(008770 KS) Changi Airport contract marks historic milestone Hotel/Leisure News Comment January 9, 2014 (Maintain) Buy Target Price (12M, W) 95,000 Share Price (01/08/14, W) 71,000 Expected Return 34% OP (14F, Wbn) 196 Consensus OP (14F, Wbn) 216 EPS Growth (14F, %) 399.8 Market EPS Growth (14F, %) 25.3 P/E (14F, x) 20.6 Market P/E (14F, x) 8.8 KOSPI 1,958.96 Market Cap (Wbn) 2,787 Shares Outstanding (mn) 40 Free Float (%) 81.1 Foreign Ownership (%) 38.9 Beta (12M) 0.50 52-Week Low (W) 41,400 52-Week High (W) 73,400 (%) 1M 6M 12M Absolute 5.2 16.6 62.3 Relative 6.3 8.8 64.2 180 160 140 120 100 80 Share price KOSPI 12/12 4/13 8/13 12/13 wins Changi Airport contract, marking a historic milestone and DFS were named the final winners of Changi Airport s major duty-free shop tenders after months of bidding (since April 2013). beat out Nuance- Watson, the incumbent operator of perfume and cosmetics shops, while DFS retained its concessions in liquor and tobacco. As widely expected, many major duty-free shop operators fiercely battled for the mega contracts (the first in five years), which grant the rights to operate duty-free shops at the airport for the next six years. The contract also included concessions for the new Terminal 4 (set to be completed in 2017), further raising prospects of long-term growth. We believe s win over the incumbent, as well as global leader DFS and domestic rival Lotte Duty Free, provides a valid argument for the re-rating of the firm s duty-free shop business. Three implications of the Changi Airport deal 1) wrote a new chapter in Korea s duty-free shop history by becoming the first domestic company to win a major foreign duty-free shop contract. Because of their excessive reliance on the domestic market, domestic duty-free shop operators have weaker brand recognition than their peers in the US and Europe. We believe Hotel Shilla s latest triumph will serve as an important milestone in the revaluation of domestic duty-free shop operators in the global market. 2) We believe the new concessions will allow to demonstrate its strong competitiveness at home and abroad. It also signals that the company s overseas expansion (which began in 2013) is now fully underway. s ability to beat out strong contenders like DFS is a testament to its competitiveness. In the medium to long term, we expect to see increased confidence in the company s ability to advance into airport and downtown duty-free shops overseas. 3) The expansion of the perfume and cosmetics business should help bring down the company s COGS ratio over the long term. Perfume and cosmetics have the lowest COGS ratio among duty-free shop categories, and thus increased exposure to the segment should improve the gross profit margin of the overall duty-free shop business. We also expect supplier diversification (through overseas expansion) and an increasing mix of perfume and cosmetics to lower the COGS ratio and boost margins long-term. Maintain Buy and Lift TP to W95,000 s Changi Airport contract win should allow for a re-rating of the company s medium to long-term growth potential. We believe the duty-free shop business warrants a premium and thus applied a 30% premium to the average multiple of global luxury retailers in deriving its value. We hence raise our target price by 11.8% to W95,000 from W85,000 and maintain our Buy call. We continue to recommend the stock as our top pick in the tourism sector. Daewoo Securities Co., Ltd. Hotel/Leisure, Textiles/Apparel Regina Hahm +822-768-4172 regina.hahm@dwsec.com FY (Dec.) 12/10 12/11 12/12 12/13F 12/14F 12/15F Revenue (Wbn) 1,440 1,764 2,190 2,265 2,702 3,006 OP (Wbn) 81 96 129 101 196 291 OP margin (%) 5.6 5.4 5.9 4.5 7.3 9.7 NP (Wbn) 49 56 101 28 138 221 EPS (W) 1,235 1,401 2,535 689 3,443 5,528 ROE (%) 9.0 9.6 15.8 4.0 18.4 24.4 P/E (x) 22.5 27.5 17.3 96.5 20.6 12.8 P/B (x) 2.0 2.7 2.7 4.0 3.6 2.9 Notes: All figures are based on non-consolidated K-IFRS 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. PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES & DISCLAIMERS IN APPENDIX 1 AT THE END OF REPORT.
Changi Airport contract to bolster overseas expansion and DFS won Changi Airport contracts and DFS were named the final winners of Changi Airport s major duty-free shop tenders after months of bidding (since April 2013). beat out Nuance-Watson, the incumbent operator of perfume and cosmetics shops, while DFS retained its concessions in liquor and tobacco. As widely expected, many major duty-free shop operators fiercely battled for the mega contracts (the first in five years), which grant the rights to operate duty-free shops at the airport for the next six years. The contract also included concessions for the new Terminal 4 (set to be completed in 2017), raising further prospects of long-term growth. At first glance, seemed to have only a slim chance of winning the large-scale deal in light of its relatively weak global status. Furthermore, with four bidders, the competition in the perfume and cosmetics arena was fiercer than that of liquor and tobacco (three bidders: DFS, Nuance-Watson, and Lotte Duty Free). We believe that key considerations for selecting the winner were business plans, business knowhow, marketing strategies, and reputations within other international airports We believe that was able to differentiate itself from its competitors in the bidding, as: 1) the company has been selected as the best duty-free shop operator by Incheon International Airport, which ranks first in terms of global duty-free shop revenue and recognition; and 2) it is expected to create synergies with the Samsung Group in formulating marketing strategies and business models. Table 1. Details about bidding for Changi Airport duty-free shops [Liquor & tobacco] [Perfumes & cosmetics] Tenancy period Apr. 9, 2014 - Apr. 8, 2020 (6 years) Oct. 1, 2014 - Sep. 30, 2020 (6 years) Incumbent DFS Nuance-Watson Estimated sales (2012) US$320mn each Tender opening date Mar. 28, 2013 Tender closing date Jun. 27, 2013 Renewal option Location No T 1, 2, and 3; 4 (upcoming) Bidders DFS DFS Group Nuance-Watson Lotte Duty Free Nuance-Watson Lotte Duty Free Shilla Duty Free Winners DFS Shilla Duty Free Source: Changi Airport, The Moodie Report, Table 2. World s top 10 airports Rank 2011 Rank 2012 Rank 2013 1 Hong Kong International Airport 1 Incheon International Airport 1 Singapore Changi Airport 2 Singapore Changi Airport 2 Singapore Changi Airport 2 Incheon International Airport 3 Incheon International Airport 3 Hong Kong International Airport 3 Central Japan International Airport 4 Munich Airport 4 Amsterdam Airport Schiphol 4 Hong Kong International Airport 5 Beijing Capital International Airport 5 Beijing Capital International Airport 5 Beijing Capital International Airport 6 Amsterdam Airport Schiphol 6 Munich Airport 6 Munich Airport 7 Zurich Airport 7 Zurich Airport 7 Zurich Airport 8 Auckland Airport 8 Kuala Lumpur International Airport 8 Vancouver International Airport 9 Kuala Lumpur International Airport 9 Vancouver International Airport 9 Tokyo International Airport (Haneda) 10 Copenhagen Airport 10 Central Japan International Airport 10 London Heathrow Airport Source: SKYTRAX 2
Three implications of the Changi Airport deal Since 2013, has been aiming to expand into airport duty-free shops overseas in the medium to long term. Last year, the major duty-free shop tenders in which participated were Guam International Airport s and Changi Airport s. We note that Lotte Duty Free won the Guam International Airport tender award. We believe domestic duty-free shop operators ramp-up of global outreach efforts has significance in that they had focused on the domestic market up until recently. Despite huge revenue, they had been undervalued on the global stage due to limited market diversification, smaller store sizes and lopsided dependence on domestic revenue. In our view, s winning of the Changi Airport contract is a historic milestone that should be differentiated from the smaller deals domestic retailers have won in the past. The qualitative and quantitative implications of the company s contract win are as follows: 1) wrote a new chapter in Korea s duty-free shop history by becoming the first domestic company to win a major foreign contract. While Korea is the only Asian nation that boasts two of the world s top 10 duty-free operators, domestic players have weaker brand recognition than peers in the US and Europe because of their excessive reliance on the domestic market. We believe s latest triumph will serve as an important milestone in the revaluation of domestic duty-free shop operators in the global market. 2) We believe the new concessions will allow to demonstrate its strong competitiveness at home and abroad. It also signals that the company s overseas expansion (which began in 2013) is now fully underway. s ability to beat out strong contenders like DFS and Lotte, as well as the incumbent, Nuance-Watson is a testament to its competitiveness. In the medium to long term, we expect to see increased confidence in the company s ability to advance into airport and downtown duty-free shops overseas. 3) The expansion of the perfume and cosmetics business should help bring down the company s COGS ratio over the long term. Perfume and cosmetics have the lowest COGS ratio among dutyfree shop categories, and thus increased exposure to the segment should improve the gross profit margin of the overall duty-free shop business. We also expect supplier diversification (through overseas expansion) and an increasing mix of perfume and cosmetics to lower the COGS ratio and boost margins long-term. Once the Changi operation gets on track in 2015, s perfume and cosmetics revenue contribution will likely increase to 50%. Figure 1. s Changi Airport vision (perfumes and cosmetics) Source: Changi Airport, The Moodie Report 3
Figure 2. DFS Changi Airport vision (liquor and tobacco) Source: Changi Airport, The Moodie Report Figure 3. The world s top 25 duty-free shop operators DFS LS Travel Retail Dufry Lotte Duty Free Autogrill Travel Retail & Duty Free Nuance-Watson Dubai Duty Free The Shilla Duty Free Gebr. Heinemann Ever Rich Group Duty Free Americas King Power International Group Aer Rianta International WHSmith Sunrise Duty Free China Duty Free Group Tallink James Richardson Sky Connection Starboard Cruise Services Japan Airport Terminal Company King Power Group (Hong Kong) DFASS Folli Follie Group (Hellenic Duty Free Shops) Qatar Duty Free (EURmn) 0 500 1,000 1,500 2,000 2,500 3,000 Source: The Moodie Report 4
Valuation: Maintain Buy and Raise TP to W95,000 Raise TP to W95,000 following upward revision of target multiple has secured a significant, medium to long-term growth driver with the Changi Airport duty-free shop contract. We thus believe the duty-free shop business warrants a premium. In valuing s duty-free shop business, we previously used the average multiple of global luxury retailers. Given the unit s considerable growth potential over the next six years, we believe a valuation premium is due and are thus revising our target price. For the duty-free shop business, we are now applying a 30% premium to the average multiple (21.1x) of global luxury retailers to our 2014F EPS. For the hotel division, we continue to apply a 20% discount to the average multiple of global hotel chains. Reflecting our upwardly revised fair multiple, we raise our target price by 11.8% to W95,000 from W85,000. Our target price implies a 2014F P/E of 27.6x and represents a 34% upside from current levels. Table 1. valuation revisions (Wbn, x, 000 shares, %) 2014F Notes Peer P/E Duty-free Hotel 21.1 - Average of global luxury retailers 30.4 - Average of major global hotel chains Valuation multiple by business Duty free 27.5-30% premium to the average of global luxury retailers Hotel 24.3-20% discount to the average of major global hotel chains Target valuation by business [Value by division] Duty free 3,331 Hotel + other 401 Total enterprise value 3,732 Target price 95,000 Current price 71,000 Upside 34% Source: estimates 5
(008770 KS/Buy/TP: W95,000) 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 2,190 2,265 2,702 3,006 Current Assets 738 663 893 1,077 Cost of Sales 1,247 334 1,508 1,679 Cash and Cash Equivalents 266 166 285 402 Gross Profit 942 1,931 1,194 1,327 AR & Other Receivables 94 99 121 134 SG&A Expenses 813 1,830 998 1,036 Inventories 354 370 453 504 Operating Profit (Adj) 129 101 196 291 Other Current Assets 23 24 29 33 Operating Profit 129 101 196 291 Non-Current Assets 804 1,015 1,018 1,056 Non-Operating Profit 4-65 -15 0 Investments in Associates 1 6 6 6 Net Financial Income 10 7 4-8 Property, Plant and Equipment 479 631 575 559 Net Gain from Inv in Associates 0 0 0 0 Intangible Assets 26 25 29 31 Pretax Profit 133 36 181 291 Total Assets 1,542 1,678 1,911 2,133 Income Tax 32 8 44 70 Current Liabilities 347 348 397 424 Profit from Continuing Operations 101 28 138 221 AP & Other Payables 138 145 177 197 Profit from Discontinued Operations 0 0 0 0 Short-Term Financial Liabilities 81 70 57 46 Net Profit 101 28 138 221 Other Current Liabilities 128 134 163 181 Controlling Interests 101 28 138 221 Non-Current Liabilities 509 637 705 703 Non-Controlling Interests 0 0 0 0 Long-Term Financial Liabilities 389 519 551 509 Total Comprehensive Profit 100 18 128 211 Other Non-Current Liabilities 109 114 156 195 Controlling Interests 100 18 128 211 Total Liabilities 856 985 1,102 1,127 Non-Controlling Interests 0 0 0 0 Controlling Interests 687 692 808 1,006 EBITDA 172 155 263 319 Capital Stock 200 200 200 200 FCF (Free Cash Flow) 91 2 117 175 Capital Surplus 197 197 197 197 EBITDA Margin (%) 7.9 6.9 9.7 10.6 Retained Earnings 288 304 429 637 Operating Profit Margin (%) 5.9 4.5 7.3 9.7 Non-Controlling Interests 0 0 0 0 Net Profit Margin (%) 4.6 1.2 5.1 7.4 Stockholders' Equity 687 692 808 1,006 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 134-40 132 190 P/E (x) 17.3 96.5 20.6 12.8 Net Profit 101 28 138 221 P/CF (x) 12.2 32.6 13.9 11.4 Non-Cash Income and Expense 82 106 125 98 P/B (x) 2.7 4.0 3.6 2.9 Depreciation 37 46 63 23 EV/EBITDA (x) 11.3 19.7 11.9 9.3 Amortization 6 9 4 5 EPS (W) 2,535 689 3,443 5,528 Others 2-36 -11-8 CFPS (W) 3,610 2,043 5,120 6,235 Chg in Working Capital -30-146 -88-59 BPS (W) 16,612 16,774 19,587 24,456 Chg in AR & Other Receivables -16 11-22 -14 DPS (W) 300 300 350 400 Chg in Inventories -25-17 -83-51 Payout ratio (%) 11.7 43.0 10.0 7.1 Chg in AP & Other Payables 9-68 33 20 Dividend Yield (%) 0.7 0.5 0.5 0.6 Income Tax Paid -19-28 -44-70 Revenue Growth (%) 24.1 3.4 19.3 11.3 Cash Flows from Inv Activities -43-174 2 16 EBITDA Growth (%) 32.2-10.0 69.5 21.3 Chg in PP&E -40-108 -9-8 Operating Profit Growth (%) 34.6-21.9 93.9 48.5 Chg in Intangible Assets -5-8 -8-8 EPS Growth (%) 81.0-72.8 399.8 60.6 Chg in Financial Assets -1-65 0 0 Accounts Receivable Turnover (x) 44.2 38.6 40.5 38.7 Others 3 7 19 32 Inventory Turnover (x) 6.4 6.3 6.6 6.3 Cash Flows from Fin Activities 19 114-15 -90 Accounts Payable Turnover (x) 20.8 20.4 21.4 20.5 Chg in Financial Liabilities 51 149-58 -53 ROA (%) 7.0 1.7 7.7 10.9 Chg in Equity 1 0 0 0 ROE (%) 15.8 4.0 18.4 24.4 Dividends Paid -12-12 -12-14 ROIC (%) 11.6 8.5 14.4 20.6 Others -21-23 -22-23 Liability to Equity Ratio (%) 124.6 142.3 136.4 112.1 Increase (Decrease) in Cash 142-100 119 117 Current Ratio (%) 212.8 190.4 224.8 253.8 Beginning Balance 124 266 166 285 Net Debt to Equity Ratio (%) 29.5 60.4 39.4 14.9 Ending Balance 266 166 285 402 Interest Coverage Ratio (x) 5.1 3.8 8.8 12.7 Source: Company data, estimates 6
APPENDIX 1 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. (W) 100,000 80,000 60,000 40,000 20,000 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. 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. 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