Hite Jinro (000080 KS) Food & Beverage

December 9, 2011 Company Report Hite Jinro (000080 KS) Food & Beverage Daewoo Securities Co., Ltd. Implications of Oriental Brewery’s beer price hike Woon-mok Baek +822-768-4158 Hite Jinro likely to raise beer prices in early 2012 [email protected] Oriental Brewery, one of KoreaÊs two largest beer makers (along with Hite Jinro), Amy Lee announced that it would raise its ex-factory prices for beer products by an average of +822-768-3066 7.48%. The ex-factory price for a 500ml bottle of Cass beer (the companyÊs flagship [email protected] product) will increase by W76.42 (or 7.48%) to W1,098.22 (from W1,021.8). This will mark the first price hike since October 2009. Even though the increase will be smaller than the companyÊs initial target (10%), it still appears pretty significant. Hite Jinro is likely to follow suit in early 2012, in our view. The beer price hike has been widely expected since 1H in light of rising malt prices, higher distribution costs, and won depreciation. However, considering the governmentÊs inflation control efforts, this price hike (of a major consumer product) Buy (Maintain) seems especially meaningful. Before beer prices are hiked, the prices for most food and beverage products (excluding soju and tobacco) would have already gone up. Target Price (12M, W) 42,000 Share Price (12/08/11, W) 32,450 Impacts of a potential price hike on Hite Jinro’s earnings Expected Return (%) 29.4 EPS Growth (11F, %) 43.5 Hite JinroÊs beer business generated revenues of approximately W1.02tr in 2010. A Market EPS Growth (11F, %) -2.8 7.5% increase (on average) in beer prices is forecast to add W70~75bn to the P/E (11F, x) 15.5 companyÊs annual revenues. While higher prices may lead to consumption Market P/E (11F, x) 10.9 contraction in 1Q12, consumption should return to normal three to four months KOSPI 1,912.39 after the hike. We think that a W100 increase in consumer prices will not affect Market Cap (Wbn) 2,255 consumption by that much. Even factoring in cost increases, higher beer prices are Shares Outstanding (mn) 71 projected to boost Hite JinroÊs annual operating profit by W30bn. Avg Trading Volume (60D, '000) 128 Avg Trading Value (60D, Wbn) 3 Maintain Buy call with TP of W42,000 Dividend Yield (11F, %) 2.2 Free Float (%) 40.1 The merger between Hite (beer) and Jinro (soju) is expected to create synergies 52-Week Low (W) 21,650 starting in 2012, including the integration of wholesale distributors and operating 52-Week High (W) 40,000 expense reductions. Furthermore, since soju prices have been frozen for the past Beta (12M, Daily Rate of Return) 0.3 three years, there seems to be ample room for price hikes in 1H12. A 1% rise in Price Return Volatility (12M Daily, %, SD) 2.5 soju prices should boost revenues by W6~7bn and operating profit by W4~5bn. Foreign Ownership (%) 20.1 With Hite JinroÊs share of the beer market falling, the companyÊs stock was Major Shareholder (s) sluggish until October. However, since Oriental BreweryÊs price increase plans Hite Holdings et al. (57.78%) Lazard Asset Management LLC et al. (6.43%) surfaced in mid-November, Hite JinroÊs shares have been rebounding. And we expect positive momentum to outweigh the negatives in 2012. We Price Performance reiterate our Buy call with a target price of W42,000. Once Hite Jinro confirms its (%) 1M 6M 12M price hike plans, we will revise up our earnings forecasts. Absolute 24.6 -6.8 -8.6 Relative 24.1 1.5 -6.4 § Earnings & Valuation Metrics Share price FY Revenues OP OP Margin NP EPS EBITDAFCF ROE P/E P/B EV/EBITDA 120 KOSPI (Wbn) (Wbn) (%) (Wbn) (Won) (Wbn) (Wbn) (%) (x) (x) (x) 110 100 12/09 980 151 15.4 123 2,867 188 -44 20.2 13.9 2.3 10.0 90 12/10 1,035 126 12.2 61 1,457 164 -36 8.9 24.3 2.3 10.5 80 12/11F 1,424 160 11.2 105 2,090 197 -221 10.0 15.5 1.6 18.6 70 12/12F 2,124 246 11.6 154 2,185 319 99 10.1 14.9 1.5 11.4 60 50 12/13F 2,183 271 12.4 169 2,399 346 150 10.2 13.5 1.4 10.3 40 Note: All figures are based on consolidated K-IFRS; NP refers to net profit attributable to controlling interests 12/10 6/11 12/11 Hite Jinro merged with Hite Brewery in September 2011 Source: Company data, KDB Daewoo Securities Research estimates Analysts who prepared this report are registered as research analysts in Korea but not in any other jurisdiction, including the U.S. December 9, 2011 Hite Jinro Table 1. Hite JinroÊs past beer price hikes (W) 12.99 1.00 1.01 1.03 12.04 1.05 1.06 1.07 5.07 7.08 12.09 1.12F Factory price 347 364 378 401 401 421 421 434 442 467 479 514 Liquor tax 450 418 378 401 401 379 337 312 318 336 345 370 Liquor tax rate (%) 130 115 100 100 100 90 80 72 72 72 72 72 Education tax 135 126 114 120 120 114 101 94 95 101 103 111 Supply price 932 908 870 923 923 914 859 839 855 903 927 996 Value-added tax 93 91 87 92 92 91 86 84 86 90 93 100 Total taxes on beer 679 635 579 614 614 584 524 490 499 527 541 581 Ex-factory price 1,025 999 957 1015 1015 1005 945 923 941 994 1,019 1,095 Tax burden ratio (%) 66 64 60 60 60 58 55 53 53 53 53 53 Distribution margin 205 200 191 203 203 201 189 185 188 199 204 219 Retail margin 246 240 230 244 244 241 227 222 226 238 245 263 Consumer price 1,476 1,438 1,379 1,462 1,462 1,447 1,360 1,330 1,355 1,431 1,468 1,577 Increase in factory price (%) 0.0 5.0 4.0 6.1 0.0 4.9 0.0 3.0 1.9 5.6 2.6 7.5 Increase in ex-factory price (%) 0.0 -2.6 -4.1 6.1 0.0 -1.0 -6.0 -2.3 1.9 5.6 2.6 7.5 Increase in consumer price (%) 0.0 -2.6 -4.1 6.1 0.0 -1.0 -6.0 -2.3 1.9 5.6 2.6 7.5 Note: 1) Based on a 500ml bottle of ÂHiteÊ beer 2) Factory price: Hite JinroÊs ASP 3) Ex-factory price: Supply price for wholesalers 4) Distribution margin: 20% of ex-factory price 5) Retail margin: 20% of ex-factory price + distribution margin 6) Consumer price: Ex-factory price + distribution margin + retail margin 7) Assumed Hite JinroÊs beer price hike of 7.5% in early 2012 Source: Company data, KDB Daewoo Securities Research Figure 1. Hite JinroÊs beer price hike trend and forecast Figure 2. Beer CPI trend (W) (W) (10=100) 550 Factory price (L) 1,200 110 Ex-factory price (R) 105 500 1,100 100 450 1,000 95 400 90 900 350 85 300 800 80 12.99 1.01 12.04 1.06 5.07 12.09 00 02 04 06 08 10 12 Note: Based on a 500ml bottle of ÂHiteÊ beer, Assumed Hite JinroÊs beer price Note: Based on Oriental BreweryÊs beer price hike in Dec. 2011 hike of 7.5% in early 2012 Source: Statistics Korea, KDB Daewoo Securities Research Source: Company data, KDB Daewoo Securities Research KDB Daewoo Securities Research 2 December 9, 2011 Hite Jinro Figure 3. Composition of beer consumer price Figure 4. International malt prices (W) (US$/tonne) (W'000/tonne) 600 800 International prices (L) 1,000 Won-denominated prices (R) 500 800 600 400 600 300 400 400 200 200 200 100 0 0 0 Factory price Tax Distribution margin Retail margin 94 97 00 03 06 09 12 Note: Based on a 500ml bottle of ÂHiteÊ beer Source: Korea International Trade Association, KDB Daewoo Securities Source: Company data, KDB Daewoo Securities Research Research Figure 5. Beer shipment growth Figure 6. Soju shipment growth ('000 kl) (%) ('000 kl) (%) 250 Beer shipments (L) 60 150 Soju shipments (L) 60 % YoY (R) % YoY (R) 200 40 120 40 150 20 90 20 100 0 60 0 50 -20 30 -20 0 -40 0 -40 99 01 03 05 07 09 11 99 01 03 05 07 09 11 Source: Statistics Korea, KDB Daewoo Securities Research Source: Statistics Korea, KDB Daewoo Securities Research Figure 7. Soju CPI trend Figure 8. Spread between soju and alcohol (1/00=100) (1/00=100) (1/00=0) 150 150 Spread between soju and alcohol prices (R) 12 CPI for soju (L) 140 140 PPI for alcohol (L) 8 130 130 4 120 120 0 110 110 -4 100 100 -8 90 90 -12 00 02 04 06 08 10 12 00 02 04 06 08 10 12 Source: Statistics Korea, KDB Daewoo Securities Research Source: Statistics Korea, KDB Daewoo Securities Research KDB Daewoo Securities Research 3 December 9, 2011 Hite Jinro Hite Jinro (000080 KS/Buy/TP: W42,000) Comprehensive Income Statement (Summarized) Statement of Financial Condition (Summarized) (Wbn) 12/10 12/11F 12/12F 12/13F (Wbn) 12/10 12/11F 12/12F 12/13F Revenues 1,035 1,424 2,124 2,183 Current Assets 402 907 994 1,005 Cost of Sales 610 872 1,253 1,270 Cash and Cash Equivalents 150 132 214 226 Gross Profit 425 553 871 912 AR & Other Receivables 182 537 537 530 SG&A Expenses 299 410 625 642 Inventories 52 171 170 175 Operating Profit (Adj) 126 142 246 271 Other Current Assets 16 64 70 72 Operating Profit 126 160 246 271 Non-Current Assets 1,017 2,732 2,817 2,900 Non-Operating Profit -1 1 -29 -31 Investments in Associates 40 39 45 51 Net Financial Income 13 25 45 48 Property, Plant and Equipment 688 2,345 2,399 2,455 Net Gain from Inv in Associates 7 9 6 6 Intangible Assets 3 46 48 49 Pretax Profit 125 143 218 239 Total Assets 1,418 3,639 3,811 3,905 Income Tax 64 38 64 70 Current Liabilities 609 1,543 1,573 1,635 Profit from Continuing Operations 61 105 154 169 AP & Other Payables 225 232 234 240 Profit from Discontinued Operations 0 0 0 0 Short-Term Financial Liabilities 271 912 957 1,002 Net Profit 61 105 154 169 Other Current Liabilities 113 399 382 393 Controlling Interests 61 105 154 169 Non-Current Liabilities 189 619 647 550 Non-Controlling Interests 0 0 0 0 Long-Term Financial Liabilities 150 534 555 453 Total Comprehensive Profit 61 115 161 176 Other Non-Current Liabilities 12 22 24 24 Controlling Interests 61 115 161 176 Total Liabilities 798 2,162 2,220 2,185 Non-Controlling Interests 0 0 0 0 Controlling Interests 621 1,477 1,591 1,720 EBITDA 164 197 319 346 Capital Stock 215 366 366 366 FCF (Free Cash Flow) -36 -221 99 150 Capital Surplus 0 710 710 710 EBITDA Margin (%)

Load more