Hanssem (924) BUY (Initiate), TP W133, Stock price (Aug 23, KRW) 18, Market cap (USD mn) 2,541 Shares outstanding (mn) 23.5 52W High/Low (KRW) 18,/34,5 6M avg. daily turnover (USD mn) 6.6 Free float (%) 41.9 Foreign ownership (%) 24.9 Yr to Sales OP NP EPS % chg EBITDA PE EV/EBITDA ROE DY Dec (W bn) (W bn) (W bn) (KRW) (YoY) (W bn) (x) (x) (%) (%) 212A 783 47 39 2,139 2.5 55 8.7 6.2 18.9 3.2 213A 1,7 8 61 3,42 59. 88 14.8 11.7 25.6 1.4 214F 1,285 98 74 4,77 19.8 17 26.5 22.1 25..6 215F 1,59 117 88 4,89 19.9 126 22.1 18.4 24.4.7 216F 1,659 129 98 5,433 11.1 14 19.9 16.4 22.3.7 Market consolidation begins Performance 1M 6M 12M Absolute (%) 17.9 87.8 27.7 Rel. to Kospi (%p) 16.5 82.8 196.5 12MF PE trend (X) (W' ) 35. 12MF PER (L) 14 3. price (R) 12 25. 1 2. 8 15. 6 1. 4 5. 2. Sep-9 Mar-11 Sep-12 Mar-14 BUY and TP W133,: We initiate coverage of Hanssem with BUY and a TP of W133,. In Korea s furniture market, price advantage is increasingly important and market consolidation is in progress led by brand-name companies. No. 1 by market share, Hanssem is transforming itself as an even more formidable leader by offering very competitive prices and steady innovation of the B2C channel. Shares currently trade at 21.2x 215F PE. We believe Hanssem deserves a premium for a few reasons. 1) The B2B market is brisk thanks to growth by trusts and REITs and bigger demand for reconstruction/remodeling. 2) In the furniture industry, competitive pricing is increasingly important as sensible consumption has become a trend, and Hanssem boasts overwhelming economies of scale. 3) Hanssem s furniture market share continues to expand on the revamped retail network. Table 25. TP calculation Category Value Note 215F NP (W bn, A) 87 Shares outstanding (mn, B) 18.1 215F EPS (KRW, C=A/Bx1) 4,89 Target PE (x, D) 27.1 2% discount to Japan Nitori s historical record high PE of 33.3x (22.6x avg. in 24-21) TP (KRW, CxD) 133, Source: Korea Investment & Securities Junsik Park 822-3276-682 junsik.park@truefriend.com Kyungja Lee 82-2-3276-6155 kyungja.lee@truefriend.com Healthy B2B market on more demand for management-type assets and reconstruction/remodeling: The B2B market is picking up. From 214, B2B construction material sales have maintained a fast growth pace on rising tenders issued by home builders. As management-type assets increase along with growth by trusts and REITs, we anticipate explosive growth for new interior demand. That is because the government has adopted a policy promoting the use of eco-friendly materials, which in turn made it difficult for mom-and-pop furniture firms with cheap products to reap benefits from the growing built-in furniture market. As a domestic leader in kitchen furniture, Hanssem is best-positioned for package sales in the B2B market. At present, the firm is widening the product line from kitchen furniture to construction materials. With that, it is ready to enjoy market booms. We anticipate a steady demand rise rather than a one-off turnaround for market conditions. With its no. 1 market share, Hanssem s competitive edge should prove overwhelming in the management-type asset market as well. Top-line growth continues on stronger B2C sales channel: In the B2C furniture market where consolidation is ongoing, Hanssem is steadily gaining dominance by strengthening and widening the retail channels. As the B2C channel grows, total sales more than doubled from five years ago and the channel s sales contribution 51
expanded from 59% to 77%. Over the same period, Hanssem grew its market share from 6% to 11%. With the newly created sales channel that offers online interior consulting, the company has absorbed domestic interior demand along with related contractors in Korea. That in turn is fueling steady top-line growth. Moreover, Hanssem has expanded the flagship store and large franchise shops, thereby maximizing the showroom effect. The efforts were made to facilitate package deals. As a result, the per capita furniture purchase volume has gone up. There are 25 large franchise stores and the company plans to add 1 each year until it reaches 5. In 28, Hanssem rolled out the IK product line and absorbed demand for low-priced furniture. Plus, it opened an online mall. As such, Hanssem s retail channels are increasingly more detailed and wide-ranging. Price competitiveness and economies of scale more important than ever: An array of retail channels and economies of scale are more essential than ever because price advantage is increasingly important in the furniture industry. With the quality-focused, well-being consumer trend in the past, there was big demand for high-quality materials and good designs. Such conditions made it easy for large furniture firms with brand value to gain market share. However, the consumer mood of late is different. Now, consumers do not accept the large manufacturers brand image or large retailers prices as they are. Consumers are younger and smarter than before and they pursue value for money in every aspect of spending. In 1H14, direct overseas online shopping was popular among consumers who were disappointed with excessive markups charged by domestic retailers. As their purchase value has reached trillions of KRW, the new shopping trend became a social issue. Huge US-based retailer Amazon has read the spending trend of domestic consumers who became more sensitive to prices and it now plans to join the Korean market. Sweden s IKEA, the world s largest furniture maker, also plans to open shop no. 1 in Korea in Gwangmyung, Gyeonggi province, this December. Sensible consumption trend and Japan s furniture market: Korean consumers continue to be more sensitive to prices for two reasons. The biggest culprit is the drop in income earned by Koreans in their 2s and 3s compared with consumer prices, which is due the domestic recession and low employment for young adults. Indeed, young Koreans are called a generation that has given up three things: marriage, romantic relationship and job. As a result, more people marry late, there are more single-person households, the birth rate is down and newlywed furnishing demand has waned. Another reason is this generation with less income can compare prices online. As trust collapsed in the prices offered by retailers and manufacturers, more people check the price online and make a purchase. Figure 54. Korea marriage rate Figure 55. Korea households by # of people 12. (Marriage per 1, people) (%) 1 One family Two family Three family Four family 1. 9 8. 8 7 6. 6 5 4. 4 2. 3 2. 197 1972 1974 1976 1978 198 1982 1984 1986 1988 199 1992 1994 1996 1998 2 22 24 26 28 21 212 1 198 1985 199 1995 2 25 21 Source: Statistics Korea, Korea Investment & Securities Source: Statistics Korea, Korea Investment & Securities 52
Korea s furniture market is in a similar position to where the Japanese counterpart once was. Japan has become a structural aging society due to a lengthy economic slump coupled with an excessive rise in real estate prices, followed by a long-term market recession and lower incomes, and poor employment conditions for young adults have led to a drop in the marriage and birth rates. According to a news report, 31% of Japanese aged 35-39 are single and the figure for the 3-34 age group is 48%. The report also predicted the figures would go up. These changes led to a large number of single-person households and in turn, the overall size of the furniture market has shriveled. The lower marriage rate is often viewed as the biggest factor. The marriage rate fell mainly because of the low income levels among young age groups compared with high consumer prices in Japan. With less money in hand, fewer young adults got married. This in turn weakened demand for high-priced furniture. Figure 56. Japan furniture industry sales Figure 57. Japan marriage rate 3,5 Furniture manufacturing (Marriage per 1, persons) 14 3, 12 2,5 1 2, 8 1,5 6 1, 4 5 2 1978 1981 1984 1987 199 1993 1996 1999 22 25 28 211 Source: CIEC, Korea Investment & Securities 1947 1954 1961 1968 1975 1982 1989 1996 23 21 Source: CIEC, Korea Investment & Securities Large firms-led consolidation is natural for the furniture industry: We should focus on two points. For starters, while furniture sales in Japan shrank at department stores featuring lofty retail prices, direct sales by manufacturers steadily went up. Second, although the overall furniture market size shrank, the large furniture makers sales kept expanding. A good example is Nitori whose market share increased from 6.8% in 29 to 8.7% in 212. Although IKEA advanced on the Japanese market in 27, large homegrown furniture firms paradoxically witnessed sharper sales growth. Although the average furniture price (P) fell amid the persistent recession, more single-person households augmented the total number of households and the appetite swelled for low-priced furniture. Thus, with lower price (P), Q surged. And large furniture companies overwhelmed small peers with their ability to control costs and offer competitive prices. 53
Figure 58. Japan s department stores sales trend downward Figure 59. Japan s furniture chain sales are rising even in recession 14 Department store sales in Japan 5 45 12M avg. sales of furniture chains in Japan 12 4 1 35 8 3 25 6 2 4 15 2 1 5 Jan-7 Nov-7 Sep-8 Jul-9 May-1 Mar-11 Jan-12 Nov-12 Sep-13 Dec-93 Jul-96 Feb-99 Sep-1 Apr-4 Nov-6 Jun-9 Jan-12 Source: CIEC, Korea Investment & Securities Figure 6. Japan brand furniture market share (%) 3 28 26 24 22 Figure 61. Sales at Nitori in Japan 4 35 3 25 2 15 1 5 2 29 21 211 212 24 25 26 27 28 29 21 211 212 213 Source: Euromonitor, Korea Investment & Securities Source: Company data, Korea Investment & Securities With consumers seeing a gloomy future, cost control is the key: In Korea, young adult unemployment stands at 9.5%, far above the overall figure of 3.5%. The real number would be even bigger considering how many Korean university students tend to postpone their graduation date if they have not landed a job. According to a news report by broadcaster KBS, 42% of Korean young adults have given up on one or more among having a romantic relationship, marriage and children, while 22.2% of have quit two or more. Since the young generation is under severe earning pressure, their sensitivity to prices would become more acute. Ironically, only large firms are more likely to survive in a market that is very sensitive to prices. The main consumer group in the market comprises a generation that is online-savvy, where product prices can be easily compared. And the generation s price sensitivity is gradually getting keener. This explains why the large domestic furniture firms market share has steadily expanded. In the end, Korean furniture firms should choose to absorb low-priced product demand through cost controls and improve ROE. To cut costs, companies must achieve economies of scale via market consolidation. And Hanssem is most deft at the strategy. 54
Hanssem commences its march to oligarchy: Since the beginning of the 2s, Hanssem has improved furniture quality and steadily lowered prices. At the same time, the company tried to cut costs by forging manufacturing contracts with momand-pop furniture firms in Korea. At present, ~75% of sales come from products made by small firms. The company plans to cut the per-unit cost by building a plant in China or Vietnam where labor is cheap. To offset the drop in P, the firm strategically increased package sales. As a result, the overall top line continues to grow fast. To spur package deals, Hanssem enlarged the flagship store and franchise shops to build showrooms decorated with in-house products. At the same time, the firm has absorbed general interior demand through the IK interior consulting channel and sent Q upward. The company has met demand for lowpriced furniture by opening an online channel and a low-end brand. Using its overwhelming position in the kitchen furniture market, Hanssem is pursuing a strategy to get into construction materials as a future growth engine. Among Korean furniture makers, Hanssem sits at the best vantage point for package sales. And the firm alone can maintain rapid top-line growth by overcoming falling P with greater Q and lower C. This is why we forecast Hanssem s market dominance would gain intensity despite the overall market trend toward lower prices. Although shares trade at 21.2x 215F PE with a premium, there is still ample upside. Sales growing at all businesses: 214 sales should increase 27% YoY, maintaining a solid growth trend. In 215, OP should expand to W117bn on robust B2C sales growth. Considering OP totaled only W47bn in 212, growth is impressive. Going forward, we forecast B2C sales will reach W1tn in 215. Hanssem should benefit most from higher package sales given its leadership in kitchen furniture. Furthermore, the company should utilize falling furniture prices as an opportunity to grow package sales and outpace peers. Table. 26 Hanssem s earnings summary (W bn, %) 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14F 4Q14F 213 214F 215F Sales 198 246 259 34 297 314 33 345 1,7 1,285 1,59 YoY (%) 5.2 27.6 33.3 46.1 5.3 27.5 27.2 13.5 28.6 27.7 17.4 B2C 153 187 177 217 21 227 233 249 735 92 1,96 YoY (%) 9.8 29.7 27.9 43.4 37.3 21.2 32. 14.7 28. 25.2 19.1 Interior 86 93 86 17 113 111 115 122 371 461 548 YoY (%) 4.6 3.2 25.9 4.3 31.1 19.9 34.9 13.4 24.8 24.1 18.8 Kitchen 67 95 91 11 98 116 118 127 363 459 548 YoY (%) 17.3 29.2 29.7 46.5 45.3 22.5 29.2 15.9 31.6 26.4 19.4 B2B 36 48 67 71 78 76 81 8 222 315 362 YoY (%) (6.1) 25.7 68.1 64.4 118.3 57.9 2.9 12.9 39.2 42. 15.1 Affiliates 9 11 16 16 9 11 16 16 51 51 51 Operating profit 17 21 17 25 22 26 22 28 8 98 117 YoY (%) 52.1 67.8 7. 82.6 33.5 26. 28.4 8.6 68.9 22.6 19.5 OPM 8.5 8.3 6.6 8.3 7.6 8.2 6.7 8. 7.9 7.6 7.7 Source: Company data, Korea Investment & Securities 55
Balance sheet FY-ending Dec. (W bn) 212A 213A 214F 215F 216F Current assets 182 287 365 428 47 Cash & cash equivalent 35 24 31 36 4 Accounts & other receivables 74 19 139 163 179 Inventory 25 41 53 62 68 Non-current assets 195 219 251 276 329 Investment assets 58 6 74 85 9 Tangible assets 11 132 147 162 212 Intangible assets 7 7 8 8 8 Total assets 377 56 616 74 798 Current liabilities 145 222 268 279 292 Accounts & other payables 17 171 18 24 216 ST debt & bond 23 23 23 13 8 Current portion of LT debt Non-current liabilities 16 2 23 26 24 Debentures LT debt & financial liabilities 4 4 4 4 Total liabilities 162 242 291 35 315 Controlling interest 215 264 325 399 483 Capital stock 24 24 24 24 24 Capital surplus 37 38 38 38 38 Other Reserves (52) (52) (52) (52) (52) Retained earnings 27 256 317 391 474 Minority interest Shareholders' equity 215 264 325 399 483 Income statement FY-ending Dec. (W bn) 212A 213A 214F 215F 216F Sales 783 1,7 1,285 1,59 1,659 COGS 538 71 95 1,64 1,17 Gross profit 245 36 381 445 489 SG&A expense 198 226 283 328 359 Operating profit 47 8 98 117 129 Financial income 3 3 3 4 4 Interest income 2 3 3 4 4 Financial expense 1 1 1 1 Interest expense 1 1 1 1 Other non-operating profit 2 (1) (1) (1) (2) Gains (Losses) in associates, subsidiaries and JV 1 (1) (1) (1) Earnings before tax 52 81 98 118 131 Income taxes 12 2 25 29 33 Net profit 39 61 74 88 98 Net profit of controlling interest 39 61 74 88 98 Other comprehensive profit (3) (3) Total comprehensive profit 37 59 74 88 98 Total comprehensive profit of controlling interest 37 59 74 88 98 EBITDA 55 88 17 126 14 Cash flow FY-ending Dec. (W bn) 212A 213A 214F 215F 216F C/F from operating 22 85 9 89 19 Net profit 39 61 74 88 98 Depreciation 6 7 8 8 1 Amortization 1 1 1 1 1 Net incr. in W/C (3) (3) 3 (11) (2) Others 6 18 5 3 2 C/F from investing (22) (86) (71) (59) (82) CAPEX (7) (26) (23) (23) (6) Decr. in fixed assets 1 Incr. in investment (17) (65) (15) (11) (6) Net incr. in intangible assets () () (2) (2) (1) Others 3 4 (31) (24) (15) C/F from financing (24) (1) (13) (24) (23) Incr. in equity 2 Incr. in debts 2 1 (1) (9) Dividends (11) (11) (13) (13) (14) Others (14) (3) () (2) () C/F from others (1) Increase in cash (24) (11) 7 5 4 Key financial data FY-ending Dec. 212A 213A 214F 215F 216F per share data (KRW) EPS 2,139 3,42 4,77 4,89 5,433 BPS 11,346 13,424 16,18 19,159 22,719 DPS 6 7 7 8 8 Growth (%) Sales growth 9.9 28.6 27.7 17.4 9.9 OP growth (3.1) 68.9 22.6 19.5 1.6 NP growth.4 55.4 2.1 19.9 11.1 EPS growth 2.5 59. 19.8 19.9 11.1 EBITDA growth (1.) 61.2 21.3 18. 11.4 Profitability (%) OP margin 6. 7.9 7.6 7.7 7.8 NP margin 5. 6.1 5.7 5.9 5.9 EBITDA margin 7. 8.7 8.3 8.3 8.4 ROA 1.2 13.9 13.1 13.4 13.1 ROE 18.9 25.6 25. 24.4 22.3 Dividend yield 3.2 1.4.6.7.7 Dividend payout ratio 27.4 2.6 17.2 16.4 14.7 Stability Net debt (W bn) (48) (1) (135) (173) (21) Debt/equity ratio (%) 12.5 1.2 8.3 4.2 1.7 Valuation (X) PE 8.7 14.8 26.5 22.1 19.9 PB 1.6 3.7 6.7 5.6 4.8 EV/EBITDA 6.2 11.7 22.1 18.4 16.4 Note: Based on K-IFRS (consolidated) 56
Guide to Korea Investment & Securities Co., Ltd. stock ratings based on absolute 12-month forward share price performance BUY: Expected to give a return of +15% or more Hold: Expected to give a return between -15% and +15% Underweight: Expected to give a return of -15% or less Korea Investment & Securities does not offer target prices for stocks with Hold or Underweight ratings. Guide to Korea Investment & Securities Co., Ltd. sector ratings for the next 12 months Overweight: Recommend increasing the sector s weighting in the portfolio compared to its respective weighting in the Kospi (Kosdaq) based on market capitalization. Neutral: Recommend maintaining the sector s weighting in the portfolio in line with its respective weighting in the Kospi (Kosdaq) based on market capitalization. Underweight: Recommend reducing the sector s weighting in the portfolio compared to its respective weighting in the Kospi (Kosdaq) based on market capitalization. Analyst Certification I/We, as the research analyst/analysts who prepared this report, do hereby certify that the views expressed in this research report accurately reflect my/our personal views about the subject securities and issuers discussed in this report. I/We do hereby also certify that no part of my/our compensation was, is, or will be directly or indirectly related to the specific recommendations or views contained in this research report. Distribution United States: This report is distributed in the U.S. by Korea Investment & Securities America, Inc., a member of FINRA/SIPC, and is only intended for major U.S. institutional investors as defined in Rule 15a-6(a)(2) under the U.S. Securities Exchange Act of 1934. 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Important Disclosures As of the end of the month immediately preceding the date of publication of the research report or the public appearance (or the end of the second most recent month if the publication date is less than 1 calendar days after the end of the most recent month), Korea Investment & Securities Co., Ltd., or its affiliates does not own 1% or more of any class of common equity securities of the companies mentioned in this report. There is no actual, material conflict of interest of the research analyst or Korea Investment & Securities Co., Ltd., or its affiliates known at the time of publication of the research report or at the time of the public appearance. Korea Investment & Securities Co., Ltd., or its affiliates has not managed or co-managed a public offering of securities for the companies mentioned in this report in the past 12 months; Korea Investment & Securities Co., Ltd., or its affiliates has not received compensation for investment banking services from the companies mentioned in this report in the past 12 months; Korea Investment & Securities Co., Ltd., or its affiliates does not expect to receive or intend to seek compensation for investment banking services from the companies mentioned in this report in the next 3 months. Korea Investment & Securities Co., Ltd., or its affiliates was not making a market in securities of the companies mentioned in this report at the time that the research report was published. Korea Investment & Securities Co., Ltd. does not own over 1% of KCC,Hanssem,Hyundai Development,LG Hausys shares as of August 26, 214. Korea Investment & Securities Co., Ltd. has not provided this report to various third parties. Neither the analyst/analysts who prepared this report nor their associates own any shares of the company/companies covered in this report as of August 26, 214. Korea Investment & Securities Co., Ltd. has issued ELW with underlying stocks of KCC and is the liquidity provider. Prepared by: Kyungja Lee This report was written by Korea Investment & Securities Co., Ltd. to help its clients invest in securities. This material is copyrighted and may not be copied, redistributed, forwarded or altered in any way without the consent of Korea Investment & Securities Co., Ltd. This report has been prepared by Korea Investment & Securities Co., Ltd. and is provided for information purposes only. Under no circumstances is it to be used or considered as an offer to sell, or a solicitation of any offer to buy. 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