Company Report (051900 KS) Cosmetics Expecting steady cosmetics growth in 4Q, 2013 4Q12 preview: Expecting steady cosmetics growth We project (LG H&H) to post 4Q12 revenues of W953bn (+15% YoY) and an operating profit of W90bn (+16% YoY). Although we believe high-end door-to-door and department-store cosmetics sales stagnated, we project the companyês sales of lower-priced products through The Face Shop soared (driven by increased M/S, and structural growth of domestic cosmetics demand for lower-priced brands). Additionally, the beverage division steadily increased market share on the back of: 1) new products, 2) an expanded customer base, and 3) cross-selling between Coca-Cola Bottling and Haitai Beverage. We also believe the household-goods unit is overcoming slowing sales growth by increasing prices and expanding market share. 2013: Valuation stays high thanks to increased M/S, new markets We believe LG H&H will continue to enjoy a valuation premium in 2013, due to its market share expansion, market diversification, and growth at its new business units. We estimate the companyês cosmetics market share grew to 19% in 2012 (from 13% in 2008) thanks to: 1) the acquisition of The Face Shop, 2) new brands, including a fermented cosmetics brand Sum, herb-based Belief, and the refrigerated brand Frostine. We expect M/S will continue to grow thanks to new brands, and new products at new business units (e.g., perfumes and dietary supplements). Furthermore, we anticipate the companyês push into China will accelerate through franchising. Under a master franchise contract, LG H&H will only be responsible for product supply and advertising; franchisees will be responsible for distribution and store operations. Finally, we expect LG H&H to expand into new business areas through M&A in Korea and overseas. Raise TP to W800,000; Maintain Buy call We maintain our Buy call and raise our target price to W800,000 (from W790,000), as we believe that the company will maintain a valuation premium regardless of economic conditions (supported by market share expansion, expectations of overseas growth, and growth in new businesses). We derived our target price by applying a P/E of 37x (the companyês three-year average; up from 35x) to 2013F EPS. However, we lowered our 2012 and 2013 EPS estimates by 5.8% and 4.9%, respectively, to reflect an increase in interest expenses caused by investment expansion. Daewoo Securities Co., Ltd. Mina Kim +822-768-4163 mina.kim@dwsec.com Buy (Maintain) Target Price (12M, W) 800,000 Share Price (01/18/13, W) 669,000 Expected Return (%) 19.6 EPS Growth (13F, %) 20.3 Market EPS Growth (13F, %) 18.8 P/E (13F, x) 31.1 Market P/E (13F, x) 9.1 KOSPI 1,987.85 Market Cap (Wbn) 10,449 Shares Outstanding (mn) 18 Avg Trading Volume (60D, '000) 25 Avg Trading Value (60D, Wbn) 16 Dividend Yield (13F, %) 0.5 Free Float (%) 59.6 52-Week Low (W) 445,500 52-Week High (W) 697,000 Beta (12M, Daily Rate of Return) 0.26 Price Return Volatility (12M Daily, %, SD) 1.8 Foreign Ownership (%) 38.4 Major Shareholder(s) LG Corp. et al. (34.26%) Treasury stock (6.14%) Fidelity Funds et al. (6.04%) Price Performance (%) 1M 6M 12M Absolute 4.7 10.0 33.0 Relative 5.0-0.7 28.0 Earnings & Valuation Metrics FY Revenues OP OP Margin NP EPS EBITDA FCF ROE P/E P/B EV/EBITDA (Wbn) (Wbn) (%) (Wbn) (Won) (Wbn) (Wbn) (%) (x) (x) (x) 12/10 2,827 347 12.3 231 13,016 407 169 33.2 30.0 35.5 16.8 12/11 3,452 401 11.6 265 14,941 453 166 29.7 32.6 21.3 18.7 12/12F 3,954 466 11.8 317 17,891 531 281 28.2 36.7 34.5 19.3 12/13F 4,519 544 12.0 381 21,527 592 361 27.0 31.1 16.5 17.9 12/14F 5,168 635 12.3 449 25,337 684 419 25.4 26.4 10.2 15.1 Note: All figures are based on consolidated K-IFRS; NP refers to net profit attributable to controlling interests Source: Company data, estimates Share price 150 KOSPI 140 130 120 110 100 90 80 1/12 5/12 9/12 1/13 Analysts who prepared this report are registered as research analysts in Korea but not in any other jurisdiction, including the U.S.
Table 1. 4Q12 earnings forecasts 4Q11 3Q12 4Q12F Change (%) (Wbn) KDB Daewoo Consensus QoQ YoY Revenues 830.1 1,052.2 952.6 946.4-9.5 14.8 Operating profit 77.6 131.1 89.7 92.5-31.6 15.6 Pretax profit 69.8 123.3 92.0 89.5-25.4 31.7 Net profit 47.8 90.5 66.7 61.3-32.3 39.6 OP margin (%) 9.3 12.5 9.4 9.8-3.0%p 0.1%p Pretax margin (%) 8.4 11.7 9.7 9.5-2.1%p 1.2%p Net margin (%) 5.8 8.6 7.0 6.5-1.6%p 1.2%p Source: estimates Table 2. Earnings forecast revisions Before After Diff. (%) (Wbn) 12F 13F 14F 12F 13F 14F 12F 13F 14F Revenues 3,990 4,559 5,215 3,954 4,518 5,168-0.9-0.9-0.9 Operating profit 477 556 648 466 544 635-2.4-2.2-2.0 Pretax profit 467 556 651 446 536 631-4.5-3.5-3.0 Net profit 345 411 482 325 391 460-5.8-4.9-4.4 OP margin (%) 12.0 12.2 12.4 11.8 12.0 12.3-0.2%p -0.2%p -0.1%p Pretax margin (%) 11.7 12.21 12.5 11.3 11.9 12.2-0.4%p -0.3%p -0.3%p Net margin (%) 8.7 9.0 9.2 8.2 8.7 8.9-0.5%p -0.3%p -0.3%p Source: estimates Table 3. Business divisions Division 2010 2011 2012F Main brands Household goods 1,026 1,182 1,390 Cosmetics 1,084 1,227 1,358 Beverage 716 1,043 1,206 Total 2,826 3,452 3,954 Source: Company data, KDB Daewoo Securities (Wbn) Perioe, Bamboo salt, Elastine, ReEn, ON the Body, Beyond, SAY, Tech, Jayonpong, Saffron, Todian, Body Fit, etc. O Hui, Whoo, Sum, Belif, Isa Knox, SooRyeHan, Lacvert, Vonin, The Face Shop, VoV, World One, etc. Coca-Cola, Sprite, PowerADE, Glaceau Vitamin Water, Aquarius, Minute Maid, Georgia Coffee, Sunkist, etc. 2
Steady expansion of the cosmetics market share We estimate LG H&HÊs cosmetics market share at 19% in 2012. As of 2012, Amorepacific is leading the Korean cosmetics market with a market share of 33% (39% including low-end brands that were spun off from Amorepacific (Etude and Innisfree)). Before LG H&H acquired The Face Shop in 2009, the companyês market share stood at just 13% as of 2008, while Amorepacific (including Etude and Innisfree) accounted for 36% of the market. However, LG H&H has steadily expanded its market by launching new brands. We expect the companyês market share will continue to grow on the back of new brands targeting both high-end (department stores) and low-end markets and new products at new business units (e.g., perfumes and dietary supplements). In addition, the partnership with Coty should help LG H&H expand its foothold in the perfume and makeup cosmetics markets. Overseas growth particularly in the low-end segment The proportion of overseas revenues in LG H&HÊs cosmetics revenues is still significantly lower than that of Amorepacific. LG H&H was slower to enter the Chinese market than Amorepacific, which has steadily expanded its market there since 2004. While Amorepacific operates five brands in China, LG H&HÊs Chinese operation is primarily focused on The Face Shop. We expect LG H&H to generate revenues of W60bn in 2012 and W90bn in 2013 in China, contributing 4% and 6% of its total cosmetics revenues, respectively. Meanwhile, AmorepacificÊs Chinese revenues are projected at W270bn in 2012 and W360bn in 2013, taking up 13% and 16.8% of cosmetics revenues. Expansion of new businesses through aggressive M&As We expect LG H&H to continue with its aggressive search for M&A opportunities. Recently, the company entered the Japanese health supplement market by acquiring Everlife. Given that the company is targeting companies engaged in similar businesses and continues to pursue M&As with overseas companies, LG H&H is expected to steadily expand into new businesses through M&As. Table 4. LG H&HÊs M&A list Business Year Brand Acquisition price Description Cosmetics 2010 The Face Shop W420bn Leader of KoreaÊs low-end cosmetics market 2012 Ginza Stefany W132bn Japanese mail-order cosmetics firm 2012 VoV W55bn Low-priced make-up cosmetics Beverage 2007 Coca-Cola Bottling W320bn Leader of Korean carbonated drink market 2009 Diamond Water W11.2bn Mineral water manufacturer 2010 Hankook Beverage W14.3bn Mid-size beverage manufacturer 2011 Haitai Beverage W12.3bn No.3 beverage manufacturer Dietary supplement 2012 Everlife W330bn Japanese dietary and health supplement manufacturer Source: Company data 3
(051900 KS/Buy/TP: W800,000) Comprehensive Income Statement (Summarized) Statement of Financial Condition (Summarized) (Wbn) 12/11 12/12F 12/13F 12/14F (Wbn) 12/11 12/12F 12/13F 12/14F Revenues 3,452 3,954 4,519 5,168 Current Assets 767 859 1,211 1,642 Cost of Sales 1,736 1,981 2,241 2,537 Cash and Cash Equivalents 92 89 333 640 Gross Profit 1,716 1,974 2,278 2,631 AR & Other Receivables 348 399 456 521 SG&A Expenses 1,356 1,538 1,764 2,026 Inventories 306 350 400 458 Operating Profit (Adj) 360 436 514 605 Other Current Assets 17 17 18 18 Operating Profit 401 466 544 635 Non-Current Assets 1,602 1,602 1,605 1,607 Non-Operating Profit -29-24 -8-3 Investments in Associates 28 78 128 178 Net Financial Income 28 21 9 6 Property, Plant and Equipment 832 773 715 655 Net Gain from Inv in Associates 6 2 1 1 Intangible Assets 664 662 662 662 Pretax Profit 372 446 536 631 Total Assets 2,369 2,461 2,815 3,249 Income Tax 101 120 145 171 Current Liabilities 731 789 849 916 Profit from Continuing Operations 272 325 391 460 AP & Other Payables 381 538 598 664 Profit from Discontinued Operations 0 0 0 0 Short-Term Financial Liabilities 183 183 183 183 Net Profit 272 325 391 460 Other Current Liabilities 166 68 69 69 Controlling Interests 265 317 381 449 Non-Current Liabilities 578 330 282 234 Non-Controlling Interests 7 8 10 12 Long-Term Financial Liabilities 382 132 82 32 Total Comprehensive Profit 261 325 391 460 Other Non-Current Liabilities 128 198 200 202 Controlling Interests 254 317 381 449 Total Liabilities 1,308 1,119 1,131 1,150 Non-Controlling Interests 7 8 10 12 Controlling Interests 997 1,252 1,572 1,959 EBITDA 453 531 592 684 Capital Stock 89 89 89 89 FCF (Free Cash Flow) 166 281 361 419 Capital Surplus 97 97 97 97 EBITDA Margin (%) 13.1 13.4 13.1 13.2 Retained Earnings 884 1,139 1,458 1,845 Operating Profit Margin (%) 11.6 11.8 12.0 12.3 Non-Controlling Interests 63 90 113 141 Net Profit Margin (%) 7.7 8.0 8.4 8.7 Stockholders' Equity 1,061 1,342 1,685 2,099 Cash Flows (Summarized) Forecasts/Valuations (Summarized) (Wbn) 12/11 12/12F 12/13F 12/14F 12/11 12/12F 12/13F 12/14F Cash Flows from Op Activities 316 376 422 487 P/E (x) 32.6 36.7 31.1 26.4 Net Profit 272 325 391 460 P/CF (x) 24.2 28.2 25.8 22.4 Non-Cash Income and Expense 212 74 78 82 P/B (x) 21.3 34.5 16.5 10.2 Depreciation 87 76 78 79 EV/EBITDA (x) 18.7 19.3 17.9 15.1 Amortization 6 1 0 0 EPS (W) 14,941 17,891 21,527 25,337 Others 4-14 0 0 CFPS (W) 20,185 23,264 25,946 29,807 Chg in Working Capital -99-37 -47-56 BPS (W) 22,839 19,046 40,588 65,929 Chg in AR & Other Receivables -1-51 -57-66 DPS (W) 3,500 3,500 3,500 3,500 Chg in Inventories -54-45 -50-58 Payout ratio (%) 22.2 17.3 14.3 12.2 Chg in AP & Other Payables -29 58 59 66 Dividend Yield (%) 0.7 0.5 0.5 0.5 Income Tax Paid -68-48 0 0 Revenue Growth (%) 22.2 14.5 14.3 14.4 Cash Flows from Inv Activities -133-53 -67-69 EBITDA Growth (%) 11.3 17.2 11.5 15.5 Chg in PP&E -137-30 -30-30 Operating Profit Growth (%) 15.6 16.2 16.8 16.8 Chg in Intangible Assets 1 0 0 0 EPS Growth (%) 14.8 19.7 20.3 17.7 Chg in Financial Assets 0 15-1 -1 Accounts Receivable Turnover (x) 10.9 10.6 10.6 10.6 Others 3-38 -37-38 Inventory Turnover (x) 12.8 12.1 12.0 12.0 Cash Flows from Fin Activities -137-328 -112-112 Accounts Payable Turnover (x) 16.6 10.3 8.0 8.2 Chg in Financial Liabilities -63-250 -50-50 ROA (%) 12.6 13.5 14.8 15.2 Chg in Equity 0 0 0 ROE (%) 29.7 28.2 27.0 25.4 Dividends Paid -45-59 -62-62 ROIC (%) 17.5 17.3 18.4 22.0 Others -30-16 0 0 Liability to Equity Ratio (%) 123.4 83.3 67.1 54.8 Increase (Decrease) in Cash 47-3 244 307 Current Ratio (%) 104.9 108.9 142.6 179.2 Beginning Balance 44 92 89 333 Net Debt to Equity Ratio (%) 44.3 16.6-4.3-20.5 Ending Balance 92 89 333 640 Interest Coverage Ratio (x) 13.5 19.0 33.7 47.6 Source: Company data, estimates 4
Important Disclosures & Disclaimers Disclosures As of the publication date, Daewoo Securities Co., Ltd and/or its affiliates do not have any special interest with the subject company and do not own 1% or more of the subject company's shares outstanding. Stock Ratings Industry Ratings Buy Relative performance of 20% or greater Trading Buy Relative performance of 10% or greater, but with volatility Hold Relative performance of -10% and 10% Sell Relative performance of -10% Overweight Fundamentals are favorable or improving Neutral Fundamentals are steady without any material changes Underweight Fundamentals are unfavorable or worsening (W) 1,000,000 800,000 600,000 400,000 200,000 0 1/11 7/11 1/12 7/12 1/13 * Ratings and Target Price History (Share price (----), Target price (----), Not covered ( ), Buy ( ), Trading Buy ( ), Hold ( ), Sell ( )) * Our investment rating is a guide to the relative return of the stock versus the market over the next 12 months. * Although it is not part of the official ratings at Daewoo Securities, we may call a trading opportunity in case there is a technical or short-term material development. * The target price was determined by the research analyst through valuation methods discussed in this report, in part based on the analystês estimate of future earnings. The achievement of the target price may be impeded by risks related to the subject securities and companies, as well as general market and economic conditions. Analyst Certification The research analysts who prepared this report (the Analysts ) are registered with the Korea Financial Investment Association and are subject to Korean securities regulations. They are neither registered as research analysts in any other jurisdiction nor subject to the laws and regulations thereof. Opinions expressed in this publication about the subject securities and companies accurately reflect the personal views of the Analysts primarily responsible for this report. Daewoo Securities Co., Ltd. policy prohibits its Analysts and members of their households from owning securities of any company in the AnalystÊs area of coverage, and the Analysts do not serve as an officer, director or advisory board member of the subject companies. Except as otherwise specified herein, the Analysts have not received any compensation or any other benefits from the subject companies in the past 12 months and have not been promised the same in connection with this report. No part of the compensation of the Analysts was, is, or will be directly or indirectly related to the specific recommendations or views contained in this report but, like all employees of Daewoo Securities, the Analysts receive compensation that is impacted by overall firm profitability, which includes revenues from, among other business units, the institutional equities, investment banking, proprietary trading and private client division. At the time of publication of this report, the Analysts do not know or have reason to know of any actual, material conflict of interest of the Analyst or Daewoo Securities Co., Ltd. except as otherwise stated herein. Disclaimers This report is published by Daewoo Securities Co., Ltd. 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