P/E EV/EBITDA P/B ROE

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1 FILA Korea (8166) BUY (Maintain), TP: W86, (Up) Stock price (Apr 4, KRW) 67,2 Market cap (USD mn) 594 Shares outstanding (mn) 1 52W High/Low (KRW) 89,9/57,5 6M avg. daily turnover (USD mn) 4.4 Free float (%) 88.4 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) (KRW) (YoY) (W bn) (x) (x) (x) (%) 21A , A (97.6) A ,423 5, F ,875 (28.6) Foreign ownership (%) F , Note: NP and EPS of controlling interest Ready to join the top rank of sportswear makers Performance 1M 6M 12M Absolute (%) 13.1 (6.) (22.) Rel. to Kospi (%p) 15.8 (4.3) (19.1) 12MF PE trend (X) (KRW) 1. 1, 8. 8, 6. 6, 4. 4, 2. 12MF PER (LHS) price (RHS) 2,. May-8 May-1 May-12 Raise TP to W86,; Profit to pick up from 2Q13: We maintain BUY on FILA Korea and lift the TP from W76, to W86, (13.7x 213F PE). We slightly raised our estimate for equity-method gains to reflect Acushnet s estimate-beating margin improvement in 212. We lifted the 213F EPS 3% and revised up the target PE for overseas businesses from 14x to 16x backed by narrowed discount to global peers from 3% to 2% considering Acushnet s robust sales growth. With effects materializing from the Acushnet buyout, FILA Korea s earnings improved in 1Q12. But FILA Korea and FILA USA s royalty income started shrinking from 2Q12 amid the slowing global economy. As Acushnet began provisioning for incentives (USD4mn p.a.) from 3Q12, expectations for equity-method gains dwindled, leading to the steady share pullback. After touching a low in 1Q13, FILA Korea s OP should start improving from 2Q13 backed by modest economic recovery and greater royalties. EBT that includes equity-method gains from Acushnet should pick up from 3Q13 as well. FILA brand pursues qualitative growth: The FILA brand s products are sold through ~3 licensees around the world. Following the acquisition of FILA Global, FILA Korea entered licensee contracts (less burdensome profit structure) in an effort to quickly normalize operations. The sale of manufactured goods is underway in only Korea and the US. For the FILA brand, FILA Korea should put more focus on quality improvement than quantity growth. FILA USA turned around in 21 on cost cuts and restructuring but it faces a task of making its merchandise (mostly low to mid-end footwear) more competitive. FILA Korea needs to overhaul its product lineup from lifestyle-based to functional products and step up marketing efforts. It is replacing unprofitable licensees into new partners. If strengthening the FILA brand leads to greater sales, better profits and more royalties, FILA Korea s mid/long-term growth potential should firm up. Eun-chae Na ec.na@truefriend.com Jinah Na jinah.na@truefriend.com Acushnet a genuine global top-notch brand: Acushnet is a global top-tier brand claiming more than 5% of the golf ball and shoes markets. After FILA Korea acquired Acushnet in 211, the golf goods maker posted USD145mn in sales and USD8mn in OP in 212. Given its incentive provisioning of USD4mn in 212 (to continue through 215), actual OP would have amounted to USD12mn in 212, up from the pre-acquisition figure of USD88mn in 21. FILA Korea owns 16% of Alexandria Holdings, a holding company for Acushnet, and plans to increase the stake to 33% (securing managerial rights) via the annual purchase of warrants and the holding company s Hong Kong IPO scheduled in 216. Equity-method gains from Acushnet should expand from ~W7.3bn in 212 (212 avg. diluted stake 14.3%) to W46bn in 216F (33%). Alexandria Holdings is posting sluggish earnings due to debt and related financial costs and incentive provisioning in the run up to the 216 IPO. But if it goes public, convertible bonds (CB) and 18

2 redeemable convertible preferred stocks (RCPS) will be converted to common stocks, which will sharply reduce its financial costs. And with the completion of incentive provisioning, Alexandria Holdings should see better earnings from 216. Keep complex accounting issues and BW in mind but focus on earnings at core businesses: FILA Korea faces various accounting issues due to ~3 licensees, a complex governance structure and equity-method gains from Acushnet. In 212, FILA Korea earned W61bn in equity-method gains from Acushnet. Although Acushnet reported NP of USD53mn in the year, it actually made loss given a one-off debt valuation gain of USD8mn (if deducting the gain, Acushnet would have been in the red). In addition, FILA Korea owns 2.25mn bonds with warrants (BW) that could dilute shares. The factors must be fully reflected in the valuation but we believe the focus should be placed on earnings at FILA Korea, FILA USA, royalty business and Acushnet s core business. We anticipate the four businesses to improve from 2Q13. Table 12. Lift TP to W86, (KRW, x, %) 213F Remarks Fully diluted EPS 6,255 Domestic business EPS 2,816 Overseas business EPS 3,439 Target PE 13.7 Domestic business target PE 11. Applied LG Fashion s target PE Overseas business target PE 16. Applied 2% discount to avg. of global sportswear players TP 86, Domestic business value per share 3,981 Overseas business value per share 55,19 Current price (KRW) 66, Upside (%) 3.3 Source: Korea Investment & Securities Table 13. Global sportswear company valuations (x, %) Columbia Deckers Callaway Lulu Avg. Nike Adidas Puma Quiksilver Sportswear Outdoor Golf Lemon PE NM E , E PB E E PS E E EV/EBITDA NM E E ROE (%) (1.8) 26.7 (29.9) E E Note: Excluding Callaway Golf and LuLu Lemon from avg. Source: Korea Investment & Securities 19

3 Table 14. NP and EPS assumptions (W bn, KRW) F Assumed NP FILA Korea NP Valuation NP Assumed equitymethod gains gains (1% booked) Acushnet accounting-based equity-method (78.9) Acushnet diluted equity-method gains (9.6) Assumed shares FILA Korea total shares (') 9,21 9,938 9,938 Shares subject to dilution due to BW (') 12, , ,223. Assumed EPS Financial statement NP/total shares , ,84.1 Financial statement NP/BW added shares , ,187.5 Valuation NP/total shares 5,792 8,135 7,693 Valuation NP/BW added shares 4,364 6,614 6,255 Source: Korea Investment & Securities Table 15. FILA Korea s key events Year Issue Description Remarks 1991 FILA Korea established FILA Korea was established as the domestic subsidiary of FILA Sport SPA (Italian parent company) 2 SPC established 25 MBO (management buyout) 26 GLBH Holdings S.a.r.l established 27 FILA Global acquired FILA Korea s five management staff established Fashion Flower (SPC) - FILA Korea management led the MBO - FILA Korea acquired and merged with Fashion Flower in Apr 25 1%-invested by FILA Korea - Acquired from SBI via GLBH Holdings S.a.r.l - Acquired FILA Global trademark and operating rights Working capital W38.8bn - Bank loan W13bn, own capital W7bn - Offered unlisted shares worth W18bn (W7,5 per share, 2.4mn shares) Acquisition cost USD127mn (W13bn) - Excluding working capital from SPC, loans mostly came from banks Paper company for acquiring FILA Global 21 IPO FILA Korea s IPO IPO proceeds W113.8mn 211 Acushnet acquired Source: Company data, Korea Investment & Securities Jointly acquired with Mirae Asset PEF for USD1.26bn Acquisition cost USD4mn (~W37bn) W11bn funded by FI: Fine Partners and three others - Issued redeemable convertible preferred stocks worth W55bn (2.75mn shares) at annual dividend yield of 9.5% - Issued BW worth W55bn (bonds 12%, warrants 3%) Bridge loan W28bn - Initial investment USD1mn, acquiring some warrants every year - Planned IPO of Alexandria Holdings (1%-owned by Acushnet) in 216 Figure 18. FILA Korea s sales breakdown Figure 19. FILA Korea s OP breakdown Overseas Royalty 6% Fila USA 27% Overseas Royalty 43% Fila Korea 46% Fila Korea 67% Fila USA 11% Note: As of 213 Source: Company data, Korea Investment & Securities Source: Company data, Korea Investment & Securities 2

4 Figure 2. FILA Korea-related companies and licensees Source: Company data Figure 21. Acushnet acquisition structure Source: Company data 21

5 Balance sheet FY-ending Dec. (W bn) 21A 211A 212A 213F 214F Current assets Cash & cash equivalents Accounts & other receivables Inventory Non-current assets Investment assets Tangible assets Intangible assets Total assets ,28 Current liabilities Accounts & other payables ST debt & bonds Current portion of LT debt Non-current liabilities Debentures LT debt & financial liabilities Total liabilities Controlling interest Capital stock Capital surplus Capital adjustments Retained earnings Minority interest (1) (8) (8) (8) Shareholders' equity Cash flow FY-ending Dec. (W bn) 21A 211A 212A 213F 214F C/F from operations Net profit Depreciation Amortization Net incr. in W/C (48) (4) 22 (1) (6) Others (15) 76 (69) (27) (41) C/F from investing (21) (118) (48) (32) (11) Capex (8) (11) (11) (11) (11) Decr. in fixed assets Incr. in investment (13) (16) (38) (11) 2 Net incr. in intangible assets () (1) () (12) (4) Others (1) () 1 1 C/F from financing 9 97 (49) (22) (32) Incr. in equity 34 9 Incr. in debt (19) 16 (52) (2) (3) Dividends (1) (5) (2) (2) (2) Others (5) (5) (4) () () C/F from others (3) 1 Increase in cash (12) 5 3 Income statement FY-ending Dec. (W bn) Key financial data 21A 211A 212A 213F 214F Sales COGS Gross profit SG&A expenses Operating profit Financial income Interest income 1 1 Financial expenses Interest expenses Other non-operating profit 4 (3) (1) Gains (Losses) in associates, subsidiaries and JV 2 (79) Earnings before tax Income taxes Net profit Net profit of controlling interest Other comprehensive profit (13) (7) (15) Total comprehensive profit 71 (6) Total comprehensive profit of controlling interest 71 (6) EBITDA FY-ending Dec. 21A 211A 212A 213F 214F Per-share data (KRW) EPS 1, ,423 8,875 11,228 BPS 34,646 32,67 42,495 51,12 62,97 DPS Growth (%) Sales growth (12.3) OP growth (16.3) NP growth (97.4) 5,481. (27.4) 26.5 EPS growth 38.7 (97.6) 5,141.8 (28.6) 26.5 EBITDA growth (14.) Profitability (%) OP margin NP margin EBITDA margin ROA ROE Dividend yield Stability Net debt (W bn) Debt/equity ratio (%) Valuation (x) PE PB PS EV/EBITDA Note: K-IFRS (consolidated) 22

6 Changes to recommendation and price target Company (Code) Date Recommendation Price target Company (Code) Date Recommendation Price target Romanson (264) NA BUY W76, BUY BUY W86, FILA Korea (8166) BUY W83, Lock&Lock (11539) BUY W5, BUY W98, BUY W48, BUY W17, BUY W39, BUY W88, BUY W36, Romanson(264) FILA Korea(8166) 16, 14, 12, 1, 8, 6, 4, 2, Apr-11 Aug-11 Dec-11 Apr-12 Aug-12 Dec-12 Apr-13 12, 1, 8, 6, 4, 2, Apr-11 Aug-11 Dec-11 Apr-12 Aug-12 Dec-12 Apr-13 Lock&Lock(11539) 6, 5, 4, 3, 2, 1, Apr-11 Aug-11 Dec-11 Apr-12 Aug-12 Dec-12 33