(071840 KS) Margins to improve in 2H Retail Results Comment May 12, 2014 (Maintain) Buy Target Price (12M, W) 89,000 Share Price (5/9/14, W) 72,300 Expected Return 23% OP (, Wbn) 187 Consensus OP (, Wbn) 188 EPS Growth (, %) 8.0 Market EPS Growth (, %) 25.4 P/E (, x) 12.2 Market P/E (, x) 10.7 KOSPI 1,956.55 Market Cap (Wbn) 1,707 Shares Outstanding (mn) 24 Free Float (%) 39.9 Foreign Ownership (%) 4.4 Beta (12M) 0.08 52-Week Low 70,900 52-Week High 90,500 (%) 1M 6M 12M Absolute -3.0-14.8-9.1 Relative -0.9-13.6-8.0 120 Lotte Himart KOSPI 110 100 What s new: 1Q OP declines 34.6% YoY s 1Q revenue and operating profit came in at W805.2bn (+10.5% YoY) and W19.9bn (-34.6% YoY), respectively, missing the market consensus. 1Q same-store sales (SSS) showed negative growth. The poor performance was primarily due to higher fixed costs from aggressive new store openings. The company opened 35 new stores in 1Q, leading to an increase in SG&A expenses, especially fixed items like rent and labor costs. The company is expected to add another 36 or 37 stores in 2Q. For 2Q, we expect revenue of roughly W1tr (+12.1% YoY) and operating profit of W51bn (-20.7% YoY). Margin deterioration will likely continue into 2Q as a result of new store openings. Still, the decline in operating profit should slightly narrow QoQ on smaller expenses related to new hire training. However, a high base of comparison (due to last year s robust air conditioner sales) and overall depressed consumer spending point to another challenging quarter in 2Q. Catalysts While many retail channels are restricted from opening new stores due to government regulations, is aggressively expanding its stores through existing Lotte Mart sites. After opening 37 new stores in 2013, the company is anticipated to open over 70 more in 2014 through shop-in-shop locations within Lotte Mart sites. Aggressive new store openings should entail high costs, but we believe related worries have been partly priced in and expect margins to stabilize in 2H. In addition, the company could get an additional boost from: 1) the expansion of consumer electronics and private label merchandise at Lotte Mart sites, and 2) stronger sales of mobile phones on the back of high traffic at hypermarket stores. Maintain Buy, but Lower TP to W89,000 We reiterate Buy on, but cut our target price by 9% to W89,000. We adjusted down our 20 EPS by 9.2% in light of the larger-than-expected decline in 1Q gross margin and the bearish 2Q outlook (sluggish consumption and high base effect). We are not overly concerned despite sluggish near-term earnings, given that: 1) the company is expected to display accelerating growth starting in 2015 after aggressively opening stores in 2014, and 2) the company boasts dominant leadership in the consumer electronics retail segment. In our view, the stock s trajectory will largely hinge on the pace of margin improvement from 3Q. 90 80 5.13 9.13 1.14 5.14 Daewoo Securities Co., Ltd. [Retail Analyst] Young Ryu +822-768-4138 young.ryu@dwsec.com FY (Dec.) 12/11 12/12 12/13 12/ 12/ 12/16F Revenue (Wbn) 3,411 3,221 3,519 4,029 4,402 4,545 OP (Wbn) 251 161 185 187 229 243 OP margin (%) 7.4 5.0 5.3 4.6 5.2 5.3 NP (Wbn) 141 70 129 139 181 201 EPS (W) 6,600 2,947 5,469 5,905 7,649 8,514 ROE (%) 11.6 4.8 8.4 8.4 10.0 10.1 P/E (x) 12.3 23.3 16.0 12.2 9.5 8.5 P/B (x) 1.3 1.1 1.3 1.0 0.9 0.8 Notes: All figures are based on consolidated K-IFRS; NP refers to net profit attributable to controlling interests Source: Company data, estimates Analysts who prepared this report are registered as research analysts in Korea but not in any other jurisdiction, including the t U.S. PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES & DISCLAIMERS IN APPENDIX 1 AT THE END OF REPORT.
1Q14P earnings review Table 1.. 1Q14P review (Wbn,%,%p) 1Q13 4Q13 1Q14P Preliminary KDB Daewoo Consensus Growth Revenue 728.7 924.8 805.2 808.4 813.1 10.5-12.9 Operating profit 30.4 29.2 19.9 19.0 23.2-34.6-32.0 OP margin 4.2 3.2 2.5 2.4 2.9-40.8-21.9 Pretax profit 25.7 24.0 15.0 13.4 19.1-41.6-37.6 Net profit 19.5 18.7 12.9 10.1 14.3-33.9-31.3 Source: Company data, WISEfn, estimates YoY QoQ Table 2. Earnings forecast revisions (Wbn, %) Before After % chg. Revenue 4,123 4,454 4,029 4,402-2.3-1.2 Operating profit 215 223 187 229-13.0 2.7 Pretax profit 198 210 178 232-10.1 10.5 Net profit 153 163 139 181-9.2 11.0 Source: estimates Notes - Reflects gross margin decrease and conservative OP margin improvement forecasts Table 3.. Quarterly and annual earnings (Wbn, %,%p) 1Q 2013 2014 2Q 3Q 4Q 1QP 2QF 3QF 4QF 2013 2014 Revenue 729 921 944 925 805 1033 1104 1087 3519 4029 YoY 4.7% 25.3% 1.7% 7.3% 10.5% 12.1% 16.9% 17.6% 9.2% 14.5% No. of stores 324 328 342 359 394 431 431 434 359 435 Net increase 4 14 16 35 37 0 3 37 76 Gross profit 177 243 245 216 192 263 280 257 880.2 991.9 Gross margin 24.3% 26.4% 25.9% 23.3% 23.8% 25.5% 25.4% 23.6% 25.0% 24.6% Operating profit 30 65 60 29 20 51 64 52 184.8 187.2 YoY -1.1% 96.3% -9.7% -5.2% -34.7% -20.7% 5.6% 78.6% 14.4% 1.3% OP margin 4.2% 7.0% 6.4% 3.2% 2.5% 5.0% 5.8% 4.8% 5.3% 4.6% Pretax profit 25.7 60.2 57.0 24.0 14.8 45.5 58.4 59.2 166.9 177.9 Net profit 19.5 47.6 43.3 18.7 12.9 35.9 44.4 46.2 129.1 139.4 Source: Company data, KDB Daewoo Securities Figure 1.. P/E band Figure 2.. P/B band (x) 16 12-month forward P/E Avg. P/E (x) 1.4 12-month forward P/B Avg. P/B 12 1.1 8 0.8 4 11 12 13 Source: QuantiWise, 0.5 11 12 13 Source: QuantiWise, 2
(071840 KS/Buy/TP: W89,000) Comprehensive Income Statement (Summarized) Statement of Financial Condition (Summarized) (Wbn) 12/13 12/ 12/ 12/16F (Wbn) 12/13 12/ 12/ 12/16F Revenue 3,519 4,029 4,402 4,545 Current Assets 529 773 871 1,073 Cost of Sales 2,639 3,037 3,310 3,418 Cash and Cash Equivalents 62 242 291 474 Gross Profit 880 992 1,092 1,127 AR & Other Receivables 97 106 116 120 SG&A Expenses 695 805 862 885 Inventories 340 389 425 439 Operating Profit (Adj) 185 187 229 243 Other Current Assets 30 36 39 40 Operating Profit 185 187 229 243 Non-Current Assets 2,226 2,240 2,250 2,255 Non-Operating Profit -18-9 3 15 Investments in Associates 0 0 0 0 Net Financial Income -21-13 -2 11 Property, Plant and Equipment 421 425 428 431 Net Gain from Inv in Associates 0 0 0 0 Intangible Assets 1,692 1,691 1,690 1,689 Pretax Profit 167 178 232 258 Total Assets 2,755 3,013 3,121 3,328 Income Tax 38 39 51 57 Current Liabilities 402 626 658 671 Profit from Continuing Operations 129 139 181 201 AP & Other Payables 253 265 290 299 Profit from Discontinued Operations 0 0 0 0 Short-Term Financial Liabilities 70 270 270 270 Net Profit 129 139 181 201 Other Current Liabilities 79 91 98 102 Controlling Interests 129 139 181 201 Non-Current Liabilities 759 661 564 565 Non-Controlling Interests 0 0 0 0 Long-Term Financial Liabilities 731 629 529 529 Total Comprehensive Profit 127 137 179 199 Other Non-Current Liabilities 28 32 35 36 Controlling Interests 127 137 179 199 Total Liabilities 1,160 1,286 1,222 1,236 Non-Controlling Interests 0 0 0 0 Controlling Interests 1,595 1,727 1,899 2,092 EBITDA 231 234 277 291 Capital Stock 118 118 118 118 FCF (Free Cash Flow) 93 116 168 184 Capital Surplus 1,056 1,056 1,056 1,056 EBITDA Margin (%) 6.6 5.8 6.3 6.4 Retained Earnings 422 555 730 925 Operating Profit Margin (%) 5.3 4.6 5.2 5.3 Non-Controlling Interests 0 0 0 0 Net Profit Margin (%) 3.7 3.4 4.1 4.4 Stockholders' Equity 1,595 1,727 1,899 2,092 Cash Flows (Summarized) Forecasts/Valuations (Summarized) (Wbn) 12/13 12/ 12/ 12/16F 12/13 12/ 12/ 12/16F Cash Flows from Op Activities 157 166 218 234 P/E (x) 16.0 12.2 9.5 8.5 Net Profit 129 139 181 201 P/CF (x) 8.3 7.1 6.1 5.8 Non-Cash Income and Expense 121 100 101 95 P/B (x) 1.3 1.0 0.9 0.8 Depreciation 45 46 47 47 EV/EBITDA (x) 12.1 10.1 8.0 7.0 Amortization 1 1 1 1 EPS (W) 5,469 5,905 7,649 8,514 Others 75 53 53 47 CFPS (W) 10,605 10,134 11,946 12,520 Chg in Working Capital -64-35 -13-5 BPS (W) 67,564 73,135 80,449 88,629 Chg in AR & Other Receivables -29-11 -8-3 DPS (W) 250 250 250 250 Chg in Inventories -88-49 -36-14 Payout ratio (%) 4.6 4.2 3.3 2.9 Chg in AP & Other Payables 68 1 16 6 Dividend Yield (%) 0.3 0.3 0.3 0.3 Income Tax Paid -30-39 -51-57 Revenue Growth (%) 9.3 14.5 9.3 3.2 Cash Flows from Inv Activities -59-48 -34-17 EBITDA Growth (%) 12.7 1.3 18.4 5.1 Chg in PP&E -63-50 -50-50 Operating Profit Growth (%) 14.9 1.1 22.5 6.1 Chg in Intangible Assets -3 0 0 0 EPS Growth (%) 85.6 8.0 29.5 11.3 Chg in Financial Assets 3-11 -8-3 Accounts Receivable Turnover (x) 54.2 49.5 48.5 47.1 Others 4 13 24 36 Inventory Turnover (x) 11.9 11.1 10.8 10.5 Cash Flows from Fin Activities -93 63-135 -33 Accounts Payable Turnover (x) 17.7 17.8 18.5 18.0 Chg in Financial Liabilities -58 98-100 0 ROA (%) 4.8 4.8 5.9 6.2 Chg in Equity 0 0 0 0 ROE (%) 8.4 8.4 10.0 10.1 Dividends Paid -6-6 -6-6 ROIC (%) 6.4 6.4 7.8 8.2 Others -29-29 -29-27 Liability to Equity Ratio (%) 72.7 74.5 64.3 59.1 Increase (Decrease) in Cash 4 180 49 183 Current Ratio (%) 131.7 123.5 132.2 159.8 Beginning Balance 58 62 242 291 Net Debt to Equity Ratio (%) 46.0 37.7 26.4 15.2 Ending Balance 62 242 291 474 Interest Coverage Ratio (x) 6.6 6.5 8.0 9.0 Source: Company data, estimates 3
APPENDIX 1 Important Disclosures & Disclaimers 2-Year Rating and Target Price History Company (Code) Date Rating Target Price (071840) 05/11/2014 Buy 89,000 03/09/2014 Buy 98,000 No Coverage 10/16/2012 Buy 90,000 07/23/2012 Buy 68,000 07/05/2012 Buy 75,000 06/29/2012 Buy 70,000 04/13/2012 Buy 80,000 (W) Lotte Himart 120,000 100,000 80,000 60,000 40,000 20,000 0 May 12 May 13 May 14 Stock Ratings Industry Ratings Buy : Relative performance of 20% or greater Overweight : Fundamentals are favorable or improving Trading Buy : Relative performance of 10% or greater, but with volatility Neutral : Fundamentals are steady without any material changes Hold : Relative performance of -10% and 10% Underweight : Fundamentals are unfavorable or worsening Sell : Relative performance of -10% 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 analyst s 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. 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. 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 Analyst s 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. ( Daewoo ), a broker-dealer registered in the Republic of Korea and a member of the Korea Exchange. Information and opinions contained herein have been compiled from sources believed to be reliable and in good faith, but such information has not been independently verified and Daewoo makes no guarantee, representation or warranty, express or implied, as to the fairness, accuracy, completeness or correctness of the information and opinions contained herein or of any translation into English from the Korean language. If this report is an English translation of a report prepared in the Korean language, the original Korean language report may have been made available to investors in advance of this report. Daewoo, its affiliates and their directors, officers, employees and agents do not accept any liability for any loss arising from the use hereof. This report is for general information purposes only and it is not and should not be construed as an offer or a solicitation of an offer to effect transactions in any securities or other financial instruments. The intended recipients of this report are sophisticated institutional investors who have substantial knowledge of the local business environment, its common practices, laws and accounting principles and no person whose receipt or use of this report would violate any laws and regulations or subject Daewoo and its affiliates to registration or licensing requirements in any jurisdiction should receive or make any use hereof. Information and opinions contained herein are subject to change without notice and no part of this document may be copied or reproduced in any manner or form or redistributed or published, in whole or in part, without the prior written consent of Daewoo. Daewoo, its affiliates and their directors, officers, employees and agents may have long or short positions in any of the subject securities at any time and may make a purchase or sale, or offer to make a purchase or sale, of any such securities or other financial instruments from time to time in the open market or otherwise, in each case either as principals or agents. Daewoo and its affiliates may have had, or may be expecting to enter into, business relationships with the subject companies to provide investment banking, market-making or other financial services as are permitted under applicable laws and regulations. The price and value of the investments referred to in this report and the income from them may go down as well as up, and investors may realize losses on any investments. Past performance is not a guide to future performance. Future returns are not guaranteed, and a loss of original capital may occur 4
Distribution United Kingdom: This report is being distributed by Daewoo Securities (Europe) Ltd. in the United Kingdom only to (i) investment professionals falling within Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (the Order ), and (ii) high net worth companies and other persons to whom it may lawfully be communicated, falling within Article 49(2)(A) to (E) of the Order (all such persons together being referred to as Relevant Persons ). This report is directed only at Relevant Persons. Any person who is not a Relevant Person should not act or rely on this report or any of its contents. United States: This report is distributed in the U.S. by Daewoo Securities (America) Inc., a member of FINRA/SIPC, and is only intended for major institutional investors as defined in Rule 15a-6(b)(4) under the U.S. Securities Exchange Act of 1934. All U.S. persons that receive this document by their acceptance thereof represent and warrant that they are a major institutional investor and have not received this report under any express or implied understanding that they will direct commission income to Daewoo or its affiliates. Any U.S. recipient of this document wishing to effect a transaction in any securities discussed herein should contact and place orders with Daewoo Securities (America) Inc., which accepts responsibility for the contents of this report in the U.S. The securities described in this report may not have been registered under the U.S. Securities Act of 1933, as amended, and, in such case, may not be offered or sold in the U.S. or to U.S. persons absent registration or an applicable exemption from the registration requirements. Hong Kong: This document has been approved for distribution in Hong Kong by Daewoo Securities (Hong Kong) Ltd., which is regulated by the Hong Kong Securities and Futures Commission. The contents of this report have not been reviewed by any regulatory authority in Hong Kong. This report is for distribution only to professional investors within the meaning of Part I of Schedule 1 to the Securities and Futures Ordinance of Hong Kong (Cap. 571, Laws of Hong Kong) and any rules made thereunder and may not be redistributed in whole or in part in Hong Kong to any person. All Other Jurisdictions: Customers in all other countries who wish to effect a transaction in any securities referenced in this report should contact Daewoo or its affiliates only if distribution to or use by such customer of this report would not violate applicable laws and regulations and not subject Daewoo and its affiliates to any registration or licensing requirement within such jurisdiction. KDB Daewoo Securities International Network Daewoo Securities Co. Ltd. (Seoul) Daewoo Securities (Hong Kong) Ltd. Daewoo Securities (America) Inc. Head Office 34-3 Yeouido-dong, Yeongdeungpo-gu Seoul 150-716 Korea Two International Finance Centre Suites 2005-2012 8 Finance Street, Central Hong Kong 320 Park Avenue, 31st Fl. New York, NY 10022 United States Tel: 82-2-768-3026 Tel: 85-2-2514-1304 Tel: 1-212-407-1000 Daewoo Securities (Europe) Ltd. Daewoo Securities (Singapore) Pte. Ltd. Tokyo Representative Office Tower 42, Level 41 25 Old Broad Street London EC2N 1HQ United Kingdom 6 Battery Road, #11-01 Singapore, 049909 7th Floor, Yusen Building 2-3-2 Marunouchi, Chiyoda-ku Tokyo 100-0005 Japan Tel: 44-20-7982-8016 Tel: 65-6671-9845 Tel: 81-3- 3211-5511 Beijing Representative Office Shanghai Representative Office Ho Chi Minh Representative Office Suite 2602, Twin Towers (East) B-12 Jianguomenwai Avenue Chaoyang District, Beijing 100022 China Unit 13, 28 th Floor, Hang Seng Bank Tower 1000 Lujiazui Ring Road Pudong New Area, Shanghai 200120 China Centec Tower 72-74 Nguyen Thi Minh Khai Street Ward 6, District 3, Ho Chi Minh City Vietnam Tel: 86-10-6567-9699 Tel: 86-21-5013-6392 Tel: 84-8-3910-6000 5