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UPDATE 2-Japan chat app Line's sales surge ahead of sector's first major IPO
July 31, 2014 / 3:01 AM / 3 years ago

UPDATE 2-Japan chat app Line's sales surge ahead of sector's first major IPO

5 Min Read

* Q2 revenue up 56 percent, rapid growth overseas

* Parent Naver considering listing in Japan, US or both

* IPO would value Line at $10 bln-$20 bln - source

* Naver denies reported talks with Alibaba, Softbank (Recasts, adds comments, industry context)

By Joyce Lee and Se Young Lee

SEOUL, July 31 (Reuters) - Japan-based messaging app Line Corp saw second-quarter revenue jump by more than half, fuelled by growth outside its home market, in a boost to the service's plans for an initial public offering that could value the firm at up to $20 billion.

Line's parent, South Korea's leading online portal operator Naver Corp, said on Thursday the surge helped its own revenue grow as it posted earnings that beat market estimates. With higher game traffic from outside Japan and new user-created emoticons creating an extra sales stream, Line's rapid growth may push IPO value expectations even higher.

The messaging app, developed to overcome downed communications in Japan after the March 2011 earthquake and tsunami, is being closely watched by potential investors. Naver has not released any details about the planned listing, but it would be the first IPO by a major chat app.

On Thursday Naver denied a local newspaper report that Chinese e-commerce giant Alibaba Group Holding Ltd IPO-BABA.N and Japanese telecom and internet company SoftBank Corp were in talks to take a stake in Line.

Naver said earlier this month that Line was considering an IPO in Tokyo or New York, or both. Banking sources have said the listing will ultimately be either a dual U.S.-Japan listing, or a listing only in the United States.

A banking source previously told Reuters Line could be valued at $10 billion to $20 billion, and was likely to launch the IPO in October with a listing in November.

Overseas Ambitions

Line's second-quarter growth outside Japan pushed revenue to 183.2 billion won ($179 million), up 56 percent from a year earlier and 26 percent higher than in the first quarter, Naver said. The parent firm didn't disclose profit details for Line.

Its revenue from outside Japan rose to 25 percent of the total, from 20 percent in the previous quarter. But as Line expands beyond Japan, it will need funds to challenge deep-pocketed messaging services such as Chinese internet company Tencent Holdings Ltd' WeChat, near-ubiquitous in the world's second-biggest economy, and social media giant Facebook Inc's WhatsApp.

Line subscribers now exceed 490 million, Naver chief financial officer Hwang In-joon said in a conference call on Thursday, although the company does not say how many of them are active on a monthly basis, a key metric for valuing chat apps. Naver said Line had 30 million fewer subscribers as recently as June 11, underlining the current pace of growth.

HMC Investment & Securities, a South Korean brokerage, estimated on July 17 that each of Line's monthly active users would have a market value of 92,810 Korean won, or $90.30. Estimating 230 million monthly active users of the service, Line's total market value would be about 21.3 trillion Korean won ($20.7 billion), the brokerage said.

That per-user estimate compares with the $42 per monthly active user that Facebook paid when it bought WhatsApp in February. Facebook is itself valued at $149.38 per user, while social media company Twitter Inc has a market value of $100.77 per user, according to Reuters calculations.

Despite its strong earnings report, Naver shares ended 2.6 percent lower on Thursday, trailing the 0.31 percent drop in the wider market.

The shares are down 15 percent from an early March peak, with investors worried about what the Line IPO would mean for shareholders in the parent company, analysts said. Line accounted for about 26 percent of total sales during the quarter at Naver.

Some analysts have said Line may need to strike partnerships with foreign players to expand into new markets in order to compete with bigger rivals like WeChat or WhatsApp. SoftBank and Alibaba have both in the past been rumoured as potential partners for Line.

Alibaba and SoftBank both declined to comment on Thursday.

Others are sceptical about whether local partnerships in major market would really work for Line.

"I think the top players in the messaging app market are getting established in each continent, and I question how much an investment from Alibaba would really help Line succeed in China at this point," said Alpha Asset Management fund manager Hong Jeong-woong.

$1 = 1027.7500 Korean Won Additional reporting by Narae Kim; Editing by Stephen Coates, Tony Munroe and Kenneth Maxwell

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