Nongshim (004370)

Simmering with Expectations!

Ae Ran Park Analyst Food & Beverage February 13, 2019 82-2-6114-2939 [email protected]

Keep BUY and raise target price to We maintain our BUY rating on Nongshim and raise the target price 4.7% to KRW335,000 KRW335,000, which was derived by applying a PER of 13.5x (10% discount applied to the F&B industry’s average PER of 15.0x) to a 12M-forward EPS of KRW17,046 and reflecting net cash holdings of KRW616.4bn. The target price represents an implied PER of 19.7x and PBR of 1.0x and corresponds to the low-end of the stock’s historical valuation band. Although the share price recently rallied in anticipation of earnings improvements, Nongshim still offers ample upside potential. If we remove the 10% discount in light of Nongshim’s ramyeon market share recovery and expansion in overseas markets, its per-share value could reach KRW360,000.

Enterprise value expected to recover, Nongshim’s dominant standing in the domestic ramyeon market has been damaged by driven by earnings improvements at launches of various new products and deep discounts at rivals over the past three years. home and abroad; Threat from rivals However, 1) such downside factors have already been factored into Nongshim’s appears to have tapered off enterprise value, 2) new product launches by rivals pose less of a threat compared to the past and 3) consumers no longer choose ramyeon products only because of their cheap price. Against this backdrop, 4) Nongshim’s market share has been increasing starting in 2H18 through product renewals by adding new flavors to mainstay products and changing the types of product packages (bowl noodle ⇔ pack noodle), while growth is continuing in the US and China. This implies the potential of Nongshim’s enterprise value recovering ahead.

2019 OP to grow 27.1%; OP to top Nongshim’s earnings are forecast to recover from the 2018 slump and improve in 2019. KRW100.0bn mark for first time since The company is forecast to turn in OR of KRW2.35tr (+5.6% YoY) and OP of 2015 KRW111.3bn (+27.1% YoY; OPM 4.7%) in 2019.

Buy maintain Trading Data Share price performance Free float 49.6% (%) 1M 3M 6M 12M Target Price (raised) KRW335,000 Avg T/O Val (3M, KRWbn) 5.3 Absolute -1.9 18.1 -4.8 -6.3 Upside/Downside 20.7% Foreign ownership 19.8% Relative -7.6 11.1 -2.8 2.0 Current price (Feb 13) KRW277,500 Major shareholders Chun-Ho Shin and 4 others 45.5% Consensus Target Price KRW326,154 Market cap USD1.5bn NPS 10.6%

Relative performance (LHS) Forecast earnings & valuation Stock price (RHS) FY-end 2017A 2018E 2019E 2020E % KRW 30 400,000 OR (KRWbn) 2,208 2,229 2,354 2,453 OP (KRWbn) 96 88 111 120 20 360,000 NP to parent (KRWbn) 91 82 103 110 10 320,000 EPS (KRW) 14,905 13,439 16,900 18,112 0 280,000 EPS Growth (%) -54.5 -9.8 25.8 7.2 -10 PER (x) 23.8 18.9 16.4 15.3 -20 240,000 EV/EBITDA (x) 9.4 5.9 5.6 5.1 -30 200,000 PBR (x) 1.2 0.8 0.9 0.8 18.2 18.5 18.8 18.11 19.2 ROE (%) 5.0 4.4 5.3 5.5 Div. Yield (%) 1.1 1.6 1.4 1.4

Source: Nongshim, KB Securities estimates

Nongshim(004370) KB RESEARCH

Earnings will grow as 1) the domestic ramyeon business’ earnings improve on the renewal of mainstay products, receding new product effects at competitors and cost cuts and 2) the US and Chinese subsidiaries sustain growth by expanding distribution channels. The Chinese subsidiary’s 2018 profit margins have recovered to levels registered in 2016, before China implemented an unofficial ban on Korean products in retaliation against the Korean government’s decision to deploy Terminal High- Altitude Area Defense (THAAD) anti-missile systems, which China considers as a threat. After suffering from channel expansion and rising production costs ensuing production line expansions in late 2017, the US subsidiary is also expected to see profit margins improve on price hikes and easing cost burdens. Nongshim will also benefit from the effects of a snack price hike in Nov 2018 (5.4% increase based on ASP) and reduced losses enabled by the fast growth of Baeksansu (bottled water).

Nongshim(004370) KB RESEARCH

Investment opinion and risks

Base-case Scenario: Catalysts 1) Earnings improvement following eased competition in domestic ramyeon market 2) Earnings improve at overseas subsidiaries Bull-case Scenario KRW430,000 (Target PER 25.0x) that were impacted by cost increases

Bull-case Scenario: Upside risks Base-case Scenario (Target Price) KRW335,000 (Target PER 19.7x) 1) Meaningful recovery of ramyeon market share

Current Price KRW277,500 2) Increased earnings contributions by

overseas subsidiaries

Bear-case Scenario KRW260,000 (F&B avg. PER 15.0x) Bear-case Scenario: Downside risks 1) Continued weakness in ramyeon market share

2) Slower-than-expected improvement in earnings at overseas subsidiaries

Revised earnings estimates Valuation and target price (KRWbn, %) Previous Revised Change calculation 2018E 2019E 2018E 2019E 2018E 2019E 1) Valuation method: OR 2,227 2,338 2,229 2,354 0.1 0.7 Reflected PER valuation and net cash OP 87 110 88 111 1.2 1.5 holdings NP to parent 81 102 82 103 1.0 1.2 Source: KB Securities estimates 2) Target price calculation: Reflected 12M Fwd EPS X PER of 13.5x and Difference vs. Consensus per-share value of KRW616.4bn in net cash (KRWbn, %) KB est. Consensus Difference holding Target PER reflects 10% discount to F&B 2018E 2019E 2018E 2019E 2018E 2019E industry avg. OR 2,229 2,354 2,233 2,350 -0.2 0.2 OP 88 111 88 106 -0.1 5.4 3) Target price range: NP to parent 82 103 83 98 -1.6 4.8 KRW430,000 ~ KRW260,000

Source: Fnguide, KB Securities estimates 4) Target price valuation: 12M Fwd PER of 19.7x, PBR of 1.0x

OR composition (2019E, %) Earnings sensitivity analysis (%) EPS change 18.2% 2018E 2019E 1% rise in FX rate -0.2 -0.2 1%p rise in interest +4.4 +3.5 rate Ramyeon

Snack 16.9% Beverage/Other

64.9%

Source: KB Securities estimates

Peer group comparison (USDmn, KRWbn, X, %) Market PER PBR ROA ROE Dividend Yield Cap 2018E 2019E 2018E 2019E 2018E 2019E 2018E 2019E 2018E 2019E Ajinomoto 8,153 22.2 15.5 1.4 1.3 8.9 8.0 6.8 8.9 1.9 2.1 Nissin 7,199 26.2 29.7 2.3 2.2 14.0 13.6 8.6 8.0 1.5 1.6 Tingyi 7,860 21.3 20.1 2.7 2.6 7.2 7.2 12.9 12.7 2.6 2.8 Ottogi 2,823 16.8 19.2 2.2 2.1 13.5 12.3 13.7 11.3 0.9 1.0 Source: Bloomberg, KB Securities

Nongshim(004370) KB RESEARCH

I. Focus Charts

Target price calculation: SOTP valuation - Keep BUY on Nongshim and raise target price to KRW335,000 - Target price derived by applying 13.5x PER to 12M-forward (KRW, x, KRW100mn, %) Content Note Per-share operating value 230,127 ① EPS of KRW17,046 and reflecting net cash holdings of EPS 17,046 12M forward basis 2017 14,905 KRW616.4bn 2018E 13,439 2019E 16,900 - 10% discount applied to F&B industry’s average PER of 15.0x 2020E 18,112 Applied 10% discount to F&B sector avg. considering weakened in order to reflect Nongshim’s weakened standing in ramyeon PER 13.5 standing in ramyeon market F&B 15.0 market Past avg. 19.5 2013~2017 avg. Net DER per share -101,339.6 ② - Nongshim’s standing as No. 1 domestic ramyeon market player Net debt -6,164.1 12M fwd basis 2017 -4,835.3 undermined 2018E -5,485.2 2019E -6,086.9 - But such concerns already priced in; Impact of rival products 2020E -6,727.5 Calculated price 331,467 ③ = ① - ② weakened as well Target price 335,000 Raised 4.7% compared to existing target price Current price 277,500 Feb 13 basis - Target price as high as KRW360,000 when valuation discount is Upside 20.7 Buy removed considering Nongshim’s recovering ramyeon market

Source: Quantiwise, Nongshim, KB Securities estimates share and overseas growth momentum

Nongshim's annual earnings trend and estimates - Nongshim’s 2018 earnings disappointing, but seem to have bottomed out

KRW100mn % - OR of KRW2.35tr (+5.6% YoY) and OP of KRW111.3bn (+27.1% OR (L) OP (R) 25,000 6 YoY, OPM 4.7%) expected in 2019 - OP to surpass KRW100.0bn for first time since 2015 5 23,000 - 1) Domestic ramyeon business’ earnings to improve on 4 renewal of mainstay products, receding new product effects at 21,000 competitors and cost cuts; 2) US and Chinese subsidiaries to 3 19,000 sustain growth via distribution channel expansions 2

17,000 1

15,000 0 13 14 15 16 17 18E 19E Source: Company data, KB Securities estimates

OP contribution growth by major region - Enterprise value expected to recover, backed by improving ramyeon earnings at home and abroad in 2019 - 1) Domestic: Earnings improvements should be led by % 2018E 2019E 150 renewals of mainstay products and reduced marketing cost burden as well as weakening threat from rivals 100 - 2) US: Earnings were hurt by rising production costs and other 50 expenses caused by expanding retail channels; Profitability 0 improvement possible in 2019, buoyed by strong growth of US

-50 market (market share up to 15%) and price markup effects

-100 - 3) China: Earnings pickup materialized in 2018 amid easing ramifications of THAAD battery deployment and price markup -150 effects in Aug 2017; Sound earnings expected to continue in -200 2019 thanks to expansion into western inland regions of China Korea China US Japan Australia and strengthening online channel. Source: Company data, KB Securities estimates

Nongshim(004370) KB RESEARCH

II. Rating and Valuation

Keep BUY and raise target price to We maintain our BUY rating on Nongshim and raise the target price 4.7% to KRW335,000 KRW335,000, which was derived by applying a PER of 13.5x (10% discount applied to the F&B industry’s average PER of 15.0x) to a 12M-forward EPS of KRW17,046 and reflecting net cash holdings of KRW616.4bn. The target price represents an implied PER of 19.7x and PBR of 1.0x and corresponds to the low-end of the stock’s historical valuation band. Nongshim offers substantial upside potential even from the current share price that rallied 28.2% from Oct 2018 (short-term trough) in anticipation of earnings improvements.

Per-share value estimated at We applied a 10% discount to the F&B industry’s average PER of 15.0x to reflect KRW360,000 if F&B industry’s Nongshim’s weakened domestic ramyeon market standing. If we remove the 10% average PER is applied discount in light of Nongshim’s ramyeon market share recovery and outstanding growth in overseas markets, its per-share value could reach KRW360,000, which would offer 29.7% upside potential from the current share price.

Enterprise value expected to Nongshim’s dominant standing in the domestic ramyeon market has been damaged recover, driven by earnings by launches of various new products and deep discounts at rivals over the past three improvements at home and abroad; years. However, 1) such downside factors have already been factored into Threat from rivals appears to have Nongshim’s enterprise value, 2) new product launches by rivals pose less of a threat tapered off compared to the past and 3) consumers no longer choose ramyeon products only because of their cheap price. Against this backdrop, 4) Nongshim’s market share has been increasing starting in 2H18 through product renewals by adding new flavors to mainstay products and changing the types of product packages (bowl noodle ⇔ pack noodle), while growth is continuing in the US and China. This implies the potential of a recovery in Nongshim’s enterprise value ahead.

Table 1. Target price calculation: SOTP valuation (KRW, x, KRW100mn, %) Content Note Per-share operating value 230,127 ① EPS 17,046 12M forward basis 2017 14,905 2018E 13,439 2019E 16,900 2020E 18,112

Applied 10% discount to industry avg. considering PER 13.5 weakened ramyeon market standing F&B 15.0 Past avg. 19.5 2013~2017 avg. Net DER per share -101,339.6 ② Net debt -6,164.1 12M fwd basis 2017 -4,835.3 2018E -5,485.2 2019E -6,086.9 2020E -6,727.5 Calculated price 331,467 ③ = ① - ② Target price 335,000 Raised 4.7% compared to current stock price Current price 277,500 Feb 13 basis Upside 20.7 Buy

Source: Quantiwise, Nongshim, KB Securities estimates

Nongshim(004370) KB RESEARCH

Table 2. Enterprise value calculated by applying avg. PER of F&B sector (KRW, X, KRW100mn, %) Content Notes Per-share operating value 255,697 ① EPS 17,046 12M Fwd basis 2017 14,905 2018E 13,439 2019E 16,900 2020E 18,112 PER 15.0 Applied F&B sector avg. F&B sector 15.0 Past avg. 19.5 2013~2017 avg. Per-share net DER -101,339.6 ② Per-share value 357,037 ③ = ① - ②

Source: Quantiwise, Nongshim, KB Securities estimates

Fig 1. PER band Fig 2. PBR band

KRW 10,000 KRW 10,000 100 12M Forward EPS 60 12M Forward BPS

1.6X 50 80 1.4X 40 60 1.1X 30 27.0X 0.9X 40 23.0X 19.0X 20 0.6X 15.0X 20 11.0X 10

0 0 13.1 15.1 17.1 19.1 13.1 15.1 17.1 19.1 Source: Quantiwise, KB Securities Source: Quantiwise, KB Securities

Nongshim(004370) KB RESEARCH

Table 3. Domestic and overseas peer comparison (KRW100mn, KRW, USDmn, OR YoY OP YoY EPS YoY OPM ROE PER PBR USD, %, X) Nongshim 2017 22,083 -0.4 964 7.4 14,905 -54.5 4.4 5.0 23.8 1.1 2018E 22,332 1.1 877 -9.0 13,656 -8.4 3.9 4.7 19.8 0.8 2019E 23,499 5.2 1,056 20.4 16,129 18.1 4.5 5.7 16.8 0.8 2020E 24,424 3.9 1,157 9.6 17,613 9.2 4.7 6.2 15.4 0.8 Ottogi 2017 21,262 5.7 1,461 2.5 38,161 -4.5 6.9 12.1 21.1 2.4 2018E 22,422 5.5 1,504 2.9 44,467 16.5 6.7 15.2 17.5 2.1 2019E 23,625 5.4 1,667 10.9 40,730 -8.4 7.1 14.5 19.1 2.0 2020E 24,790 4.9 1,822 9.3 43,920 7.8 7.3 14.4 17.7 1.8 Samyang Foods 2017 4,585 27.6 433 71.4 3,807 56.6 9.4 15.3 25.4 3.6 2018E 4,781 4.3 562 29.7 5,841 53.4 11.8 20.1 11.8 2.1 2019E 5,081 6.3 608 8.2 6,239 6.8 12.0 17.7 11.1 1.8 2020E 5,490 8.0 690 13.5 6,903 10.6 12.6 16.7 10.0 1.6 Toyo Suisan Kaisha 2017 3,540 10.8 273 15.6 1.5 8.7 7.7 7.9 20.3 1.6 2018 3,509 -0.9 241 -11.8 1.5 0.0 6.9 5.9 24.9 1.4 2019E 3,666 4.5 227 -5.8 1.6 1.7 6.2 6.6 22.6 1.4 2020E 3,768 2.8 248 9.3 1.6 10.4 6.6 6.7 20.5 1.4 Nissin Foods 2017 4,586 17.5 265 20.3 1.5 23.3 5.8 6.7 27.9 1.9 2018 4,661 1.6 308 16.3 2.0 0.0 6.6 8.6 26.2 2.3 2019E 4,175 -10.4 331 7.5 2.5 -9.0 7.9 8.0 29.7 2.2 2020E 4,312 3.3 344 3.9 2.5 5.7 8.0 7.4 28.1 2.2 Tingyi 2017 8,734 4.3 516 28.3 0.0 52.1 5.9 9.9 39.0 3.9 2018E 9,053 3.7 604 17.0 0.0 39.4 6.7 12.9 21.3 2.7 2019E 9,539 5.4 621 2.9 0.0 4.5 6.5 12.7 20.1 2.5 2020E 10,027 5.1 682 9.8 0.1 11.4 6.8 13.1 18.3 2.5 Uni-President 2017 3,155 -0.2 176 21.3 0.0 42.3 5.6 7.1 26.8 1.8 2018E 3,278 3.9 214 21.6 0.0 26.2 6.5 8.4 23.8 2.0 2019E 3,420 4.3 231 8.1 0.0 10.5 6.8 9.0 21.3 1.9 2020E 3,612 5.6 254 10.0 0.0 14.3 7.0 9.5 19.1 1.9

Source: Bloomberg, FnGuide, KB Securities Note: Earnings estimates based onconsensus

Nongshim(004370) KB RESEARCH

III. Operating Results & Outlook

1) 4Q18 Preview: Profitability Improvements Expected

4Q18 OP expected to rise 74.2% We project Nongshim to turn in 4Q18 OR of KRW567.2bn (+4.1% YoY) and OP of YoY; Earnings improvements KRW25bn (+74.2% YoY, OPM 4.4%). We credit the solid performance to: 1) a low expected base, 2) increased ramyeon sales volume (+6.0%; +5.5% in domestic market), and 3) reduced cost burdens. In particular, the renewal of existing mainstay items (e.g., “Seafood Ansungtangmyun” and “Tempura Udon- flavored Noodle Soup”) incurs moderate expense burdens, but should bear tangible results.

Ramyeon sales volume and market Nongshim accounted for a 57.5% share of the domestic ramyeon market in 4Q18, share increasing compared to increasing 0.1%p YoY and 2.3%p QoQ. Ramyeon sales volume increased, while summer market share grew in 4Q18 compared to 2Q-3Q18, which saw fierce competition in sales of ramyeon products for the summer season. In 2018, rival Ottogi’s market share remained trapped at the 23%-level (based on monetary value, Fig 13) after growth that continued since 2013 came to an end. Samyang Food’s market share also appears to have dropped after enjoying new product effects (Hot Chicken Flavor Ramyeon Carbonara) in Dec 2017.

Earnings improvements expected to Reflecting 4Q18 earnings, we project Nongshim to achieve OR of KRW2.23tr (+0.9% continue in 2019 following 4Q18 YoY) and OP of KRW87.6bn (-9.2% YoY, OPM 3.9%) in 2019. Weak earnings in 2018 are primarily attributable to unfavorable factors that lasted until 3Q18, such as declining ramyeon sales volume, cost rises and increased marketing expenses amid intensifying competition in the domestic market. Also, increased expenses that were incurred to expand retail channels in China and the US also posed a burden. However, marked earnings improvements are expected to have been achieved in 4Q18 and this trend is expected to continue in 2019.

Table 4. Nongshim's 4Q18 earnings estimates 4Q18E Change (%, %p) Difference (KRWbn, %) 4Q17 1Q18 2Q18 3Q18 KB est. Consensus YoY QoQ Consensus OR 545 563 533 566 567 571 4.1 0.2 -0.6 OP 14 34 6 22 25 25 74.2 15.0 -1.3 EBT 19 42 12 26 30 31 57.5 13.0 -4.8 NP 16 32 8 20 23 25 40.6 15.5 -9.9 NP margin 2.6 6.1 1.2 3.8 4.4 4.4 1.8 0.6 0.0 EBT margin 3.5 7.4 2.2 4.7 5.3 5.5 1.8 0.6 -0.2 NP margin 2.9 5.7 1.4 3.5 4.0 4.4 1.0 0.5 -0.4

Source: Nongshim, KB Securities estimates

Nongshim(004370) KB RESEARCH

Fig 3. Contribution to 4Q18 OR growth by country Fig 4. Contribution to 4Q18 OP growth by country

% % 4Q17 4Q18E 4Q17 4Q18E 100 40

20 50 0

-20 0 -40

-60 -50

-80

-100 -100 Korea China US Japan Australia Korea China US Japan Australia

Source: Company data, KB Securities Source: Company data, KB Securities

2) 2019 Earnings Forecast: OP to Return to KRW100.0bn range

2019 OP to grow 27.1%; OP to top Nongshim’s earnings slumped in 2018. This is likely to be the trough as earnings are KRW100.0bn mark for first time forecast to improve in 2019. The company is forecast to turn in OR of KRW2.35tr since 2015 (+5.6% YoY) and OP of KRW111.3bn (+27.1% YoY; OPM 4.7%) in 2019. Earnings will grow as 1) the domestic ramyeon business’ earnings improve on the renewal of mainstay products, receding new product effects at competitors and cost cuts and 2) the US and Chinese subsidiaries sustain growth by expanding distribution channels. The Chinese subsidiary’s 2018 profit margins have recovered to levels registered in 2016, before China implemented an unofficial ban on Korean products in retaliation against the Korean government’s decision to deploy THAAD. After suffering from costs arising from distribution channel expansions and rising production costs stemming from production line expansions in late 2017, the US subsidiary is also expected to see profit margins improve thanks to price hikes (5.0% hike in Oct 2018) and easing cost burdens. Nongshim will also benefit from the effects of the snack price hike in Nov 2018 (5.4% increase based on ASP) and reduced losses due to the fast growth of Baeksansu (bottled water).

Fig 5. Contribution to OR growth by country Fig 6. Contribution of OP growth by region

% % 2018E 2019E 2018E 2019E 150 150

100 100

50 50 0 0 -50 -50 -100

-100 -150

-150 -200 Korea China US Japan Australia Korea China US Japan Australia

Source: Company data, KB Securities Source: Company data, KB Securities

Nongshim(004370) KB RESEARCH

Table 5. Earnings trend and estimates of Nongshim's major business divisions (K-IFRS standalone)

2016 2017 2018E 2019E (KRWbn, %) 1Q 2Q 3Q 4Q 연간 1Q 2Q 3Q 4Q 연간 1Q 2Q 3Q 4QE 연간E 1QE 2QE 3QE 4QE 연간E

OR 478 441 459 485 1,862 459 454 481 462 1,855 469 444 468 473 1,855 480 468 489 491 1,927

GP 514 479 499 525 2,017 498 495 528 501 2,024 518 502 522 528 2,070 535 521 544 547 2,146

Ramyeon 340 317 327 365 1,350 318 324 347 340 1,329 334 323 334 362 1,353 344 332 344 372 1,393

Sales volume (mn units) 58 55 57 64 234 53 54 58 57 222 56 53 56 61 227 58 55 58 62 233

ASP (KRW/unit) 59 57 58 57 58 60 60 60 59 60 59 60 59 60 60 59 60 60 60 60

Snack 82 80 83 82 327 88 83 90 80 341 88 86 87 83 344 91 91 93 88 363

Cooked rice 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

Beverage/Other 91 82 89 78 340 92 88 92 81 353 97 93 101 83 373 100 98 107 86 391

YoY 2.5 -3.6 -2.3 -0.2 -0.9 -3.9 2.9 4.9 -4.8 -0.4 2.2 -2.1 -2.7 2.6 0.0 2.3 5.3 4.5 3.7 3.9

Ramyeon 4.2 -3.6 -5.0 -0.6 -1.3 -6.3 2.2 5.8 -6.7 -1.5 4.7 -0.4 -3.5 6.4 1.7 3.1 2.9 3.0 2.9 3.0

Snack -11.8 -4.8 7.5 3.3 -2.0 6.9 4.5 8.6 -2.7 4.3 -0.7 3.4 -3.0 3.9 0.8 4.0 5.8 6.9 5.9 5.7

Cooked rice -96.9 ------

Beverage/Other 18.2 10.2 11.2 5.1 11.3 0.7 7.1 3.6 4.5 3.9 5.1 5.9 9.2 2.2 5.7 3.1 5.1 6.4 3.7 4.6

OP 29 5 16 20 69 26 16 24 10 76 28 3 14 19 65 31 10 20 22 83

OP margin 6.0 1.1 3.5 4.0 3.7 5.7 3.5 4.9 2.3 4.1 6.0 0.7 3.0 4.1 3.5 6.4 2.2 4.2 4.5 4.3

YoY 9.1 -74.9 -50.2 -28.6 -34.4 -8.9 220.8 49.0 -46.6 10.1 8.3 -81.4 -39.8 86.2 -14.6 8.2 243.4 44.0 12.6 28.0

EBT 155 14 27 26 222 36 22 31 17 106 37 11 29 18 95 38 17 31 23 110

EBT margin 32.4 3.2 5.8 5.4 11.9 7.8 4.9 6.5 3.7 5.7 7.8 2.6 6.3 3.7 5.1 7.9 3.7 6.4 4.7 5.7

YoY 387.4 -68.4 -24.8 -27.9 49.3 -77.0 55.4 18.4 -34.0 -52.0 2.9 -48.4 -6.5 2.2 -10.7 3.5 51.0 6.4 32.5 15.5

NP 144 11 20 20 194 27 17 24 13 80 28 8 17 17 71 29 15 22 23 88

NP margin 30.0 2.5 4.3 4.1 10.4 5.9 3.7 5.0 2.7 4.3 6.0 1.9 3.6 3.7 3.8 6.1 3.1 4.5 4.6 4.6

YoY 504.0 -68.2 -25.6 -34.6 68.6 -81.1 55.6 19.7 -36.8 -58.6 4.7 -51.0 -30.0 38.1 -12.0 3.5 76.5 31.0 30.2 25.1

Source: Nongshim, KB Securities estimates

Fig 7. Nongshim's ramyeon market share Fig 8. Nongshim's snack market share

% %p % %p Sales-based YoY QoQ Sales-based YoY QoQ 80 10 40 4

70 5 2 60 35

50 0 0 40 30

30 -5 -2

20 25 -10 -4 10

0 -15 20 -6 06 08 10 12 14 16 18E 06 08 10 12 14 16 18E

Source: Company data, Nielsen, KB Securities Source: Company data, Nielsen, KB Securities

Nongshim(004370) KB RESEARCH

Table 6. Nongshim's earnings trend and estimates by key sales region (K-IFRS consolidated)

2016 2017 2018E 2019E (KRWbn, %) 1Q 2Q 3Q 4Q Yearly 1Q 2Q 3Q 4Q Yearly 1Q 2Q 3Q 4QE Yearly E 1QE 2QE 3QE 4QE Yearly E OR 568 527 548 574 2,217 555 536 572 545 2,208 563 533 566 567 2,229 585 572 599 598 2,354 Korea 458 424 443 468 1,794 442 438 461 440 1,782 445 422 444 450 1,761 454 449 464 466 1,834 China 46 41 43 39 169 45 31 39 31 146 44 35 42 36 157 48 39 47 39 173 US 52 48 49 56 204 56 53 56 59 224 58 57 63 66 244 65 64 69 75 273 Japan 8 9 8 9 35 9 10 10 11 39 11 12 11 12 46 12 14 12 13 51 Australia 4 5 4 2 14 4 5 5 4 17 5 6 6 4 21 6 7 7 4 23 YoY 5.2 -0.4 0.3 1.4 1.6 -2.2 1.7 4.4 -5.1 -0.4 1.4 -0.7 -1.0 4.1 0.9 3.9 7.4 5.9 5.4 5.6 Korea 1.5 -4.3 -2.7 -0.5 -1.5 -3.5 3.2 4.1 -6.0 -0.7 0.7 -3.7 -3.7 2.2 -1.2 2.0 6.3 4.5 3.7 4.1 China 27.1 15.5 13.2 10.6 16.6 -3.8 -24.4 -8.2 -19.3 -13.5 -2.0 13.8 6.4 14.4 7.1 10.0 9.5 12.8 9.6 10.5 US 22.1 19.5 17.6 11.2 17.3 7.8 9.8 14.6 6.3 9.5 3.9 9.2 10.7 12.0 9.0 13.0 11.3 10.0 12.8 11.8 Japan 31.3 37.8 19.3 25.7 28.4 8.8 5.4 19.4 15.1 12.1 23.9 22.3 18.1 13.5 19.2 5.7 16.6 8.2 11.9 10.7 Australia 4.9 26.6 5.5 -32.8 1.8 10.2 4.5 14.9 75.9 19.8 31.8 28.5 25.4 -8.8 20.0 8.5 13.5 10.0 6.1 10.0 OR prop. 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Korea 80.7 80.5 80.9 81.6 80.9 79.6 81.7 80.7 80.7 80.7 79.1 79.2 78.5 79.3 79.0 77.7 78.4 77.5 78.0 77.9 China 8.1 7.8 7.8 6.8 7.6 8.0 5.8 6.9 5.8 6.6 7.7 6.7 7.4 6.3 7.0 8.2 6.8 7.9 6.6 7.4 US 9.1 9.1 9.0 9.7 9.2 10.0 9.8 9.9 10.8 10.1 10.3 10.8 11.0 11.7 10.9 11.2 11.2 11.5 12.5 11.6 Japan 1.5 1.7 1.5 1.6 1.6 1.6 1.8 1.7 1.9 1.8 2.0 2.2 2.0 2.1 2.1 2.0 2.4 2.1 2.2 2.2 Australia 0.6 0.9 0.7 0.4 0.7 0.7 0.9 0.8 0.7 0.8 0.9 1.2 1.0 0.6 0.9 1.0 1.2 1.1 0.6 1.0 OP 32 12 23 22 90 32 18 31 14 96 34 6 22 25 88 37 17 28 28 111 Korea 29 5 16 19 69 26 16 23 11 76 28 3 14 20 65 30 10 20 22 83 China 2 3 2 -1 6 0 -3 2 -1 -3 2 1 4 -1 6 2 2 3 0 7 US 2 2 4 2 10 4 3 3 2 13 2 2 2 3 8 2 2 3 3 11 Japan 0 0 0 0 1 0 0 0 0 1 0 0 0 0 1 0 0 0 0 1 Australia 0 0 0 0 0 0 0 0 0 0 0 0 0 0 1 0 0 0 0 1 Adj. -1 1 1 2 4 2 2 3 3 9 3 1 1 3 8 3 3 2 2 9 OP margin 5.7 2.4 4.2 3.9 4.0 5.8 3.4 5.5 2.6 4.4 6.1 1.2 3.8 4.4 3.9 6.4 3.0 4.7 4.7 4.7 Korea 6.2 1.3 3.6 4.1 3.9 5.9 3.6 5.1 2.5 4.3 6.3 0.7 3.2 4.4 3.7 6.7 2.2 4.3 4.8 4.5 China 4.9 7.7 3.8 -3.8 3.3 0.4 -9.6 4.1 -4.4 -1.8 3.7 2.6 10.3 -3.6 3.6 3.8 5.1 6.8 -0.7 3.9 US 4.0 4.6 7.4 4.2 5.0 7.6 6.2 5.3 3.4 5.6 2.7 2.6 3.4 3.9 3.2 3.5 3.7 3.9 4.2 3.9 Japan 1.8 2.2 3.0 0.6 1.9 1.1 2.2 3.0 0.9 1.8 1.8 2.3 1.6 3.5 2.3 1.9 2.5 1.7 3.7 2.5 Australia 3.9 3.3 4.1 -3.3 2.7 1.7 2.9 4.7 -0.5 2.3 2.1 2.8 2.1 3.7 2.6 3.1 4.0 3.4 5.4 3.8 YoY 17.1 -48.7 -39.4 -23.4 -24.2 0.2 47.0 37.7 -35.1 7.4 6.0 -64.6 -30.7 74.2 -9.2 8.9 169.2 30.0 12.8 27.1 Korea 8.6 -72.5 -49.6 -27.1 -33.5 -8.6 192.9 46.6 -43.3 10.3 8.2 -82.1 -39.5 80.8 -14.9 7.7 241.8 42.2 12.8 27.0 China 456.7 366.3 1.1 TR 109.5 -92.6 TR 0.6 LC TR 875.5 TB 165.8 LC TB 12.9 113.1 -25.4 LC 21.3 US 51.8 128.9 179.6 35.9 91.7 103.3 48.9 -17.6 -13.0 22.1 -63.2 -53.4 -29.8 27.9 -37.8 46.8 57.5 27.9 21.9 35.4 Japan TB 151.6 506.1 117.8 1,466.6 -34.1 5.4 22.0 86.4 8.9 98.2 31.6 -39.2 328.7 52.3 11.7 24.0 15.2 17.9 17.9 Australia 83.9 -34.7 18.6 TR -31.8 -52.2 -8.0 32.2 LC 5.7 61.3 24.3 -43.3 TB 32.8 60.4 64.2 74.8 52.6 63.0 OP prop. 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Korea 88.2 43.8 70.1 87.1 77.2 80.5 87.3 74.7 76.1 79.2 82.2 44.2 65.2 79.0 74.2 81.2 56.1 71.3 79.0 74.2 China 7.0 25.7 7.1 -6.7 6.2 0.5 -16.5 5.2 -9.7 -2.7 4.7 14.5 20.0 -5.2 6.4 4.9 11.5 11.5 -0.9 6.1 US 6.4 17.7 16.0 10.6 11.4 13.0 17.9 9.6 14.2 13.0 4.5 23.5 9.7 10.4 8.9 6.1 13.8 9.6 11.3 9.5 Japan 0.5 1.6 1.1 0.2 0.7 0.3 1.2 0.9 0.7 0.7 0.6 4.3 0.8 1.7 1.2 0.6 2.0 0.7 1.7 1.1 Australia 0.4 1.2 0.7 -0.3 0.4 0.2 0.8 0.7 -0.1 0.4 0.3 2.7 0.6 0.5 0.6 0.5 1.6 0.8 0.7 0.8 Adj. -2.4 10.0 4.9 9.2 4.0 5.5 9.3 8.9 18.9 9.3 7.7 10.8 3.7 13.6 8.6 6.7 15.0 6.2 8.2 8.3 Source: Nongshim, KB Securities estimates

Nongshim(004370) KB RESEARCH

Ⅳ. Investment Points for 2019

1) Domestic Ramyeon Business: Renewals of Mainstay Items to Take Effect

Domestic ramyeon market grows The domestic ramyeon market expanded 2.9% YoY to KRW2.05tr in 2018, ending a 2.9% in 2018 downtrend that began in 2017. We surmise that the short-term impact of new product launches by Ottogi and Samyang Food was reflected in early 2018. Sales growth of bowl noodle products was also positive, because their ASP is higher than pack noodle products. That said, the ramyeon market is forecast to see limited quantitative growth, with the convenience food market displaying accelerating growth on the back of manufacturing technology improvements and product diversification. Hence, the ramyeon market is forecast to remain flattish in size compared to 2018.

Fig 9. Domestic ramyeon market size

KRW100mn % 25,000 Domestic ramyeon market size (L) YoY (R) 10

8 20,000 6

15,000 4 2

10,000 0

-2 5,000 -4

0 -6 12 13 14 15 16 17 18P 19E

Source: Industry estimates, KB Securities estimates

Bowl noodle demand to keep A noteworthy change in the domestic ramyeon market is the uptrend in bowl noodle growing due to rising consumer sales. We believe the uptrend mirrors an increasing number of one-person preference for convenience households and the expansion of convenience stores, a market segment targeting consumers in their teens and 20s. The size of the bowl noodle market shot up from KRW540bn in 2011 to more than KRW800bn in 2018, while the percentage of bowl noodle products expanded from 29% to 37% of the ramyeon market during the same period. Growing demand for bowl noodle products is expected to continue amid a rising preference among consumers for convenience foods. To cope with such a trend, Nongshim has launched “Mini Cup Noodle” which boasts cost effectiveness and “Mild Neoguri Cup,” which is a mainstay product that is being sold in a new type of packaging. Bowl noodles account for a 79% share of the Japanese ramyeon market and 50% share of the US market for such products.

Nongshim(004370) KB RESEARCH

Fig 10. Proportion of pack noodles in domestic Fig 11. Proportion of bowl noodles in domestic ramyeon market ramyeon market

KRW100mn % KRW100mn % Pack noodle market (L) Proportion ® Bowl noodle market Proportion (R) 15,000 75 10,000 40

14,000 70 8,000 35

13,000 65 6,000 30

12,000 60 4,000

25 11,000 55 2,000

10,000 50 0 20 12 13 14 15 16 17 18P 12 13 14 15 16 17 18P

Source: Food Information Statistics System, KB Securities Source: Food Information Statistics System, Industry estimates, KB Securities

Domestic ramyeon sales expected to Nongshim’s domestic ramyeon sales are estimated to increase 2.5% YoY to rise in 2019, backed by product KRW1.23tr in 2019. Sales are expected to grow in 2019 after ending a sluggish trend renewals seen during 2015-18. Nongshim is sustaining its market share in the 55%-range in money terms despite continuing price discounts at rivals, while benefiting from adding new flavors to mainstay products and changing the types of product packaging (bowl noodles ⇔ pack noodles).

Fig 12. Nongshim's domestic ramyeon sales

KRW100mn Sales (L) YoY growth (R) % 13,000 6

12,500 4

2 12,000 0 11,500 -2 11,000 -4

10,500 -6

10,000 -8 10 11 12 13 14 15 16 17 18E 19E

Source: Nongshim, KB Securities estimates

Cost burden expected to be offset Nongshim is expected to see its marketing cost burden being offset by increasing by rising ramyeon sales volume ramyeon sales volume and improving market shares. The domestic ramyeon business and improving market share has weak structural growth momentum in the face of changing market conditions, such as a growing preference for convenience foods and expanding food delivery services. With the threat from rivals having tapered off, however, Nongshim’s promotional expenses are bound to decline YoY.

Ottogi Foods’s advances slowing During the past three years, Ottogi Foods’s rapid advances threatened Nongshim. Ottogi Foods’s ramyeon market strategy still has a considerable impact on Nongshim. Based on retail sales in 1Q-3Q18, the market share gap between Nongshim’s Shin Ramyun and Ottogi’s Jin Ramen narrowed to 7.8%p (vs. 17.2%p in 2012. After advancing on low-ball promotions, Ottogi Foods’s ramyeon market

Nongshim(004370) KB RESEARCH

share has stopped at the 23% range in 2018. Moreover, its promotion strategy seems to be losing sustainability and impact. Meanwhile, Ottogi Foods’s convenience food business may be weighed down in 2019 by aggressive marketing efforts by market leader, CJ Cheiljedang and rising raw ingredient prices. Due to such developments, Ottogi Foods may alter its ramyeon business strategy.

Fig 13. Sales-based market shares of domestic ramyeon companies

% % 80 Nongshim (L) Ottogi Foods (R) Samyang Foods (R) 25

20 60

15 40 10

20 5

0 0 10 11 12 13 14 15 16 17 3Q18 누적

Source: Company data, KB Securities

Fig 14. Volume-based market shares of domestic ramyeon companies

% % Nongshim (L) Ottogi Foods (R) Samyang Foods (R) 80 30

25 60 20

40 15

10 20 5

0 0 10 11 12 13 14 15 16 17 3Q18 누적

Source: Company data, KB Securities

Fig. 15. Retail sales-based market shares of domestic Fig. 16. Nongshim Shin Ramyun and Ottogi Jin Ramen ramyeon companies market shares

% Nongshim (L) Ottogi Foods (R) % % Samyang Foods (R) Paldo (R) 70 30 25 Shin Ramyun Jin Ramen Gap (%p)

60 25 20 50 20 40 15 15 30 10 10 20

5 10 5

0 0 0 12 13 14 15 16 17 18 12 13 14 15 16 17 18 Source: Food Information Statistics System, KB Securities Source: Food Information Statistics System, KB Securities

Nongshim(004370) KB RESEARCH

Fig. 17. Annual sales of key Nongshim ramyeon brands Fig 18. Retail store market share of Nongshim's major brands

KRW100mn % % 2016 2017 Shin Ramyun (L) Chapaghetti (R) 3,500 30 12 Neoguri (R) Ansungtangmyun (R) 3,000 25 10

2,500 20 8 2,000 15 6 1,500 10 4 1,000

500 5 2

0 0 0 Shin Ramyun Chapaghetti Neoguri Ansungtangmyun 12 13 14 15 16 17 18

Source: Industry data, KB Securities Source: Food Information Statistics Service, KB Securities Note: Sales growth in 1Q-3Q18: Shinramyun +5.2% YoY, Chapagetti +30.6% YoY, Neoguri -18.2% YoY, Ansungtangmyun +17.5% YoY

Fig 19. Retail market shares of Ottogi's major brands Fig 20. Retail store market share of Ottogi's major brands

KRWmn % Jin Ramen (L) % 2016 2017 12 4 200,000 Jin Jjambbong Ramen (L) Sesame Ramen (R)

150,000 9 3

100,000 6 2

50,000 3 1

0 Jin Ramyun Sesame Ramen Jin Jjambbong 0 0 Ramen 12 13 14 15 16 17 18

Source: Industry data, KB Securities Source: Food Information Statistics Service, KB Securities Note: Sales growth in 1Q-3Q18: Jin Ramen -4.7 YoY, Sesame Ramen -5.1% YoY, Jin Jjambbong -28.9% YoY

Nongshim(004370) KB RESEARCH

Fig 21. Annual OR of Samyang's major brands Fig 22. Retail store market share of Samyang's major brands

KRW100mn % 2016 2017 Samyang Ramyun 85,000 8 Hot Chicken Flavor Ramen Buldak Ramen Carbonara

80,000 6

75,000

4 70,000

65,000 2

60,000 0 Samyang Ramen Spicy Chicken Roasted Noodles 12 13 14 15 16 17 18

Source: Food Information Statistics System, KB Securities Source: Food Information Statistics Service, KB Securities Note: Sales growth in 1Q-3Q18: Samyang Ramen +8.6 YoY, Spicy Chicken Roasted Noodles -10.7% YoY

Fig 24. Retail store market share of Paldo's major Fig 23. Annual OR of Paldo Bibimmyeon brands

KRW100mn (%) % Sales (L) YoY growth ® 700 30 6 Bibimmyeon King Bowl Noodles

600 5 20 500 4 10 400 3 300 0 2 200 -10 100 1

0 -20 0 13 14 15 16 17 12 13 14 15 16 17 18

Source: Food Information Statistics System, KB Securities Source: Food Information Statistics Service, KB Securities

3.6% rise in ramyeon ASP to result in The scenario for Nongshim’s ramyeon ASP hikes are depicted below

. The 8.6% upward revision of OP scenarios disregard ASP rises induced by increases in the sales proportion of new estimates premium products and bowl noodles. They also translate 50% of ramyeon sale increases into OP, assuming 1) a 10% rise in flour (main ingredient) prices and 2) an ensuing 3.6% ASP hike (average 6.0% price hike for products accounting for 60% of sales). Based on the above, a 3.6% rise in ramyeon ASP leads to an 8.6% upward revision in OP estimates.

Nongshim(004370) KB RESEARCH

Fig 25. Average monthly wheat price Fig 26. Average monthly palm oil prices

USD/ton % USD/ton % wheat price (L) YoY (R) MoM (R) palm oil price (L) YoY (R) MoM (R) 250 30 800 40

200 20 600 20

150 10 400 0

100 0

200 -20 50 -10

0 -20 0 -40 17/01 17/07 18/01 18/07 19/01 17/01 17/07 18/01 18/07 19/01

Source: Bloomberg, KB Securities Source: Bloomberg, KB Securities

Table 7. Average annual price trend of major products made by domestic ramyeon manufacturers

Maker Nongshim Ottogi Samyang Foods Paldo

Shin Chapaghetti Yukejang Bowl Bibimmyun Chacharoni Samyang Ramen King Bowl Brand Ramyun Bibim Men (KRW850) Noodle (KRW800) (Multi-pack) (Pack) Cham (Pack) Noodles (KRW750)

Weight 120g * 5 140g * 5 86g 130g * 5 145g * 5 120g * 5 130g * 5 110g

2010 668 747 693 550 652 618 678 798

2011 668 745 691 562 691 612 683 791

2012 623 680 648 577 649 589 714 823

2013 627 724 639 553 649 605 714 812

2014 629 711 640 563 657 595 695 814

2015 623 726 660 583 652 603 715 819

2016 623 714 620 613 666 561 655 806

2017 535 667 600 578 675 541 657 784

2018 533 675 601 580 669 526 653 765

YoY -0.4 1.2 0.2 0.3 -0.9 -2.8 -0.6 -2.4

Source: Food Information Statistics System, KB Securities Note: Based on unit price

Table 8. Assumption of rise in Nongshim's ramyeon ASP

Consolidated earnings ② 3.6% ASP rise (KRWbn, %) ① 10% rise in flour purchase cost ①+② 2017 2018E 2019E in domestic ramyeon OR 2,208 2,229 2,354 2,354 2,404 2,404 Domestic ramyeon 1,329 1,353 1,393 1,393 1,443 1,443 Assumed 3.6% Proportion 60.2 60.7 59.2 59.2 60.0 60.0 COGS 1,474 1,549 1,617 1,632 1,642 1,657 Domestic flour purchase cost 155 155 155 171 155 171 Assumed 10.0% Proportion 10.5 10.0 9.6 10.4 9.4 10.3 GP 734 680 737 722 763 747 SG&A 638 593 626 626 626 626 OP 96 88 111 96 136 121 Assumed No change in SG&A OP margin 4.4 3.9 4.7 4.1 5.7 5.0 Assumed 50% rise in ramyeon sales amount Change compared to existing OP - - - -13.9 22.5 8.6

Source: Nongshim, KB Securities estimates

Nongshim(004370) KB RESEARCH

2) US Ramyeon Business: Sales Volume Growth Coupled with Selling Price Rises

US ramyeon market growth being The US is the world’s sixth-largest ramyeon market, where two Japanese companies, led by bowl noodle products Toyo Suisan (Maruchan) and Nissin (Cup Noodles), account for more than a 70% share. The US ramyeon market, which grew 0.9% YoY to USD1.04bn in 2017, has been exhibiting sluggish growth, burdened by the spread of a wellness trend and launches of various types of convenience food products. For reference, this trend is being witnessed in Korea as well. Nevertheless, the US ramyeon market has managed to achieve moderate growth, buttressed by: 1) a high level of convenience for consumers and affordable prices, which are appealing points to young consumers and 2) bowl noodle products. In addition, a variety of new ramyeon products are hitting the market, including low-salt ramyeon and ramyeon targeting vegetarians. According to the market research firm Euromonitor, the US ramyeon market is projected to grow at a CAGR of 2.2% and reach USD1.12bn until 2022.

Fig 27. Size of US ramyeon market

( USDmn ) (%) 1,200 market size (L) YoY (R) 10

1,000 8

800 6

600 4

400 2

200 0

0 -2 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18E 19E 20E 21E 22E

Source: Food Information Statistics System, Euromonitor, KB Securities Note: Based on instant noodle data

Fig 28. Shares of US package and bowl ramyeon markets

% Package ramyeon share Bowl ramyeon share 100

0 12 13 14 15 16 17E 18E 19E 20E Source: Food Information Statistics System, Euromonitor, KB Securities Note: Pack ramyeon also referred to as "instant noodle pouches" and bowl ramyeon as "noodle cups"

Nongshim(004370) KB RESEARCH

Sales began in US ramyeon market in Nongshim entered the US ramyeon market in 1971, targeting Korean-Americans in 1971 and established local factory in the country. The company built its first US factory in Los Angeles, California in 2005 I 2005 where it m manufactures mainstay items (e.g., Shin Ramyun, Neoguri, Chapaghetti, Hot & Spicy Bowl Noodle Soup). In 2017, Nongshim became the first Korean company to sell Shin Ramyun at all of Walmart’s 4,692 stores in the US and expanded its retail channels to include Costco and Kroger.

Nongshim’s share of US ramyeon As a result, Nongshim saw its US market share grow from 2% in 2008 to 15% in market up from 2% in 2008 to 15% 2018, rising to third place (Toyo Suisan ranks first with 46% share, followed by Nissin in 2018 with 30%). Also, Nongshim maintains a tight level of supply compared to demand in the US despite a capacity ramp-up at its factory in LA in end-2017. By expanding bowl noodle production facilities, Nongshim is pursing growth in a burgeoning bowl noodle market, while boosting further growth potential through the set-up of a No. 2 factory. This points to strong growth continuing in the US market, although it remains unclear when the No. 2 factory will open, how much it will invest and how far capacity will grow.

US subsidiary expected to see profit The US subsidiary turned in OR of USD230mn (+11.9% YoY) in 2018, posting a CAGR margin growth in 2019, buoyed by of 13% since 2015. The unit achieved stronger profit margins than its domestic rising sales volume and price markup business during 2016-17, but margins were hurt by rising production costs and effects increased expenses caused by expanding retail channels in 2018. In 2019, however, profit margins are expected to improve (OPM: 5.6% in 2017 →3.2% in 2018 → 3.9% estimated in 2019), driven by a 5% hike in product prices in Oct 2018 and cost cuts.

Table 9. Nongshim's business operations in US Contents History Year Note

1971 Entered US ramyeon market targeting Korean-Americans 1994 Established US corporation Production starts at US factory in Los Angeles (located in Rancho 2005 Cucamonga) 2013 Continued expansion of production facilities Addition of 1 cup noodle production line (currently operates 2 packaged 2017 noodle and 3 cup noodle production lines) Earnings 2018 OR reaches USD230mn, +12% YoY Main Shin Ramyun, Neoguri, Chapaghetti, etc. products Market Market share rose from 2% in 2008 to 15% in 2018 position Others In 2017, Nongshim became the first Korean food company to enter all Walmart stores

Source: Nongshim, KB Securities

Nongshim(004370) KB RESEARCH

Fig 29. Earnings performance of Nongshim's US subsidiary

KRWbn % OR (L) OPM (R) 3,000 6

2,500 5

2,000 4

1,500 3

1,000 2

500 1

0 0 13 14 15 16 17 18E 19E

Source: Nongshim, KB Securities estimates Note: Based on amount reflected in Nongshim's consolidated earnings

Fig 30. US market share of major players Fig 31. Nongshim's share of US ramyeon market

9% % 16

14 15% 12 Maruchan 10 46% Nissin 8 Nongshim 6 Other 4

2 30% 0 08 11 16 18 Source: Media reports, KB Securities Source: Nongshim, KB Securities

Nongshim(004370) KB RESEARCH

Table 10. Status of major instant noodle manufacturers in US

Company Subject

- In Jul 2017, Nong Shim became the first Korean food manufacturer to sell products (Shin Ramyun) in 4,692 Walmart stores - In addition to Walmart, ramyeon products are available in a variety of retail stores and small and medium- sized food stores Overview rd Nongshim - Market share rose from 2% in 2008 to 15% in 2018, making Nongshim 3 -largest instant noodle company in US - "Shin Ramyun" popular among wide range of American consumers - Boosting US market share by appealing to taste for Korean-style spicy flavor and premium image

Main products Shin Ramyun, Chapaghetti, Neoguri, Jjawang, Matchampong

- Toyo Suisan is the leading instant noodle maker in the US with the largest market share of 46% - Japanese food company sells noodles (including ramyeon) and frozen foods Overview - Maruchan, the representative brand, saw sales grow 19% in 2016 Toyo Suisan Kaisha - Chicken, beef and shrimp-flavored products mainly sold at low prices. - Operates ramyeon noodle factory in California, Virginia and Texas

Main products "Maruchan Instant Wonton Spicy Chinese Soup," "Maruchan Instant Wonton Soup Pork Bone"

- Nissin, a Japanese food company, was the first to introduce ramyeon in the US - Mainly sells Asian ramyeon products featuring chicken, beef and shrimp flavors Overview Nissin Food USA - In addition to large distributors, Nissin also sells products through retailers and intermediaries. - Has production facilities in California, Pennsylvania, etc.

Main products Top Ramen, Cup Noodles, Hot & Spicy, Chow Mein, Ramen Bowl, RAOH, Souper Meal, etc.

Source: aT, KB Securities

Nongshim(004370) KB RESEARCH

3) Chinese Ramyeon Business: Reorganization Completed and Regional Expansion Resumes in 2018

Chinese ramyeon market begins China is a massive ramyeon market that accounts for approximately half of the recovery in 2018 world’s ramyeon consumption. The growth of China’s ramyeon market was stumped for several years as rising income levels resulted in dietary changes, increasing popularity of food delivery services and incidents related to food safety (Taiwanese ramen company Kangshifu’s cooking oil scandal), but began recovering in 2018. According to the Chinese Institute of Food Science & Technology, China’s ramyeon sales increased 8.6% YoY and sales volume 4.5% YoY in 1H18. The increases are attributable to Kangshifu, Uni-President Enterprises and other major companies releasing various premium products in line with the changing consumer trends.

Fig 32. Size of China's ramyeon market

USDmn % China's ramyeon market size (좌) YoY (R) 15,000 8

12,000 4

9,000 0

6,000 -4

3,000 -8

0 -12 12 13 14 15 16 17 18E 19E 20E 21E Source: Food Information Statistics System, Euromonitor, KB Securities Note 1: Based on instant noodle data Note 2: According to recent data, ramyeon sales in China rose 4.5% YoY in 1H18, while sales grew 8.6%, which was better than expected

Fig 33. Proportion of bowl and pack ramyeon in US market

% pack ramyeon bowl ramyeon 100

0 12 13 14 15 16 17 18E 19E 20E Source: Food Information Statistics System, Euromonitor, KB Securities Note: Pack ramyeon also referred to as "instant noodle pouches" and bowl ramyeon as "noodle cups”

Nongshim(004370) KB RESEARCH

Ramyeon sales in China date back to Nongshim began its foray into China after the Shanghai plant was completed in Sep 1996; Currently operates three local 1996. The company added production bases in Qingdao (supplies ingredients and plants semi-finished goods for ramyeon production) in Jul 1998 and Shenyang in Nov 2000. Nongshim’s mainstay product in China is Shin Ramyun. The company then obtained the foundation for growth when the second Qingdao plant was completed in 2002 and the Shanghai plant relocated to a larger facility in 2008. After China’s unofficial ban on Korean products began to ease in 2018, Nongshim began to expand its operations to China’s western inland regions.

Reached BEP in 2015; Earnings Nongshim’s Chinese subsidiary reached BEP in 2015 and posted solid earnings due improved in 2018 amid easing of to the expansion of sales channels and regions until 2016. Earnings deteriorated in China’s retaliation against THAAD 2017 due to China’s retaliation against THAAD, but began to rebound starting in 2018, driven by the easing of China’s economic retaliation and price markups (+10% in Apr, 2015→ +10% in Aug, 2017). We estimate the Chinese subsidiary’s 2018 OR at KRW156.9bn (+7.2% YoY: +23.0% if local subsidiary sales are simply combined) and OP at KRW5.6bn (turn black YoY, OPM 3.6%), which suggests that the Chinese subsidiary’s earnings returned to levels seen in 2016.

China subsidiary expected to The Chinese subsidiary is projected to turn in OR of KRW173.5bn (+10.5% YoY) and continue earnings growth in 2019, OP of KRW6.8bn (+21.3% YoY, OPM 3.9%) in 2019. Despite the diminishing effects backed by expanding sales coverage of price markups compared to last year, earnings look to continue improving, and strengthening online channels bolstered by resumed expansions of sales regions into China’s western inland areas and strengthening online channels. Nongshim’s enterprise value is poised to recover due to domestic earnings growth combined with marked growth overseas.

Table 11. Nongshim's business operations in China Subject History Year Subject Operations began at Shanghai factory capable of producing 200 mn packs of 1996 ramyeon Operations began at Qingdao factory manufacturing raw materials and semi- 1998 finished products necessary for ramyeon production Operations began at Shanghai factory capable of producing 300 mn packs of 2000 ramyeon 2002 Completed construction of 2nd factory in Qingdao 2008 Expansion and relocation of Shanghai factory Earnings 2018 OR reached USD280mn (consolidated), +23% YoY Main Shin Ramyun, Kimchi Ramyun, etc. products Market Market share less than 2% (stood at 2% in 2016 before the THAAD issue emerged) position Others Online sales account for about 6% of OR, aims to strengthen online marketing

Source: Nongshim, KB Securities

Nongshim(004370) KB RESEARCH

Fig 34. Earnings performance of Nongshim's Chinese subsidiary

KRWbn % 2,000 OR (L) OPM (R) 6

1,500 2

0 1,000 -2

-4 500

-6

0 -8 13 14 15 16 17 18E 19E

Source: Nongshim, KB Securities estimates Note: Based on amount reflected in Nongshim's consolidated earnings

Fig 35. Chinese market shares of major players Fig 36. Sales of healthy ramyeon in China

( 100mn Yuan) (%) Well-being ramyeon sales (L) YoY (R) 15.3% 100 25 46.5% Kang Shi 2.8% 80 20 Fu Tongyi 7.7% Jin Mai 60 15 Lang Baishang

Nissin 40 10 9.9% Other 20 5

17.8% 0 0 12 13 14 15 16 17E Source: aT, KB Securities Source: aT, KB Securities Note: 2016 basis

Nongshim(004370) KB RESEARCH

Table 12. Major instant noodle manufacturers in China

Company Subject

- Established in China in 1991 by a joint venture between Tungshin Group of Taiwan and Sanyo Foods of Japan - Started ramen business in 1992, now it has more than 600 branches and more than 100,000 direct sales stores - The main characteristic is the reinterpretation of local food by region in China. Overview - “Dongbeiluandun Noodle” (东北乱炖面) reproduces the local dish “Luandun Noodle” of northeastern China, TingYi “Jiangxiangchuanqi” is a product based on paste found in northern China, “Jiangnanmeishi” contains the flavor of southern Chinese cuisine

Beef-flavored ramyeon noodles "Hongshaoniurou Noodle" (红烧牛肉面), seafood ramyeon "Haixiayuban Noodle" Main products (海虾鱼板面), etc.

- Founded in 1992 as a Chinese branch of Tongyi Group, a food manufacturer in Taiwan - First to launch premium ramyeon in China's market Overview - "Tongyi 100" is a popular product released in 1996 Uni-President - There are two kinds of beef meat noodles - "Laotan Suancai Beef Noodle" (老坛酸菜牛肉面) and "Braised Beef Noodle" (卤肉面)'

Main products "Tongyi 100," "Qiangmianguan" (巧面馆), "Paste Mix Noodle" (酱拌面), "Xiangbanyicheng" (相拌一城), etc.

- Hebei Hwalong Food Group (established in 1994), changed its name in 2007 - Has 21 ramyeon production plants and 142 production lines Overview - Exports to 36 countries including North America, Australia, Korea and Japan JinMaiLang - Famous for its premium product, "Yicai Yimian" (一菜一面)' - Premium products account for more than 20% of sales

Main products "Yicai Yimian" (一菜一面)'

Source: aT, KB Securities

4) Effects of Domestic Snack Price Hike: Key Driver of Earnings Growth in 2019

Snack price hike in Nov 2019 to Nongshim raised the average factory prices of 19 (out of 23) snack products by have positive effects on 2019 6.7% in Nov 2018. Notable price hikes include the 6.3% hike for Shrimp Cracker and earnings 6.1% each for Onion Rings and Honey Twist Snack. This was the first hike since the prices of 15 products were raised by an average 7.9% in Jul 2016. Given that the products whose prices were raised are estimated to account for around 80% of snack sales, the price hikes boosted ASP by 5.4%. When factoring in the price hikes, the snack wing’s 2019 OR is forecast to come in at KRW342.0bn (+5.8% YoY), contributing 36.4% of the company’s overall OP increase.

Nongshim(004370) KB RESEARCH

Fig 37. Nongshim's share of snack market

% 40

20 10 11 12 13 14 15 16 17 18E 19E

Source: Nongshim, KB Securities

Table 13. Effects of Nongshim's snack price hike Consolidated earnings (KRWbn, %) Effects of snack price hike and basic assumptions 2017 2018E 2019E OR 2,208 2,229 2,354 OR proportion of snacks whose prices were raised in 2018 80 % (assumed) KRWbn Domestic snack 321 323 342 OR of snacks whose prices were raised in 2018 259 (assumed) Proportion 14.5 14.5 14.5 Snack ASP increase due to price hike 5.4 % YoY -0.4 0.9 5.6 ASP growth effect of domestic snack sales growth in 2019 17 KRWbn Domestic snack 5.5 0.9 5.8 Existing snack OR growth estimate for 2019 1 KRWbn Proportion (%p) 0.8 0.0 0.0 Growth of combined OR 19 KRWbn OP 96 88 111 Reflected 50% of revenue growth due to 2019 price hike on OP 9 KRWbn OP margin 4.4 3.9 4.7 Company-wide OP growth in 2019 24 KRWbn YoY 7.4 -9.2 27.1 Contribution of snack price hike 36.6 %

Source: Nongshim, KB Securities estimates

Nongshim(004370) KB RESEARCH

Profit & Loss Statement of financial position (KRWbn) 2016A 2017A 2018E 2019E 2020E (KRWbn) 2016A 2017A 2018E 2019E 2020E (Reporting standard) (IFRS-C) (IFRS-C) (IFRS-C) (IFRS-C) (IFRS-C) (Reporting standard) (IFRS-C) (IFRS-C) (IFRS-C) (IFRS-C) (IFRS-C)

Operating revenue 2,217 2,208 2,229 2,354 2,453 Total assets 2,481 2,450 2,529 2,622 2,720 Cost of sales 1,504 1,474 1,549 1,617 1,674 Current assets 1,057 986 1,070 1,144 1,221 Gross profit 713 734 680 737 778 Cash and cash equivalents 179 155 172 188 215

SG&A expenses 624 638 593 626 658 Current financial assets 443 396 446 490 527 Operating profit 90 96 88 111 120 Trade receivables 223 223 229 233 238 EBITDA 175 179 172 194 201 Inventories 169 172 181 185 189

Non-operating accounts 144 23 22 25 27 Other current assets 43 39 43 47 52 Interest income 10 11 3 12 13 Non-current assets 1,424 1,464 1,458 1,478 1,499 Interest expenses 3 3 1 3 3 Investment assets 260 248 254 267 280

Profit on equity method 0 0 0 0 0 Property, plant and equipment 1,092 1,122 1,124 1,128 1,132 Net other non-operating income 136 12 14 14 15 Intangible assets 59 61 60 63 66 Profit before tax 233 119 110 136 147 Other non-current assets 13 33 20 20 20

Income tax expense 34 29 28 33 36 Total liabilities 679 609 629 642 652 Net profit 199 91 82 103 111 Current liabilities 549 489 508 520 529 NP to parent 199 91 82 103 110 Trade payables 279 236 241 246 251

Adj. net profit 199 91 82 103 110 Short-term financial liabilities 40 12 13 13 13

Other current liabilities 221 231 254 260 264 Operating Statistics & Ratios Non-current liabilities 130 120 121 122 124

(%) 2016A 2017A 2018E 2019E 2020E Non-current financial liabilities 59 56 56 56 56

OR growth 1.6 -0.4 0.9 5.6 4.2 Other non-current liabilities 1 0 0 0 0

OP growth -24.2 7.5 -9.2 27.1 7.9 Total equity 1,802 1,841 1,899 1,979 2,068 EBITDA growth -11.6 2.5 -4.4 13.0 4.0 Issued capital 30 30 30 30 30 NP growth of parent 69.8 -54.5 -9.8 25.8 7.2 Share premium 121 121 121 121 121

GP margin 32.2 33.3 30.5 31.3 31.7 Other equity interest -81 -81 -81 -81 -81 OP margin 4.1 4.4 3.9 4.7 4.9 Accumulated other comprehensive income -2 -30 -30 -30 -30 EBITDA margin 7.9 8.1 7.7 8.2 8.2 Retained earnings 1,721 1,788 1,846 1,926 2,013

EBT margin 10.5 5.4 4.9 5.8 6.0 Equity attributable to owners of parent 1,790 1,828 1,887 1,966 2,053 NP margin 9.0 4.1 3.7 4.4 4.5 Non-controlling Interests 13 13 13 13 14

Cash Flow Key Ratio (KRWbn) 2016A 2017A 2018E 2019E 2020E (X, %, KRW) 2016A 2017A 2018E 2019E 2020E

Cash flow from operating activities 221 103 184 185 189 Multiples

Net profit 199 91 82 103 111 PER 10.1 23.8 18.9 16.4 15.3 Depreciation & amortization 85 83 84 83 81 PBR 1.1 1.2 0.8 0.9 0.8

Other non-cash adjustments 61 48 44 33 36 PSR 0.9 1.0 0.7 0.7 0.7 Investments in working capital -80 -95 4 -2 -4 EV/EBITDA 8.6 9.4 5.9 5.6 5.1 Decrease(Increase) in Receivables -13 -8 -5 -5 -5 EV/EBIT 16.9 17.5 11.6 9.8 8.6 Decrease(Increase) in Inventories 1 -9 -10 -5 -4 Dividend yield, ordinary (%) 1.2 1.1 1.6 1.4 1.4

Increase(Decrease) in Payables -6 -38 4 5 5 EPS 32,764 14,905 13,439 16,900 18,112 Other operating cash flow -45 -23 -30 -32 -35 BPS 294,260 300,600 310,167 323,264 337,573 Cash flow from investing activities -136 -79 -144 -146 -139 SPS 364,482 363,043 366,461 387,001 403,206

Capital expenditure -48 -127 -90 -85 -85 DPS (Annual, Ordnry.) 4,000 4,000 4,000 4,000 4,000 Investments in intangibles -4 -5 -1 -4 -4 Cash dividends payout ratio (%) 11.6 25.5 28.3 22.5 21.0 Changes in investment assets -84 53 -59 -13 -13 Operating performance

Other investment cash flow 0 0 0 0 0 ROE 11.6 5.0 4.4 5.3 5.5 Cash flow from financing activities -76 -47 -24 -22 -22 ROA 8.1 3.7 3.3 4.0 4.2 Proceeds from (repayments of) debt -55 -24 -1 0 0 ROIC 8.3 6.5 5.6 7.2 7.8

Changes in equity 0 0 0 0 0 Financial structure (%) Dividends paid -23 -23 -23 -23 -23 Total liab./equity 37.7 33.1 33.1 32.4 31.6 Other financing cash flow 2 0 0 0 0 Net debt/equity Net Cash Net Cash Net Cash Net Cash Net Cash

Other cash flow 1 -1 0 0 0 Current Ratio 1.9 2.0 2.1 2.2 2.3 Increase/decrease in cash 11 -24 17 16 28 Interest coverage (x) 26.9 33.5 133.7 36.7 39.4 Cash and cash equivalents at FYE 179 155 172 188 215 Activity ratios

Free cash flow 173 -24 94 100 104 Asset turnover (x) 0.9 0.9 0.9 0.9 0.9 Net cash flow 102 -40 65 60 64 Receivables turnover (x) 10.2 9.9 9.9 10.2 10.4 Net cash (net debt) 523 484 549 609 673 Inventory turnover (x) 13.0 12.9 12.6 12.9 13.1

Source: Nongshim, KB Securities estimates

Nongshim(004370) KB RESEARCH

Disclosures Rating and Target Price Changes (Share price ━, Target Price ━)

Nongshim (004370) KRW Nongshim Date R ating Target Price Differential (%) 440,000 (KRW) Av g. Max / Min 17-03-09 Hold 300,000 6.16 -3.17 380,000 17-05-31 Hold 350,000 -4.52 4.86 320,000 17-08-15 Hold 320,000 5.96 10.47 17-11-05 Hold 340,000 -3.68 10.59 260,000 18-05-05 6 month later 340,000 -6.26 -5.44 200,000 18-05-15 Buy 370,000 -9.74 -3.78 17.2 17.6 17.10 18.2 18.6 18.10 19.2 18-06-17 Buy 400,000 -23.36 -12.38 18-08-16 Buy 350,000 -29.08 -25.86 18-09-28 Buy 330,000 -31.42 -26.82 18-11-05 Buy 300,000 -19.18 -14.83 18-12-05 Buy 320,000 -15.32 -9.06 19-02-13 Buy 335,000

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