(8 KS) It s always darkest before the dawn Beverage Company Report April 1, 213 (Maintain) Trading Buy Target Price (12M, W) 37, Share Price (3/29/13, W) 33,85 Expected Return 9% OP (13F, Wbn) 192 Consensus OP (13F, Wbn) 251 EPS Growth (13F, %) -.6 Market EPS Growth (13F, %) 22.1 P/E (13F, x) 23.3 Market P/E (13F, x) 9.3 KOSPI 2,4.89 Market Cap (Wbn) 2,352 Shares Outstanding (mn) 71 Free Float 38.3 Foreign Ownership 17.4 Beta (12M).47 52-Week Low (W) 19,55 52-Week High (W) 35,7 1M 6M 12M Absolute -.7 38.7 32.8 Relative.3 38.3 33.2 16 14 12 1 8 6 Share price KOSPI 3/12 7/12 11/12 3/13 Daewoo Securities Co., Ltd. Food & Beverage / Tobacco Woon-mok Baek +822-768-4158 wm.baek@dwsec.com Hye-rin Yoo +822-768-4173 hyerin.yoo@dwsec.com Sales force integration in 1Q13 We project muted 1Q earnings for, with revenue and operating profit contracting.6% YoY and 3.6% YoY, respectively. Price hikes in December 212 led to increased anticipatory demand during the final months of last year, and we thus project weaker soju sales volume in 1Q. The firm s soju market share shrunk in January, but normalized in February to 49%. Beer sales have also been subdued due to the brewery s overhaul of its sales force. Beer market share declined to 38% in January, but picked up to the 4% range in February. Three key catalysts We expect to steadily regain its beer market share from 3Q, aided by positive effects from its sales force integration. In early January, overhauled its sales force structure. It shifted from a sales structure in which a single type of alcohol (soju or beer) was assigned to each sales agent, to multiple brands/categories per agent (covering Chamisul, Hite, Max, and Dry Finish D). The change will allow sales agents to cross-sell both soju and beer products, with a greater focus on the firm s traditionally weak second-tier accounts (i.e., restaurants and bars) than on first-tier accounts (i.e., wholesalers). We believe 1H will be a transitional period while the firm adjusts to this new structure. We expect visible results (i.e., beer market share gains) to slowly emerge from 2H. We forecast s annual beer market share to reach 44% in 213. We also expect to see a decline in the firm s leverage. s current debt stands at W1.3tr, of which W15bn will be paid off through the sale of properties (e.g., logistics center, etc.). Furthermore, the firm s subsidiary Jinro Japan plans to raise capital via a rights offering. Once Jinro Japan secures the funds, intends to sell part of its stake in Jinro Soju to Jinro Japan (Jinro Soju is a wholly-owned subsidiary that manufactures export-only soju). The sale would bring in an additional W15bn, which also intends to use to reduce its debt. Another positive catalyst is overseas exports. In particular, we are upbeat on the potential of soju exports to China and Southeast Asia. At present, ex-japan soju exports amount to just W15bn (vs. W45bn to Japan). In China, the firm recently launched a new soju brand, mainly in Beijing and Shanghai. We believe the key to success in the Chinese market will be establishing close partnerships with local distribution channels. As for Southeast Asia, we see strong upside to exports given the robust demand in countries like Cambodia and Myanmar. Maintain TP of W37,; Upbeat on efforts to gain beer market share s shares have recently been correcting on the risk of sluggish 1Q earnings and a potential liquor tax hike. In the soju segment, we expect the firm to retain its market position (213F market share of 48.5%) thanks to its strong competitiveness. However, we are doubtful about a pickup in the beer segment in 1H, as it will likely take time to adjust to the new sales system. Still, we are encouraged by the company s numerous efforts to increase its beer market share (e.g., multiple brand targets, change in compensation program, ongoing restructuring, etc.) and thus view 1H as a bottom for share prices. Our Trading Buy call on the stock remains unchanged; however, once the firm s sales force integration begins to bear fruit, we will upgrade our rating. FY (Dec.) 12/1 12/11 12/12 12/13F 12/14F 12/15F Revenue (Wbn) 1,66 1,374 2,35 2,83 2,29 2,322 OP (Wbn) 122 125 167 192 212 232 OP Margin 11.4 9.1 8.2 9.2 9.6 1. NP (Wbn) 48 7 13 13 12 14 EPS (W) 1,136 1,396 1,465 1,456 1,699 1,984 ROE 7. 6.9 7.3 7.3 8.6 9.8 P/E (x) 31.2 18. 2.8 23.3 19.9 17.1 P/B (x) 2.2 1.2 1.6 1.9 1.8 1.8 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 U.S.
April 1, 213 Earnings forecasts Table 1. 1Q13 earnings preview (Wbn, %) 1Q12 4Q12 1Q13F Growth KDB Daewoo Consensus YoY QoQ Revenue 442 55 44 471 -.6-13. Operating profit 41 25 4 57-3.6 57.2 Pretax profit 24-6 24 41-1.5 TTB Net profit 18 2 18 27 -.1 619.2 OP margin 9.3 5. 9. 12.2 - - NP margin 4..5 4. 5.6 - - Note: Operating profit is adjusted Source: estimates Table 2. Quarterly and annual earnings forecasts (Wbn, %) 1Q12 2Q12 3Q12 4Q12 1Q13F 2Q13F 3Q13F 4Q13F 212 213F 214F Revenue 442 538 549 55 44 548 565 531 2,35 2,83 2,29 Operating profit 41 37 64 25 4 5 68 34 167 192 212 Pretax profit 24 76 43-6 24 36 53 24 137 137 16 Net profit 18 54 3 2 18 27 4 18 13 13 12 OP margin 9.3 6.9 11.6 5. 9. 9.1 12. 6.4 8.2 9.2 9.6 NP margin 4. 1. 5.4.5 4. 5. 7.1 3.4 5.1 4.9 5.4 Revenue growth 8.9 88.1 5.9 5.4 -.6 1.8 2.8 5.2 48.1 2.4 6. OP growth 25.3 2.4 85. 17.1-3.6 34.8 6.4 35.8 33.7 14.7 1.6 Pretax profit growth -15.7 45.1 42.5 TTR -1.5-52.2 24.2 TTB 23.5.2 16.6 Net profit growth -12. 29.3 43.3 TTB -.1-49.3 34.1 641.9 47.5 -.6 16.7 Notes: Operating profit is adjusted; figures do not include expected restructuring costs Source: Company data, Table 3. Revisions to 213-15 earnings forecasts (Wbn, %) Previous Revised % change 13F 14F 15F 13F 14F 15F 13F 14F 15F Comments Revenue 2,7 2,186 2299 2,83 2,29 2,321.6 1. 1. - Reflects revisions to beer sales estimates Operating profit 199 216 235 192 212 232-3.6-2. -1. - Reflects revisions to raw material cost estimates Pretax profit 142 163 182 137 16 187-3.6-1.6 2.6 Net profit 17 123 138 13 12 14-4.3-2.4 1.8 OP margin 9.6 9.9 1.2 9.2 9.6 1. - - - NP margin 5.2 5.6 6. 4.9 5.4 6. - - - Source: estimates 2
April 1, 213 Key charts Figure 1. Soju M/S Figure 2. Beer M/S 54 Other 1 OB 52 8 5 6 48 4 46 2 44 6 7 8 9 1 11 12 13F 3 5 7 8 9 1 11 12 13F Source: KALIA, Source: KALIA, Figure 3. CPI for soju (1/=1) 15 Figure 4. CPI for beer (1/=1) 12 14 115 13 11 12 15 11 1 1 95 9 9 2 4 6 8 1 12 2 4 6 8 1 12 Source: Statistics Korea, Source: Statistics Korea, Figure 5. International price & won-denominated price for malt Figure 6. Spread between CPI for soju and PPI for alcohol (US$/tonne) 8 6 4 2 International price (L) Won-denominated price (R) (W'/tonne) 1, 8 6 4 2 (1/=1) 16 15 14 13 12 11 1 CPI for soju - PPI for alcohol (R) CPI for soju (L) PPI for alcohol (L) (1/=1) 12 6-6 -12-18 9-24 94 97 3 6 9 12 2 4 6 8 1 12 Source: KITA, Source: Statistics Korea, 3
April 1, 213 Figure 7. Soju shipment growth Figure 8. Beer shipment growth (' kl) 15 Soju shipments (L) YoY growth (R) 6 (' kl) 25 Beer shipments (L) YoY growth (R) 6 12 4 2 4 9 2 15 2 6 1 3-2 5-2 -4 99 1 3 5 7 9 11 13F Source: Statistics Korea, KALIA, -4 99 1 3 5 7 9 11 13F Source: Statistics Korea, KALIA, 4
April 1, 213 (8 KS/Trading Buy/TP: W37,) Comprehensive Income Statement (Summarized) Statement of Financial Condition (Summarized) (Wbn) 12/12 12/13F 12/14F 12/15F (Wbn) 12/12 12/13F 12/14F 12/15F Revenue 2,35 2,83 2,29 2,322 Current Assets 812 841 92 964 Cost of Sales 1,163 1,188 1,259 1,323 Cash and Cash Equivalents 78 167 188 214 Gross Profit 872 896 95 998 AR & Other Receivables 564 499 529 556 SG&A Expenses 75 74 738 766 Inventories 128 131 139 146 Operating Profit (Adj) 167 192 212 232 Other Current Assets 4 41 43 46 Operating Profit 167 192 212 232 Non-Current Assets 2,77 2,74 2,764 2,87 Non-Operating Profit -3-54 -52-45 Investments in Associates 2 4 6 Net Financial Income 69 6 55 48 Property, Plant and Equipment 2,188 2,29 2,22 2,249 Net Gain from Inv in Associates 28 2 2 2 Intangible Assets 221 225 23 234 Pretax Profit 137 137 16 187 Total Assets 3,519 3,58 3,666 3,771 Income Tax 33 34 4 47 Current Liabilities 1,473 1,463 1,483 1,498 Profit from Continuing Operations 14 13 12 14 AP & Other Payables 255 261 277 291 Profit from Discontinued Operations Short-Term Financial Liabilities 834 89 789 769 Net Profit 14 13 12 14 Other Current Liabilities 384 393 417 438 Controlling Interests 13 13 12 14 Non-Current Liabilities 637 723 77 821 Non-Controlling Interests Long-Term Financial Liabilities 528 578 587 61 Total Comprehensive Profit 7 7 87 17 Other Non-Current Liabilities 26 57 91 128 Controlling Interests 7 7 87 17 Total Liabilities 2,11 2,186 2,253 2,319 Non-Controlling Interests Controlling Interests 1,49 1,393 1,412 1,451 EBITDA 289 297 318 34 Capital Stock 366 366 366 366 FCF (Free Cash Flow) -156 19 137 136 Capital Surplus 71 71 71 71 EBITDA Margin 14.2 14.2 14.4 14.6 Retained Earnings 428 446 498 571 Operating Profit Margin 8.2 9.2 9.6 1. Non-Controlling Interests 1 1 1 1 Net Profit Margin 5.1 4.9 5.4 6. Stockholders' Equity 1,49 1,394 1,413 1,452 Cash Flows (Summarized) Forecasts/Valuations (Summarized) (Wbn) 12/12 12/13F 12/14F 12/15F 12/12 12/13F 12/14F 12/15F Cash Flows from Op Activities 234 339 276 286 P/E (x) 2.8 23.3 19.9 17.1 Net Profit 14 13 12 14 P/CF (x) 9.5 11.5 1.6 9.7 Non-Cash Income and Expense 212 194 197 199 P/B (x) 1.6 1.9 1.8 1.8 Depreciation 115 94 95 96 EV/EBITDA (x) 12.1 12.4 11.5 1.7 Amortization 7 11 11 11 EPS (W) 1,465 1,456 1,699 1,984 Others -18 3 CFPS (W) 3,188 2,941 3,192 3,54 Chg in Working Capital -61 77-1 -7 BPS (W) 18,557 18,278 18,484 18,978 Chg in AR & Other Receivables -13 65-3 -27 DPS (W) 1,25 1, 1, 1, Chg in Inventories 38-3 -8-7 Payout ratio 81.9 66. 56.6 48.4 Chg in AP & Other Payables 18 6 16 14 Dividend Yield 4.1 3. 3. 3. Income Tax Paid -2-34 -4-47 Revenue Growth 48.1 2.4 6. 5.1 Cash Flows from Inv Activities -9-126 -115-131 EBITDA Growth 49.1 2.7 7.1 6.9 Chg in PP&E -131-115 -16-123 Operating Profit Growth 33.7 14.7 1.6 9.5 Chg in Intangible Assets -179-15 -15-15 EPS Growth 4.9 -.6 16.7 16.8 Chg in Financial Assets -3 Accounts Receivable Turnover (x) 3.8 4.1 4.5 4.5 Others 223 4 6 7 Inventory Turnover (x) 13.8 16.1 16.4 16.3 Cash Flows from Fin Activities -22-123 -14-129 Accounts Payable Turnover (x) 21.7 2.1 2.5 2.4 Chg in Financial Liabilities -48-89 -123-153 ROA 2.9 2.9 3.3 3.8 Chg in Equity ROE 7.3 7.3 8.6 9.8 Dividends Paid -84-85 -68-68 ROIC 5.1 5.6 6.2 6.7 Others -7-63 -61-55 Liability to Equity Ratio 149.7 156.8 159.5 159.7 Increase (Decrease) in Cash -64 9 21 26 Current Ratio 55.1 57.4 6.8 64.4 Beginning Balance 142 78 167 188 Net Debt to Equity Ratio 91. 87.3 83.8 79.4 Ending Balance 78 167 188 214 Interest Coverage Ratio (x) 2.4 3.1 3.5 4.2 Source: Company data, estimates 5
April 1, 213 Important Disclosures & Disclaimers Disclosures As of the publication date, Daewoo Securities Co., Ltd. has been acting as a financial advisor to for its treasury stock trust, and other than this, Daewoo Securities has no other special interests in the companies covered in this report. (W) 5, 4, 3, 2, 1, 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. 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. 4/11 9/11 3/12 9/12 3/13 6
April 1, 213 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 2 (Financial Promotion) Order 25 (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 15-716 Korea Two International Finance Centre Suites 25-212 8 Finance Street, Central Hong Kong 6 Lexington Avenue Suite 31 New York, NY 122 United States Tel: 82-2-768-326 Tel: 85-2-2514-134 Tel: 1-212-47-122 Daewoo Securities (Europe) Ltd. Tokyo Representative Office Beijing Representative Office Tower 42, Level 41 25 Old Broad Street London EC2N 1HQ United Kingdom 7th Floor, Yusen Building 2-3-2 Marunouchi, Chiyoda-ku Tokyo 1-5 Japan Suite 262, Twin Towers (East) B-12 Jianguomenwai Avenue Chaoyang District, Beijing 122 China Tel: 44-2-7982-816 Tel: 81-3- 3211-5511 Tel: 86-1-6567-9699 Shanghai Representative Office Ho Chi Minh Representative Office Unit 13, 28 th Floor, Hang Seng Bank Tower Centec Tower 1 Lujiazui Ring Road 72-74 Nguyen Thi Minh Khai Street Pudong New Area, Shanghai 212 Ward 6, District 3, Ho Chi Minh City China Vietnam Tel: 86-21-513-6392 Tel: 84-8-391-6 7