Retail OVERWEIGHT/OVERWEIGHT

Transcription

1 Industry Report October 27, 216 Retail OVERWEIGHT/OVERWEIGHT Finding bargain buys in Korean retail Retail Jong-ryeol Park Purpose of this report In this report, we introduce the investment strategies and stocks of great prospects that can weather the global recession. We outline how to achieve absolute returns even in difficult times like this. Two ways of value investing The current global recession is clearly different from those of the past. During past crises, not every part of the world was in the doldrums and there were regions that had a strong appetite for imports. Ailing countries were thus able to pull out of the slump by expanding their exports. However, the global recession that has been going on since 2H14 is affecting every country in the world. There are not many countries at the receiving end and the specter of trade protectionism is rearing its ugly head again. Seeing this as a structural downturn that will last for some time, we need to change our way of selecting and approaching stocks that have bright prospects. We propose two ways: first, find companies that can weather the storm; and second, select companies that are extremely undervalued but have nearly zero chances of defaulting. Note those that shine in difficult times In a downturn like this, we need to first look at the balance sheet of a company since it is the key gauge of stability. At the same time, we need to also look at the income statement and cash flow to evaluate the company s profitability and growth potential. After evaluating the company s stability, profitability, and growth potential, we then select the better ones and analyze how their financials changed during the past three crises. Additionally, we need to look at the company s other qualitative aspects such as product technology, price competitiveness, customer loyalty, and management. Buy extremely undervalued retail companies The conventional wisdom is that good stocks are not cheap. Good companies tend to be fairly valued compared with their domestic or global peers. Because of this, we need to tweak thinking process and find ones that have been severely oversold, have an extremely thin chance of bankruptcy, and look great in terms of P/B, not P/E. Top picks Against this backdrop, we present Lotte Shopping (2353 KS, BUY) and GS Home Shopping (2815 KS, BUY) as our Korean retail sector top picks.

2 INDUSTRY REPORT A matter of choice The global recession is turning into reality as feared. The global recession that is currently in progress is clearly different from the ones that we experienced in the past. The 1997 Asian financial crisis was mainly the problem of South Asia and the region s countries were able to overcome the crisis by increasing exports to other unaffected advanced countries. Also, during the 28 global financial crisis and 21 European debt crisis, emerging economies such as China and India remained healthy and were able to help steer the global economy out of a severe slump. However, the global recession that has been going on since 2H14 is affecting every country in the world. Each country is trying to boost exports but there are not many countries at the receiving end. Inevitably, many countries are opting to boost domestic consumption as a way to revitalize their respective economies. Responding to the stock market is getting increasingly difficult because of the global downturn. Finding a great investment is a daunting task. There are few great investment ideas that can help investors select promising stocks. The current leaders in the stock market are already too expensive, and those that are relatively undervalued in terms of P/E, P/B, and EV/EBITDA are underperforming for a reason. Against this backdrop, we believe it is necessary to tweak our thinking. We need to find companies that are ready for a total makeover and have the potential to stage a remarkable comeback. We need to calculate the value of these firms to identify which are the most undervalued. And these companies, regardless of sector, have to meet the following five criteria. First, the company s share price has to have fallen nearly by half over the past two to three years. The said company has to have slim chances of bankruptcy. It would, of course, be nonsense to suggest that a company has absolutely zero chance of default. What we are proposing is finding a company with a low probability of going bankrupt. Second, the reasons for the correction must be identifiable and the negatives that have been weighing on shares will diminish in the near term or at least signal some sort of recovery. Third, the company s business performance must have potential for growth. It would be best to find those that are likely to report operating profit growth but if not, those with the prospect of pretax profit and net profit growth will suffice. Of note, due to strict accounting standards, most companies last year wrote off their losses accumulated in investment assets, accounts receivable, inventories, and intangible assets, both at home and abroad. Fourth, if the company s P/E is unattractive, then P/B must provide a high liquidation value. We look into the company s tangible/intangible assets, accounts receivables, inventories, and investments to calculate its real P/B, to see if the company falls in the undervalued category. Fifth, the company whose negative issues in the non-operating side can be eliminated in the near future. Disputes over ownership and opaque governance structure are one of such example. The company must have an enterprise value that is likely to re-rate on the back of growing subsidiary value. After identifying such companies, we evaluate the company s value to see whether the stock has the potential to 2

3 Retail Jong-ryeol Park / jrpark@hmcib.com grow at least twofold. When adding to positions, we recommend accumulating shares through multiple, consecutive purchases) because one never knows the bottom of the stock price. After buying the shares, we also recommend holding them for at least two to three years. Of course, if the stock reaches the target, it would be prudent to sell before the targeted holding period. What should we choose? With the global economy heading for a deeper recession, we need to find companies that are ready for a total makeover and have the potential to stage a remarkable comeback. Qualifying companies will have the following characteristics: First, despite lackluster earnings currently, they must have at least one segment that is set for growth. Second, they should have an extremely low chance of going bankrupt. Third, their shares should have almost halved over the past two to three years. Fourth, they should be trading at or below 1.x book value. Most importantly, their asset value combining tangible/intangible assets and investment assets has to exceed book value. We see potential in Lotte Shopping, Hyundai Department Store, GS Home Shopping, and Hyundai Home Shopping. Among these, our top picks are Lotte Shopping and GS Home Shopping. Fig 1. Investment summary by company Company Rating Oct 26 close (KRW) Target price (KRW) Lotte Shopping BUY 232,5 33, (2353 KS) Hyundai Department Store (6996 KS) BUY 12, 176, Investment points Attractively valued considering liquidation value; shares trade at.3x P/B (based on market value), thus have potential to rise 3.3 times from current price Management overhaul efforts to help improve transparency of ownership structure; interest in values of unlisted Lotte affiliates to increase Earnings growth to be limited short term but mid/long-term outlook bright Despite being a latecomer, co laid the foundation for growth by employing aggressive strategies to differentiate from others in the outlet market Growth to continue helped by the synergies with subsidiaries Hyundai Home Shopping and Handsome Corp Mostly undervalued name vs. global large-cap retail companies in terms of P/E, P/B, EV/EBITDA, etc. GS Home Shopping BUY 169,9 26, Strategic focus on profitability in the mobile business bearing fruit, with earnings growing since 4Q15 Growing competitiveness on the back of strong product lineup comprised mostly of exclusive (2815 KS) products Extremely undervalued, trading at 3.6x P/E after net cash; attractive dividend play with a yield of 3.3% Hyundai Home Collaborations with subsidiaries Handsome (fashion) and Hyundai Rental Care (water purifier rental) BUY 116, 16, Shopping provide growth engines Unlike competitors, co focusing on top-line growth, strengthening mobile biz and trying to secure (575 KS) premium TV channel number Extremely undervalued at 1.2x P/E given the value of net cash holdings and equity holdings in subsidiaries 3

4 INDUSTRY REPORT Company Note October 27, 216 Lotte Shopping (2353.KS) BUY/ TP KRW33, Retail Jong-ryeol Park Share price (KRW, Oct 26) Upside (%) Market cap (KRW bn) Shares outstanding ( ) Paid-in capital (KRW bn)/face value (KRW) 232, ,322 31, /5, 52-week high/low (KRW) 277,5/193, 6-day avg. daily T/O (KRW bn) 15 Foreign ownership (%) Major shareholders (%) Price performance Absolute (%) Relative (%p) K-IFRS, consolidated 1M Shin Dong-bin and 18 others M M (KRW) 16F EPS 17F EPS TP Previous 8,983 14,27 29, Revised 8,849 14,26 33, Consensus 1,895 14,87 253,412 Difference -18.8% -.4% 3.2% 12-month price performance Lotte Shopping KOSPI Source: WiseFn, HMC Investment Securities Earnings forecasts and valuations Shares set for a re-evaluation Sales OP NP EBITDA EPS Growth P/E P/B EV/EBITDA ROE Div. yield (KRW bn) (KRW bn) (KRW bn) (KRW bn) (KRW) (%YoY) (x) (x) (x) (%) (%) ,1 1, ,88 16, , ,84-12,164 TR F 29, ,727 8,849 TB F 31, ,85 14, F 33, ,884 18, Note: K-IFRS, consolidated; TB=turn to black, TR=turn to red 1) Investment highlights - Despite the recent stock rally, Lotte Shopping shares are still trading at a 31% discount to global peers in terms of P/B. We see room for growth, and raise our target price to KRW33, while maintaining BUY. We applied a 15% discount to the global peer average EV/EBITDA of 7.9x to arrive at our new target price. - Lotte Group proposed a raft of measures to overhaul corporate governance, which include: 1) the establishment of a compliance committee; 2) investing KRW4tn and creating 7, jobs over the next five years; 3) transitioning 1, part-time workers to full-time employees over the next three years; and 4) enhancing its governance structure through the IPO of Hotel Lotte. It also announced plans to launch the IPOs of healthy affiliates as a part of efforts to establish transparent and sound management practices. 2) Major issues and earnings outlook - Lotte Shopping shares are now trading at about half their three-year peak. Looking at the price performance alone, one may think the company as likely to default. However, this could not be further from truth because the company is very healthy in terms of its short-term liquidity, quick ratio, current ratio, and capital ratio. The major reasons behind the massive corrections were: 1) poor domestic performance; 2) management dispute and opaque governance structure; and 3) losses at overseas operations. - We now take a different approach and recommend investors to add to positions. While we do not see an earnings-driven stock re-rating in the near term, we do believe in the company s brighter prospects going forward, based on the following reasons: 1) the stock is extremely undervalued considering its massive liquidation value; 2) the probe into alleged massive corruption within the group have passed the worst when the court denied the arrest warrant for Chairman Shin Dong-bin; 3) continued restructuring at overseas arms should help narrow losses, leading to mid/long-term earnings growth; and 4) the likely IPO of Hotel Lotte is a signal to the start of a series of IPOs for other healthy unlisted affiliates such as Lotte Card, Lotte Home Shopping, and Korea Seven, which calls for renewed interest in the value of these companies. 3) Share price outlook and valuation - Despite the recent rebound, shares are still trading below the lower end of the historical P/B bands (fiveyear average.5-.8x). Our target price of KRW33, implies a 216F P/B of.63x and 217F P/B of.62x. - The worst has passed and we believe the company will lay the foundation for a stock re-rating through many positive developments. 4

5 Retail Jong-ryeol Park / jrpark@hmcib.com Investment points 1. Attractively valued considering liquidation value In terms of liquidation value, Lotte Shopping is a very attractive stock. We value its tangible and investment assets: its KRW16tn in tangible assets represent 4% of total assets and are mostly made up of land and buildings which are used as operating assets such as department stores, hypermarkets, and convenience stores. Most of these offline stores are located in key commercial zones and they went through asset reevaluations in 21. Since then, the price of land across the country has skyrocketed, and the values of central zones in major cities have risen even further. In sum, the actual value of Lotte s property holdings is much higher than the current book value. We also have high expectations for Chairman Shin Dong-bin s governance structure reshuffling efforts. We expect the IPO of Hotel Lotte to make visible progress next year, and afterward, other currently non-listed Lotte affiliates will follow suit. These affiliates Korea Seven (51.1% ownership), Lotteria (38.7%), Lotte Card (93.85), Lotte Home Shopping (53%) already qualify for IPOs and are ready to go public if major shareholders will it. Lotte Shopping is trading at.4x P/B based on book value but in terms of market value, it is actually trading at.3x P/B. In all, considering the liquidation value, the stock has the potential to go up 2.5 to 3.3 times. 2. Business performance to improve in the mid to long term In our view, growth of the domestic business is limited. The restructuring of big corporations is imminent; employment and wages are unlikely to increase given faltering exports and domestic consumption. Worse yet, housing expenses and non-consumption spending are both on the rise. It all points to a decrease in household income and spending capacity. Despite the negative environment, however, Lotte Shopping s earnings should start to increase after the 3Q16 bottom. Operating profit likely slipped in 3Q16 but should rebound in 4Q16 on the back of growing earnings at department stores at home and abroad and narrowing losses at China-based hypermarkets. Next year, we expect to see double-digit growth in operating profit led by recoveries across all divisions including department stores, hypermarkets, and convenience stores. The overseas business, including China, does not hold as great prospects but after booking massive impairment losses in 215, 216 is unlikely to suffer the kind of one-off expenses seen in 215. As such, we expect to witness the gradual recoveries of earnings on/offshore going forward. 3. Owner risk to gradually dissipate Owner risk, one of the major stock discount factors in addition to earnings deterioration, is gradually dissipating. The worst seems to have past as the court denied an arrest warrant for the Chairman Shin Dongbin. The brotherly dispute over ownership which erupted in July last year is expected to be gradually resolved, because Shin Dong-bin is now widely regarded as the owner of the group by shareholders and employees. Also, concerns about the transparency of the group s governance structure should improve when Hotel Lotte goes public. As such, with the owner risk now appearing to have waned, conditions should improve going forward. 5

6 INDUSTRY REPORT Fig 1. Fair target price valuation (KRW bn) 216F 217F 12M forward Note 1. Business value 11,594 12,121 12,33 EBITDA 1,727 1,85 EV/EBITDA % discount to global peer average of 7.9x 2. Investment value 2,6 2,69 2,675 25% discount to net asset value 1) Affiliates 1,1 1,1 2) LT available-for-sale securities ) Other financial assets 1,143 1, Enterprise value (1+2) 14,193 14,81 14,78 4. Net cash 3,263 3,424 3, Non-controlling interest Fair shareholders equity value ( 3+5-5) 1,55 1,428 1,366 Shares outstanding ( shares) 31,491 31,491 31,491 Fair per-share value (KRW) 319,39 331, ,165 Current price (KRW) 232,5 232,5 232,5 Upside potential (%) Fig 2. Operating profit to move upward from 216 bottom (KRW bn) Sales (KRW bn) 4, Operating profit (R) 1,8 1,5 3, 1,2 2, 9 6 1, F 17F 18F Fig 3. Margins to improve 7 (%) (1) (2) F 17F 18F Operating margin Recurring margin Net margin Fig 4. EBITDA and EBITDA margin (KRW bn) (%) EBITDA 2,5 EBITDA margin (R) 1 Fig 5. Asset soundness gradually improving (%) Current ratio (%) 14 Debt ratio (R) 15 2, ,5 1, F 17F 18F F 17F 18F 1 6

7 Retail Jong-ryeol Park / jrpark@hmcib.com Fig 6. Earnings forecasts (KRW bn) F 1Q 2Q 3Q 4QF 1QF 2QF 3QF 4QF F 216F Gross sales 7,178 7,451 7,719 7,88 7,461 7,54 7,912 8,147 3,1 6 31,24 32,956 Department stores 2,95 2,55 1,929 2,586 2,166 2,126 2,5 2,85 8,665 9,148 9,913 Hypermarkets 2,154 2,91 2,237 2,34 2,181 2,7 2,259 2,92 8,516 8,62 9,167 Himart ,63 1, ,94 1,48 3,896 3,981 4,239 Financial services ,79 1,77 1,825 Others 1,66 1,864 2,13 1,752 1,791 1,97 2,44 1,782 7,289 7,524 7,812 Sales 6,935 7,228 7,484 7,48 7,179 7,23 7,646 7,841 29,128 29,896 31,811 Gross profit 2,17 2,258 2,24 2,243 2,221 2,28 2,315 2,373 8,911 9,189 9,885 Operating profit Department stores Hypermarkets Himart Financial services Others Pretax profit Net profit (CI) Profitability (%) Gross margin Operating margin Recurring margin Net margin Growth (%YoY) Sales Operating profit Pretax profit TR TB TR TB 34.9 Net profit TR ,423.2 TB TR TB 58.5 Key assumptions (%) GDP growth (real) Private consumption (%YoY) CPI (%YoY) Note: Profitability is based on gross sales; TB = turn to black, TR = turn to red, RR = remain red Source: Company data, HMC Investment Securities 7

8 INDUSTRY REPORT Income statement Balance sheet (KRW bn) F 217F 218F (KRW bn) F 217F 218F Sales 28,1 29,128 29,896 31,811 33,48 Current assets 14,976 15,997 15,78 15,883 16,13 Change (%) Cash and cash equivalents 1,928 1,751 1,368 1,28 1,21 Cost of goods sold 19,337 2,217 2,77 21,927 22,995 Short-term investment assets 8,56 9,635 9,459 9,459 9,459 % of sales Accounts receivable Gross profit 8,763 8,911 9,189 9,885 1,485 Inventory assets 3,161 3,266 3,397 3,617 3,792 Gross margin (%) Other current assets Change (%) Non-current assets 25,97 24,696 25,153 25,862 26,599 SG&A expenses 7,575 8,57 8,382 8,971 9,55 Tangible assets 15,91 15,759 16,3 16,498 16,999 % of sales Intangible assets 4,156 3,578 3,619 3,739 3,855 EBITDA 2,88 1,84 1,727 1,85 1,884 Investment assets 3,78 3,364 3,466 3,586 3,76 EBITDA margin (%) Other non-current assets 1,962 1,995 2,38 2,38 2,38 Change (%) Other financial assets Operating profit 1, Total assets 4,72 4,693 4,934 41,745 42,72 Operating margin (%) Current liabilities 12,534 11,919 11,859 12,11 12,312 Change (%) Short-term debt 1,487 1,79 1,499 1,499 1,499 Non-operating profit Accounts payable 3,761 3,726 3,888 4,126 4,332 Interest income Current portion of long-term debt 3,82 2,477 2,665 2,665 2,665 Interest expenses Other current debt 4,23 3,926 3,87 3,811 3,815 Other non-operating income Non-current liabilities 9,995 11,687 11,791 11,894 12, Subsidiaries/affiliate income Bonds 6,787 7,96 8,79 8,79 8,79 Pretax profit from cont ops 1, Long-term debt 1,37 1,857 1,71 1,71 1,71 Pretax margin (%) LT financial debt (incl. lease) Change (%) TR TB Other non-current debt 1,733 1,792 1,878 1,982 2,87 Income tax Other financial liabilities Profit from continuing ops Total liabilities 22,528 23,66 23,65 23,995 24,311 Profit from discontinuing ops Owners of parent equity 16,726 16,247 16,49 16,792 17,32 Net profit Paid-in capital Net margin (%) Capital surplus 3,911 3,911 3,911 3,911 3,911 Change (%) -3.1 TR TB Capital adjustment, etc NP from controlling interest Other accumul earnings and comp income NP from non-controlling interest Retained earnings 12,36 11,894 12,99 12,482 13,1 Other comprehensive income Non-controlling interest ,71 Total comprehensive income Total equity 17,544 17,88 17,284 17,75 18,39 Cash flow Key financial data (KRW bn) F 217F 218F (KRW, x, %) F 217F 218F Operating cash flow 1, ,236 1,486 1,515 EPS (based on net profit) 19,552-1,971 1,64 16,698 22,2 Net profit EPS (based on parent net profit) 16,724-12,164 8,849 14,26 18,648 Depreciation on tangible assets BPS (based on total equity) 557,11 542, , , ,99 Amortization on intangible assets BPS (based on owners of parent equity) 531, , ,7 533, ,99 FX-related profit DPS 2, 2, 2, 2, 2, Dec (inc) in working capital , P/E (based on net profit) Others 416 1, P/E (based on parent net profit) Investing cash flow -6-1,558-1,228-1,446-1,314 P/B (based on total equity) Dec (inc) in investment assets P/B (based on owners of parent equity) Decrease in tangible assets 1, EV/EBITDA (reported) Increase in tangible assets -1,863-1,95-1,27-1,32-1,36 Dividend yield Others Growth (%) Financing cash flow EPS (based on net profit) -3.1 TR TB Increase (decrease) in debt EPS (based on parent net profit) TR TB Increase (decrease) in bond 199 1, Profitability (%) Increase in capital ROE (based on net profit) Dividend ROE (based on parent net profit) Others , ROA Other cash flow 5 9 Stability (%) Increase (decrease) in cash Total liabilities/equity Beginning cash 1,39 1,928 1,751 1,368 1,28 Net debt/equity Ending cash 1,928 1,751 1,368 1,28 1,21 Interest coverage Note: K-IFRS, consolidated; TB=turn to black, TR=turn to red 8

9 Company Note October 27, 216 GS Home Shopping (2815.KS) Retail Jong-ryeol Park / jrpark@hmcib.com BUY / TP KRW26, Retail/Education/Paper Jong-ryeol Park jrpark@hmcib.com A great value play which deserves re-evaluation Share price (KRW, Oct 26) Upside (%) Market cap (KRW bn) Shares outstanding ( ) Paid-in capital (KRW bn)/face value (KRW) 169, ,115 6,563 33/5, 52-week high/low (KRW) 197,/155,1 6-day avg. daily T/O (KRW bn) 2 Foreign ownership (%) Major shareholders (%) Price performance Absolute (%) Relative (%p) K-IFRS, non-consolidated 1M GS Corp 3. 3M M -7.6 (KRW) 16F EPS 17F EPS TP Previous 16,228 16,955 23, Revised 16,228 16,955 26, Consensus 15,263 16, ,4 Difference 6.3% -.2% 11.9% 12-month price performance GS Home Shopping KOSDAQ 1.6 1) Investment highlights - GS Home Shopping s (GSHS) ROE is lower than those of its global peers but its valuation indicators such as P/E, P/B, and EV/EBITDA suggest that the stock is extremely undervalued vs. peers. Despite the recent share price rebound, shares remain attractively valued and we recommend investors to add to positions. - We raise our target price to KRW26, and keep our rating at BUY. Our target price is based on 4.8x EV/EBITDA, a 15% discount to the average sector multiple. It is still quite conservative compared with the global peer average EV/EBITDA of 9.7x. 2) Major issues and earnings outlook - We believe earnings remained strong in 3Q16 on the back of the low base and margin-focused business strategies. The upward earnings trend should sustain through end-216, facilitating structural earnings growth. - We expect earnings momentum to pick up further in 2H16 vs. 1H16, because: 1) last year s MERS outbreak had visible impacts until 3Q15, which creates a low base for 2H; and 2) the mobile division is currently focusing on profitability, avoiding cutthroat competition with other social commerce sites such as Coupang, Ticket Monster, and Wemakeprice. - GSHS plans to further improve its profitability by strengthening its product lineup for TV home shopping (e.g., exclusively offered products). Home shopping billings and operating profit for 216 are forecast to grow 3.7% and 11.7% YoY to KRW3.64tn and KRW125.7bn, respectively, with an operating margin of 3.5% (+.3%p YoY). The main reasons are: 1) a low base stemming from the fake herb scandal and the MERS outbreak last year; 2) reduced marketing spending thanks to a renewed focus on profitability; and 3) an improving cost structure on the normalization of SO commissions Source: WiseFn, HMC Investment Securities Earnings forecasts and valuations Sales OP NP EBITDA EPS Growth P/E P/B EV/EBITDA ROE Div. yield (KRW bn) (KRW bn) (KRW bn) (KRW bn) (KRW) (%YoY) (x) (x) (x) (%) (%) 214 1, , , , F 1, , F 1, , F 1, , Note: K-IFRS, non- consolidated 9

10 INDUSTRY REPORT Fig 1. Fair valuation (KRW bn) F 217F 12M forward Note 1. Business value EBITDA EV/EBITDA % discount to sector average (5.6x) 2. Investment value % discount to book value 1) Affiliates ) LT available-for-sale securities Enterprise value (1+2) Net cash Fair shareholders equity value ( 3+4) 1,425 1,665 1,74 1,728 Shares outstanding ( shares) 6,563 6,563 6,563 6,563 Fair per-share value (KRW) 217, ,72 265, ,245 Current price (KRW) 169,9 169,9 169,9 169,9 Upside potential (%) Fig 2. Earnings forecasts (KRW bn) F 1Q 2Q 3Q 4QF 1Q 2Q 3QF 4QF F 217F Gross sales (billings) ,11 3,512 3,641 3,89 TV ,826 1,82 1,838 Internet Mobile ,55 1,284 1,476 Catalog Others Sales ,91 1,19 1,152 Gross profit ,34 Operating profit Pretax profit Net profit (CI) Profitability (%) Gross margin Operating margin Recurring margin Net margin Growth (%YoY) Sales Operating profit Pretax profit Net profit Key assumptions (%YoY) GDP growth (real) Private consumption CPI Note: Profitability is based on gross sales Source: Company data, HMC Investment Securities 1

11 Retail Jong-ryeol Park / jrpark@hmcib.com Income statement Balance sheet (KRW bn) F 217F 218F (KRW bn) F 217F 218F Sales 1,61 1,91 1,19 1,152 1,25 Current assets Change (%) Cash and cash equivalents Cost of goods sold Short-term investment assets % of sales Accounts receivable Gross profit ,34 1,84 Inventory assets Gross margin (%) Other current assets Change (%) Non-current assets SG&A expenses Tangible assets % of sales Intangible assets EBITDA Investment assets EBITDA margin (%) Other non-current assets Change (%) Other financial assets Operating profit Total assets 1,3 1,239 1,379 1,455 1,529 Operating margin (%) Current liabilities Change (%) Short-term debt Non-operating profit Accounts payable Interest income Current portion of long-term debt Interest expenses Other current debt Other non-operating income Non-current liabilities Subsidiaries/affiliate income Bonds Pretax profit from cont ops Long-term debt Pretax margin (%) LT financial debt (incl. lease) 2 Change (%) Other non-current debt Income tax Other financial liabilities Profit from continuing ops Total liabilities Profit from discontinuing ops Owners of parent equity ,1 1,76 1,149 Net profit Paid-in capital Net margin (%) Capital surplus Change (%) Capital adjustment, etc NP from controlling interest Other accumul earnings and comp income NP from non-controlling interest Retained earnings ,62 Other comprehensive income Non-controlling interest Total comprehensive income Total equity ,1 1,76 1,149 Cash flow Key financial data (KRW bn) F 217F 218F (KRW, x, %) F 217F 218F Operating cash flow EPS (based on net profit) 18,293 12,38 16,228 16,955 17,685 Net profit EPS (based on parent net profit) 18,293 12,38 16,228 16,955 17,685 Depreciation on tangible assets BPS (based on total equity) 136, , , , ,67 Amortization on intangible assets BPS (based on owners of parent equity) 136, , , , ,67 FX-related profit DPS 7,7 5,2 6, 7, 7, Dec (inc) in working capital P/E (based on net profit) Others P/E (based on parent net profit) Investing cash flow P/B (based on total equity) Dec (inc) in investment assets P/B (based on owners of parent equity) Decrease in tangible assets EV/EBITDA (reported) Increase in tangible assets Dividend yield Others Growth (%) Financing cash flow EPS (based on net profit) Increase (decrease) in debt -1 EPS (based on parent net profit) Increase (decrease) in bond Profitability (%) Increase in capital ROE (based on net profit) Dividend ROE (based on parent net profit) Others ROA Other cash flow Stability (%) Increase (decrease) in cash Total liabilities/equity Beginning cash Net debt/equity Net cash Net cash Net cash Net cash Net cash Ending cash Interest coverage N/A N/A N/A N/A N/A Note: K-IFRS, non- consolidated 11

12 INDUSTRY REPORT Investment rating and target price history Date Rating TP Date Rating TP 14/8/29 BUY 391, 16/5/9 BUY 36, 14/1/8 BUY 391, 16/6/21 M.PERFORM 24, 14/11/1 M.PERFORM 32, 16/8/8 M.PERFORM 22, 14/12/2 M.PERFORM 32, 16/1/6 BUY 29, 15/1/7 M.PERFORM 292, 16/1/27 BUY 33, 15/2/6 M.PERFORM 292, 15/4/1 M.PERFORM 27, 15/5/11 M.PERFORM 27, 15/8/1 M.PERFORM 25, 16/2/15 M.PERFORM 25, 16/2/29 BUY 32, 16/4/4 BUY 36, Two-year price chart (KRW ) 5 4 Lotte Shopping Target price Investment rating and target price history Date Rating TP Date Rating TP 14/6/19 BUY 31, 15/7/29 BUY 283, 14/6/26 BUY 31, 15/1/29 BUY 22, 14/7/3 BUY 31, 16/1/7 BUY 22, 14/8/4 BUY 31, 16/2/3 BUY 22, 14/8/29 BUY 33, 16/5/3 BUY 23, 14/1/8 BUY 33, 16/6/22 BUY 23, 14/1/31 BUY 37, 16/8/3 BUY 23, 14/12/2 BUY 37, 16/9/27 BUY 23, 15/1/9 BUY 37, 16/1/27 BUY 26, 15/1/29 BUY 37, 15/4/1 BUY 37, 15/4/29 BUY 283, Two-year price chart (KRW ) GS Home Shopping Target price

13 Retail Jong-ryeol Park / jrpark@hmcib.com Compliance note The author(s) of this report does(do) not have any interests in the company(ies) covered herein. HMC Investment Securities has not disclosed the material contained in this report to any institutional investor or third party prior to its publication. The author(s) of this report does(do) not own more than 1% of the shares of the company(ies) covered in this report. HMC Investment Securities has not taken part in securities issuance (DR, CB, IPO, and market making) of the company(ies) covered in this report as lead manager for the past six months. This report accurately reflects the author(s) s professional views and was written without any undue external influence or interference. Investment rating HMC Investment Securities offers three sector investment ratings based on six-month forward fundamentals and share price outlook. OVERWEIGHT: Sector-wide fundamentals and share prices are expected to turn up. NEUTRAL: No meaningful fundamental improvement is expected. UNDERWEIGHT: Sector-wide fundamentals and share prices are expected to turn down. HMC Investment Securities offers three company investment ratings based on the relative return expected in the following six months, based on the closing price on the date of rating declaration. BUY: Excess return of +15%p or more MARKETPERFORM (M.PERFORM): Excess return of between -15%p and +15%p SELL: Excess return of -15%p or less Stock ratings distribution (October 1, 215- September 3, 216) Rating Count % of rating category BUY MARKETPERFORM SELL This report has been prepared for informational purposes only and thus may not be reproduced or distributed without the prior written consent of HMC Investment Securities. The information and statistical data contained herein were taken from sources believed to be reliable but in no way can be guaranteed and, therefore, final investment decisions should be made based on each client s own judgment. This report cannot be used as evidence in any legal disputes related to the client s investment decisions. 13