(227 KS) No change in fundamentals Food & Beverage Earnings Preview October 18, 216 (Maintain) Buy Target Price (12M, W) 1,, Share Price (1/17/16, W) 688, Expected Return 45% OP (16F, Wbn) 82 Consensus OP (16F, Wbn) 84 EPS Growth (16F, %) 12.9 Market EPS Growth (16F, %) 19. P/E (16F, x) 16.6 Market P/E (16F, x) 1.6 KOSPI 2,27.61 Market Cap (Wbn) 942 Shares Outstanding (mn) 1 Free Float 49.8 Foreign Ownership 6.7 Beta (12M).69 52-Week Low 649, 52-Week High 995, 1M 6M 12M Absolute 5.7-12.2-29.4 Relative 4.2-12.8-29.3 11 1 9 8 7 6 Mirae Asset Daewoo Co., Ltd. [F&B/Tobacco] Woon-mok Baek +822-768-4158 wm.baek@miraeasset.com KOSPI 5 1.15 2.16 6.16 1.16 3Q16 preview We estimate revenue and operating profit increased 2.5% and 5.9% YoY, respectively, in 3Q16. We think earnings were driven by the food services (F/S; instant foods, home meal replacements, coffee, etc.), processed meat, and ice cream segments. For instant foods (ready-to-eat lunch boxes, etc.), revenue likely rose by more than 2%, with OP margin up by 2-3%p. The processed meat unit (ham, etc.) likely saw profit growth despite only mild revenue growth, thanks to a 1% drop in pork prices. For ice cream, we estimate revenue and profit both recovered (following a revenue drop in 2Q16), backed by higher-than-usual temperatures, new products, and the suggested retail price (SRP) system. Investment points and risks We expect operating profit to rise 19% YoY in 216 and 9.5% YoY in 217, driven by the growth of the F/S unit, margin improvement for infant formula, and continuously solid margins for oil/fats and processed meat. For the F/S business, we see growth potential in supply of instant foods (to convenience stores), coffee beans, and home meal replacements (HMR). In 3Q16, instant foods (ready-to-eat lunch boxes, samgak kimbap, sandwiches) likely displayed revenue growth of over 2% and margin improvement (on a decline in fixed cost burden). The company mainly supplies coffee beans to Lotte Group affiliates (Angel-in-us Coffee, Lotte Chilsung, etc.), Seven Café, coffee shops, and department stores. In 3Q16, revenue grew 1%, and OP margin was high at 15%. The HMR business should grow further, driven by product portfolio expansion (launch of private label (PL) brands) and the completion of the Pyeongtaek plant (W5bn invested) in October-November. For infant formula, margins are on the rise, as consumers have been switching to the antibiotic-free version of the company s infant formula brand With Mom. (Antibiotic-free accounts for 3% of sales.) Decreasing consumption of infant formula should be offset by higher prices and increased market share. Oil/fats and processed meat margins should remain steady, with no sharp cost rises expected. We see potential risks to infant formula exports to China and ice cream margins. The company s infant formula exports are estimated at W4bn for 216. China will implement tougher regulations in October 216, requiring the registration of formulations and limiting the number of brands per company to three (grace period until 218). The company has 13 brands, with three of them accounting for 7-8% of revenue. In our view, needs to set up a plan for brands with weak sales until 218. For ice cream, sales growth is unlikely, due to the shrinkage of key customer groups (1-39 age group). We expect the company to pursue higher margins on the launch of new products, high-end products, the SRP system, etc. Maintain Buy rating but Lower TP to W1,, We think negatives (industry-wide downtrend, Lotte Group issues, unfavorable supply/demand conditions) have been mostly priced in. We now expect fundamental upside factors to be reflected, including the growth potential of the F/S business and sales growth of the Pasteur brand (dairy). However, although we retain our Buy rating, we lower our target price to W1,, (217-18F P/E of 2x) from W1,2, due to the broader F&B sector de-rating. FY (Dec.) 12/13 12/14 12/15 12/16F 12/17F 12/18F Revenue (Wbn) 1,568 1,633 1,76 1,765 1,849 1,936 OP (Wbn) 74 66 69 82 9 1 OP margin 4.7 4. 4. 4.6 4.9 5.2 NP (Wbn) 114 6 5 57 63 72 EPS (W) 83,227 43,721 36,711 41,445 46,179 52,225 ROE 16.5 7.5 5.8 6.2 6.5 6.9 P/E (x) 9. 13.3 25.9 16.6 14.9 13.2 P/B (x) 1.3 1. 1.5 1..9.9 Notes: All figures are based on consolidated K-IFRS; NP refers to net profit attributable to controlling interests Source: Company data, estimates
October 18, 216 Table 1. 3Q16 preview (Wbn, %) 3Q16F Growth 3Q15 2Q16 Mirae Asset Daewoo Consensus YoY QoQ Revenue 469.6 452.2 481.3 488.1 2.5 6.4 Operating profit 3.1 24.2 31.9 32.4 5.9 31.8 Pretax profit 22. 2.8 28.2 32.2 28.5 35.9 Net profit 18.9 15.6 21.8 24.6 15.2 39.6 OP margin 6.4 5.4 6.6 6.6 - - Net margin 4. 3.5 4.5 5. - - Notes: 3Q16 pretax profit growth was inflated by a low base in 3Q15 caused by the Pyeongtaek factory fire Source: Company data, Table 2. Quarterly and annual earnings (Wbn, %) 215 216 215 216F 217F 1Q 2Q 3Q 4Q 1Q 2Q 3QF 4QF Annual Annual Annual Revenue 45 443 47 389 423 452 481 49 1,76 1,765 1,849 Operating profit 13 25 3 2 2 24 32 7 69 82 9 Pretax profit 13 21 22 6 2 21 28 5 63 74 82 Net profit 11 18 19 2 15 16 22 4 5 57 63 OP margin 3.2 5.6 6.4.4 4.7 5.4 6.6 1.6 4. 4.7 4.9 Net margin 2.7 4.1 4..6 3.6 3.5 4.5 1. 2.9 3.2 3.4 Revenue growth 5.6 4.1 6.3 1.7 4.5 2. 2.5 5.1 4.5 3.4 4.8 Operating profit growth -11.1 1.7 14.2 91.7 52.6-1.9 5.9 329.9 5. 19. 9.5 Pretax profit growth -19.1-42.3-12.8 TTB 49.7 -.9 28.5-17. -14.4 18.7 1.8 Net profit growth -18.8-4.7-3.1 TTB 39.9-13.7 15.2 74. -16. 12.9 11.4 Source: Company data, Table 3. Earnings forecast revisions Previous Revised % chg. 216F 217F 216F 217F 216F 217F Revenue 1,788 1,868 1,765 1,849-1.3-1. - Sales expected to slump Operating profit 84 91 82 9-1.9 -.9 Pretax profit 77 84 74 82-3.5-2. Net profit 59 63 57 63-3.8.4 OP margin 4.7 4.9 4.7 4.9 - - Net margin 3.3 3.4 3.2 3.4 - - Source: Company data, Notes (Wbn, %) Figure 1. Domestic convenience store lunch box market size Figure 2. Frozen dessert (ice cream) shipments (Wbn) 5 4 (' tonnes) 6 5 Shipments (L) 3 2 3 4 1 3 2 2-1 1 1-2 13 14 15 16F 11 12 13 14 15 16-3 Source: Media reports, Source: Statistics Korea, 2
October 18, 216 Figure 3. Domestic pork hind leg price Figure 4. Processed meat PPI trend (falling pork prices higher margins for ) (W/kg) 6 5 Price (L) 1 75 (21=1) 125 12 Sausage Ham/sausage 4 5 115 3 25 11 2 15 1-25 1 1/13 7/13 1/14 7/14 1/15 7/15 1/16 7/16-5 95 1 11 12 13 14 15 16 Source: Korea Pork Producer Association, Source: Statistics Korea, Figure 5. Ham/sausage shipments Figure 6. Powdered infant formula shipments (' tonnes) 2 Ham/sausage shipments (L) 45 (tonne) 25 Powdered infant formula shipments (L) 9 17 3 22 6 19 3 14 15 16 11 13-3 8 1 11 12 13 14 15 16-15 1 1 11 12 13 14 15 16-6 Source: Statistics Korea, Source: Statistics Korea, Figure 7. China-bound powdered infant formula exports Figure 8. Infant formula: Mix of national brands is increasing ($mn) 12 Infant formula exports to China (L) 16 (Wbn) 5 National brands PL 9 12 4 3 6 8 2 3 4 1 5 6 7 8 9 1 11 12 13 14 15 16F 17F Source: Korea Customs Service, 1 11 12 13 14 15 16F 17F Source: Company data, 3
October 18, 216 (227 KS/Buy/TP: W1,,) Comprehensive Income Statement (Summarized) Statement of Financial Condition (Summarized) (Wbn) 12/15 12/16F 12/17F 12/18F (Wbn) 12/15 12/16F 12/17F 12/18F Revenue 1,76 1,765 1,849 1,936 Current Assets 494 455 517 584 Cost of Sales 1,358 1,398 1,461 1,525 Cash and Cash Equivalents 114 57 1 148 Gross Profit 348 367 388 411 AR & Other Receivables 191 2 29 219 SG&A Expenses 279 285 298 311 Inventories 158 166 173 181 Operating Profit (Adj) 69 82 9 1 Other Current Assets 31 32 35 36 Operating Profit 69 82 9 1 Non-Current Assets 794 863 87 88 Non-Operating Profit -6-8 -8-6 Investments in Associates 55 57 6 63 Net Financial Income -3-2 -2-1 Property, Plant and Equipment 52 563 563 565 Net Gain from Inv in Associates -6-6 -5-4 Intangible Assets 57 53 49 47 Pretax Profit 63 74 82 94 Total Assets 1,288 1,319 1,387 1,464 Income Tax 12 18 19 22 Current Liabilities 229 257 265 273 Profit from Continuing Operations 5 57 63 72 AP & Other Payables 118 124 13 136 Profit from Discontinued Operations Short-Term Financial Liabilities 69 89 89 Net Profit 5 57 63 72 Other Current Liabilities 42 44 46 137 Controlling Interests 5 57 63 72 Non-Current Liabilities 166 12 123 128 Non-Controlling Interests Long-Term Financial Liabilities 85 35 35 Total Comprehensive Profit 64 56 63 72 Other Non-Current Liabilities 81 85 88 128 Controlling Interests 64 56 63 72 Total Liabilities 395 377 388 41 Non-Controlling Interests Controlling Interests 893 942 998 1,63 EBITDA 117 134 145 153 Capital Stock 7 7 7 7 FCF (Free Cash Flow) 81-4 68 71 Capital Surplus 73 73 73 73 EBITDA Margin 6.9 7.6 7.8 7.9 Retained Earnings 746 794 851 916 Operating Profit Margin 4. 4.6 4.9 5.2 Non-Controlling Interests Net Profit Margin 2.9 3.2 3.4 3.7 Stockholders' Equity 893 942 998 1,63 Cash Flows (Summarized) Forecasts/Valuations (Summarized) (Wbn) 12/15 12/16F 12/17F 12/18F 12/15 12/16F 12/17F 12/18F Cash Flows from Op Activities 125 15 119 124 P/E (x) 25.9 16.6 14.9 13.2 Net Profit 5 57 63 72 P/CF (x) 1.6 7. 6.6 6.2 Non-Cash Income and Expense 72 78 81 81 P/B (x) 1.5 1..9.9 Depreciation 44 47 51 51 EV/EBITDA (x) 11.3 7.4 6.5 5.8 Amortization 4 4 3 3 EPS (W) 36,711 41,445 46,179 52,225 Others 24 27 27 27 CFPS (W) 89,639 98,656 15,16 111,171 Chg in Working Capital 18-15 -6-6 BPS (W) 651,86 687,653 729,52 776,496 Chg in AR & Other Receivables -11-9 -9-9 DPS (W) 4,78 4,78 4,78 4,78 Chg in Inventories 28-8 -7-8 Payout ratio 13. 11.5 1.4 9.2 Chg in AP & Other Payables 7 4 4 4 Dividend Yield.5.7.7.7 Income Tax Paid -17-15 -19-22 Revenue Growth 4.5 3.5 4.8 4.7 Cash Flows from Inv Activities -42-116 -58-61 EBITDA Growth 4.5 14.5 8.2 5.5 Chg in PP&E -43-18 -51-53 Operating Profit Growth 4.5 18.8 9.8 11.1 Chg in Intangible Assets EPS Growth -16. 12.9 11.4 13.1 Chg in Financial Assets -26-9 -9-9 Accounts Receivable Turnover (x) 9.7 9.5 9.5 9.5 Others 27 1 2 1 Inventory Turnover (x) 9.9 1.9 1.9 1.9 Cash Flows from Fin Activities 14-4 -1-1 Accounts Payable Turnover (x) 18.4 17.7 17.7 17.6 Chg in Financial Liabilities 25-3 ROA 4.1 4.4 4.7 5. Chg in Equity ROE 5.8 6.2 6.5 6.9 Dividends Paid -3-7 -7-7 ROIC 7.2 8. 8.4 9.5 Others -8-3 -3-3 Liability to Equity Ratio 44.3 4. 38.9 37.7 Increase (Decrease) in Cash 96-58 44 48 Current Ratio 215.3 177. 195.2 213.8 Beginning Balance 18 114 57 1 Net Debt to Equity Ratio 2.1 4.8. -4.6 Ending Balance 114 57 1 148 Interest Coverage Ratio (x) 19.5 25.3 28. 33.5 Source: Company data, estimates 4
October 18, 216 APPENDIX 1 Important Disclosures & Disclaimers 2-Year Rating and Target Price History Company (Code) Date Rating Target Price (227) 1/17/216 Buy 1,, 11/3/215 Buy 1,2, 1/5/215 Buy 1,4, 8/17/215 Buy 1,2, 5/26/215 Buy 1,1, 4/22/215 Buy 9, 11/24/214 Buy 85, 11/16/214 Buy 87, 6/17/214 Buy 93, (W) 1,5, 1,, 5, Oct 14 Oct 15 Oct 16 Stock Ratings Equity Ratings Distribution Buy Trading Buy Hold Sell 69.27% 17.7% 13.66%.% * Based on recommendations in the last 12-months (as of September 3, 216) 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 Mirae Asset Daewoo Co., Ltd., 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. Disclosures As of the publication date, Mirae Asset Daewoo 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. Mirae Asset Daewoo Co., Ltd. ( Mirae Asset Daewoo ) 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 Mirae Asset Daewoo, 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 Mirae Asset Daewoo except as otherwise stated herein. Disclaimers This report is published by Mirae Asset 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 Mirae Asset 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. Mirae Asset 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 Mirae Asset 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 Mirae Asset Daewoo. Mirae Asset 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 5
October 18, 216 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. Mirae Asset 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. 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 Mirae Asset 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 Mirae Asset 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 Mirae Asset Daewoo and its affiliates to any registration or licensing requirement within such jurisdiction. Mirae Asset Daewoo International Network Mirae Asset Daewoo 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, China 32 Park Avenue 31st Floor New York, NY 122 United States Tel: 82-2-768-326 Tel: 85-2-2845-6332 Tel: 1-212-47-1 Daewoo Securities (Europe) Ltd. Daewoo Securities (Singapore) Pte., Ltd. PT. Daewoo Securities Indonesia 41st Floor, Tower 42 25 Old Broad St. London EC2N 1HQ United Kingdom Six Battery Road #11-1 Singapore, 4999 Equity Tower Building Lt.5 Sudirman Central Business District Jl. Jendral Sudirman Kav. 52-53, Jakarta Selatan Indonesia 1219 Tel: 44-2-7982-8 Tel: 65-6671-9845 Tel: 62-21-515-114 Beijing Representative Office Shanghai Representative Office Ho Chi Minh Representative Office 241A, 24th Floor, East Tower, Twin Towers B-12 Jianguomenwai Avenue Chaoyang District, Beijing 122 China Room 38T31, 38F SWFC 1 Century Avenue Pudong New Area, Shanghai 212 China Suite 213, Saigon Trade Center 37 Ton Duc Thang St, Dist. 1, Ho Chi Minh City, Vietnam Tel: 86-1-6567-9299 Tel: 86-21-513-6392 Tel: 84-8-391-6 Daewoo Investment Advisory (Beijing) Co., Ltd. 241B, 24th Floor, East Tower, Twin Towers B-12 Jianguomenwai Avenue, Chaoyang District, Beijing 122 China Daewoo Securities (Mongolia) LLC #46, Blue Sky Tower, Peace Avenue 17 1 Khoroo, Sukhbaatar District Ulaanbaatar 1424 Mongolia Tel: 86-1-6567-9699 Tel: 976-711-87 6