(7184 KS) Nothing left to lose Retail Earnings Preview April 6, 216 (Maintain) Buy Target Price (12M, W) 69, Share Price (4/5/16, W) 52,4 Expected Return 32% OP (16F, Wbn) 175 Consensus OP (16F, Wbn) 176 EPS Growth (16F, %) 1.4 Market EPS Growth (16F, %) 1.5 P/E (16F, x) 1.5 Market P/E (16F, x) 11.1 KOSPI 1,962.74 Market Cap (Wbn) 1,237 Shares Outstanding (mn) 24 Free Float (%) 33.6 Foreign Ownership (%) 9.6 Beta (12M).82 52-Week Low 51, 52-Week High 84, (%) 1M 6M 12M Absolute -3. -21.4-2.1 Relative -3.3-2.8-16.8 14 KOSPI 12 1 8 4.15 8.15 12.15 4.16 Negatives s stock has declined continuously after hitting a high in 2Q15, and is now back at all-time lows. Since its IPO, there have been two instances in which the stock fell to record lows; one was in mid-212, when earnings plunged due to non-businessrelated factors, and the other was in late 214, when top-line expectations failed to materialize despite aggressive store openings. This time, the stock s plunge can be blamed on disappointment over the company s lack of progress in improving margins, despite shifting its focus from growth to profits last year. But now that the company has gone through the margin erosion caused by increasing sales of low-margin mobile devices and aggressive promotional discounts (which were mostly covered by the company, rather than the manufacturers), as well as the 2Q15 slump in seasonal appliance sales, we see little room for further deterioration. Positives Mobile product margins have been picking up steadily, driven by increasing fee income amid subscriber growth. We also expect the retailer to gain more leverage over major manufacturers this year. The sales percentage of the two biggest brands, Samsung and LG, has fallen to the low-5% range (from % previously). Also encouraging is that the sales mix of seasonal appliances has been gradually declining in favor of mobile devices and small household appliances. While the pace may be slow, we expect these improvements to continue. One thing worth noting is the recent moderation of the decline in TV sales. After dropping more than 1% in 215, TV sales have lately been falling at a slower rate (midsingle digits) thanks to growing sales of cheaper Chinese brands, such as Haier and TCL. We think the company will continue to differentiate its product offerings by sourcing competitive, foreign-brand products in large volumes. As the largest domestic electronics retailer, the company has a strong advantage in product sourcing, which could become a major selling point for the stock. Maintain Buy, but Cut TP to W69, For 1Q16, we expect revenue to grow 5.7% YoY, but operating profit to shrink 7% YoY due to one-off gains recorded in the previous year. However, we think the earnings decline is already priced in, and hence do not see much cause for concern. Business conditions are back to normal, and the focus is likely to shift to 2Q16 earnings, which should pick up on favorable comparisons (MERS effect and muted sales of seasonal appliances). We lowered our target price on the stock to W69, after revising our earnings estimates. Still, we believe continued share price declines have made valuation attractive and think the stock will gradually move higher in line with earnings. We also note the stock is finding strong support at around 1x P/E. Daewoo Securities Co., Ltd. [Retail] Aiden Lee +822-768-3297 aiden.lee@dwsec.com FY (Dec.) 12/12 12/13 12/14 12/15 12/16F 12/17F Revenue (Wbn) 3,212 3,519 3,754 3,896 4,148 4,4 OP (Wbn) 162 185 144 1 175 2 OP margin (%) 5. 5.3 3.8 4.1 4.2 4.5 NP (Wbn) 71 129 96 17 118 141 EPS (W) 3,23 5,469 4,85 4,515 4,986 5,985 ROE (%) 4.9 8.4 5.9 6.1 6.4 7.2 P/E (x) 22.8 16. 16.5 13.1 1.5 8.8 P/B (x) 1.1 1.3.9.8.7.6 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.
Figure 1. Major factors affecting s share price movements (W') 1 9 8 Share price - Strong earnings after IPO - Store expansion boosts growth expectations Expectations of synergy with Lotte Shopping - Cost burden due to store expansion - Cannibalization effect - Seasonal appliance sales slowdown -Profitability improves on SG&A and cost savings - Air conditioner sales slump - Overall sales slowdown - Margin erosioncaused by worsening product mix 7 5 -Conflict with Eugene -CEO scandal -Earnings surprise on strong summer appliance sales - Top-line expectations with store openings in Lotte Mart 4 6/11 12/11 6/12 12/12 6/13 12/13 6/14 12/14 6/15 12/15 Source: Figure 2. 12-month forward P/E trend Figure 3. Operating profit trend (W') 1 Share price (L) (x) 3 (Wbn) Operating profit (L) (%) 7 YoY (R) 1 9 8 7 5 12M forward P/E (R) 25 2 15 1 5 4 3 2 1 8 4 2-2 -4 4 11 12 13 14 15 16 5 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15 1Q16F 3Q16F - Source: Source: Company data, Figure 4. Gross margin growth Figure 5. OP margin growth (%) (%p) 27 YoY (R) 1.5 Gross margin (L) 1. 26.5 25. (%) 8 7 6 5 YoY (R) OP margin (L) (%p) 3 2 1-1 24 -.5-1. 4 3-2 -3 23 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15 1Q16F 3Q16F -1.5 2 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15 1Q16F 3Q16F -4 Source: Company data, Source: Company data, 2
Table 1. Quarterly and annual earnings (Wbn, no. of stores, %) 215 216F 1Q15 2Q15 3Q15 4Q15 1Q16F 2Q16F 3Q16F 4Q16F 215 216F 217F Growth (%) 1Q16F 216F 217F Revenue 859 968 1,63 1,6 98 1,42 1,119 1,79 3,896 4,148 4,4 5.7 6.5 6.1 Stand-alone stores 677 789 872 825 696 831 96 877 3,163 3,311 3,434 2.8 4.7 3.7 Shop-in-shops 169 161 166 15 187 174 174 1 647 694 738 1.6 7.4 6.3 Online 13 18 25 31 25 36 39 43 86 143 228 95. 65.1. No. of stores 437 438 437 44 438 442 448 457 44 457 465.2 3.9 1.8 Stand-alone stores 333 333 332 334 332 335 34 347 334 347 352 -.3 3.9 1.4 Shop-in-shops 14 15 15 16 16 17 18 11 16 11 113 1.9 3.8 2.7 Revenue per store 2. 2.2 2.4 2.3 2.1 2.4 2.5 2.4 8.9 9.1 9.5 5.5 2.5 4.3 Stand-alone stores 2. 2.4 2.6 2.5 2.1 2.5 2.7 2.5 9.5 9.5 9.8 3.2.7 2.5 Shop-in-shop 1.6 1.5 1.6 1.4 1.8 1.6 1.6 1.5 6.2 6.4 6.6 8. 3.9 3. Gross profit 213 247 267 236 22 268 284 256 963 1,27 1,1 2.9 6.6 7.1 Operating profit 35 42 56 27 33 48 61 33 1 175 2-7. 9.4 13.9 Gross margin 24.9 25.5 25.2 23.4 24.2 25.7 25.4 23.7 24.7 24.8 25. OP margin 4.1 4.4 5.3 2.6 3.6 4.6 5.5 3.1 4.1 4.2 4.5 Notes: Stand-alone, shop-in-shop, and online data are estimates Source: Company data, 3
(7184 KS/Buy/TP: W69,) Comprehensive Income Statement (Summarized) Statement of Financial Condition (Summarized) (Wbn) 12/14 12/15 12/16F 12/17F (Wbn) 12/14 12/15 12/16F 12/17F Revenue 3,754 3,896 4,148 4,4 Current Assets 548 64 758 945 Cost of Sales 2,828 2,933 3,121 3,3 Cash and Cash Equivalents 15 13 173 322 Gross Profit 927 963 1,27 1,1 AR & Other Receivables 74 69 94 13 SG&A Expenses 782 83 852 91 Inventories 357 416 464 489 Operating Profit (Adj) 144 1 175 2 Other Current Assets 12 25 27 31 Operating Profit 144 1 175 2 Non-Current Assets 2,226 2,265 2,28 2,29 Non-Operating Profit -2-17 -18-11 Investments in Associates Net Financial Income -2-18 -14-7 Property, Plant and Equipment 435 422 434 44 Net Gain from Inv in Associates Intangible Assets 1,694 1,75 1,71 1,698 Pretax Profit 124 143 157 188 Total Assets 2,775 2,95 3,38 3,235 Income Tax 28 37 39 47 Current Liabilities 642 638 58 569 Profit from Continuing Operations 96 17 118 141 AP & Other Payables 27 28 289 299 Profit from Discontinued Operations Short-Term Financial Liabilities 3 285 135 185 Net Profit 96 17 118 141 Other Current Liabilities 72 74 84 85 Controlling Interests 96 17 118 141 Non-Current Liabilities 447 484 64 645 Non-Controlling Interests Long-Term Financial Liabilities 433 469 619 619 Total Comprehensive Profit 96 15 118 141 Other Non-Current Liabilities 14 15 21 26 Controlling Interests 96 15 118 141 Total Liabilities 1,9 1,122 1,148 1,214 Non-Controlling Interests Controlling Interests 1,685 1,783 1,89 2,22 EBITDA 198 213 226 246 Capital Stock 118 118 118 118 FCF (Free Cash Flow) 135 89 74 123 Capital Surplus 1,56 1,56 1,56 1,56 EBITDA Margin (%) 5.3 5.5 5.4 5.6 Retained Earnings 512 8 716 847 Operating Profit Margin (%) 3.8 4.1 4.2 4.5 Non-Controlling Interests Net Profit Margin (%) 2.6 2.7 2.8 3.2 Stockholders' Equity 1,685 1,783 1,89 2,22 Cash Flows (Summarized) Forecasts/Valuations (Summarized) (Wbn) 12/14 12/15 12/16F 12/17F 12/14 12/15 12/16F 12/17F Cash Flows from Op Activities 195 12 134 173 P/E (x) 16.5 13.1 1.5 8.8 Net Profit 96 17 118 141 P/CF (x) 7.3 6. 5.6 5.1 Non-Cash Income and Expense 121 127 14 11 P/B (x).9.8.7.6 Depreciation 51 49 47 44 EV/EBITDA (x) 11.2 9.5 8. 7. Amortization 2 3 3 3 EPS (W) 4,85 4,515 4,986 5,985 Others 68 74 54 54 CFPS (W) 9,213 9,887 9,41 1,268 Chg in Working Capital 24-88 -49-22 BPS (W) 71,381 75,519 8,75 85,629 Chg in AR & Other Receivables 22 3-19 -8 DPS (W) 33 43 43 43 Chg in Inventories -17-59 -48-25 Payout ratio (%) 8.1 9.5 8.6 7.2 Chg in AP & Other Payables 2 4 12 5 Dividend Yield (%).5.7.8.8 Income Tax Paid -47-25 -39-47 Revenue Growth (%) 6.7 3.8 6.5 6.1 Cash Flows from Inv Activities -53-85 -53-36 EBITDA Growth (%) -14.6 7.6 6.3 9.1 Chg in PP&E -58-31 - -5 Operating Profit Growth (%) -21.9 1.9 9.4 13.9 Chg in Intangible Assets -3-11 EPS Growth (%) -25.3 1.5 1.4 2. Chg in Financial Assets 4-54 -6-7 Accounts Receivable Turnover (x) 58.8 74.3 66.5 57.9 Others 4 11 13 21 Inventory Turnover (x) 1.8 1.1 9.4 9.2 Cash Flows from Fin Activities -1-11 -37 12 Accounts Payable Turnover (x) 16.4 16. 15.6 15.9 Chg in Financial Liabilities -69 21 5 ROA (%) 3.5 3.8 4. 4.5 Chg in Equity ROE (%) 5.9 6.1 6.4 7.2 Dividends Paid -6-8 -1-1 ROIC (%) 5. 5.3 5.7 6.3 Others -25-24 -27-28 Liability to Equity Ratio (%) 64.7 63..7. Increase (Decrease) in Cash 43 25 44 149 Current Ratio (%) 85.3 1.3 149.2 166.1 Beginning Balance 62 15 13 173 Net Debt to Equity Ratio (%) 37.2 34.9 3.6 23.8 Ending Balance 15 13 173 322 Interest Coverage Ratio (x) 5.7 6.7 6.5 7.1 Source: Company data, estimates 4
APPENDIX 1 Important Disclosures & Disclaimers 2-Year Rating and Target Price History Company (Code) Date Rating Target Price (7184) 4/6/216 Buy 69, 11/25/215 Buy 9, 8/9/215 Buy 1, 5/19/215 Buy 11, 3/23/215 Buy 77, 3/5/215 Buy 74, No Coverage 8/5/214 Buy 82, 5/11/214 Buy 89, 3/1/214 Buy 98, (W) 12, 1, 8,, 4, 2, Apr 14 Apr 15 Apr 16 Stock Ratings Industry Ratings Buy : Relative performance of 2% or greater Overweight : Fundamentals are favorable or improving Trading Buy : Relative performance of 1% or greater, but with volatility Neutral : Fundamentals are steady without any material changes Hold : Relative performance of -1% and 1% Underweight : Fundamentals are unfavorable or worsening Sell : Relative performance of -1% 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. Equity Ratings Distribution Buy Trading Buy 71.8% 11.76% 17.16%.% * Based on recommendations in the last 12-months (as of December 31, 215) 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 Hold Sell 5
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