Lotte Confectionery (004990)

Transcription

1 Company Note May 9, 211 Lotte Confectionery (499) BUY (Maintain) TP: W2,, (Up) KOSPI (May 6) 2,147 Stock price (May 6) 1,67, Shares outstanding (mn) 1.4 Market cap (USD mn) 2,19 52-Week Low/High (won) 1,17,/1,65, 6M avg. daily turnover (USD mn) 2. Free float (%) 49. Dividend yield (211F, %).3 Foreign ownership (%) 41.3 Major shareholders (%) Lotte Aluminum Co., Ltd Lotte Foundation 8.69 Stock performance 1M 6M 12M Absolute (%) Relative to KOSPI (%p) Price chart (21.5.6=1) 14 Lotte 13 Confection ery May-1 Aug-1 Nov-1 Feb-11 May-11 Price hikes and earnings turnaround at overseas subsidiaries Raise TP to W2,, on price hikes and earnings improvement from overseas subsidiaries We maintain BUY and lift our TP to W2,, (SoP). We derive the TP from the company s higher operating and equity value. We adjusted the operating value from the price hikes in biscuits and snacks (effective May 3, 211), and equity value on rising stock prices of listed subsidiaries such as Lotte Shopping, and raised values of overseas subsidiaries. We believe Lotte Confectionery s shares will continue to rise thanks to strong operating momentum in both the domestic and overseas markets. Domestically, the recent price hike boosted profitability, and grain-related raw material costs are set to drop in 2H11F as well. Overseas subsidiaries have finished restructuring, and showed sales growth and improved profitability in 1Q11. The 211F and 212F PERs stand at 12.6x and 1.x, lower than 29 s and 21 s respective PERs of 16.3x and 12.8x. They are also below the 211F and 212F global peer PER average, which stand at 18.3x and 16.3x, respectively. In the long term, the Lotte Group is likely to improve corporate governance, which will draw market s attention on Lotte Confectionery, as the company essentially acts as a holding company for many subsidiaries within the group. Profitability to improve on price hikes Lotte Confectionery raised prices for most of its products excluding gum and chocolate by an average of 8% starting May 3, 211. The price hikes were an effort to offset rising raw material prices. We estimate the 211F raw material prices for sugar, cocoa bean, starch syrup, oil, and packaging materials to rise 19.7%, 8.%, 1.1%, 11.9%, and 4.2% YoY, respectively. Considering the trend in raw materials, there is a chance of another round of price hikes on products that did not have their prices raised this time. Profitability improved during the past two years on the growing portion of premium products in the product mix and corporate restructuring. Going forward, profitability should improve further from the product price hikes. In 212F, grain-related raw material costs will fall YoY, helping profitability. OPM will rise from 1.6% in 21 to 1.9% and 12.5% respectively, in 211F and 212F. Due to the price hikes, we raised our respective estimates for 211F, 212F and 213F OP by 1.7%, 8.2%, and 8.8% from the previous estimates. Overseas subsidiaries NP to turn positive from 212F We expect 1Q11F sales from overseas subsidiaries to grow by more than 3% YoY. Sales from the Chinese subsidiary came to W25.bn (+4% YoY), and the Kyoung Ju Lee kjlee@truefriend.com Eunkyung Lee ek.lee@truefriend.com Yr to Sales OP EBT NP EPS % chg EBITDA P/E EV/EBITDA P/B ROE Dec (W bn) (W bn) (W bn) (W bn) (won) (YoY) (W bn) (x) (x) (x) (%) 29A 1, , A 1, , F 1, , F 1, , F 1, ,

2 operating deficit is declining, showing signs of a dynamic recovery. We believe the improvements are the result from the reorganization of the sales team, and the streamlining of distribution channels during the past two years. We see strong earnings in the future thanks to localization of product, marketing and sales, and synergy with Lotte Group distribution channels such as Lotte Mart. We estimate the Chinese subsidiary s 211F net profit will turn positive to W8.8bn. NP from subsidiaries in India and Europe will improve as well, resulting in total overseas subsidiaries recording W1.8bn in net profit for 212F. We lift Lotte Confectionery s net profit estimates from 211F to 213F by 11.9%, 17.7%, 18.2%, respectively from our previous estimates on higher operating profit and overseas earnings. SoP valuation Book value Equity value Equity value per share Valuation method (W bn) (W bn) (won) Operating value 1, ,294,35 DCF (WACC 1.5%, ROIC 1.5%, Growth rate.5% Implied EBITDA Multiple(X) 7.6 Domestic (listed) Lotte Shopping 1, ,983 4% discount after applying market price Lotte Chilsung (incl. preferred stocks) ,598 4% discount after applying market price Lotte Samkang ,14 4% discount after applying market price Others ,969 4% discount after applying market price Domestic (unlisted) Kirin ,863 4% discount to book value as of Dec 21 Others ,979 4% discount to book value as of Dec 21 Overseas Lotte India ,19 5% discount to book value as of Dec 21 Lotte Europe Holdings ,69 5% discount to book value as of Dec 21 Lotte Confectionery Holdings ,42 5% discount to book value as of Dec 21 Lotte Food Holding ,966 5% discount to book value as of Dec 21 Others ,64 5% discount to book value as of Dec 21 Subtotal (B) 2,148. 1, ,258 Treasury stock (C) ,83 3% discount after applying market price Net cash (D) ,169 As of Dec 21 Total (A+B+C+D) 2, ,65,522 Note: EBITDA is 211F. Market price of domestic subsidiaries is average ending price of the past month. Sales breakdown by product category Breakdown of raw material costs 2, 1,8 1,6 1,4 (W bn) Gum Biscuit Snack Icecream Sales growth (RHS) Candy Chocolate Other (confectionery) Other(including Healthone) (%, YoY) 14% 12% 1% 8% (W bn) (%, YoY) Packaging materials Sugar & flour Dairy (domestic) Oil Other raw materials (domestic) Dairy (imported) Agricultural products Flavoring Other raw materials (imported) Changes in raw material costs (RHS) 25% 2% 15% 1,2 1, 8 6% 4% 2% % 5% % -2% -4% 2 1 % -5% F 212F 213F -6% F 212F 213F -1% 2

3 Sales and net profit breakdown by geographical area (W mn, %) F 212F 213F 214F [Sales] China 92,597 9,741 73,374 73,89 94, , ,53 174,268 India 35,455 41,458 49,899 53,734 75,228 84,255 93,523 11,94 Europe (Guylian) 8,6 122,5 112, , , ,16 137,661 Russia 52,28 62,77 71,761 83,243 94,64 17,233 12,11 Vietnam 29,733 43,85 57,364 65,667 79,81 9,623 14, ,972 Indonesia 1,419 15,232 17,669 19,966 22,761 25,493 Taiwan 16,91 19,616 22,166 25,269 28,31 Total 157,785 37, ,633 48, , ,68 629,131 74,737 [Net profit] China -11,821-17,62-11,93-18,288 8,86 11,233 14,47 15,355 India ,532 1,91 2,333 2,88 Europe (Guylian) -5,834-34,493 7,159 8,48 8,811 9,536 1,49 Russia -29,877-31,288-42,461-22,895-15,13-9,298-3,664 Vietnam -1, ,423 2,251 3,271 3,977 4,98 5,671 Indonesia -2,49-7,419-3, Taiwan ,31 1,227 Total -13,698-53,682-77,182-57,871-3,439 1,766 22,44 32,17 (%, YoY) [Sales] China India Europe (Guylian) Russia Vietnam Indonesia Taiwan Total [Net profit] China India Europe (Guylian) Russia Vietnam , Indonesia Taiwan Total Note: Companies subject to the equity method are as of December 21. Sales and NP are actual numbers for respective companies without considering the percentage of shares held by Lotte Confectionery. PE comparison with global peers (X) 211F 212F 211F Peer average (excluding Lotte Confectionery) Want Want Kellogg Kraft Foods Nestle SA PepsiCo Hershey MEIJI Ezaki Glico Lotte China Holdings Confectionery Holdings Source: Bloomberg, Korea Investment & Securities 3

4 PE band PB band 4,5, (w on) 3,, (w on) 1.5x 4,, 3,5, 3,, 2,5, 2,, 1,5, 1,, 5, Jan-4 Jan-5 Jan-6 Jan-7 Jan-8 Jan-9 Jan-1 Jan-11 2,5, 1.2x 2,,.9x 2.x 1,5, 15.x.6x 1,, 1.x 5, 5.x Jan-4 Jan-5 Jan-6 Jan-7 Jan-8 Jan-9 Jan-1 Jan-11 4

5 Balance sheet Fiscal year ending Dec. (W bn) 29A 21A 211F 212F 213F Current assets Cash & cash equivalents Accounts receivable Inventory Non-current assets 2, ,185. 3, , ,679. Investments 2,3.9 2, , ,485. 2,683.8 Tangible assets Intangible assets Total assets 3, ,74.2 3, ,25.7 4,32.2 Current liabilities Accounts payable Short-term debt and bond..... Current portion of LT debt Non-current liabilities Debentures LT debt and lease Total liabilities 1,37.8 1, ,27.3 1,43.6 1,68.5 Paid-in capital Capital surplus Capital adjustments (12.8) (15.4) (15.4) (15.4) (15.4) Retained earnings 1, , , , ,127.8 Shareholders' equity 2, , ,762. 2, ,233.7 Income statement Fiscal year ending Dec. (W bn) 29A 21A 211F 212F 213F Sales 1, , ,55.7 1,71.4 1,822.1 Gross profit SG&A expenses Operating profit Non-operating profit Interest income FX gains Equity gains Non-operating expenses Interest expenses FX losses Equity losses Earnings before tax Income taxes Profit from discontinued..... Net profit EBITDA Cash flow Fiscal year ending Dec. (W bn) 29A 21A 211F 212F 213F C/F from operations Net profit Depreciation Amortization Net incr. in W/C 19.4 (8.8) (78.8) (31.8) (18.4) Others (9.8) (29.6) (71.6) (9.9) (96.3) C/F from investing (38.7) (53.2) (127.8) (174.1) (27.3) Capex (154.1) (7.8) (73.) (78.) (82.) Decr. in fixed assets Net incr. in current assets (2.6) (26.8) (34.9) Incr. in investment (269.4) (91.8) (32.) (66.9) (88.5) Others (2.2) (2.4) (1.9) C/F from financing (5.) (48.2) 5.6 (2.4) Incr. in equity..... Incr. in debt (.) (8.2) (3.8) (3.) Dividends (4.2) (4.9) (5.6) (5.9) (6.2) Others Increase in cash (74.6) Key financial data Fiscal year ending Dec. 29A 21A 211F 212F 213F Per-share data (won) EPS 67,92 1, ,341 16, ,42 BPS 1,79,253 1,825,151 1,946,98 2,11,772 2,278,723 DPS 3,5 4, 4,2 4,4 4,6 SPS 926,41 996,531 1,12,134 1,29,275 1,295,35 Growth (%) Sales growth OP growth NP growth (46.3 ) EPS growth (46.3 ) EBITDA growth Profitability (%) OP margin NP margin EBITDA margin ROA ROE Dividend yield Stability Net debt (W bn) Int. coverage (x) D/E ratio (%) Valuations (x) PER PBR PSR EV/EBITDA Note: Based on K-GAAP (non-consolidated) 5

6 Changes to recommendation and price target Company (Code) Date Recommendation Price target Lotte Confectionery (499) BUY W1,6, BUY W1,33, BUY W1,41, BUY W2,, 2,5, 2,, 1,5, 1,, 5, M ay-9 Sep-9 Jan-1 M ay-1 Sep-1 Jan-11 6

7 Guide to Korea Investment & Securities Co., Ltd. stock ratings based on absolute 12-month forward share price performance BUY: Expected to give a return of +15% or more Hold: Expected to give a return between -15% and 15% Underweight: Expected to give a return of +15% or less Guide to Korea Investment & Securities Co., Ltd. sector ratings for the next 12 months Overweight: Recommend increasing the sector s weighting in the portfolio compared to its respective weighting in the Kospi (Kosdaq) based on market capitalization. Neutral: Recommend maintaining the sector s weighting in the portfolio in line with its respective weighting in the Kospi (Kosdaq) based on market capitalization. Underweight: Recommend reducing the sector s weighting in the portfolio compared to its respective weighting in the Kospi (Kosdaq) based on market capitalization. Analyst Certification I/We, as the research analyst/analysts who prepared this report, do hereby certify that the views expressed in this research report accurately reflect my/our personal views about the subject securities and issuers discussed in this report. I/We do hereby also certify that no part of my/our compensation was, is, or will be directly or indirectly related to the specific recommendations or views contained in this research report. Important Disclosures As of the end of the month immediately preceding the date of publication of the research report or the public appearance (or the end of the second most recent month if the publication date is less than 1 calendar days after the end of the most recent month), Korea Investment & Securities Co., Ltd., or its affiliates does not own 1% or more of any class of common equity securities of Lotte Confectionery. There is no actual, material conflict of interest of the research analyst or Korea Investment & Securities Co., Ltd., or its affiliates known at the time of publication of the research report or at the time of the public appearance. Korea Investment & Securities Co., Ltd., or its affiliates has not managed or co-managed a public offering of securities for Lotte Confectionery in the past 12 months; Korea Investment & Securities Co., Ltd., or its affiliates has not received compensation for investment banking services from Lotte Confectionery in the past 12 months; Korea Investment & Securities Co., Ltd., or its affiliates does not expect to receive or intends to seek compensation for investment banking services from Lotte Confectionery in the next 3 months. Korea Investment & Securities Co., Ltd., or its affiliates was not making a market in Lotte Confectionery s securities at the time that the research report was published. Korea Investment & Securities Co., Ltd. does not own over 1% of Lotte Confectionery shares as of May 9, 211. Korea Investment & Securities Co., Ltd. has not provided this report to various third parties. Neither the analysts covering these companies nor their associates own any shares of as of May 9, 211. Prepared by: Kyoung Ju Lee, Eunkyung Lee This report was written by Korea Investment & Securities Co., Ltd. to help its clients invest in securities. This material is copyrighted and may not be copied, redistributed, forwarded or altered in any way without the consent of Korea Investment & Securities Co., Ltd. This report has been prepared by Korea Investment & Securities Co., Ltd. and is provided for information purposes only. Under no circumstances is it to be used or considered as an offer to sell, or a solicitation of any offer to buy. We make no representation as to its accuracy or completeness and it should not be relied upon as such. The company accepts no liability whatsoever for any direct or consequential loss arising from any use of this report or its contents. The final investment decision is based on the client s judgment, and this report cannot be used as evidence in any legal dispute related to investment decisions. 7