the Cristal project is still uncertain, with no immediate material benefit expected, leaving future cost efficiencies and profit improvements speculative.
  
• Continued reliance on PayPay-related campaigns for profit growth entails risks, as market saturation or unsuccessful campaigns could limit further revenue and margin expansion.
  
• Share buyback and capital allocation strategies depend heavily on uncertain M&A activities, which may result in underutilized capital buffers, affecting shareholder returns and potential earnings stability.

Valuation

• The analysts have a consensus price target of ¥534.071 for LY based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ¥650.0, and the most bearish reporting a price target of just ¥300.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ¥2269.5 billion, earnings will come to ¥196.8 billion, and it would be trading on a PE ratio of 20.4x, assuming you use a discount rate of 7.3%.
• Given the current share price of ¥528.0, the analyst price target of ¥534.07 is 1.1% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.