Amid valuation controversy, Kakao's financial subsidiaries lose growth momentum

Kakao Pay CEO Ryu Young-joon speaks during an event to celebrate its KOSPI debut at the Korea Exchange's office in Seoul, Nov. 3. Yonhap

By Lee Min-hyung

Kakao Pay's stock valuation is following in the footsteps of KakaoBank, in that it experienced a sharp decline after its initial public offering (IPO) and failed to bounce back to a previous high on lingering high valuation concerns.

The stock price of Kakao Pay closed at a record high of 193,000 won ($163) on Nov. 3 on the first day of its listing on the main bourse, up 114 percent from its public offering price of 90,000 won. But the firm's stock valuation has since been on a downward curve, hovering around the 150,000 won range as of Wednesday.

KakaoBank also enjoyed a rally only a few days after its IPO in August, but ended up losing growth momentum amid an unceasing controversy over its high valuation.

Kakao Pay has been operating mobile payment services by taking advantage of Kakao's platform dominance here. Many critics argue that the firm's potential remains promising due to the rapid rise of digital banking and fintech platforms after the start of the pandemic.

But it still remains controversial whether Kakao Pay is properly valued on the local stock market, as the firm's market capitalization topped 19.6 trillion won as of Wednesday. This figure is on par with that of Shinhan Financial Group, which is the nation's second-largest financial holding firm in terms of market capitalization.

Shinhan Financial Group generated 3.56 trillion won in net profit between January and September of this year, up 20.7 percent from the previous year. But it is only recently that Kakao Pay started making money after achieving an operating profit of 2.6 billion won in the first half of 2021. The Kakao subsidiary suffered a net loss of 17.2 billion won last year.

Kakao Pay's plan to establish a non-life insurance subsidiary is also expected to be delayed further. The company was supposed to submit a request for a business license from the nation's financial authority sometime around the end of October. But the schedule was postponed, decreasing the likelihood of a launch of the tentatively named Kakao Pay General Insurance by the end of this year.

The securities industry is in a wait-and-see mode on the outlook for Kakao Pay. According to market tracker FnGuide, no analysis reports have been released on the company since the firm's KOSPI debut.

This situation is in contrast to the earlier rosy outlook from major brokerage houses here.

“Kakao Pay's transaction volume has been on high growth, and the company is expected to report whopping earnings growth with an estimated profit of 50 billion won this year,” eBest Invesment & Securities analyst Sung Jong-hwa said in a pre-IPO outlook report on Kakao Pay.

Despite the strong potential for an earnings rebound, the government's regulatory stance on Kakao is also another risk factor for Kakao Pay and KakaoBank.

The financial watchdogs and the ruling party have stepped up their regulatory pressure on big tech firms, including Kakao and Naver. Kakao founder Kim Beom-su was also recently summoned to testify at a National Assembly audit, where he was grilled over Kakao's excessive expansion as a platform, which poses a threat to small business owners.