Hyundai Department Store (069960 KS ) Lack of momentum vs. attractive valuation

Retail 1Q17 review: OP down 4.5% YoY minus one-time gain For 1Q17, Hyundai Department Store (HDS) reported consolidated gross sales of Results Comment W1.38tr (+3.9% YoY) and operating profit of W138.5bn (+35.3% YoY). Stripping out a May 11, 2017 W40.7bn one-off gain f rom a VAT reversal due to changes in the accounting of allowances for bonus gift cards, gross sales were up 0.9% YoY, and operating profit was down 4.5% YoY. Same-store sales (SSS) declined 1.5% YoY.

(Maintain) Buy Revenue growth showed wide divergence among locations. The Pangyo and D- Cube City stores delivered over 10% YoY growth on the back of strong consumer Target Price (12M, W) 147,000 appeal and renewals, while the Chungcheong location also saw 6% YoY growth. On the other hand, the Cheonho, Daegu, Ulsan, and Ulsan Dong-gu stores su ffered Share Price (05/10/17, W) 111,000 negative YoY growth ranging from -5% to -10%. In the near term, we see no meaningful recovery on the horizon for these Expected Return 32% locations, given ongoing construction at the Cheonho store, new competition facing the Daegu store, and the local economic slump plaguing the Ulsan/Ulsan Dong-gu stores. And with no plans for store rollouts aside from the Garden Five OP (17F, Wbn) 420 City outlet opening in late May, we believe earn ings will largely depend on whether Consensus OP (17F, Wbn) 405 consumer spending recovers. EPS Growth (17F, %) 11.1 Attractive valuation points to limited downside risks Market EPS Growth (17F, %) 36.2 P/E (17F, x) 8.5 However, valuation looks attractive, with the stock currently trading at 8.5x our Market P/E (17F, x) 9.8 conservative 2017 EPS estimate and 9.2x 2016 EPS. We thus believe even the KOSPI 2,270.12 slightest pickup in earnings could drive a strong rebound in the stock. In 1H17, most retailers with cheap valuations have bounced back sharply with just modest Market Cap (Wbn) 2,598 earnings growth. HDS is the only stock among the 10 retail names under our Shares Outstanding (mn) 23 coverage to underperform the KOSPI. Free Float (%) 60.3 Foreign Ownership (%) 30.6 The good news is that consumer sentiment appears to be recovering from the lows Beta (12M) 0.58 seen since 2H16. While we do not foresee a strong consumer recovery, 52-Week Low 92,000 consumption should benefit (albeit modestly) from a more stable political 52-Week High 140,000 environment, potential stimulus from the new governme nt, and improvements in economic indicators. (%) 1M 6M 12M Absolute 8.8 -6.3 -20.7 Maintain Buy, but Cut TP to W147,000 Relative 2.3 -17.4 -30.8 We maintain our Buy call on HDS, but lower our target price to W147,000 following our earnings forecast revisions. With downside risks to shares limited, we advise 130 Hyundai Department Store KOSPI adding positions depending on the strength of the consumer cycle, rather than 110 betting on any sharp earnings/share price recovery.

90

70

50 5.16 9.16 1.17 5.17

FY (Dec.) 12/13 12/14 12/15 12/16 12/17F 12/18F Mirae Asset Daewoo Co., Ltd. Revenue (Wbn) 1,534 1,552 1,657 1,832 1,894 1,943

[Retail ] OP (Wbn) 393 364 363 383 420 444 OP margin (%) 25.6 23.5 21.9 20.9 22.2 22.9 Aiden Lee NP (Wbn) 299 268 241 276 306 319 +822 -3774 -1708 [email protected] EPS (W) 12,771 11,470 10,294 11,784 13,094 13,632 ROE (%) 10.4 8.6 7.2 7.7 8.0 7.7

P/E (x) 12.6 10.7 12.3 9.2 8.5 8.1

P/B (x) 1.2 0.9 0.8 0.7 0.6 0.6

Dividend yield (%) 0.4 0.6 0.6 0.6 0.6 0.0

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

May 11, 2017 Hyundai Department Store

Table 1. 1Q17 review (Wbn, %, %p) 1Q17P Growth (%) Diff. (%) 1Q16 4Q16 Preliminary (A) Mirae Asset Daewoo Consensus (B) YoY QoQ (A vs. B) Gross sales 1,324 1,472 1,376 1,335 3.9 -6.5 Net sales 459 490 495 461 490 8.0 1.1 1.1 Operating profit 102 121 138 101 106 35.3 14.4 31.0 OP margin 22.3 24.7 28.0 21.9 21.6 5.6 3.3 Pretax profit 118 135 163 112 118 38.1 20.5 38.3 Net profit 75 88 103 69 74 38.2 17.3 39.2 Notes: Based on consolidated K-IFRS Source: Company data, Bloomberg, Mirae Asset Daewoo Research estimates

Table 2. Quarterly and annual earnings (Wbn, %) 2016 2017F Growth 2016 2017F 2018F 1Q16 2Q16 3Q16 4Q16 1Q17P 2Q17F 3Q17F 4Q17F 1Q17 2017F 2018F Gross sales 1,324 1,315 1,262 1,472 1,376 1,332 1,290 1,518 5,372 5,516 5,605 3.9 2.7 1.6 Net s ales 459 450 434 490 495 454 442 502 1,832 1,894 1,943 8.0 3.4 2.6 Gross profit 376 382 351 408 405 382 354 427 1,517 1,568 1,622 7.6 3.4 3.5 Operating profit 102 78 82 121 138 77 76 128 383 420 444 35.3 9.6 5.7 Gross margin 28.4 29.0 27.8 27.7 29.4 28.6 27.5 28.1 28.2 28.4 28.9 OP margin 7.7 5.9 6.5 8.2 10.1 5.8 5.9 8.4 7.1 7.6 7.9 Notes: Based on consolidated K-IFRS Source: Company data, Mirae Asset Daewoo Research estimates

Mirae Asset Daewoo Research 2 May 11, 2017 Hyundai Department Store

Hyundai Department Store (069960 KS/Buy/TP: W147,000)

Comprehensive Income Statement (Summarized) Statement of Financial Condition (Summarized) (Wbn) 12/15 12/16 12/17F 12/18F (Wbn) 12/15 12/16 12/17F 12/18F Revenue 1,657 1,832 1,894 1,943 Current Assets 911 1,150 1,363 1,541 Cost of Sales 263 315 326 321 Cash and Cash Equivalents 44 70 291 427 Gross Profit 1,394 1,517 1,568 1,622 AR & Other Receivables 576 606 571 603 SG&A Expenses 1,031 1,133 1,148 1,179 Inventories 60 60 65 65 Operating Profit (Adj) 363 383 420 444 Other Current Assets 231 414 436 446 Operating Profit 363 383 420 444 Non-Current Assets 5,250 5,437 5,600 5,820 Non-Operating Profit 26 53 74 72 Investments in Associates 559 582 605 618 Net Financial Income -2 -7 -7 -4 Property, Plant and Equipment 4,397 4,577 4,720 4,927 Net Gain from Inv in Associates 39 39 69 65 Intangible Assets 47 45 44 42 Pretax Profit 389 436 494 516 Total Assets 6,161 6,587 6,963 7,361 Income Tax 108 115 131 139 Current Liabilities 1,087 1,326 1,341 1,364 Profit from Continuing Operations 280 321 363 377 AP & Other Payables 633 588 601 624 Profit from Discontinued Operations 0 0 0 0 Short-Term Financial Liabilities 41 280 280 280 Net Profit 280 321 363 377 Other Current Liabilities 413 458 460 460 Controlling Interests 241 276 306 319 Non-Current Liabilities 1,043 951 964 974 Non-Controlling Interests 39 45 56 58 Long-Term Financial Liabilities 679 579 579 579 Total Comprehensive Profit 293 313 363 381 Other Non-Current Liabilities 364 372 385 395 Controlling Interests 254 268 304 323 Total Liabilities 2,130 2,277 2,305 2,339 Non-Controlling Interests 39 45 59 58 Controlling Interests 3,450 3,694 3,984 4,292 EBITDA 489 527 558 588 Capital Stock 117 117 117 117 FCF (Free Cash Flow) -100 109 270 324 Capital Surplus 612 612 612 612 EBITDA Margin (%) 29.5 28.8 29.5 30.3 Retained Earnings 2,769 3,035 3,325 3,629 Operating Profit Margin (%) 21.9 20.9 22.2 22.9 Non-Controlling Interests 581 617 673 731 Net Profit Margin (%) 14.5 15.1 16.2 16.4 Stockholders' Equity 4,031 4,311 4,657 5,023

Cash Flows (Summarized) Forecasts/Valuations (Summarized) (Wbn) 12/15 12/16 12/17F 12/18F 12/15 12/16 12/17F 12/18F Cash Flows from Op Activities 401 442 550 524 P/E (x) 12.3 9.2 8.5 8.1 Net Profit 280 321 363 377 P/CF (x) 5.6 4.4 4.1 3.9 Non-Cash Income and Expense 250 262 277 293 P/B (x) 0.8 0.7 0.6 0.6 Depreciation 125 142 137 143 EV/EBITDA (x) 8.2 6.8 6.2 5.7 Amortization 2 2 2 1 EPS (W) 10,294 11,784 13,094 13,632 Others 123 118 138 149 CFPS (W) 22,650 24,923 27,309 28,660 Chg in Working Capital -39 -42 49 -3 BPS (W) 151,083 161,839 174,252 187,380 Chg in AR & Other Receivables -26 -34 38 -30 DPS (W) 700 700 700 0 Chg in Inventories -5 0 -5 0 Payout ratio (%) 5.7 5.0 4.4 0.0 Chg in AP & Other Payables -56 -33 17 18 Dividend Yield (%) 0.6 0.6 0.6 0.0 Income Tax Paid -85 -97 -131 -139 Revenue Growth (%) 6.8 10.6 3.4 2.6 Cash Flows from Inv Activities -542 -524 -289 -208 EBITDA Growth (%) 2.3 7.8 5.9 5.4 Chg in PP&E -500 -333 -280 -200 Operating Profit Growth (%) -0.3 5.5 9.7 5.7 Chg in Intangible Assets 0 0 0 0 EPS Growth (%) -10.3 14.5 11.1 4.1 Chg in Financial Assets -16 -175 -9 -8 Accounts Receivable Turnover (x) 3.0 3.2 3.3 3.4 Others -26 -16 0 0 Inventory Turnover (x) 28.9 30.7 30.4 30.0 Cash Flows from Fin Activities 167 108 -16 -16 Accounts Payable Turnover (x) 0.5 0.7 0.7 0.7 Chg in Financial Liabilities 219 140 0 0 ROA (%) 4.7 5.0 5.4 5.3 Chg in Equity 0 0 0 0 ROE (%) 7.2 7.7 8.0 7.7 Dividends Paid -19 -23 -16 -16 ROIC (%) 6.7 6.7 7.1 7.4 Others -33 -9 0 0 Liability to Equity Ratio (%) 52.8 52.8 49.5 46.6 Increase (Decrease) in Cash 26 26 221 135 Current Ratio (%) 83.8 86.8 101.6 112.9 Beginning Balance 18 44 70 291 Net Debt to Equity Ratio (%) 11.9 9.4 3.7 0.6 Ending Balance 44 70 291 427 Interest Coverage Ratio (x) 43.2 24.5 26.1 27.6 Source: Company data, Mirae Asset Daewoo Research estimates

Mirae Asset Daewoo Research 3 May 11, 2017 Hyundai Department Store

APPENDIX 1

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

Company (Code) Date Rating Target Price (W) Hyundai Department Store Hyundai Department Store (069960) 05/10/2017 Buy 147,000 200,000 05/04/2016 Buy 170,000 01/19/2016 Buy 160,000 150,000 07/21/2015 Buy 190,000 03/05/2015 Trading Buy 151,000 100,000

50,000

0 May 15 May 16 May 17

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 Buy Trading Buy Hold Sell 72.86% 15.58% 11.56% 0.00% * Based on recommendations in the last 12-months (as of March 31, 2017)

Disclosures As of the publication date, Mirae Asset Daewoo Co., Ltd. has acted as a liquidity provider for single stock futures backed by shares of Hyundai Department Store as an underlying asset, and 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 and regulations thereof. Opinions expressed in this publication about the subject securities and companies accurately reflect the personal views of the Analysts primarily responsible for this report. Mirae Asset Daewoo Co., Ltd. (“Mirae Asset Daewoo”) policy prohibits its Analysts and members of their households from owning securities of any company in the Analyst’s area of coverage, and the Analysts do not serve as an officer, director or advisory board member of the subject companies. Except as otherwise specified herein, the Analysts have not received any compensation or any other benefits from the subject companies in the past 12 months and have not been promised the same in connection with this report. No part of the compensation of the Analysts was, is, or will be directly or indirectly related to the specific recommendations or views contained in this report but, like all employees of Mirae Asset Daewoo, the Analysts receive compensation that is 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 is published by Mirae Asset Daewoo, a broker-dealer registered in the Republic of Korea and a member of the Korea Exchange. Information and opinions contained herein have been compiled 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 and regulations or subject Mirae Asset Daewoo and 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 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

Mirae Asset Daewoo Research 4 May 11, 2017 Hyundai Department Store

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Mirae Asset Daewoo Research 5 May 11, 2017 Hyundai Department Store

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