AmorePacific (090430 KS ) Busy 2019

Cosmetics A lot to juggle Company Report After two years of profit declines, Amorepacific management seems determined to: 1) March 19, 2019 overhaul and revamp its domestic/overseas revenue growth strategy and; 2) streamline its manufacturing and SG&A expenses in 2019, which we think is positive for the company’s long-term growth. However, despite management’s good track record of execution, we think the current (Initiate) Trading Buy challenging market environments (i.e., stiffer competition in the domestic and China mass cosmetics market and weak Korea consumption outlook) should p ose risks for Target Price (12M, W) 210,000 management to deliver the targets it intend to achieve. We think that any meaningful turnaround in earnings, if any, should start from 2H19. Share Price (03/14/19, W) 186,500 We expect the share price volatility to continue during 1H19.

Expected Return 13% China distribution channel expansion: Better late than never

Until 2018, management focused more on enhancing same-store sales growth (SSSG ) of the existing stores, rather than expanding new stores. Management seems to think OP (19F, Wbn) 576 that its China growth would have been stronger last year if it had b een more Consensus OP (19F, Wbn) 576 aggressive in channel expansions. EPS Growth (19F, %) 21.4 For 2019, management plans to accelerate its China revenue growth by focusing on Market EPS Growth (19F, %) -19.5 expansions in both off- and online channels. For its luxury cosmetics brand, Sulwhasoo, P/E (19F, x) 27.0 management plans to open 40 new counters in the luxury department stores Market P/E (19F, x) 10.6 (compared with 2018’s 33). Regarding its mass cosmetics brand, Innisfree, KOSPI 2,155.68 management plans to accelerate its penetration into the 3rd-and-4th-tier cities via Market Cap (Wbn) 10,903 aggressive store openings. As a typical Innisfree store ramp-up takes roughly six to Shares Outstanding (mn) 69 twelve months, we think sales and earnings contribution from the new stores should Free Float (%) 52.2 start in 2H19. Foreign Ownership (%) 33.0 Initiating coverage with Trading Buy and target price of W210,000 Beta (12M) 1.24 52-Week Low 150,000 We initiate coverage of Amorepacific with a Trading Buy rating and targ et price of 52-Week High 351,500 W210,000, which is based on a 2020 P/E of 27x, a -1 STD of historical average valuation.

(%) 1M 6M 12M Since the 4Q18 earnings release, the shares have had a nice recovery, thanks to upbeat Absolute 8.1 -30.5 -38.1 management guidance and market expectations for an earnings turnaro und, along Relative 11.6 -25.3 -28.7 with the company’s cost efficiency improvement plan and revised marketing strategy. The stock is currently trading at 23.6x 2020 P/E, which is close to -2 STD of its historical

140 AmorePacific KOSPI average levels. 120 We think a discount to its historical average valuation should be reasonable, due to 100 lower earnings visibility, caused by stiffer competition in the mass cosmetics market in 80 Korea and China. We estimate that around 34% of the company’s consolidated revenue 60 is related to the mass cosmetics market in 2019. 40 3.18 7.18 11.18 3.19

Mirae Asset Daewoo Co., Ltd.

FY (12) 12/16 12/17 12/18 12/19F 12/20F 12/21F Revenue (Wbn) 5,645 5,124 5,278 5,669 6,103 6,574 Woochang Chung +822 -3774 -6753 OP (Wbn) 848 596 482 576 652 737 [email protected] OP margin (%) 15.0 11.6 9.1 10.2 10.7 11.2

NP (Wbn) 639 394 332 403 462 527 EPS (W) 9,262 5,709 5,683 6,897 7,898 9,023 ROE (%) 17.7 9.8 7.7 8.8 9.3 9.9

P/E (x) 34.7 53.3 36.9 27.0 23.6 20.7 P/B (x) 5.7 5.1 3.3 2.7 2.5 2.3 Dividend yield (%) 0.5 0.4 0.6 0.8 0.9 1.0 Note: All figures are based on consolidated K-IFRS; NP refers to net profit attributable to controlling interests Source: Company data, Mirae Asset Daewoo Research estimates

March 19, 2019 AmorePacific

Management guidance vs. our estimates

Management is guiding for 2019 YoY revenue and operating profit growth of 10% and 25%, respectively.

The 10% YoY revenue growth is based on: 1) 10%+ YoY growth in DFS (duty-free store) sales (versus 15% YoY in 2018); 2) low-single-digit growth in domestic non-DFS revenue growth (versus –10% YoY in 2018); and 3) continued strong growth in overseas markets, including China (15% YoY).

We think management’s targets for DFS (24.1% of total revenue) and overseas revenue growth (36.6% of total revenue) look achievable, considering its aggressive distribution expansion plans in China and growing brand awareness across Asia.

However, we remain unconvinced of the forecast low-single-digit YoY growth in non-DFS revenue growth. We expect domestic consumption to remain weak in 2019, despite a low base of 2018. Moreover, competition in the mass cosmetics market is unlikely to ease any time soon. We note that roughly 14.9% of Amorepacific’s total revenue is from domestic mass cosmetics.

Regarding the operating profit target of 25% YoY, management plans to achieve the target via: 1) large-scale cost efficiency improvement efforts; 2) reduction in one-off costs; and 3) a recovery in non-DFS domestic sales.

Our 2019 sales and operating profit estimates are 3% and 5% below the management guidance, as we are more bearish on non-DFS domestic revenue estimates. We expect the company’s non-DFS domestic revenue to decline 1% YoY in 2019, compared with management’s target of low-single-digit YoY growth.

Table 1. Management guidance vs our estimates for 2019 (Wbn) Management guidance Our estimates Diff. (%)

Revenue 5,858 5,669 -3.2 Operating profit 603 576 -4.5 OP margin (%) 10.3 10.2

Source: Company data, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 2 March 19, 2019 AmorePacific

China distribution channel expansion: Better late than never

Until 2018, management focused more on enhancing same-store sales growth (SSSG) of the existing stores, rather than expanding new stores. Management seems to think that its China growth would have been stronger last year if it had been more aggressive in channel expansions.

For 2019, management plans to accelerate its China revenue growth by focusing on expansion in both off and online channels.

For its luxury cosmetics brand, Sulwhasoo, management plans to open 40 new counters in luxury department stores (compared with 2018’s 33). With the additions this year, the number of Sulwhasoo counters in China should reach 202 by the end of this year, which should approach that of LG H&H’s luxury cosmetics brand, The History of Whoo.

In addition, to keep pace with the fast-rising online cosmetics sales trend in China, Amorepacific plans to open its official online mall for the Sulwhasoo brand on major Chinese online e-commerce platforms, including JD.com and Tmall.com.

Regarding its mass cosmetics brand, Innisfree, management plans to accelerate its penetration into 3rd-and-4th-tier cities via aggressive store openings.

Currently, Amorepacific owns around 500 Innisfree stores in China, of which only 60 are located in 3rd-and-4th-tier cities. Management targets to open 100 new Innisfree stores (+17% YoY) this year, most of which should be located in 3rd-and-4th-tier cities.

As a typical Innisfree store ramp-up takes roughly six to twelve months, we think sales and earnings contribution from the new stores should start in 2H19.

Figure 1. Number of Sulwhasoo department store counters in Figure 2. Number of Innisfree stores in China China

(%) (%) 250 70 No. of counters (L) 700 No. of stores (L) 100 YoY chg. (R) YoY chg. (R) 90 60 600 200 80 50 500 70 150 40 400 60 50 30 100 300 40 20 200 30 50 20 10 100 10 0 0 0 0 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 1Q19F 2Q19F 3Q19F 4Q19F 4Q18P 1Q19F 2Q19F 3Q19F 4Q19F 4Q18P

Source: Company data, Mirae Asset Daewoo Research estimates Source: Company data, Mirae Asset Daewoo Research estimates

Mirae Asset Daewoo Research 3 March 19, 2019 AmorePacific

Continued competition in the China mass cosmetics market

We estimate that roughly 24% of Amorepacific’s consolidated revenue (including Innisfree) is from China’s mass cosmetics market.

Figure 3. Amorepacific’s China mass cosmetics exposure Figure 4. Amorepacific’s China luxury cosmetics exposure

(Wbn) (%) (Wbn) (%) 1,600 China mass cosmetics revenue (L) 30 1,400 China luxury cosmetics sales (L) 25 Contribution to total revenue (R) Contribution to total revenue (R) 1,400 25 1,200 20 1,200 1,000 20 1,000 15 800 800 15 600 600 10 10 400 400 5 5 200 200

0 0 0 0 2013 2014 2015 2016 2017 2018P 2019F 2015 2016 2017 2018P 2019F

Source: Company data, Mirae Asset Daewoo Research estimates Source: Company data, Mirae Asset Daewoo Research estimates

Recently, local Chinese cosmetics companies have been aggressively taking market share away from multinationals in the mass skincare and color cosmetics markets. According to industry sources, the combined market shares of the mass skincare and color cosmetics markets by local Chinese reached 23.1% and 15.3%, respectively, in 2017 (up from 12.8% and 9.9% in 2014).

We believe these market share gains have been helped by locals’ strong distribution networks, price attractiveness, and improving cosmetics product quality. Most major local Chinese cosmetics companies have expedited their product quality improvement, teaming up with Korean ODMs.

Considering local players’ comparatively low penetration rates in the mass skincare and color cosmetics markets, we expect local players’ market share expansion to continue to accelerate over the next few years. We think this bodes ill for Amorepacific’s mass cosmetics operations.

Mirae Asset Daewoo Research 4 March 19, 2019 AmorePacific

Figure 5. Combined mass skincare market share by Figure 6. Combined skincare sales growth outlook by local Chinese cosmetics companies major local Chinese cosmetics companies

(%) (%) 35 20

30

15 25

20 10 15

10 5

5

0 0 08 13 14 15 16 17 18F 19F 20F 18F 19F 20F

Source: Industry data, Mirae Asset Daewoo Research Source: Industry data, Mirae Asset Daewoo Research

Figure 7. Combined mass color cosmetics market share by Figure 8. Combined color cosmetics sales growth outlook by local Chinese cosmetics companies major local Chinese cosmetics companies

(%) (%) 20 35 18 30 16 14 25

12 20 10 15 8

6 10 4 5 2 0 0 08 13 14 15 16 17 18F 19F 20F 18F 19F 20F

Source: Industry data, Mirae Asset Daewoo Research Source: Industry data, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 5 March 19, 2019 AmorePacific

Limited impact of implementation of China’s e-commerce tax law

In September 2018, the Chinese government passed its first law governing e-commerce activities, and the law was implemented in early January this year.

Details of new e-commerce law include: 1) all e-commerce operators (including daigous , or unauthorized resellers) should apply for business registrations and pay taxes on their operations; 2) both marketplace platforms and merchants are obliged to respect and protect intellectual property rights; 3) e-commerce operator should properly disclose information about the goods to ensure the right of consumers to information and choice.

There have been market concerns that the implementation of the regulation could dampen overall daigou activities in Korean duty-free stores (DFS), as: 1) daigous should enjoy lower reselling profits from their activities, if registered to pay taxes; 2) daigous are likely to stop their online marketing and advertisements to maintain low profiles and remain as unregistered entities; and 3) the Chinese government could strengthen customs inspections at airports to catch unregistered daigous .

However, contrary to the market’s concerns, the implementation of the e-commerce law has so far not had a meaningful impact on daigou activities. According to local press reports, the combined sales of Korean duty free operators grew 10.5% YoY to W1.07tr. Korean cosmetics companies have confirmed that YTD February sales from DFS remain healthy, being little affected by the e-commerce law thus far.

We attribute the solid daigou activities YTD despite the implementation of the new e- commerce law to the lack of intensity of Chinese government law enforcement, especially in registration and taxation of daigous . We believe that the government’s focus on the implementation of the e-commerce law leans more toward the promotion of consumers’ rights than the curbing of daigous ’ activities, which could have a negative impact on the online retail industry in general.

We see a possibility of stronger enforcement of the e-commerce law in March, because of the precedent of the Chinese government announcing consumer-related policies and regulations in March, the month when Consumer Rights Day occurs in China. However, to reiterate, we think that stronger enforcement of the e-commerce law should still be biased toward the protection of consumers’ rights, rather than the curbing of daigous ’ activities.

Considering the Chinese government’s recently stated intention of boosting domestic consumption, we believe that the Chinese government would be reluctant to strictly enforce the imposition of taxes on daigous at the risk of incurring possibly negative impact on the online retail industry. As such, we think the e-commerce law should have limited impact on Korean cosmetics’ DFS sales in 2019.

Overall, we expect Amorepacific’s DFS sales to grow 17.5% YoY in 2019, despite a high base in 2018 of 15% YoY.

Mirae Asset Daewoo Research 6 March 19, 2019 AmorePacific

Figure 10. Amorepacific's DFS revenue as percentage of total Figure 9. Amorepacific's DFS revenue trend revenue

(Wbn) (%) (%) 1,800 DFS revenue (L) 120 30 YoY chg. (R) 1,600 100 25 1,400 80 1,200 20 60 1,000 40 15 800 20 600 10 0 400 5 200 -20

0 -40 0 2013 2014 2015 2016 2017 2018P 2019F 2020F 2013 2014 2015 2016 2017 2018P 2019F 2020F

Source: Company data, Mirae Asset Daewoo Research estimates Source: Company data, Mirae Asset Daewoo Research estimates

Figure 11. Amorepacific's DFS operating profit as percentage Figure 12. Amorepacific's revenue from Chinese nationals of total operating profit trend

(%) (Wbn) (%) 60 3,000 Total revenue from Chinese nationals (L) 50 Contribution to total revenue (R) 50 2,500 40

40 2,000 30 30 1,500 20 20 1,000

10 10 500

0 0 0 2013 2014 2015 2016 2017 2018P 2019F 2020F 2013 2014 2015 2016 2017 2018P 2019F

Source: Company data, Mirae Asset Daewoo Research estimates Source: Company data, Mirae Asset Daewoo Research estimates

Figure 13. Amorepacific's domestic luxury cosmetics exposure

(Wbn) (%) 1,050 Domestic luxury cosmetics sales (L) 25 Contribution to total revenue (R) 1,000 20

950 15

900 10

850 5

800 0 2015 2016 2017 2018P 2019F

Source: Company data, Mirae Asset Daewoo Research estimates

Mirae Asset Daewoo Research 7 March 19, 2019 AmorePacific

Impact of resumption of Chinese group tours

According to the Korea Tourism Organization (KTO), Chinese inbound tourists to Korea recovered by 14.9% YoY to 4.8mn in 2018, thanks largely to rapid growth in the numbers of Chinese free independent travelers (FITs) and daigous . Despite the sharp recovery in Chinese inbound tourists in 2018, the total number of inbound tourists last year translates into only 60% of 2016’s peak levels, due to the absence of Chinese group tourists.

Earlier this year, local press reports commented on the likelihood of a resumption of Chinese group tours in 2H of this year, after President Xi’s planned visit to Korea in May. We think any resumption would provide some upside risk to Korean cosmetics companies’ DFS sales.

Our current estimate for Amorepacific’s 2019 DFS sales do not include the possible positive impact from the resumption of Chinese group tours in 2019.

Based on our sensitivity analysis, if the number of Chinese group tourists in 2H19 should reach 20% of 2H16’s level, our estimates for Amorepacific’s DFS sales and operating profit in 2H19 should rise by 2.1% and 4.3%, respectively.

Figure 14. Korea: Monthly Chinese inbound traffic

('000 persons) 1,000 2016 2017 2018 2019 900 800 700 600 500 400 300 200 100 0 Jan. Feb. Mar. Apr. May Jun. Jul. Aug. Sep. Oct. Nov. Dec.

Source: KTO, Mirae Asset Daewoo Research

Figure 15. Korea: Chinese inbound traffic via airports Figure 16. Korea: Chinese inbound traffic via ports

('000 persons) ('000 persons) 700 2016 2017 2018 2019 300 2016 2017 2018 2019

600 250

500 200 400 150 300 100 200

100 50

0 0 Jan. Feb. Mar. Apr. May Jun. Jul. Aug. Sep. Oct. Nov. Dec. Jan. Feb. Mar. Apr. May Jun. Jul. Aug. Sep. Oct. Nov. Dec.

Source: KTO, Mirae Asset Daewoo Research Source: KTO, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 8 March 19, 2019 AmorePacific

Figure 17. Amorepacific's DFS growth vs. Chinese inbound traffic growth

(%) AmorePacific's YoY DFS revenue growth 120 YoY Chinese inbound traffic growth 100 80 60 40 20 0 -20 -40 -60 -80 1Q15 3Q15 1Q16 3Q16 1Q17 3Q17 1Q18 3Q18 1Q19F 3Q19F

Source: Company data, Mirae Asset Daewoo Research estimates

2019 earnings outlook: Recovery back-half weighted

We expect an earnings recovery to start to come in 2H19 at 60% YoY (versus 1H19’s 8.8%).

Despite a low base of 1Q18 (-25.5% YoY), we expect 1Q19 operating profit to remain at W262bn (+11% YoY), due to continued weak domestic non-DFS operations.

In 1Q18, the company’s operating profit fell 25.5% YoY, due to: 1) weak DFS revenue growth, along with a 31% YoY decline in inbound Chinese tourists and the company’s tightened DFS purchase limit policy; and 2) a slowdown in non-DFS domestic operations.

Although DFS revenue should pick up in 1Q19 by 40% YoY, we expect non-DFS domestic operations (48% of sales) to continue to weigh on the company’s earnings.

We project YoY consolidated operating profit growth to remain at 9% in 1H19, before recovering to 60% in 2H19, along with: 1) a low base; and 2) the positive impact from cost restructuring and channel expansion in China.

Mirae Asset Daewoo Research 9 March 19, 2019 AmorePacific

Table 2. Amorepacific: Quarterly earnings estimates (Wbn) 1Q18 2Q18 3Q18 4Q18P 2018P 1Q19F 2Q19F 3Q19F 4Q19F 2019F

Revenue 1,432 1,344 1,278 1,224 5,278 1,576 1,423 1,375 1,296 5,669 Operating profit 236 146 76 24 482 262 153 110 51 576 Pre-tax profit 236 144 68 4 453 255 136 111 47 550 Net profit (for controlling stake) 173 109 49 2 332 187 100 81 35 403 Chg. (YoY)

Revenue -8.8 11.5 5.7 7.4 3.0 10.1 5.9 7.5 5.9 7.4 Operating profit -25.5 43.6 -24.3 -69.1 -19.2 11.0 5.2 43.9 112.7 19.5 Pre-tax profit -19.9 30.0 -36.0 -92.0 -20.2 8.0 -5.4 62.8 nm 21.4 Net profit (for controlling stake) -21.3 38.1 -37.6 -91.1 -15.7 8.0 -7.8 66.1 nm 21.4 Margins (%)

Operating profit margin 16.5 10.8 6.0 1.9 9.1 16.6 10.8 8.0 3.9 10.2 Pre-tax profit 16.5 10.7 5.3 0.4 8.6 16.2 9.6 8.1 3.7 9.7 Net profit margin 12.1 8.1 3.8 0.1 6.3 11.9 7.0 5.9 2.7 7.1 Source: Company data, Mirae Asset Daewoo Research

Table 3. Amorepacific revenue breakdown (Wbn) 2015 2016 2017 2018P 2019F 2020F

Consolidated revenue 4,767 5,645 5,124 5,278 5,669 6,103 Domestic revenue 3,559 4,001 3,347 3,347 3,533 3,713 Luxury 1,779 2,122 1,766 1,830 1,997 2,117 Premium 1,066 1,134 886 787 800 840 Mass 474 500 470 460 462 472 Others 239 244 227 270 275 285 Overseas revenue 1,208 1,645 1,776 1,931 2,136 2,390 China 766 1,091 1,212 1,300 1,417 1,516 Others 442 554 565 630 719 873 DFS revenue 1,069 1,499 1,103 1,271 1,493 1,612 Chg. (%)

Consolidated revenue 18.4 -9.2 3.0 7.4 7.6 Domestic revenue 12.4 -16.3 0.0 5.5 5.1 Luxury 19.3 -16.8 3.6 9.1 6.0 Premium 6.3 -21.9 -11.2 1.6 5.0 Mass 5.5 -6.1 -2.0 0.3 2.2 Others 2.3 -7.3 19.4 1.6 3.8 Overseas revenue 36.2 8.0 8.7 10.7 11.8 China 42.5 11.1 7.3 9.0 7.0 Others 25.3 1.9 11.7 14.1 21.4 DFS revenue 40.3 -26.4 15.1 17.5 8.0 Composition (%)

Consolidated revenue 100.0 100.0 100.0 100.0 100.0 100.0 Domestic revenue 74.7 70.9 65.3 63.4 62.3 60.8 Luxury 37.3 37.6 34.5 34.7 35.2 34.7 Premium 22.4 20.1 17.3 14.9 14.1 13.8 Mass 9.9 8.9 9.2 8.7 8.1 7.7 Others 5.0 4.3 4.4 5.1 4.8 4.7 Overseas revenue 25.3 29.1 34.7 36.6 37.7 39.2 China 16.1 19.3 23.7 24.6 25.0 24.8 Others 9.3 9.8 11.0 11.9 12.7 14.3 DFS revenue 22.4 26.6 21.5 24.1 26.3 26.4 Source: Company data, Mirae Asset Daewoo Research estimates

Mirae Asset Daewoo Research 10 March 19, 2019 AmorePacific

Table 4. Amorepacific operating profit breakdown (Wbn) 2015 2016 2017 2018P 2019F 2020F

Consolidated operating profit 772.9 848.1 596.4 482.0 576.0 652.4 Domestic 641.0 677.6 417.7 283.9 334.5 369.1 Overseas 159.6 210.3 194.2 206.7 246.4 289.3 China 103.5 143.3 153.8 148.0 156.4 167.3 Others 56.1 67.0 40.4 58.7 90.0 121.9 Internal transactions -27.7 -39.8 -15.5 -8.6 -4.9 -6.0 Chg. (%)

Consolidated operating profit 9.7 -29.7 -19.2 19.5 13.3

Domestic 5.7 -38.4 -32.0 17.8 10.3

Overseas 31.8 -7.7 6.4 19.2 17.4

China 38.5 7.3 -3.8 5.7 7.0

Others 19.4 -39.7 45.5 53.3 35.4

Composition (%)

Consolidated operating profit 100.0 100.0 100.0 100.0 100.0 100.0 Domestic 82.9 79.9 70.0 58.9 58.1 56.6 Overseas 20.6 24.8 32.6 42.9 42.8 44.3 China 13.4 16.9 25.8 30.7 27.2 25.7 Others 7.3 7.9 6.8 12.2 15.6 18.7 Internal transactions -3.6 -4.7 -2.6 -1.8 -0.9 -0.9 Margin (%)

Consolidated operating profit 16.2 15.0 11.6 9.1 10.2 10.7 Domestic 18.0 16.9 12.5 8.5 9.5 9.9 Overseas 13.2 12.8 10.9 10.7 11.5 12.1 China 13.5 13.1 12.7 11.4 11.0 11.0 Source: Company data, Mirae Asset Daewoo Research estimates

Mirae Asset Daewoo Research 11 March 19, 2019 AmorePacific

Our earnings estimates vs. consensus

Meanwhile, our 2019 sales and operating profit estimates are broadly in line with consensus estimates, while our 2020 operating profit and net profit estimates are 3.9% and 6.1% lower than consensus estimates.

We attribute the variance partly to: 1) our bearish view on non-DFS domestic operations; and 2) higher A&P cost assumptions. Speaking with major global cosmetics companies, including Estée Lauder (EL US/CP: US$159.44), L’Oréal (OR FP/CP: €229.60) and Shiseido (4911 JP/CP: JPY7,655), they plan to increase their brand investment and A&P spending through 2020 in China to garner bigger shares in the fast-growing local premium cosmetics market.

Table 5. Our estimates vs consensus (K-IFRS consolidated) (Wbn, %, %p) Our estimates Consensus Diff (%) 2019F 2020F 2019F 2020F 2019F 2020F Revenue 5,669 6,103 5,733 6,219 -1.1 -1.9 Operating profit 576 652 555 679 3.8 -3.9 Net profit (controlling stake) 406 465 406 496 0.1 -6.1 Operating profit margin (%) 10.2 10.7 9.7 10.9 0.5 -0.2 Net profit margin (%) 7.2 7.6 7.1 8.0 0.1 -0.3 Source: Bloomberg, Mirae Asset Daewoo Research estimates

Initiating coverage with Trading Buy and target price of W210,000

We initiate coverage of Amorepacific with a Trading Buy rating and target price of W210,000, which is based on a PE valuation.

Since the 4Q18 earnings release, the share has had a nice recovery, thanks to upbeat management guidance and market expectations on earnings turnaround, along with the company’s cost efficiency improvement plan and reshuffled marketing strategy. The stock is currently trading at 23.6x 2020 P/E, which is slightly below its historical average levels.

Our target price is based on a 2020 P/E of 27x, which is close to the -1 STD of historical average valuation. We think a discount to its historical average valuation would be reasonable, due to lower earnings visibility caused by stiffer competition in the mass cosmetics market in Korea and China. We estimate that around 34% of the company’s consolidated revenue is related to the mass cosmetics markets in 2019.

Mirae Asset Daewoo Research 12 March 19, 2019 AmorePacific

Table 6. Global luxury cosmetic companies valuation comparison table (US$mn, EURmn, JPYbn, Wbn) Name AmorePacific Estee Lauder L’Oréal Shiseido Kose LGH&H

Code 090430 KS Equity EL US Equity OR FP Equity 4911 JP Equity 4922 JP Equity 051900 KS Equity

Local currency W US$ EUR JPY JPY W Current price (local currency) 186,500 155.98 226.2 7,725 18,480 1,340,000

Sales 2017 5,124 11,826 26,024 1,005 267 6,105 (local currency) 2018F 5,278 13,691 26,937 1,095 303 6,748 2019F 5,731 14,550 28,654 1,184 333 7,170

2020F 6,203 15,517 30,161 1,267 354 7,662

OP (local currency) 2017 596 1,878 4,798 80 39 930 2018F 482 2,266 4,965 108 48 1,039

2019F 584 2,469 5,313 137 58 1,152

2020F 680 2,725 5,673 161 62 1,255

NP (local currency) 2017 394 1,249 3,581 23 22 606 2018F 332 1,108 3,895 61 31 683

2019F 420 1,774 4,257 87 38 782

2020F 491 2,034 4,587 104 40 865

OPM (%) 2017 11.6 15.9 18.4 8.0 14.7 15.2 2018F 9.1 16.6 18.4 9.9 16.0 15.4

2019F 10.2 17.0 18.5 11.6 0.2 16.1

2020F 11.0 17.6 18.8 12.7 17.6 16.4

NPM (%) 2017 7.7 10.6 13.8 2.3 8.1 9.9 2018F 6.3 8.1 14.5 5.6 10.1 10.1

2019F 7.3 12.2 14.9 7.3 11.5 10.9

2020F 7.9 13.1 15.2 8.2 11.4 11.3

ROE (%) 2017 9.6 31.4 14.5 5.6 14.1 17.7 2018F 7.8 24.4 15.6 18.0 17.7 18.0

2019F 0.0 40.6 15.4 17.4 19.6 0.0

2020F 0.0 48.1 15.4 18.6 18.4 0.0

ROA (%) 2017 7.5 12.0 10.1 2.4 9.0 13.1 2018F 6.1 9.2 10.6 6.3 11.8 13.6

2019F 0.0 15.2 0.0 10.2 17.4 0.0

2020F 0.0 16.9 0.0 11.5 16.9 0.0

Dividend yield (%) 2017 0.5 1.2 1.8 0.5 0.8 0.6 2018F 0.6 1.3 1.8 0.7 1.0 0.8

2019F 0.8 1.1 1.2 0.7 1.0 0.8

2020F 0.9 1.2 2.0 0.8 1.1 0.9

EPS (local currency) 2017 5,709 3.4 6.4 56.9 379.7 34,226 2018F 5,683 3.0 6.9 153.6 536.6 43,712

2019F 6,682 4.7 7.6 218.1 671.1 48,280

2020F 7,829 5.5 8.1 259.5 708.9 53,618

EPS growth (%) 2017 -38.4 8.0 3.0 -29.0 16.0 6.8 2018F -0.5 11.9 8.8 170.0 41.3 27.7

2019F 21.4 59.7 9.1 42.0 25.1 15.3

2020F 14.5 16.8 7.3 19.0 5.6 10.4

EV/EBITDA (x) 2017 17.5 22.6 17.8 17.4 21.8 17.5 2018F 14.5 18.6 18.5 17.9 17.3 14.5

2019F 13.3 23.3 18.5 15.5 15.5 15.0

2020F 11.9 21.2 17.4 13.4 14.4 13.8

P/E (x) 2017 53.3 26.0 27.1 95.6 46.3 32.9 2018F 36.7 31.6 29.5 44.8 32.2 27.0

2019F 27.0 31.2 28.8 34.6 26.9 26.6

2020F 25.6 27.9 27.0 28.7 25.4 23.2

Source: Bloomberg, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 13 March 19, 2019 AmorePacific

AmorePacific (090430 KS/Trading Buy/TP: W210,000)

Comprehensive Income Statement (Summarized) Statement of Financial Condition (Summarized) (Wbn) 12/18 12/19F 12/20F 12/21F (Wbn) 12/18 12/19F 12/20F 12/21F Revenue 5,278 5,669 6,103 6,574 Current Assets 1,900 2,121 2,621 3,016 Cost of Sales 1,527 1,594 1,690 1,792 Cash and Cash Equivalents 859 1,002 1,417 1,719 Gross Profit 3,751 4,075 4,413 4,782 AR & Other Receivables 380 408 439 473 SG&A Expenses 3,269 3,499 3,761 4,044 Inventories 386 415 446 481 Operating Profit (Adj) 482 576 652 737 Other Current Assets 275 296 319 343 Operating Profit 482 576 652 737 Non-Current Assets 3,747 3,844 3,885 3,921 Non-Operating Profit -29 -26 -22 -18 Investments in Associates 0 0 0 0 Net Financial Income 9 13 17 23 Property, Plant and Equipment 2,662 2,759 2,800 2,836 Net Gain from Inv in Associates 0 0 0 0 Intangible Assets 240 240 240 240 Pretax Profit 453 550 630 719 Total Assets 5,648 5,965 6,506 6,937 Income Tax 118 143 164 188 Current Liabilities 1,071 1,054 1,213 1,209 Profit from Continuing Operations 335 406 465 532 AP & Other Payables 132 136 141 145 Profit from Discontinued Operations 0 0 0 0 Short-Term Financial Liabilities 85 0 85 0 Net Profit 335 406 465 532 Other Current Liabilities 854 918 987 1,064 Controlling Interests 332 403 462 527 Non-Current Liabilities 155 157 159 162 Non-Controlling Interests 3 3 4 4 Long-Term Financial Liabilities 43 43 43 43 Total Comprehensive Profit 335 406 465 532 Other Non-Current Liabilities 112 114 116 119 Controlling Interests 332 403 462 527 Total Liabilities 1,226 1,210 1,372 1,370 Non-Controlling Interests 3 3 4 4 Controlling Interests 4,399 4,730 5,107 5,538 EBITDA 722 829 911 1,001 Capital Stock 35 35 35 35 FCF (Free Cash Flow) 288 309 422 492 Capital Surplus 720 720 720 720 EBITDA Margin (%) 13.7 14.6 14.9 15.2 Retained Earnings 3,703 4,036 4,415 4,848 Operating Profit Margin (%) 9.1 10.2 10.7 11.2 Non-Controlling Interests 23 25 27 29 Net Profit Margin (%) 6.3 7.1 7.6 8.0 Stockholders' Equity 4,422 4,755 5,134 5,567

Cash Flows (Summarized) Forecasts/Valuations (Summarized) (Wbn) 12/18 12/19F 12/20F 12/21F 12/18 12/19F 12/20F 12/21F Cash Flows from Op Activities 577 659 722 792 P/E (x) 36.9 27.0 23.6 20.7 Net Profit 335 406 465 532 P/CF (x) 20.4 15.7 14.3 12.9 Non-Cash Income and Expense 372 411 437 466 P/B (x) 3.3 2.7 2.5 2.3 Depreciation 240 253 259 264 EV/EBITDA (x) 17.5 13.3 11.8 10.3 Amortization 0 0 0 0 EPS (W) 5,683 6,897 7,898 9,023 Others 132 158 178 202 CFPS (W) 10,246 11,842 13,081 14,453 Chg in Working Capital -12 -15 -16 -17 BPS (W) 63,739 68,535 74,003 80,248 Chg in AR & Other Receivables -17 -32 -35 -37 DPS (W) 1,261 1,472 1,686 1,926 Chg in Inventories -11 -29 -32 -34 Payout ratio (%) 26.0 25.0 25.0 25.0 Chg in AP & Other Payables 0 4 4 4 Dividend Yield (%) 0.6 0.8 0.9 1.0 Income Tax Paid -118 -143 -164 -188 Revenue Growth (%) 3.0 7.4 7.7 7.7 Cash Flows from Inv Activities -296 -357 -307 -307 EBITDA Growth (%) -12.0 14.8 9.9 9.9 Chg in PP&E -289 -350 -300 -300 Operating Profit Growth (%) -19.1 19.5 13.2 13.0 Chg in Intangible Assets 0 0 0 0 EPS Growth (%) -0.5 21.4 14.5 14.2 Chg in Financial Assets 0 0 0 0 Accounts Receivable Turnover (x) 16.0 16.3 16.4 16.4 Others -7 -7 -7 -7 Inventory Turnover (x) 13.9 14.2 14.2 14.2 Cash Flows from Fin Activities -88 -159 -1 -184 Accounts Payable Turnover (x) 11.6 11.9 12.2 12.6 Chg in Financial Liabilities 0 -85 85 -85 ROA (%) 6.1 7.0 7.5 7.9 Chg in Equity 0 0 0 0 ROE (%) 7.7 8.8 9.3 9.9 Dividends Paid -88 -74 -86 -99 ROIC (%) 10.4 11.2 12.4 13.9 Others 0 0 0 0 Liability to Equity Ratio (%) 27.7 25.5 26.7 24.6 Increase (Decrease) in Cash 193 143 415 302 Current Ratio (%) 177.4 201.3 216.1 249.6 Beginning Balance 666 859 1,002 1,417 Net Debt to Equity Ratio (%) -16.5 -20.2 -25.1 -30.1 Ending Balance 859 1,002 1,417 1,719 Interest Coverage Ratio (x) 166.8 298.5 338.1 382.2 Source: Company data, Mirae Asset Daewoo Research estimates

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APPENDIX 1

Important Disclosures & Disclaimers 2-Year Rating and Target Price History

Company (Code) Date Rating Target Price (W) AmorePacific AmorePacific (090430) 03/18/2019 Trading Buy 210,000 500,000 08/07/2018 No Coverage 400,000 05/09/2018 Trading Buy 380,000 01/31/2018 Buy 380,000 300,000 01/17/2018 Buy 400,000 200,000 12/04/2017 Buy 420,000 10/30/2017 Trading Buy 380,000 100,000

09/18/2017 Buy 380,000 0 05/25/2017 Buy 400,000 Mar 17 Mar 18 Mar 19 04/24/2017 Buy 370,000 02/02/2017 Buy 450,000

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 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.

Equity Ratings Distribution & Investment Banking Services Buy Trading Buy Hold Sell Equity Ratings Distribution 81.28% 9.63% 9.09% 0.00% Investment Banking Services 84.61% 3.85% 11.54% 0.00% * Based on recommendations in the last 12-months (as of December 31, 2018)

Disclosures As of the publication date, Mirae Asset Daewoo Co., Ltd. has acted as a liquidity provider for equity-linked warrants backed by shares of AmorePacific as an underlying asset; other than this, Mirae Asset Daewoo has no other special interests in the covered companies.

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 or regulations thereof. Each Analyst responsible for the preparation of this report certifies that (i) all views expressed in this report accurately reflect the personal views of the Analyst about any and all of the issuers and securities named in this report and (ii) no part of the compensation of the Analyst was, is, or will be directly or indirectly related to the specific recommendations or views contained in 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. Like all employees of Mirae Asset Daewoo, the Analysts receive compensation that is determined 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 was prepared 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 in good faith and from sources believed to be reliable, 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. In case of 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. 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 or regulations or subject Mirae Asset Daewoo or any of its affiliates to registration or licensing requirements in any jurisdiction shall receive or make any use hereof. This report is for general information purposes only and it is not and shall not be construed as an offer or a solicitation of an offer to effect transactions in any securities or other financial instruments. The report does not constitute investment advice to any person and such person shall not be treated as a

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client of Mirae Asset Daewoo by virtue of receiving this report. This report does not take into account the particular investment objectives, financial situations, or needs of individual clients. The report is not to be relied upon in substitution for the exercise of independent judgment. Information and opinions contained herein are as of the date hereof and are subject to change without notice. The price and value of the investments referred to in this report and the income from them may depreciate or appreciate, and investors may incur losses on investments. Past performance is not a guide to future performance. Future returns are not guaranteed, and a loss of original capital may occur. Mirae Asset Daewoo, its affiliates and their directors, officers, employees and agents do not accept any liability for any loss arising out of the use hereof. Mirae Asset Daewoo may have issued other reports that are inconsistent with, and reach different conclusions from, the opinions presented in this report. The reports may reflect different assumptions, views and analytical methods of the analysts who prepared them. Mirae Asset Daewoo may make investment decisions that are inconsistent with the opinions and views expressed in this research report. 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 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. 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.

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