Company Note April 7, 2014 (192820) 12M rating BUY (Initiate) 12M TP W75,000 Up/downside +23% Stock Data(Pre-separation data) KOSPI (Apr 4, pt) 1,988 Stock (Apr 4, KRW) 60,000 Market cap (USD mn) 774 Shares outstanding (mn) 5 52-Week high/low (KRW) 65,200/42,300 6M avg. daily turnover (USD mn) 4.7 Free float / Foreign ownership (%) 75.5/27.9 Major shareholders (%) Gyeong-Su Lee and 4 others 23.3 National Pension Service (NPS) 12.4 Performance 1M 6M 12M Absolute (%) 0.0 26.3 15.4 Relative to KOSPI (%p) (1.7) 26.8 13.9 12MF PE trend 30.0 25.0 20.0 15.0 10.0 5.0 (X) 12MF PE (L) Price (R) 0.0 May-09 May-10 May-11 May-12 May-13 Source: WISEfn consensus (KRW) 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0 Smooth transition, third growth phase Initiate coverage with BUY and TP of W75,000 We initiate coverage on (192820), an operating company listed on April 7 after being spun off, with a BUY rating and a TP of W75,000 (target market cap of W668bn). Based on pre spin-off data, our TP equates to W49,145. Of note, BTI is not part of the KIS universe. Our TP is based on 31x 2014 PE (10% discount to historical peak). We believe shares will re-rate, given: 1) stable growth of the domestic ODM business, 2) overall margin improvement fueled by a higher contribution from the high-margin China business, 3) OP turnaround at Guangzhou, and 4) expanding exports of global premium brands. 2014F sales and OP growth should be equivalent to about 26.2% YoY and 20.2% YoY, respectively, if we rebase 2013 earnings on the new structure. Robust fundamentals to drive stock rise Short-term upside may be limited after the re-listing as shares already surged in February on an earnings surprise and as the transition to a holding company structure was d in. However, fundamentals should eventually determine longterm share performance. The operating company will secure the parent cosmetics ODM business and the overseas cosmetics subsidiaries, which are the core variables for valuations. As such, there should be limited changes in the operating fundamentals after the transition. Short-term OP may erode as the rapidly growing Bio (health supplements, 30.6% OP contribution to total OP as of 2013) is transferred to the holding company. However, we believe the operating company is sufficiently attractive given the overseas cosmetics expansion momentum. 2014F domestic and overseas operating outlooks solid Domestic and overseas earnings outlooks are both solid in 2014. The domestic business faces a high comparison base (20.9% YoY in 2013), but should still post stable growth of 13.8% as TV home shopping, online channels and brand shops, the core downstream markets for domestic ODM, are solid. In China, the business should grow over 30% YoY despite recent concerns over slowing consumption. Local mass brands in China, which are the main customers of, should come to the fore during the slow consumer spending, and the company s sales should grow once capacity expansion projects are completed in 2014. Meanwhile, Indonesia plant, which began operation in 3Q13, should generate W4bn of sales in 2014 and US plant should begin operation in 4Q14F at earliest after the facility enhancement. Jung-In Lee 822-3276-6239 jilee@truefriend.com Sangeun Lee 822-3276-6196 sangeun.lee@truefriend.com Yr to Sales OP EBT NP EPS % chg EBITDA PE EV/EBITDA PB ROE Dec (W bn) (W bn) (W bn) (W bn) (won) (YoY) (W bn) (x) (x) (x) (%) 2012A 313 26 24 20 1,523 78.1 32 28.4 20.9 7.6 29.8 2013A 379 35 30 22 1,629 7.0 43 30.6 18.3 7.1 25.5 2014F 360 34 27 22 2,394 47.0 45 24.7 19.8 7.9 26.6 2015F 455 44 38 31 3,389 41.5 55 17.5 16.2 5.7 37.9 2016F 561 57 51 40 4,497 32.7 69 13.2 12.8 4.1 36.3 Note: Pre-separation basis for 2012-2013A; 2014-2016F PE based on the KRX s base announcement (W59,200)
(192820) Holding company and operating company both attractive, but operating company to post structural growth Some investors believe the holding company is more attractive than the operating company due to the recent performance of mid-cap companies that adopted a holding company structure. However, the performance of both companies depends solely on the transition structure and fundamentals. As for Donga Pharm and Korea Kolmar, holding companies were more attractive as they retained the core businesses. However, underwent the smoothest transition in the pharmaceutical/cosmetics sector over the past five years. As the operating company has secured the core business, the operating company should remain attractive and have an advantage in the equity swap ratio calculation to meet the requirements to transition to a holding company structure. Holding company: Solid long-term outlook on re-rating of holding companies and Bio We believe the operating company is more attractive given the structural growth momentum in the cosmetics ODM business. But, we believe both the holding company and operating company will re-rate upwards. Investors have become more positive on holding companies over the past several years. Furthermore, BTI has secured a strong operating subsidiary, Bio, which should bolster enterprise value over the long term, and BTI grows into more than a simple holding company. We believe there are several similar cases: AmoreG (low-end brand subsidiaries, Etude and Innisfree), Korea Kolmar Holdings (Sunbiotech, health supplements, and Kolmar Pharm, ODM for overseas pharma companies), and Donga Socio Holdings (domestic Bacchus business and biosimilar development). Immediately after the re-listing, Initial of BTI will be formed between W30,850-123,400 (minimum 50% discount to maximum 100% premium to the base of W61,700) and closing band will be W26,223-141,910. BTI plans to complete the holding company transition via an investment in-kind (by largest shareholder and related parties) and BTI s rights offering. Assuming shares are swapped in the ratio same as the spin-off ratio (holding company 0.338: operating company 0.662), the holding company should issue 4.1mn shares (89% of 4.59mn shares outstanding after separation). And, the majority shareholder and related parties should have a 59.5% stake in the holding company, while the holding company has a 24.2% stake in the operating company. After the rights issue, BTI shares are estimated at W50,398 (W26,614 based on number of shares after rights offering; market cap W231.5bn, 20% NAV discount, refer to Table 6 SotP and Table 7 sensitivity analysis). 2
(192820) Table 1. Financial statements post spin-off (as of end of June, 2013) (W bn, %) Pre spin-off (W bn) Post spin-off (W bn) Post spin-off (%) BTI BTI (new operating (new operating (remaining company) (remaining company) company) company) Total assets 215 37 178 17.4 83.0 Current assets 129 22 107 17.2 82.8 Cash & cash equivalents 12 9 3 75.5 24.5 Current financial assets 25 13 12 52.3 47.7 Non-Current Assets 86 15 72 17.7 83.3 Investments in associates/subsidiaries 28 10 18 35.6 64.4 Tangible assets 48 2 46 4.2 95.8 Total liabilities 142 13 130 8.9 91.4 Short-term borrowings 33 3 30 9.0 91.0 Long-term borrowings 39 8 31 19.4 80.6 Shareholder's equity 73 25 49 33.8 66.8 Capital stock 7 2 4 33.8 66.2 Retained earnings 16 (28) 44 NM 268.7 Source: DART, Company data Figure 1. s ownership structure (pre spin-off) President Lee Kyung-soo and family 23.3% (044820.KS) 100% 80% 98.83% 62.54% 51% 100% 100% China USA Indonesia Bio 3 Apples cosmetics 3 ATSM International 100% 50% Guangzhou Tree of life F&B Figure 3. s ownership structure (post spin-off) 23.3% President Lee Kyung-soo and family 23.3% (new op.co.) (192820.KS) 0.9% BTI (existing entity) (044820.KS) China USA Indonesia Bio 3 Apples cosmetics 3 ATSM International Guangzhou Tree of life F&B 3
(192820) Table 2. Earnings revisions (W bn, %) Previous Revised % Difference 2014F 2015F 2016F 2014F 2015F 2016F 2014F 2015F 2016F Sales 491 615 768 360 455 561 (26.6) (26.0) (26.9) Operating profit 47 61 80 34 44 57 (26.3) (27.4) (28.6) EBT 44 61 82 27 38 51 (38.8) (37.1) (38.1) Net profit 36 49 67 22 31 41 (38.8) (37.1) (38.1) NP of parent shareholders 34 47 64 22 31 40 (36.9) (35.8) (36.9) OP margin (%) 9.5 9.9 10.4 9.5 9.7 10.2 EPS 2,538 3,527 4,761 2,394 3,389 4,497 (5.6) (3.9) (5.5) Source: Korea Investment & Securities Figure 3. 12MF PE cosmetics peer comparison (PER) Current Av erage High Low 50 40 30 20 10 0 LG H&H AP Large cap. av g. Korea Kolmar Genic OEM av g. Note: based on pre-spinoff data Table 3. Base s announced by KRX (W) Company Stock type Listing Lowest asking (-50% to the listing ) Middle (-50% to the listing ) Highest asking (+100% to the listing ) Trading range after decision BTI Common stock 61,700 30,850 92,550 123,400 26,223-141,910 (Holdings) +15% change 70,955 35,478 106,433 141,910-15% change 52,445 26,223 78,668 104,890 Common stock 59,200 29,600 88,800 118,400 25,160-136,140 (Operating +15% change 68,080 34,040 102,120 136,160 company) -15% change 50,320 25,160 75,480 100,640 Note 1: Listing is calculated by multiplying book value ratio (separation ratio) to the mkt. cap of the day before the trading suspension and dividing it with each companies number of shares; Officially announced on the day before the re-listing (Apr 4) via KOSCOM Note 2: Initial to be set based at 9am between the lowest asking of -50% to the listing and the highest of +100% and to trade within +15% and -15% of the Source: KIND, Korea Investment & Securities 4
(192820) Table 4. Spin-off precedents: Price flow after the stock trading reopening Company Closing before the suspension Listing Initial Initial to listing (%) Closing Closing to initial (%) (KRW) Closing to listing (%) Hanmi Pharm Holdings 86,200 118,000 59,100-49.9% 50,200-15.1% -57.5% (2010) Operating Co. 75,800 90,000 18.7% 99,900 11.0% 31.8% Korea Kolmar Holdings 14,800 15,300 7,650-50.0% 8,790 14.9% -42.5% (2012) Operating Co. 14,600 22,500 54.1% 24,500 8.9% 67.8% Donga Pharm Holdings 124,000 139,000 91,000-34.5% 104,500 14.8% -24.8% (2013) Operating Co. 115,500 175,000 51.5% 148,500-15.1% 28.6% Chong Kun Dang Holdings 79,700 73,900 56,000-24.2% 48,000-14.3% -35.0% (2013) Operating Co. 82,000 80,000-2.4% 72,000-10.0% -12.2% Average Holdings 79,700 73,900 56,000-39.7% 48,000 0.1% -40.0% Operating Co. 82,000 80,000 30.5% 72,000-1.3% 29.0% Table 5. Spin-off precedents: Reasons for flows after relisting Price up (+)/down (-) Company Reasons Holdings Op. co. (-) (+) Hanmi Pharm The holding company was evaluated as unattractive as the operating company, Hanmi Pharm, holds core businesses and subsidiaries (pharmaceutical, Hanmi Chemical, Beijing Hanmi) (+) (-) Donga Pharm Core businesses (domestic Bacchus business, biosimilar development, etc ) was thought to be transferred to the holding company, Donga Socio Holdings (+) (+) Korea Kolmar The operating company maintained core businesses, but the holding company, Korea Kolmar Holdings, was also regarded as securing stable operating subsidiaries (Sunbiotech, Kolmar Pharm) The operating company maintained core businesses and fundamentals are solid as well. However, the stock (-) (-) Chong Kun Dang surged before the trading suspension, fully pricing in positive outlook for the transition. Stock s skidded after the reopening Source: Korea Investment & Securities Table 6. Fair value of holding company, BTI (W bn, KRW, mn share, %) Value Method (Before equity swap Value of investment assets target mkt. cap stake value (24.2%) 162 Value of tangible assets Real estate 0 Value of other subsidiaries (unlisted) 116 Bio 25x 2014F NP (Suheung Capsule 2014F PE, 93 30% discounted to avg. of top-tier firms) 3 Apples cosmetics 2013A BV 0 International 2013A BV 3 3ATSM 2013A BV 1 Operating value (Brand royalty + dividend + management) 10x 2014F OP 18 Total vale 278 (Net cash) 2013A (12) NAV 289 NAV (discounted) 215 NAV discount (%) 20 Number of shares (mn) 4.6 Fair equity value per share (W) 50,398 5
(192820) Table 7. Scenario analysis on fair value of BTI based on NAV discount rate and 2014 PE of Bio (KRW) Bio 2014F PE (x) 20x 25x 30x 35x NAV discount (%) -50% 29,466 31,499 33,532 35,566-40% 35,359 37,799 40,239 42,679-30% 41,252 44,099 46,945 49,792-20% 47,145 50,398 53,652 56,905-10% 53,038 56,698 60,358 64,018 0% 58,931 62,998 67,065 71,132 10% (premium) 64,824 69,298 73,771 78,245 Note: Fair value of BTI is based on current number of shares (4.59mn), before the rights offering and equity swap Company overview & Glossary was established in Nov 1992 for cosmetics manufacture and sales. currently take the second place on sales amount base in Korean cosmetics OEM/ODM market among over 200 competitors. In 2012, was chosen as the best cooperation partner of the global brand Loreal group. There are China (amount to 21% of total consolidated sales as of 2013A) and Bio (health functional food business, amount to 16.2% of total consolidated sales as of 2013A) ODM (Original Development Manufacturing): Provide total service from product design, development to production 6
(192820) Balance sheet FY-ending Dec. (W bn) 2012A 2013A 2014F 2015F 2016F Current assets 120 159 182 230 284 Cash & cash equivalent 9 15 5 6 7 Accounts & other receivables 54 77 98 123 152 Inventory 42 54 68 85 105 Non-current assets 121 149 168 193 203 Investment assets 13 6 6 7 9 Tangible assets 103 127 148 167 171 Intangible assets 4 9 9 11 13 Total assets 242 308 350 423 487 Current liabilities 111 127 231 263 282 Accounts & other payables 52 64 81 103 127 ST debt & bond 53 48 43 43 38 Current portion of LT debt 2 7 7 7 7 Non-current liabilities 50 79 44 58 67 Debentures 0 0 0 0 0 LT debt & financial liabilities 40 65 31 41 46 Total liabilities 162 206 276 321 349 Controlling interest 77 95 67 94 129 Capital stock 7 7 4 4 4 Capital surplus 17 17 44 44 44 Capital adjustments (5) (5) 0 0 0 Retained earnings 56 74 18 46 81 Minority interest 3 7 8 8 9 Shareholders' equity 80 102 75 102 138 Income statement FY-ending Dec. (W bn) 2012A 2013A 2014F 2015F 2016F Sales 313 379 360 455 561 COGS 259 313 301 380 465 Gross profit 54 66 59 76 96 SG&A expense 28 31 25 32 39 Operating profit 26 35 34 44 57 Financial income 0 0 0 0 0 Interest income 0 0 0 0 0 Financial expense 5 5 6 4 4 Interest expense 5 5 5 4 4 Other non-operating profit 1 (0) (1) (2) (2) Gains (Losses) in associates, subsidiaries and JV 2 0 0 0 0 Earnings before tax 24 30 27 38 51 Income taxes 2 6 5 7 10 Net profit 22 24 22 31 41 Net profit of controlling interest 20 22 22 31 40 Other comprehensive profit (2) (1) (1) (1) (1) Total comprehensive profit 20 24 21 31 41 Total comprehensive profit of controlling interest 18 21 21 30 40 EBITDA 32 43 45 55 69 Cash flow FY-ending Dec. (W bn) 2012A 2013A 2014F 2015F 2016F C/F from operating 12 13 107 33 31 Net profit 22 24 22 31 41 Depreciation 6 8 10 10 11 Amortization 0 0 1 1 1 Net incr. in W/C (22) (30) 75 (12) (26) Others 5 11 (0) 3 3 C/F from investing (33) (28) (30) (38) (24) CAPEX (38) (34) (30) (30) (15) Decr. in fixed assets 18 0 0 0 0 Incr. in investment (12) 5 (1) (2) (2) Net incr. in intangible assets (2) (1) (0) (3) (3) Others 2 1 1 (3) (3) C/F from financing 21 21 (88) 6 (6) Incr. in equity 0 0 24 0 0 Incr. in debts 23 24 (39) 10 0 Dividends (3) (4) (4) (3) (3) Others 0 0 (69) (1) (2) C/F from others (0) 0 0 0 0 Increase in cash (1) 6 *(11) 1 1 Key financial data FY-ending Dec. 2012A 2013A 2014F 2015F 2016F per share data (KRW) EPS 1,523 1,629 2,394 3,389 4,497 BPS 5,726 7,023 7,453 10,426 14,327 DPS 270 330 350 350 530 Growth (%) Sales growth 28.1 21.3 (4.9) 26.3 23.2 OP growth 54.8 33.3 (1.2) 28.3 29.9 NP growth 78.0 7.0 (1.7) 41.5 32.7 EPS growth 78.1 7.0 47.0 41.5 32.7 EBITDA growth 47.6 34.2 4.0 23.7 25.4 Profitability (%) OP margin 8.4 9.2 9.5 9.7 10.2 NP margin 6.6 5.8 6.0 6.7 7.2 EBITDA margin 10.2 11.3 12.4 12.1 12.3 ROA 10.1 8.9 6.6 8.0 9.1 ROE 29.8 25.5 26.6 37.9 36.3 Dividend yield 0.6 0.7 0.6 0.6 0.9 Stability Net debt (W bn) 76 99 71 78 75 Debt/equity ratio (%) 119.0 117.7 109.0 89.6 66.3 Valuation (X) PE 28.4 30.6 24.7 17.5 13.2 PB 7.6 7.1 7.9 5.7 4.1 PS 1.9 1.8 1.5 1.2 0.9 EV/EBITDA 20.9 18.3 19.8 16.2 12.8 Note: 1. Based on K-IFRS (consolidated) 2. Before separation for 2012-2013A 3. *Based on 2013-2014 balance sheet; Due to the difference between before and after separation, cash increase on the cash flow statement and actual amount do not match Note: 2014-2016F PE based on the KRX announced base (W59,200 7
(192820) Changes to recommendation and target Company (Code) Date Recommendation Price target (192820) 04-07-14 BUY W75,000 Guide to Korea Investment & Securities Co., Ltd. stock ratings based on absolute 12-month forward share 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 Korea Investment & Securities does not offer target s for stocks with Hold or Underweight ratings. 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 10 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. 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 in the past 12 months; Korea Investment & Securities Co., Ltd., or its affiliates has not received compensation for investment banking services from in the past 12 months; Korea Investment & Securities Co., Ltd., or its affiliates does not expect to receive or intend to seek compensation for investment banking services from in the next 3 months. Korea Investment & Securities Co., Ltd., or its affiliates was not making a market in s securities at the time that the research report was published. Korea Investment & Securities Co., Ltd. does not own over 1% of shares as of April 6, 2014. Korea Investment & Securities Co., Ltd. has not provided this report to various third parties. Neither the analyst/analysts who prepared this report nor their associates own any shares of the company/companies covered in this report as of April 6, 2014. Prepared by: Jung-In 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. 8