Fila Korea (8166) BUY (Maintain), TP: W98, (Maintain) Stock price (Apr 26, KRW) 83,5 Yr to Sales OP EBT NP EPS % chg EBITDA P/E EV/EBITDA P/B ROE Market cap (USD mn) 697 Dec (W bn) (W bn) (W bn) (W bn) (KRW) (YoY) (W bn) (x) (x) (x) (%) Shares outstanding (mn) 9 21A 616 12 11 83 1,24 38.7 18 7.8 8.2 2.3 34.8 52W High/Low (KRW) 97,4/65, 211A 764 17 3 2 237 (97.6) 114 327.8 9.1 2.4.7 6M avg. daily turnover (USD mn) 3.6 212F 765 128 126 96 1,121 4,171.9 137 8.3 8. 2. 27. Free float (%) 87.8 213F 83 139 144 19 11,526 13.9 147 7.2 7.4 1.6 24. Foreign ownership (%) 33.8 214F 872 149 163 124 13,74 13.4 157 6.4 6.6 1.3 21.9 Note: NP and EPS based on figures attributed to controlling interest Widespread growth potential Performance 1M 6M 12M Absolute (%) (5.8) 4.4 11.9 Rel. to Kospi (%p) (3.).7 22.9 12MF PER trend (x) (KRW) 1. 1, 8. 8, 6. 6, 4. 4, 12MF PBR (LHS) 2. 2, price (RHS). 27 28 29 21 211 Only global brand in Korea s fashion industry; Maintain BUY with TP W98,: Fila Korea (Fila) is the only global brand business among Korean fashion companies. Fila s profitability eroded in 211 due to costs related to the takeover of Acushnet, a US-based golf equipment company, seasonally slow demand and depleted inventory after revising its Europe licensee. In 212, we expect Fila to make an earnings turnaround on the effects of the Acushnet acquisition and the normalized European operation. We maintain BUY with a TP of W98, (12x diluted 212F EPS). 212 the first year of turnaround: Sales should fall a bit YoY in 212 due to the absence of inventory sales (~W1bn) seen in 211 on the European licensee revision. But OP should increase 16% YoY thanks to 1) more than W2.5bn in new royalty income annually coming from the European licensee, 2) a narrowing operating loss from W9.5bn in 211, incurred as a result of the inventory sales in Europe a year ago and 3) better profitability at Fila USA. Equity-method gains from Acushnet should amount to W12bn in 212F compared to the loss seen in 211. Fila should gradually shore up earnings and increase its ownership of Acushnet every year by exercising bonds with warrant. We anticipate the equity-method gains from Acushnet will reach W46.5bn in 216F. Expand overseas business in the mid to long-term: Fila aims to expand the overseas business in the mid to long-term, which we view as positive. We expect it to grow 3% p.a. from 21 to 213. Profit from overseas, which includes the equity-method gains from Fila USA and Acushnet, amounted to W48.4bn in 21 but shrank to W8.6bn in 211 during the transition period after the Acushnet takeover. We expect the profit to rebound to W86.4bn in 212F and to W16bn in 213F. Mounting dependence on the overseas business that has solid long-term growth potential would improve earnings and lift the valuation multiples. Eun-chae Na 822-3276-616 ec.na@truefriend.com Fila s global strategy and greater ownership of Acushnet to be gradual: A key to growth is bolstering Fila s global brand recognition. While Fila recognizes revenue by selling products exclusively in the US and Korea, it does business in China as a joint venture and earns royalty income or equity-method gains in other countries. The Fila brand s global sales totaled W1.9trn in 211, less than other global brands. But we see strong growth potential considering sales of W1.5trn in 21. Greater ownership of Acushnet, the world s biggest golf equipment maker, will be gradual. Fila plans to lift ownership from the current 12% (diluted) to 33. over the next five years. Earnings growth at Acushnet and growth momentum stemming from the Chinese market should gradually materialize. 39
Earnings estimates (W bn, %, % YoY) 1Q11 2Q11 3Q11 4Q11 1Q12F 2Q12F 3Q12F 4Q12F 211 212F 213F Sales 181.4 195. 185. 23.1 156. 195.1 185.1 228.8 764.4 765.1 83.4 Chg. (% YoY) 41.9 2.8 26.4 12.8 (14.).1.1 12.7 24.2.1 8.5 OP 19.2 32.1 24.7 3.6 23.1 38.1 28.7 38.6 16.6 128.5 139.1 Chg. (% YoY) 44.9 (1.7) 1.1 8.8 2.1 18.5 16. 26.4 4.7 2.5 8.3 OPM (%) 1.6 16.5 13.4 15.1 14.8 19.5 15.5 16.9 13.9 16.8 16.8 EBT 17.1 31.5-5.2-4.8 26.6 45.8 28.8 25. 2.7 126.2 143.7 Chg. (% YoY) 5. (24.2) NM NM 55.4 45.1 NM NM (97.3) 4528.3 13.9 EBT margin (%) 9.4 16.2 NM NM 17.1 23.4 15.6 1.9.4 16.5 17.3 NP 13.8 25.8-6.5-31. 2.2 34.8 21.9 19..7 95.9 19.2 Chg. (% YoY) 57.9 (26.9) NM NM 46.9 34.6 NM NM (99.2) 147.3 13.9 NPM (%) 7.6 13.2 NM NM 13. 17.8 11.8 8.3.1 12.5 13.2 TP W98, 212F Note Fully-diluted EPS 8,47 Domestic business EPS 3,219 Overseas business EPS 4,828 Target PE 12.1 Domestic business target PE 1. 1% discounted to target PE given to LG Fashion Overseas business target PE 13.6 4% premium to the market; Global sportswear labels trading at PE 15.6x on average Target price 97,749 Domestic business value per share 32,186 Overseas business value per share 65,563 Current price (KRW) 83,5 Upside potential (%) 17.4 Sales breakdown Fila sees overseas sales contribution slowly rising Overseas merchandizing sales 26% Overseas royalties 6% 14 12 1 8 6 4 (W bn) Overseas OP + equity-method gains (L) (%) 2 Overseas EBT contribution (R) FILA USA turnaround Acushnet's OP contribution expands -2-4 -6 Fila Korea 68% 2-2 28 29 21 211 212F 213F -8-1 -4-12, Korea Investment & Securities 4
Ownership structure Acushnet takeover PE band Shareholder breakdown (KRW) 1 9 8 Others 53% Major shareholder & related parties 12% NPS 9% Franklin Templeton 6% 7 x13. x12. KB Asset x11. 6 x1. 5 Sep-1 Dec-1 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Nomura Asset Samsung Asset Allianz Global 41
Balance sheet 21A 211A 212F 213F 214F Current assets 256 324 362 46 488 Cash & cash equivalents 24 48 69 91 157 Accounts & other receivables 89 123 123 133 14 Inventory 18 131 138 146 153 Non-current assets 425 515 614 74 76 Investment assets 14 32 13 191 231 Tangible assets 4 43 44 44 44 Intangible assets 357 45 46 432 445 Total assets 681 839 976 1,11 1,248 Current liabilities 188 243 251 239 22 Accounts & other payables 74 87 87 95 1 ST debt & bonds 86 114 114 94 74 Current portion of LT debt 12 12 12 12 Non-current liabilities 177 298 333 374 412 Debentures 56 57 57 57 57 LT debt & financial liabilities 72 176 211 246 281 Total liabilities 365 541 585 613 633 Controlling interest 316 39 42 58 625 Capital stock 45 47 47 47 47 Capital surplus 75 77 77 77 77 Capital adjustments Retained earnings 17 167 26 366 483 Minority interest (1) (1) (1) (1) Shareholders' equity 316 299 392 498 615 Income statement 21A 211A 212F 213F 214F Sales 616 764 765 83 872 Gross profit 333 386 45 435 456 SG&A expenses 235 277 277 297 38 Other operating gains 4 (3) Operating profit 12 17 128 139 149 Financial income 15 17 3 4 6 Interest income 1 1 3 4 6 Financial expenses 18 42 17 18 19 Interest expenses 15 13 17 18 19 Other non-operating profit Gains (Losses) in associates, subsidiaries and JV 2 (79) 12 19 28 Earnings before tax 11 3 126 144 163 Income taxes 18 2 3 34 39 Net profit 83 1 96 19 124 Net profit of controlling interest 83 2 96 19 124 Other comprehensive profit (13) (7) Total comprehensive profit 71 (6) 96 19 124 Total comprehensive profit of controlling interest 71 (6) 96 19 124 EBITDA 18 114 137 147 157 Cash flow 21A 211A 212F 213F 214F C/F from operations 27 45 93 84 86 Net profit 83 1 96 19 124 Depreciation 6 8 8 8 8 Amortization Net incr. in W/C (48) (42) 1 (14) (18) Others (14) 78 (12) (19) (28) C/F from investing (21) (118) (16) (74) (33) Capex (8) (11) (8) (8) (8) Decr. in fixed assets Incr. in investment (13) (16) (86) (42) (12) Net incr. in intangible assets () (1) (1) (26) (13) Others (11) 2 C/F from financing 9 97 33 12 12 Incr. in equity 34 Incr. in debt (19) 16 35 15 15 Dividends (1) (5) (2) (3) (3) Others (5) (4) C/F from others (3) 1 Increase in cash 12 24 21 22 66 Key financial data FY-ending Dec. 21A 211A 212F 213F 214F Per-share data (KRW) EPS 1,24 237 1,121 11,526 13,74 BPS 34,646 32,67 42,427 53,623 65,997 DPS 5 25 3 33 7 Growth (%) Sales growth 22.6 24.2.1 8.5 5.1 OP growth 19.7 4.7 2.5 8.3 6.7 NP growth 117.1 (97.4) 4,37.3 13.9 13.4 EPS growth 38.7 (97.6) 4,171.9 13.9 13.4 EBITDA growth 18.4 6.4 19.5 7.8 6.4 Profitability (%) OP margin 16.5 13.9 16.8 16.8 17. NP margin 13.6.3 12.5 13.2 14.2 EBITDA margin 17.5 15. 17.9 17.7 18. ROA 13.1.1 1.6 1.5 1.5 ROE 34.8.7 27. 24. 21.9 Dividend yield.6.3.4.4.8 Stability Net debt (W bn) 176 39 313 34 253 Debt/equity ratio (%) 69.4 121.4 11.5 82.8 69.5 Valuation (x) PE 7.8 327.8 8.3 7.2 6.4 PB 2.3 2.4 2. 1.6 1.3 PS 1.1.9 1. 1..9 EV/EBITDA 8.2 9.1 8. 7.4 6.6 Note: K-IFRS consolidated 42
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 +1 or more Hold: Expected to give a return between -1 and +1 Underweight: Expected to give a return of -1 or less 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. 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 intends 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 Youngone Holdings,Handsome,Shinsegae International,FILA Korea,The Basic House,LG Fashion,Youngone shares as of April 3, 212. Korea Investment & Securities Co., Ltd. has not provided this report to various third parties. Neither the analysts covering these companies nor their associates own any shares of as of April 3, 212. Korea Investment & Securities Co., Ltd. has lead-managed an initial public offering of the companies mentioned in this report in the past 12 months. Prepared by: Eun-chae Na 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. We make no representation as to its accuracy or completeness and it should not be relied upon as such. The company accepts no liability whatsoever for any direct or consequential loss arising from any use of this report or its contents. The final investment decision is based on the client s judgment, and this report cannot be used as evidence in any legal dispute related to investment decisions.