Kor ea retail BNP PARIBAS Boyoung Kim. CVS: Double-digit OP growth to return in 2H16E

Transcription

1 Kor ea retail BNP PARIBAS 29 MARCH 2016 SECTOR REPORT KOREA RETAIL CVS: Double-digit OP growth to return in 2H16E One-offs weigh on 1H16E, but 2H16E looks brighter We forecast normalised OP growth of 25-27% y-y for BGF Retail and GS Retail, but a decline in reported OP of 37-40% y-y in 1Q16 due to one-offs. We are confident that both companies will see a meaningful rebound in 2H16 with 20-25% y-y OP growth, and attribute 1H16 weakness to one-off gains of cigarette inventory in 1Q15 and higher-than-expected van commission rebates in 1H15, as well as sluggish other divisions in 1H16. However, the net store increase has been much faster-thanexpected in 1Q16, and food sales continue their strong momentum with double-digit y-y growth YTD, indicating a brighter 2H16. Core business remain intact; fresh food continues to drive growth We expect fresh food at CVS to record >20-30% y-y sales growth in Fresh food accounted for 7.8% of GS Retail s revenue in 2015 (vs 7% in 2014 and 30% at Seven Eleven Japan) and still enjoys strong growth thanks to the addition of new products and brands such as espresso coffee. BGF Retail has been a laggard in fresh food but is now seeing strong catch-up momentum after launching a new lunch box brand in December 2015, which contributed 23% of total fresh food sales in January As a result, we expect fresh food to contribute more than 5.5% of BGF Retail s revenue in 2H16, from 5% in Share rebound very likely in 2H16E We lower 2016E/17E EPS as we have slightly raised our assumptions for COGS and SG&A, and believe new stores may cannibalise sales at older outlets. Our TPs are based on the average of P/E and DCF methodologies: our new TP for BGF is KRW194,000 (from KRW214,000) and for GS it is KRW59,000 (from KRW62,000). We maintain BUY ratings because 1) CVS is the only retail channel that enjoys rising customer traffic, rising ASPs, and solid franchise demand, 2) a successful fresh food take-off implies promising growth visibility, and 3) continued innovations should support customer traffic growth (i.e. introduction of internet banking and EV battery charge services). BNPP recommendations Company BBG code Rating Share price Target price Upside/downside GS Retail KS Buy 47, , % BGF Retail KS Buy 166, , % Note: Priced at close of business 29/3/2016. Share prices and TPs are in listing currency. Sources: FactSet; BNP Paribas estimates boyoung.kim@asia.bnpparibas.com Our research is available on Thomson One, Bloomberg, TheMarkets.com, FactSet and on Please contact your salesperson for authorisation. Please see the important notice on the back page. PREPARED AND PUBLISHED BY NON-US BROKER-DEALER(S): BNP PARIBAS SECURITIES KOREA CO LTD. THIS MATERIAL HAS BEEN APPROVED FOR U.S DISTRIBUTION. ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES CAN BE FOUND AT APPENDIX ON PAGE 16.

2 Investment thesis We raise 2016E/2017E sales but lower 2016E/2017E EPS: Faster store opening: Thanks to strong demand for new stores and slower than expected store closures, net store increases have exceeded our expectation in 1Q16. We revise our forecast net store increase to 800 from 600 for 2016; we lower our SSSG forecast to 8% from 9%, considering potential sales cannibalisation. Bigger-than-expected impact from one-offs: We now believe that the OP contribution from inventory gains and van commission rebates in 2015 was bigger than we previously expected. Accordingly, we have slightly raised our assumptions for COGS and SG&A for both companies. We maintain our BUY ratings but marginally lower our P/E and DCF average-based TPs, incorporating revised earnings forecasts for both BGF Retail and GS Retail. In our P/E valuations, we maintain our target multiple of 24x, to reflect the improving growth visibility from 2H16E; this multiple is in line with the Asian peer average (on Bloomberg consensus estimates). In our DCF valuations, we maintain our key assumptions WACC (6.6% for BGF Retail and 6.5% for GS Retail), risk free rate (2.1%), equity risk premium (6.1%), beta (0.8x for BGF Retail and 0.9x for GS Retail), and perpetual growth (2%). Catalyst We expect catalysts to be: 1) improved shareholder return policies (higher dividend payouts or share buybacks), 2) fresh food sales growth and margin expansion from 2H16, and 3) potential synergies or turnaround at subsidiaries. Risk to our call Risks to our forecasts include 1) regulatory pressures, including restrictions on further sales rebates; 2) a slowdown in net store increases and SSSG in a competitive environment; and 3) unfavourable weather. M&A can become risks for both companies, but the liquidation of supermarket and property businesses remains a long-term opportunity for GS Retail, in our view. CONTENTS Event calendar Date Event 1Q16 preview... 3 Food to continue growing at double-digit SSSG in 2016E... 4 More services on offer at CVS... 6 Other divisions Mar-16 MOTIE releases February SSS growth data 1 st week of Apr KOSIS releases February retail sales data Mid-May GS Retail releases 1Q16 Result Mid-May BGF Retail releases 1Q16 Result Sources: Ministry of Trade, Industry, and Energy (MOTIE); Bloomberg; BNP Paribas Forecasts and valuations... 8 BGF Retail and GS Retail historical P/E (x) GS Retail BGF Retail May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16 Sources: Bloomberg; BNP Paribas 2 BNP PARIBAS 29 MARCH 2016

3 1Q16 preview We expect CVS business to deliver strong sales growth of 21-26% y-y in 1Q16, thanks to 10-15% y-y SSSG (5-8% y-y excluding cigarette sales) and 10-12% y-y net store increase. Solid SSSG: We forecast SSSG will remain solid at 10-15% y-y in 1Q16 and 5-7% y-y in 2016 for the full-year. We forecast combined SSSG in January and February was roughly 20% y-y (or 8-9% y-y excluding cigarette sales) thanks to low-base effect from last year s slower traffic growth after cigarette price hike. Although SSSG should have normalised in March, we forecast SSSG will remain at mid-single digits (5-8% y-y), driven by strong food sales growth. Store openings: We expect the net store increase will remain strong in 2016, thanks to rising demand for new stores and lower store closures due to improved per-store profitability. Despite the rapid net store increase by BGF Retail (1,001) and GS Retail (995) in 2015, the store contract renewal process has been successful in 1Q16, according to management. In 1Q16, we expect each company to deliver a 300 net store increase. One-off costs to weigh on OP until 1H16E: We expect OP to bottom out with a 38% y-y decline in 1Q16, recovering to a 7-10% y-y increase in 2Q16 and fully normalising at 18-25% y-y in 2H16. In 1H16, the ban on van commission rebates (which started from July 2015 and boosted CVS operators OP by KRW4b-5b quarterly until 1H15) should drag down comparable OP by 8-10%. The elimination of cigarette inventory gains, which boosted OP by KRW20b-22b (even more than our previous forecast) in 1Q15, should result in a >45-50% y-y OP decline in 1Q16E. Exhibit 1: 1Q16 and 2016 preview BGF Retail 1Q16E 1Q15 Change BBG cons Diff 2016E 2015 Change BBG cons Diff (KRW b) (KRW b) (y-y %) (KRW b) (%) (KRW b) (KRW b) (y-y %) (KRW b) (%) Sales 1, , ,128 4, , OP (40.0) (8.7) NP (21.9) 26 (1.2) (0.9) 170 (11.6) GS Retail Sales 1,631 1, , ,321 6, , OP (37.5) 36 (30.6) (4.8) NP (51.8) 22 (32.6) (2.8) 178 (10.2) Sources: Bloomberg; BNP Paribas estimates Exhibit 2: CVS - retail sales growth vs per-store sales growth (y-y %) CVS retail sales growth Per-store sales growth (6) Jul 13 Sep 13 Nov 13 Jan 14 Mar 14 May 14 Jul 14 Sep 14 Nov 14 Jan 15 Mar 15 May 15 Jul 15 Sep 15 Nov 15 Jan 16 Source: Ministry of Trade, Industry, and Energy (MOTIE) Exhibit 3: CVS traffic and ASP growth (y-y %) Revenue per ticket Number of tickets (2) Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Source: Ministry of Trade, Industry, and Energy (MOTIE) Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 3 BNP PARIBAS 29 MARCH 2016

4 Food to continue growing at double-digit SSSG in 2016E The year 2015 was a turning point in which CVS positioned itself as a food service operator. Fresh food sales at convenience stores grew 18% y-y in 2015 (vs 5% y-y in 2014 and 12% y-y in 2013), according to MOTIE. We expect fresh food will enjoy a double-digit sales CAGR in , thanks to growing demand for lunch boxes, coffee, desserts, etc. As a result, the revenue contribution of profitable food products should start rising and lift overall gross profit margin from 2H16E. Exhibit 4: CVS retail sales growth by merchandise Exhibit 5: CVS sales contribution of cigarette and food (%) Jul 13 Sep 13 Nov 13 Jan 14 Mar 14 Beverage & processed food Cigarette Fresh food May 14 Jul 14 Sep 14 Nov 14 Jan 15 Mar 15 May 15 Jul 15 Sep 15 Nov 15 Jan 16 (%) Cigarette Food total Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q E Source: Ministry of Trade, Industry, and Energy (MOTIE) Source: Ministry of Trade, Industry, and Energy (MOTIE) Exhibit 6: Revenue breakdown by merchandise (FY15) Exhibit 7: Gross profit margin by merchandise (FY15) (%) BGF Retail GS Retail (%) Korea Japan Family Mart Japan Seven Eleven Japan * Fast food Food (processed, daily, snack) Cigarettes Liquor E-commerce Other Fast food Food (processed, daily, snack) Cigarettes Liquor E-commerce Other Source: Companies; BNP Paribas Source: GS Retail for Korea; Family Mart Japan for Japan; BNP Paribas GS Retail GS Retail s fresh food contribution reached 7.8% of total sales in 4Q15, thanks to strong lunch box demand, sales of which grew >40% y-y in In 2016, the company plans to maintain a 20-30% fresh food sales CAGR. Fast-growing demand for espresso cafe drinks: We expect fresh coffee to again be a category killer in 2016, just like in Japanese convenience stores. Based on management guidance, we estimate fresh coffee beverage sales will rise from KRW10b in 2015 (0.2% of CVS sales) to KRW25b (0.5% of CVS sales) in Guidance includes: a) ASP of KRW1,000 per cup; b) doubling the number of counters equipped with espresso machines to 3,000 (equivalent to one third of total outlets) from the current 1,500; and c) daily average sales volume per store of 20 cups (already reached); the estimated breakeven point is 14 cups. 4 BNP PARIBAS 29 MARCH 2016

5 Launch of new private label brand to improve brand image and consumer perception of product quality. In 4Q15, the company changed the name of its private label brand to You us from GS25. During the transition process, it scrapped product inventory with the previous name at a write-off cost of roughly KRW4b-5b in 4Q15. Private label already contributed 35% of ex-cigarette sales in BGF Retail BGF Retail s fresh food contribution is slightly lower than that of GS Retail, at 5% of sales in However, the company highlights several improvements in 1Q16 and we expect the contribution to rise to 5.5-6% by end The revenue contribution of lunch boxes to total fresh food increased from 20% in 2015 to 33% in January after the launch of a new brand that collaborated with famous chef Baek Jong-Won. This new brand contributes 72% of lunch box sales as of 1Q16. The company currently offers four products under this brand but plans to launch an additional two products by end BNP PARIBAS 29 MARCH 2016

6 More services on offer at CVS As we expected, the Korean CVS industry is continuously offering innovation. Although revenue contributions from new services should initially be minimal, we expect them to help increase customer traffic to CVS in the long term. Internet banking Both GS Retail and BGF Retail plan to offer internet banking services in the next one to two years. We think the earnings contribution from internet banking services will be minimal, given a different operating environment in Korea to that in other countries; however, CVS will likely enjoy traffic growth because of it in the long term, in our view. In Japan, the major revenue source from internet banking by Seven & I is ATM transaction fees, given high service fees by traditional banks. Yet, ATM transactions are already free or attract very low fees (<KRW1,000) in Korea. Therefore, in order to boost accounting opening, internet banking operators may provide free ATM transaction services at CVS, which should eventually lead to traffic growth at CVS. BGF Retail: Although I-Bank, in which BGF Retail has a stake, failed to win an internet banking licence, BGF Retail separately signed a MOU with NH Investment & Securities in March 2016, according to the media. The basic agreement is to provide cash transaction services at no fee through BGF Retail s nearly 10,000 ATM machines from this year, and also includes potential future services such as account opening at CVS counters. NH I&S has 65,652 clients, equivalent to 1.5-2% of BGF Retail s total daily customers (= the industry average customers per CVS of 370 in 2015 x total number of BGF Retail s CVS outlets of 9,409 at end-2015). BGF Retail plans to increase the number of partners in the next few years. GS Retail: After being selected as one of the internet banking consortiums, K- Bank consortium, in which GS Retail has 10% stake, plans to start providing internet banking services at CVS from 2H15. Although details were not disclosed, management guided that it is benchmarking Seven & I s business model. Electric vehicle battery charge station GS Retail recently signed a MOU with Korea Electric Vehicle Charge Service Corp (KEVCS) in March 2016 to install battery charge stations at CVS and supermarkets starting this year in Jeju. KEVCAS is the JV that Kepco, KT, and a few other companies established together. Given limited demand for EV battery charging and the limited number of suitable stores in metropolitan areas, we expect its earnings contribution to be limited, especially in Seoul and Gyunggi, which contribute more than 60% of CVS sales, but it should help traffic at stores in non-metropolitan areas in the long term, given faster pick-up in EV penetration. Exhibit 8: Number of registered electric vehicles in Korea by region (end-2015) (Unit) Number of registered EV (LHS) % of total vehicle (RHS) 4,000 3,500 3,000 2,500 2,000 1,500 1, (%) Jeju Seoul Kyunggi Other 0.0 Source: Ministry of Environment(for EV); Ministry of Land, Infrastructure and Transport (for total autos) 6 BNP PARIBAS 29 MARCH 2016

7 Other divisions GS Retail We expect other divisions to remain sluggish in 2016 and record losses at supermarkets and hotels in 1Q16 on weak seasonality. 1 Supermarket: This business will likely record operating losses in 1Q16 due to weak seasonality, but we expect losses to remain unchanged y-y thanks to resilient SSSG at flat to 1% during January and February. 2 Hotel: The consolidation of Parnas Hotel (unlisted) from August 2015 will likely drag down earnings in 1H16E, because 1) Parnas Office Tower will undergo its final construction, which will end before Chuseok, and will likely hurt traffic to the Grand Intercontinental Hotel (next to Parnas Tower) until 3Q16, and 2) 4Q is the strongest season and other quarters are relatively weak. The company is currently working on securing anchor tenants. 3 Other business: We expect its subway station leasing business to take some time to recover due to a high vacancy rate (10% in 2014 to 30-40% in end-2015 and not much improved so far in 2016). However, the magnitude of y-y OP decline should be mild compared with 4Q15, due to the elimination of one-off costs such as inventory write-off on private-label products during the brand transition and the employee year-end special bonus. BGF Retail The consolidation of Bokwang Icheon, which BGF Retail acquired in February 2016, started in March Management targets to turn Bokwang Icheon profitable with KRW3b-4b OP and KRW12b-13b revenue in 2017, after reaching breakeven point in 2016 by converting the premium membership golf course to a public facility in June However, we conservatively assume it will record KRW5b operating losses during March and December BNP PARIBAS 29 MARCH 2016

8 KOREA RETAIL Forecasts and valuations Earnings revision We slightly raise 2016E/2017E sales but lower 2016E/2017E EPS: Faster store opening: Thanks to strong demand for new store openings and slower than expected store closures, the net store increase seems to have exceeded our expectation in 1Q16. We revise up our forecast of net store increase to 800 from 600 for 2016; we lower our SSSG forecast to 8% from 9% considering potential sales cannibalisation from new stores. Bigger-than-expected impact from one-offs: We now think the OP contribution from inventory gains and van commission rebates in 2015 was bigger than we previously expected. Accordingly, we slightly raise our assumptions for COGS and SG&A for both companies. BGF Retail booked van commission rebates as revenue and GS Retail booked them as SG&A costs until June Exhibit 9: Earnings revisions After Before Change * 2016E 2017E 2015** 2016E 2017E E 2017E (KRW b) (KRW b) (KRW b) (KRW b) (KRW b) (KRW b) (%) (%) (%) BGF Retail Gross sales 4,334 5,128 5,742 4,334 5,100 5, Operating profit (8.1) (6.1) Pre-tax profit (9.0) (6.6) Net profit (9.9) (7.6) EPS (KRW) 6,144 6,070 7,310 6,139 6,744 7, (10.0) (7.4) GS Retail Gross sales 6,273 7,321 8,068 6,273 7,290 7, Operating profit (0.1) (4.5) (5.4) Pre-tax profit (6.1) (6.4) Net profit (5.6) (6.1) EPS (KRW) 2,133 2,072 2,450 2,133 2,200 2,608 (0.0) (5.8) (6.1) Note: * Actual reported figures and ** preliminary figures Source: BNP Paribas estimates Target prices and recommendations We maintain our BUY ratings but marginally lower our P/E and DCF average-based TPs, incorporating revised earnings forecasts for both BGF Retail and GS Retail. In our DCF valuations, we incorporate our earnings revisions but maintain our key assumptions such as WACC (6.6% for BGF Retail and 6.5% for GS Retail), risk free rate (2.1%), equity risk premium (6.1%), beta (0.8x for BGF Retail and 0.9x for GS Retail), and perpetual growth rate (2%). For our P/E valuations, we maintain our target multiple of 24x to reflect improving growth visibility from 2H16E; this is in line with the Asian peer average (on Bloomberg consensus estimates). In Japan, the CVS segment saw a 7-8% EPS CAGR in , but an average forward P/E of 22x and a peak P/E of 35x (vs an 11x average forward P/E for the grocery retailers). In Korea, we forecast a 16-20% EPS CAGR for the segment in , but their current P/E of 18-23x is below the Japanese historical average. Hence, we expect the segment s P/E multiple to expand to 25-30x. 8 BNP PARIBAS 29 MARCH 2016

9 Exhibit 10: Target price revision ---- Fair value per share Target/implied P/E --- Note After Before After Before (KRW) (KRW) (x) (x) BGF Retail DCF-based fair value 245, , PER-based fair value 143, , Applied Asia peer average given stronger growth visibility from 2H16E Fair value per share (average, rounded off) 194, , GS Retail DCF-based fair value 69,000 71, PER-based fair value 49,700 52, Applied Asia peer average given stronger growth visibility from 2H16E Fair value per share (average, rounded off) 59,000 62, Source: BNP Paribas estimates Exhibit 11: BGF Retail and GS Retail historical P/E (x) GS Retail BGF Retail Exhibit 12: Taiwan peers historical P/E (x) PCSC Taiwan Family Mart May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16 Jan-09 May-09 Sep-09 Jan-10 May-10 Sep-10 Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 Jan-13 May-13 Sep-13 Jan-14 May-14 Sep-14 Jan-15 May-15 Sep-15 Jan-16 Sources: Bloomberg; BNP Paribas estimates Sources: Bloomberg; BNP Paribas Exhibit 13: Japanese peers historical P/E (x) Family Mart Lawson Seven & i Holdings Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Sources: Bloomberg; BNP Paribas Exhibit 14: Thai CP All s historical P/E (x) Feb-09 May-09 Aug-09 Nov-09 Feb-10 May-10 Aug-10 Nov-10 Feb-11 May-11 Aug-11 Nov-11 Feb-12 May-12 Aug-12 Nov-12 Feb-13 May-13 Aug-13 Nov-13 Feb-14 May-14 Aug-14 Nov-14 Feb-15 May-15 Sources: Bloomberg; BNP Paribas 9 BNP PARIBAS 29 MARCH 2016

10 Exhibit 15: Asian peer valuation BBG code Curr Price Mkt cap P/E P/BV EPS growth ROE Div yield FY15E FY16E FY15E FY16E FY15E FY16E FY15E FY16E FY15E FY16E (LC) (USD b) (x) (x) (x) (x) (%) (%) (%) (%) (%) (%) GS Retail KS KRW 47, (2.8) BGF Retail KS KRW 166, (1.2) Seven & I 3382 JP JPY 5, Lawson 2651 JP JPY 9, Family Mart 8028 JP JPY 5, (13.6) CPALL CPALL TB THB President Chain Store 2912 TT TWD Peer average Priced at close 29 March 2016 Sources: Bloomberg; BNP Paribas estimates for GS Retail and BGF Retail, Bloomberg consensus estimates for others Exhibit 16: BGF Retail sales and operating profit overview P 2016E 2017E 1Q15 2Q15 3Q15 4Q15P 1Q16E 2Q16E 3Q16E 4Q16E (KRW b) (KRW b) (KRW b) (KRW b) (KRW b) (KRW b) (KRW b) (KRW b) (KRW b) (KRW b) (KRW b) (KRW b) Sales Consolidated 3, , , , , , , , , , ,315.6 BGF Retail 3, , , , , , , , , , ,284.8 Bokwang Icheon Other Change (y-y %) Consolidated BGF Retail Bokwang Icheon 50.0 Other (3.7) (1.7) Operating profit Consolidated BGF Retail Bokwang Icheon (4.5) (1.0) (1.2) (1.4) (1.4) (0.5) Other (0.0) OPM (%) Consolidated BGF Retail Bokwang Icheon (100.0) (15.0) (550.0) (85.0) (85.0) (49.1) Other (0.2) Contribution (%) Consolidated BGF Retail Bokwang Icheon (2.4) (0.4) Other (0.1) Change (y-y %) Consolidated (41.1) BGF Retail (38.4) Bokwang Icheon Other 10.1 (24.1) (104.6) (7.5) (15.2) (41.2) n.m. (10.7) Sources: BGF Retail; BNP Paribas estimates 10 BNP PARIBAS 29 MARCH 2016

11 Exhibit 17: GS Retail sales and operating profit overview E 2016E 2017E 1Q15 2Q15 3Q15 4Q15 1Q16E 2Q16E 3Q16E 4Q16E (KRW b) (KRW b) (KRW b) (KRW b) (KRW b) (KRW b) (KRW b) (KRW b) (KRW b) (KRW b) (KRW b) (KRW b) Sales Consolidated 4,962 6,273 7,321 8,068 1,325 1,568 1,724 1,657 1,631 1,853 2,011 1,827 CVS 3,502 4,653 5,538 6, ,168 1,292 1,243 1,197 1,391 1,518 1,431 SM 1,331 1,389 1,458 1, Hotel Other Change (y-y %) Consolidated CVS SM (2.9) (2.5) Hotel n.a n.a. n.a. n.a. n.a (23.7) Other (2.6) Breakdown (%) CVS SM Hotel Other Operating profit Consolidated CVS SM (1.9) (9.4) (2.0) (9) Hotel (0.2) Other Change (y-y %) Consolidated (7.6) (37.4) CVS (7.7) (38.0) SM (89.7) (68.8) n.m n.m. (6.0) (5.7) n.m. Hotel n.a. (9.9) 28.4 n.a. n.a. n.a. n.a (34.9) Other 57.6 (14.8) (73.3) (3.8) (5.5) Margin (%) Consolidated CVS SM (0.6) (3.0) (0.6) (2.9) Hotel (0.5) Other Sources: GS Retail; BNP Paribas estimates 11 BNP PARIBAS 29 MARCH 2016

12 Financial statements BGF Retail Profit and Loss (KRW b) Year Ending Dec 2014A 2015A 2016E 2017E 2018E Revenue 3,368 4,334 5,128 5,742 6,290 Cost of sales ex depreciation (2,559) (3,424) (4,077) (4,556) (4,981) Gross profit ex depreciation ,051 1,185 1,309 Other operating income Operating costs (580) (619) (752) (831) (918) Operating EBITDA Depreciation (105) (108) (110) (127) (127) Goodwill amortisation Operating EBIT Net financing costs Associates Recurring non operating income Non recurring items Profit before tax Tax (35) (44) (48) (58) (67) Profit after tax Minority interests 0 (1) (1) (1) (2) Preferred dividends Other items Reported net profit Non recurring items & goodwill (net) Recurring net profit Per share (KRW) Recurring EPS * 4,125 6,144 6,070 7,310 8,437 Reported EPS 4,125 6,144 6,070 7,310 8,437 DPS 600 1,204 1,190 1,433 1,654 Growth Revenue (%) Operating EBITDA (%) Operating EBIT (%) Recurring EPS (%) (1.2) Reported EPS (%) (1.2) Operating performance Gross margin inc depreciation (%) Operating EBITDA margin (%) Operating EBIT margin (%) Net margin (%) Effective tax rate (%) Dividend payout on recurring profit (%) Interest cover (x) n/a n/a n/a n/a n/a Inventory days Debtor days Creditor days Operating ROIC (%) (70.8) (170.8) (134.6) (156.5) (117.9) ROIC (%) ROE (%) ROA (%) *Pre exceptional pre-goodwill and fully diluted Revenue By Division (KRW b) 2014A 2015A 2016E 2017E 2018E BGF Retail Revenue 3,303 4,258 5,040 5,642 6,179 Other Revenue Source: BGF Retail, BNP Paribas estimates 12 BNP PARIBAS 29 MARCH 2016

13 Financial statements BGF Retail Cash Flow (KRW b) Year Ending Dec 2014A 2015A 2016E 2017E 2018E Recurring net profit Depreciation Associates & minorities (1) (1) (1) (1) (1) Other non-cash items Recurring cash flow Change in working capital Capex - maintenance (68) (93) (220) (100) (100) Capex - new investment Free cash flow to equity Net acquisitions & disposals Dividends paid (10) (15) (30) (29) (35) Non recurring cash flows (188) (230) (18) (20) (22) Net cash flow (5) Equity finance Debt finance 17 (32) Movement in cash 12 (20) Per share (KRW) Recurring cash flow per share 8,616 11,104 12,599 14,540 13,501 FCF to equity per share 7,823 10,417 5,625 12,119 10,736 Balance Sheet (KRW b) Year Ending Dec 2014A 2015A 2016E 2017E 2018E Working capital assets Working capital liabilities (516) (624) (719) (792) (852) Net working capital (400) (511) (578) (634) (679) Tangible fixed assets Operating invested capital (31) (136) (77) (143) (197) Goodwill Other intangible assets Investments Other assets Invested capital Cash & equivalents (607) (835) (880) (1,077) (1,286) Short term debt Long term debt * Net debt (494) (767) (812) (1,009) (1,218) Deferred tax Other liabilities Total equity ,040 1,208 Minority interests Invested capital * includes convertables and preferred stock which is being treated as debt Per share (KRW) Book value per share 22,686 31,319 36,091 41,968 48,752 Tangible book value per share 20,780 29,231 33,936 39,675 46,285 Financial strength Net debt/equity (%) (86.4) (99.1) (90.7) (96.8) (100.4) Net debt/total assets (%) (36.9) (47.3) (43.5) (47.9) (51.6) Current ratio (x) Valuation 2014A 2015A 2016E 2017E 2018E Recurring P/E (x) * Recurring target price (x) * Reported P/E (x) Dividend yield (%) P/CF (x) P/FCF (x) Price/book (x) Price/tangible book (x) EV/EBITDA (x) ** target price (x) ** EV/invested capital (x) * Pre exceptional & pre-goodwill and fully diluted ** EBITDA includes associate income and recurring non operating income Source: BGF Retail, BNP Paribas estimates 13 BNP PARIBAS 29 MARCH 2016

14 Financial statements GS Retail Profit and Loss (KRW b) Year Ending Dec 2014A 2015A 2016E 2017E 2018E Revenue 4,962 6,273 7,321 8,068 8,752 Cost of sales ex depreciation (3,877) (5,014) (5,867) (6,457) (6,987) Gross profit ex depreciation 1,086 1,259 1,454 1,611 1,765 Other operating income Operating costs (762) (834) (989) (1,090) (1,196) Operating EBITDA Depreciation (180) (199) (230) (247) (250) Goodwill amortisation Operating EBIT Net financing costs (12) (18) (32) (32) (23) Associates (3) (2) (1) (0) 1 Recurring non operating income Non recurring items Profit before tax Tax (37) (55) (54) (64) (78) Profit after tax Minority interests 0 (2) (3) (4) (5) Preferred dividends Other items Reported net profit Non recurring items & goodwill (net) Recurring net profit Per share (KRW) Recurring EPS * 1,445 2,133 2,072 2,450 2,981 Reported EPS 1,445 2,133 2,072 2,450 2,981 DPS ,188 Growth Revenue (%) Operating EBITDA (%) (1.0) Operating EBIT (%) (7.6) Recurring EPS (%) (6.5) 47.6 (2.8) Reported EPS (%) (6.5) 47.6 (2.8) Operating performance Gross margin inc depreciation (%) Operating EBITDA margin (%) Operating EBIT margin (%) Net margin (%) Effective tax rate (%) Dividend payout on recurring profit (%) Interest cover (x) Inventory days Debtor days Creditor days Operating ROIC (%) ROIC (%) ROE (%) ROA (%) *Pre exceptional pre-goodwill and fully diluted Revenue By Division (KRW b) 2014A 2015A 2016E 2017E 2018E CVS 3,502 4,653 5,538 6,205 6,799 Supermarket 1,331 1,389 1,458 1,499 1,548 Other Source: GS Retail, BNP Paribas estimates 14 BNP PARIBAS 29 MARCH 2016

15 Financial statements GS Retail Cash Flow (KRW b) Year Ending Dec 2014A 2015A 2016E 2017E 2018E Recurring net profit Depreciation Associates & minorities (1) Other non-cash items Recurring cash flow Change in working capital Capex - maintenance (187) (255) (330) (200) (200) Capex - new investment Free cash flow to equity Net acquisitions & disposals Dividends paid (35) (46) (65) (64) (75) Non recurring cash flows 7 (766) (37) (36) (35) Net cash flow 153 (502) Equity finance Debt finance (93) (100) (200) Movement in cash 60 (53) 8 68 (5) Per share (KRW) Recurring cash flow per share 4,101 5,327 5,076 5,662 6,217 FCF to equity per share 2,350 4,029 1,435 3,474 3,964 Balance Sheet (KRW b) Year Ending Dec 2014A 2015A 2016E 2017E 2018E Working capital assets Working capital liabilities (445) (702) (821) (904) (978) Net working capital (186) (373) (433) (472) (505) Tangible fixed assets 898 2,259 2,395 2,384 2,369 Operating invested capital 712 1,885 1,962 1,912 1,863 Goodwill Other intangible assets Investments Other assets 1,319 1,813 1,948 2,013 2,141 Invested capital 2,042 3,513 3,721 3,732 3,808 Cash & equivalents (433) (154) (155) (238) (174) Short term debt Long term debt * 400 1,024 1, Net debt 67 1,044 1, Deferred tax Other liabilities Total equity 1,682 1,793 1,889 2,002 2,140 Minority interests Invested capital 2,042 3,513 3,721 3,732 3,808 * includes convertables and preferred stock which is being treated as debt Per share (KRW) Book value per share 21,838 23,281 24,527 26,000 27,793 Tangible book value per share 21,838 23,281 24,527 26,000 27,793 Financial strength Net debt/equity (%) Net debt/total assets (%) Current ratio (x) Valuation 2014A 2015A 2016E 2017E 2018E Recurring P/E (x) * Recurring target price (x) * Reported P/E (x) Dividend yield (%) P/CF (x) P/FCF (x) Price/book (x) Price/tangible book (x) EV/EBITDA (x) ** target price (x) ** EV/invested capital (x) * Pre exceptional & pre-goodwill and fully diluted ** EBITDA includes associate income and recurring non operating income Source: GS Retail, BNP Paribas estimates 15 BNP PARIBAS 29 MARCH 2016

16 Disclaimers and Disclosures APPENDIX DISCLAIMERS AND DISCLOSURES APPLICABLE TO NON-US BROKER-DEALER(S): BNP PARIBAS SECURITIES KOREA CO LTD ANALYST(S) CERTIFICATION, BNP Paribas Securities Korea Co Ltd, , The BNP Paribas Securities Korea Co Ltd Analysts mentioned in this disclaimer are employed by a non-us affiliate of BNP Paribas Securities Corp., and are not registered/ qualified pursuant to NYSE and/or FINRA regulations The individual(s) identified above certify(ies) that (i) all views expressed in this report accurately reflect the personal view of the analyst(s) with regard to any and all of the subject securities, companies or issuers mentioned in this report; and (ii) no part of the compensation of the analyst(s) was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed herein. IMPORTANT DISCLOSURES REQUIRED IN THE UNITED STATES BY FINRA RULES AND OTHER JURISDICTIONS "BNP Paribas is the marketing name for the global banking and markets business of BNP Paribas Group. No portion of this report was prepared by BNP Paribas Securities Corp (US) personnel, and it is considered Third-Party Affiliate research under NASD Rule The following disclosures relate to relationships between companies covered in this research report and the BNP entity identified on the cover of this report, BNP Securities Corp., and other entities within the BNP Paribas Group (collectively, "BNP Paribas"). The disclosure column in the following table lists the important disclosures applicable to each company that has been rated and/or recommended in this report: Company Ticker Disclosure (as applicable) N/A N/A N/A BNP Paribas represents that: 1. Within the past year, it has managed or co-managed a public offering for this company, for which it received fees. 2. It had an investment banking relationship with this company in the last 12 months. 3. It received compensation for investment banking services from this company in the last 12 months. 4. It expects to receive or intends to seek compensation for investment banking services from the subject company/ies in the next 3 months. 5. It beneficially owns 1% or more of any class of common equity securities of the subject company. 6. It makes a market in securities in respect of this company. 7. The analyst(s) or an individual who assisted in the preparation of this report (or a member of his/her household) has a financial interest position in securities issued by this company. The financial interest is in the common stock of the subject company, unless otherwise noted. 8. The analyst (or a member of his/her household) is an officer, director, or advisory board member of this company or has received compensation from the company. IMPORTANT DISCLOSURES REQUIRED IN KOREA The disclosure column in the following table lists the important disclosures applicable to each Korea listed company that has been rated and/or recommended in this report: Company Ticker Price (as of 29-Mar-2016 closing price) Interest BGF Retail KS KRW166,500 N/A GS Retail KS KRW47,750 N/A 1. The performance of obligations of the Company is directly or indirectly guaranteed by BNP Paribas Securities Korea Co. Ltd ( BNPPSK ) by means of payment guarantees, endorsements, and provision of collaterals and/or taking over the obligations. 2. BNPPSK owns 1/100 or more of the total outstanding shares issued by the Company. 3. The Company is an affiliate of BNPPSK as prescribed by Item 3, Article 2 of the Monopoly Regulation and Fair Trade Act. 4. BNPPSK is the financial advisory agent of the Company for the Merger and Acquisition transaction or of the Target Company whereby the size of the transaction does not exceed 5/100 of the total asset of the Company or the total number of outstanding shares. 5. BNPPSK has taken financial advisory service regarding listing to the Company within the past 1 year. 6. With regards to the tender offer initiated by the Company based on Item 2, Article 133 of the Financial Investment Services and Capital Market Act, BNPPSK acts in the capacity of the agent for the tender offer designated either by the Company or by the target company, provided that this provision shall apply only where tender offer has not expired. 7. The listed company which issued the stocks in question in case where 40 days has not passed since the new shares were listed from the date of entering into arrangement for public offering or underwriting-related agreement for issuance of stocks 8. The Company that has signed a nominated advisor contract with BNPPSK as defined in Item 2 of Article 8 of the KONEX Market Listing Regulation. 9. The Company is recognized as having considerable interests with BNPPSK in relation to No.1 to No The analyst or his/her spouse owns (including delivery claims of marketable securities based on legal regulations and trading and misc. contracts) the following securities or rights (hereinafter referred to as Securities, etc. in this Article) regardless of whose name is used in the trading. 1) Stocks, bond with stock certificate, and certificate of pre-emptive rights issued by the Company whose securities dealings are being solicited. 2) Stock options of the Company whose securities dealings are being solicited. 3) Individual stock future, stock option, and warrants that use the stocks specified in Item 1) as underlying. 16 BNP PARIBAS 29 MARCH 2016

17 History of change in investment rating and/or target price BGF Retail ( KS) May-14 Nov-14 May-15 Nov , , , , , ,000 90,000 60,000 30,000 (KRW) BGF Retail Target Price Date Rating Target price Date Rating Target price Date Rating Target price 22-May-14 Buy 75, Apr-15 Buy 127, Jul-15 Buy 200, Nov-14 Buy 84, May-15 Buy 142, Nov-15 Buy 190, Feb-15 Buy 96, Jun-15 Buy 189, Feb-16 Buy 214, started covering this stock from 22 May 2014 Price and TP are in local currency Valuation and risks: Downside risks to our DCF/PE-based TP include government regulation, competition, and further M&A. Sources: FactSet; BNP Paribas GS Retail ( KS) Mar-13 Sep-13 Mar-14 Sep-14 Mar-15 Sep-15 72,000 64,000 56,000 48,000 40,000 32,000 24,000 16,000 (KRW) GS Retail Target Price Date Rating Target price Date Rating Target price Date Rating Target price 22-May-13 Buy 37, Aug-14 Buy 28, Jun-15 Buy 50, Aug-13 Buy 36, Feb-15 Buy 32, Jul-15 Buy 56, Jan-14 Buy 33, Apr-15 Buy 37, Aug-15 Buy 65, Jul-14 Buy 30, May-15 Buy 44, Feb-16 Buy 62, started covering this stock from 03 May 2013 Price and TP are in local currency Valuation and risks: Downside risks to our DCF/PE-based TP include government regulation, competition, and further M&A. Sources: FactSet; BNP Paribas GENERAL DISCLAIMER This report was produced by BNP Paribas Securities Korea Co Ltd, member company(ies) of the BNP Paribas Group. This report is for the use of intended recipients only and may not be reproduced (in whole or in part) or delivered or transmitted to any other person without our prior written consent. By accepting this report, the recipient agrees to be bound by the terms and limitations set forth herein. This report does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. Customers are advised to use the information contained herein as just one of many inputs and considerations prior to engaging in any trading activity. This report does not constitute a prospectus or other offering document or an offer or solicitation to buy or sell any securities or other investments. This report is not intended to provide the sole basis of any evaluation of the subject securities and companies mentioned in this report. Information and opinions contained in this report are published for reference of the recipients and are not to be relied upon as authoritative or without the recipient s own independent verification, or taken in substitution for the exercise of judgment by the recipient. Additionally, the products mentioned in this report may not be available for sale in certain jurisdictions. 17 BNP PARIBAS 29 MARCH 2016

18 As an investment bank with a wide range of activities, BNP Paribas may face conflicts of interest, which are resolved under applicable legal provisions and internal guidelines. You should be aware, however, that BNP Paribas may engage in transactions in a manner inconsistent with the views expressed in this document, either for its own account or for the account of its clients. Australia: This report is being distributed in Australia by BNP Paribas Sydney Branch, registered in Australia as ABN at 60 Castlereagh Street Sydney NSW BNP Paribas Sydney Branch is licensed under the Banking Act 1959 and the holder of Australian Financial Services Licence no and therefore subject to regulation by the Australian Securities & Investments Commission in relation to delivery of financial services. By accepting this document you agree to be bound by the foregoing limitations, and acknowledge that information and opinions in this document relate to financial products or financial services which are delivered solely to wholesale clients (in terms of the Corporations Act 2001, sections 761G and 761GA; Corporations Regulations 2001, division 2, reg & ) and/or professional investors (as defined in section 9 of the Corporations Act 2001). Canada: The information contained herein is not, and under no circumstances is to be construed as, a prospectus, an advertisement, a public offering, an offer to sell securities described herein, or solicitation of an offer to buy securities described herein, in Canada or any province or territory thereof. Any offer or sale of the securities described herein in Canada will be made only under an exemption from the requirements to file a prospectus with the relevant Canadian securities regulators and only by a dealer properly registered under applicable securities laws or, alternatively, pursuant to an exemption from the dealer registration requirement in the relevant province or territory of Canada in which such offer or sale is made. The information contained herein is under no circumstances to be construed as investment advice in any province or territory of Canada and is not tailored to the needs of the recipient. To the extent that the information contained herein references securities of an issuer incorporated, formed or created under the laws of Canada or a province or territory of Canada, any trades in such securities must be conducted through a dealer registered in Canada. No securities commission or similar regulatory authority in Canada has reviewed or in any way passed judgment upon these materials, the information contained herein or the merits of the securities described herein, and any representation to the contrary is an offence. Hong Kong: This report is prepared for professional investors and is being distributed in Hong Kong by BNP Paribas Securities (Asia) Limited to persons whose business involves the acquisition, disposal or holding of securities, whether as principal or agent. BNP Paribas Securities (Asia) Limited, a subsidiary of BNP Paribas, is regulated by the Securities and Futures Commission for the conduct of dealing in securities, advising on securities, providing automated trading services, dealing in futures contacts and advising on corporate finance. For professional investors in Hong Kong, please contact BNP Paribas Securities (Asia) Limited for all matters and queries relating to this report. India: In India, this document is being distributed by BNP Paribas Securities India Pvt. Ltd. ("BNPPSIPL"), having its registered office at 5 th floor, BNP Paribas House, 1 North Avenue, Maker Maxity, Bandra Kurla Complex, Bandra (East), Mumbai , INDIA (Tel. no / , Fax no ). BNPPSIPL is registered with the Securities and Exchange Board of India ( SEBI ) as a research analyst (Regn. No. INH ) and as a stockbroker in the Equities and the Futures & Options segments of National Stock Exchange of India Ltd. and BSE Ltd. (SEBI Regn. Nos.: INB/INF/NSF , INB/INF ; CIN: U74920MH2008FTC182807; Website: No material disciplinary action has been taken against BNPPSIPL by any regulatory or government authority. Indonesia: This report is being distributed by PT BNP Paribas Securities Indonesia and is delivered by its licensed employee(s), including marketing/sales person, to its client. PT BNP Paribas Securities Indonesia, having its registered office at Menara BCA, 35th floor, Grand Indonesia, JL. M.H. Thamrin No.1, Jakarta 10310, Indonesia, is a subsidiary company of BNP Paribas SA and licensed under Capital Market Law no. 8 year 1995, a holder of broker-dealer and underwriter licenses issued by the Capital Market and Financial Institution Supervisory Agency (now Otoritas Jasa Keuangan/OJK). PT BNP Paribas Securities Indonesia is also a member of Indonesia Stock Exchange and supervised by Otoritas Jasa Keuangan (OJK). Neither this report nor any copy hereof may be distributed in Indonesia or to any Indonesian citizens except in compliance with applicable Indonesian capital market laws and regulations. This report is not an offer of securities in Indonesia and may not be distributed within the territory of the Republic of Indonesia or to Indonesian citizens in circumstance which constitutes an offering within the meaning of Indonesian capital market laws and regulations. Japan: This report is being distributed to Japanese based firms by BNP Paribas Securities (Japan) Limited or by a subsidiary or affiliate of BNP Paribas not registered as a financial instruments firm in Japan, to certain financial institutions defined by article 17-3, item 1 of the Financial Instruments and Exchange Law Enforcement Order. BNP Paribas Securities (Japan) Limited is a financial instruments firm registered according to the Financial Instruments and Exchange Law of Japan and a member of the Japan Securities Dealers Association, the Financial Futures Association of Japan and the Type II Financial Instruments Firms Association. BNP Paribas Securities (Japan) Limited accepts responsibility for the content of a report prepared by another non-japan affiliate only when distributed to Japanese based firms by BNP Paribas Securities (Japan) Limited. Some of the foreign securities stated on this report are not disclosed according to the Financial Instruments and Exchange Law of Japan. Malaysia: This report is issued and distributed by BNP Paribas Capital (Malaysia) Sdn Bhd. The views and opinions in this research report are our own as of the date hereof and are subject to change. BNP Paribas Capital (Malaysia) Sdn Bhd has no obligation to update its opinion or the information in this research report. This publication is strictly confidential and is for private circulation only to clients of BNP Paribas Capital (Malaysia) Sdn Bhd. This publication is being provided to you strictly on the basis that it will remain confidential. No part of this material may be (i) copied, photocopied, duplicated, stored or reproduced in any form by any means or (ii) redistributed or passed on, directly or indirectly, to any other person in whole or in part, for any purpose without the prior written consent of BNP Paribas Capital (Malaysia) Sdn Bhd. Philippines: This report is being distributed in the Philippines by BNP Paribas Manila Branch, an Offshore Banking Unit (OBU) of BNP Paribas whose head office is in Paris, France. BNP Paribas Manila OBU is registered as an offshore banking unit under Presidential Decree No (PD 1034), and regulated by the Bangko Sentral ng Pilipinas. This report is being distributed in the Philippines to qualified clients of OBUs as allowed under PD 1034, and is qualified in its entirety to the products and services allowed under PD Singapore: This report is distributed in Singapore by BNP Paribas Securities (Singapore) Pte Ltd ("BNPPSSL") and may be distributed in Singapore only to an Accredited or Institutional Investor, each as defined under the Financial Advisers Regulations ("FAR") and the Securities and Futures Act (Chapter 289) of Singapore, as amended from time to time. In relation to the distribution to such categories of investors, BNPPSSL and its representatives are exempted under Regulation 35 of the FAR from the requirements in Section 36 of the Financial Advisers Act of Singapore, regarding the disclosure of certain interests in, or certain interests in the acquisition or disposal of, securities referred to in this report. For Institutional and Accredited Investors in Singapore, please contact BNP Paribas Securities (Singapore) Ptd Ltd (company registration number: C; address: 10 Collyer Quay, 34/F Ocean Financial Centre, Singapore ; tel: (65) ; fax: (65) ) for all matters and queries relating to this report. South Africa: In South Africa, BNP Paribas Securities South Africa (Pty) Ltd is a licensed member of the Johannesburg Stock Exchange and an authorised Financial Services Providers and subject to regulation by the Financial Services Board. BNP Paribas Securities South Africa (Pty) Ltd does not expressly or by implication represent, recommend or propose that the financial products referred to in this report are appropriate to the particular investment objectives, financial situation or particular needs of the recipient. This document does not constitute advice as contemplated in the Financial Advisory and Intermediary Services Act, South Korea: BNP Paribas Securities Korea is registered as a Licensed Financial Investment Business Entity under the FINANCIAL INVESTMENT SERVICES AND CAPITAL MARKETS ACT and regulated by the Financial Supervisory Service and Financial Services Commission. This document does not constitute an offer to sell to or the solicitation of an offer to buy from any person any financial products where it is unlawful to make the offer or solicitation in South Korea. Switzerland: This report is intended solely for customers who are Qualified Investors as defined in article 10 paragraphs 3 and 4 of the Swiss Federal Act on Collective Investment Schemes of 23 June 2006 (CISA) and the relevant provisions of the Swiss Federal Ordinance on Collective Investment Schemes of 22 November 2006 (CISO). Qualified Investors includes, among others, regulated financial intermediaries such as banks, securities dealers, fund management companies and asset managers of collective investment schemes, regulated insurance companies as well as pension funds and companies with professional treasury operations. This document may not be suitable for customers who are not Qualified Investors and should only be used and passed on to Qualified Investors. For specification purposes, a Swiss Corporate Customer is a Client which is a corporate entity, incorporated and existing under the laws of Switzerland and which qualifies as Qualified Investor as defined above." BNP Paribas (Suisse) SA is authorised as bank and as securities dealer by the Swiss Federal Market Supervisory Authority FINMA. BNP Paribas (Suisse) SA is registered at the Geneva commercial register under No. CH BNP Paribas (Suisse) SA is incorporated in Switzerland with limited liability. Registered Office: 2 place de Hollande, CH-1204 Geneva. Taiwan: Information on securities that trade in Taiwan is distributed by BNP Paribas Securities (Taiwan) Co., Ltd. Such information is for your reference only. 18 BNP PARIBAS 29 MARCH 2016