Ae Ran Park Analyst

T E K R A M E H T O T T S R I F January 11, 2019 Food & Beverage 82-2-6114-2939 [email protected]

Nongshim(004370) Second US Factory Planned to Expand Foundation for Overseas Growth

Nongshim’s US subsidiary posts top-line growth of 11.9% in 2018; No. 2 factory to be built to expand foundation for growth — Nongshim is moving to establish a second factory in the US. (Korea Business, Jan 11) — The US subsidiary turned in OR of USD230mn (+11.9% YoY) in 2018, achieving a CAGR of 13% since 2015. — In 2005, Nongshim built its first factory in LA, from which it has produced Shinramyun, Neoguri, , Hot & Spicy Bowl Soup and other products. — Nongshim’s was the first Korean ramen to be sold in Walmart’s some 4,000 stores across the US. Afterwards, Nongshim expanded its retail channels to include Costco and Kroger. — As a result, Nongshim’s US ramen market share climbed from a mere 2% in 2008 to 15% in 2018, making it the third largest market after Toyo Suisan’s 46% and ’s 30%. Even after a capacity increase in late 2017, the LA plant is having trouble keeping up with demand. — The amount of capex and output capacity has yet to be decided, but Nongshim’s decision was proof of the company’s brisk growth in the US. — In 2018, the US subsidiary’s profits were dampened by increased production costs and promotional expenses entailing distribution channel expansions, but earnings are forecast to improve in 2019, boosted by: 1) a 5% price hike in Oct, 2018 and 2) lowered cost burdens.

Focus on full-fledged earnings improvements in 4Q18 and ramen business growth at home and abroad in 2019 — Nongshim is estimated to turn in 4Q18 OR of KRW565.5bn (+3.8% YoY) and OP of KRW24bn (+67.2% YoY, OPM of 4.2%), complying with the market consensus. — The earnings pickup seems attributable to a 6% rise in ramen sales volume (5.5% based on domestic sales), cost cuts and base effect. — Uplift is expected from product renewals, which is cheaper than developing a completely new product. Recent renewals include Seafood Ansungtangmyeon and Tempura - flavor . — Nongshim’s domestic ramen market share is estimated at 57.6% (+0.2%p YoY, +2.5%p QoQ) for 4Q18. Sales volume and market share seem better than in the summer season, when competition between seasonal products was fierce. — Earnings began to turn around in 4Q18. There are plenty of factors suggesting improvement of the ramen business’ performance at home and abroad in 2019. — Earnings improvement will be fueled by 1) renewal of mainstay products and weakened effects of competitors’ new products and 2) growth of the US and Chinese subsidiary growth driven by distribution channel expansions

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Fig 1. Nongshim's US earnings Fig 2. Retail market share by ramen maker

(KRWbn) (%) (%) Nongshim (L) Ottogi (R) (%) OR (L) OPM (R) Samyang (R) Paldo (R) 300 6 70 30

60 250 5 25

50 200 4 20 40 150 3 15 30 100 2 10 20

50 1 10 5

0 0 0 0 15 16 17 18E 19E 12 13 14 15 16 17 18 Source: Company data, KB Securities estimates Source: Food Information Statistics System, KB Securities

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