June 26, 2015
KOREA
Company News & Analysis Major Indices Close Chg Chg (%) Samsung Electronics (005930/Buy/TP: W1,800,000) Lower TP KOSPI 2,090.26 5.20 0.25 At the forefront of component innovation KOSPI 200 254.48 0.68 0.27 KOSDAQ 750.50 -3.16 -0.42 Lotte Chilsung (005300/Buy/TP: W3,100,000) Reinventing the soju industry Turnover ('000 shares, Wbn) Volume Value KOSPI 487,506 6,233 Economy & Strategy Update KOSPI 200 82,020 3,998 Economic Note KOSDAQ 599,788 4,849 Policy direction for 2H15 Market Cap (Wbn) Value KOSPI 1,301,844 KOSDAQ 204,922
KOSPI Turnover (Wbn) Buy Sell Net Foreign 1,465 1,400 65 Institutional 991 1,029 -37 Retail 3,755 3,772 -17
KOSDAQ Turnover (Wbn) Buy Sell Net Foreign 257 294 -37 Institutional 256 253 3 Retail 4,326 4,283 43
Program Buy / Sell (Wbn) Buy Sell Net KOSPI 998 1,083 -85 KOSDAQ 72 60 12
Advances & Declines Advances Declines Unchanged KOSPI 291 518 53 KOSDAQ 378 636 50
KOSPI Top 5 Most Active Stocks by Value (Wbn) Price (W) Chg (W) Value Hynix 42,000 -1,100 330 Samsung Electronics 1,278,000 9,000 263 Choong Wae Pharm. 45,400 2,500 148 Hanmi Science 123,500 3,500 135 Amore Pacific 419,000 17,500 117
KOSDAQ Top 5 Most Active Stocks by Value (Wbn) Price (W) Chg (W) Value Daum Communications 123,500 3,700 234 Sansung P&C 112,700 4,700 211 Celltrion 79,500 -2,200 112 NaturalendoTech 21,150 4,850 97 Diostech 17,100 200 96 Note: As of June 26, 2015
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Samsung Electronics (005930 KS) At the forefront of component innovation
2Q15 preview: Revenue of W51.2tr and OP of W7.03tr Technology For 2Q, we forecast Samsung Electronics (SEC) to report consolidated revenue and operating profit of W51.2tr (+9% QoQ, -2% YoY) and W7tr (+18% QoQ, -2% YoY), Earnings Preview respectively, the latter slightly missing the recently lowered consensus (OP of W7.3tr). June 26, 2015 Semiconductor: We project 2Q revenue of W11.3tr (+16% YoY) and operating profit of W3.3tr (+76% YoY). DRAM shipments should expand 8% QoQ, while ASP should fall 8% QoQ. The DRAM market recovery is likely to be somewhat delayed as a result of tepid PC demand in 1H and elevated DRAM inventory. NAND shipments should climb 16% QoQ, (Maintain) Buy while ASP should slide 7% QoQ. The system LSI (logic) business is likely to swing to a small profit, helped by increased shipments of 14nm FinFET application processors (AP). Target Price (12M, W) 1,800,000 Overall, NAND and system LSI should be the main earnings drivers in semiconductor. Display panel (DP): We forecast 2Q revenue of W6.6tr (+5% YoY) and operating profit Share Price (06/25/15, W) 1,269,000 of W0.5tr (+160% YoY). The LCD business should deliver a better-than-expected performance, thanks to a 6% QoQ rise in shipment area and stable panel prices. In Expected Return 42% contrast, operating profit from small/mid-sized OLEDs is likely to decline QoQ, affected by weaker smartphone shipments and higher depreciation costs due to the operation of the A3 line. Utilization should start to pick up in 3Q with the conversion of the A2 line. OP (15F, Wbn) 27,543 IT & mobile communications (IM): We forecast 2Q revenue of W26.3tr (-8% YoY) and Consensus OP (15F, Wbn) 28,265 operating profit of W3tr (-31% YoY). S martphone shipments are likely to be weaker EPS Growth (15F, %) -3.8 than previously anticipated at 75.4mn units (-9% QoQ, +1% YoY), dragged down by a sharp fall in mid/low-end smartphone shipments following the discontinuation of less Market EPS Growth (15F, %) 37.7 profitable, aging models. ASP, however, should jump 15% QoQ due to an increased mix P/E (15F, x) 9.7 of high-end models. Looking ahead in 2H, we expect the IM unit to maintain stable Market P/E (15F, x) 10.8 earnings, supported by the rollout of the (tentatively named) Galaxy S6 Edge Plus and KOSPI 2,085.06 the Galaxy Note 5.
Market Cap (Wbn) 186,923 Consumer electronics (CE): We anticipate 2Q revenue of W12.3tr (-6% YoY) and Shares Outstanding (mn) 170 operating profit of W0.2tr (-74% YoY). Operating profit should pick up QoQ on Free Float (%) 70.1 seasonally strong demand for air conditioners, but margins are likely to continue to Foreign Ownership (%) 51.8 underperform previous years. However, the operating environment for set makers appears to be gradually improving, with the euro and emerging market currencies Beta (12M) 1.02 turning favorable and TV panel prices now moving lower. 52-Week Low 1,083,000 52-Week High 1,503,000 Differentiated components to become key areas of strength
(%)(%)(%) 1M1M1M 6M6M6M 12M12M12M We believe SEC’s components business—most notably 3D NAND, flexible OLED, and logic chips—deserves close attention. In a highly competitive smartphone market, SEC is Absolute -6.0 -5.5 -3.9 adding value by internally producing a variety of differentiated components and chips, Relative -3.2 -11.8 -8.6 which are now considered the company’s biggest competitive advantage. Looking
120 forward, we think 3D NAND (48 layers) and foldable OLED will become SEC’s key areas Samsung Electronics KOSPI of strength. 110
100 Reiterate Buy, but Trim TP by 3% to W1,800,000 90 We slightly lowered our target price to W1,800,000 (from W1,850,000) to reflect our 80 revisions to IM and DP earnings. Still, we believe the company is deeply undervalued at
70 its current share price, trading at a more than 20% discount due to uncertainties 6.14 10.14 2.15 6.15 regarding Samsung Group’s restructuring. In our view, the stock’s current P/B of 0.1x offers an attractive entry point. Daewoo Securities CCo.,o., Ltd. FY (Dec.) 12/12 12/13 12/14 12/15F 12/16F 12/17F Revenue (Wbn) 201,104 228,693 206,206 203,328 211,558 218,962 [Semiconductor] OP (Wbn) 29,049 36,785 25,025 27,543 30,814 31,231
Jonathan Hwang OP margin (%) 14.4 16.1 12.1 13.5 14.6 14.3 +822-768-4140 NP (Wbn) 23,185 29,821 23,082 22,197 25,457 25,689 [email protected] EPS (W) 136,278 175,282 135,673 130,468 149,628 150,995 ROE (%) 21.6 22.8 15.1 13.0 13.3 12.0 Joon-ho Jang +822-768-3241 P/E (x) 11.2 7.8 9.8 9.7 8.5 8.4 [email protected] P/B (x) 2.1 1.5 1.3 1.1 1.0 0.9 Notes: All figures are based on consolidated K-IFRS; NP refers to net profit attributable to controlling interests 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 t he U.S. PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES & DISCLAIMERS IN APPENDIX 1 AT THE END OF REPORT.
Lotte Chilsung (005300 KS) Reinventing the soju industry
2Q15 preview: Earnings to sharply improve Food & Beverage We expect Lotte Chilsung to report consensus-beating 2Q earnings, with a 6.5% YoY rise in revenue (+20% for alcoholic beverages and flat for other beverages) and a 44.6% Earnings Preview YoY increase in operating profit.
June 25, 2015 2Q earnings growth will likely be driven by strong soju sales. We forecast 2Q domestic soju sales to grow more than 20% YoY, bolstered by sales of the hugely popular fruit- infused soju Chum Churum Soonhari. Another major driver will be sales of soft drinks (Maintain) Buy (Chilsung Cider), which have higher margins. While sales volume is unlikely to grow materially, soft drink revenue should increase due to price hike effects (which should lift overall beverage revenue by 2.8%). We believe beer (Kloud), sparkling water (Trevi), and Target Price (12M, W) 3,100,000 bottled water (Icis) sales have also been growing sharply. On th e other hand, sales of whisky, cheongju (traditional liquor), gwasilju (fruit-based liquor), and juice are likely to Share Price (6/24/15, W) 2,455,000 have declined.
Expected Return 26% Key driver will be soju in the near term and beer in the long term Lotte Chilsung’s main products include soft drinks , juice, soju, beer, whisky, coffee, and
sparking and bottled (still) water. Among them, we believe the business performance of OP (15F, Wbn) 143 the soju and beer segments will have the biggest impact on earnings. Consensus OP (15F, Wbn) 149 The release of Lotte Chilsung’s Chum Churum Soonhari (alcohol content 14%) in March EPS Growth (15F, %) 295.5 has brought about significant changes to the soju market. While regular soju sales are Market EPS Growth (15F, %) 37.7 continuously rising amid decreasing alcohol content, fruit-flavored soju has emerged as P/E (15F, x) 45.1 a new market, with Lotte Chilsung, HiteJinro, and Muhak all getting in on the action. Market P/E (15F, x) 10.8 Lotte Chilsung controls 17% of the domestic soju market and 25-30% of the market in KOSPI 2,085.53 the Seoul capital area. In 2014, the company’s soju revenue stood at W337bn (W250bn domestic and W87bn exports). For 2015, we forecast plain soju revenue to rise 8%, but Market Cap (Wbn) 3,037 expect overall soju revenue to grow at a faster rate of 16.9% (+28% in the domestic Shares Outstanding (mn) 1 market and -15% for exports), driven by robust sales of Soonhari, which we estimate at Free Float (%) 47.1 around W5bn monthly and more than W50bn annually. And o nce the company’s new Foreign Ownership (%) 13.2 soju plant is completed at the end of this year, market share should expand to 25% in Beta (12M) 1.00 2016 (based on production volume). 52-Week Low 1,461,000 Lotte Chilsung has not spent much on marketing Soonhari since its release. However, 52-Week High 2,753,000 the launch of rival HiteJinro’s grapefruit-flavored soju in June is likely to set off marketing competition among the three major players in July. (%)(%)(%) 1M1M1M 6M6M6M 12M12M12M Absolute -3.5 61.3 37.3 We project Lotte Chilsung’s beer revenue to expand from W43bn in 2014 to W100bn in Relative -0.7 50.6 31.3 2015. Given capacity limitations, beer revenue is lik ely to stay at around W100bn through 2017. Once capacity expansions are completed in 2017, the brewery business
170 LotteChilsung KOSPI could become an important revenue contributor starting in 2018. 150
130 Maintain Buy and TP of W3,100,000
110 Lotte Chilsung is focusing on soju, beer, and sparkling and bottled water to drive long- term growth, while making steady profits on soft drinks. This year, the company has 90 changed the soju industry by creating a new market category . We expect the company 70 6.14 10.14 2.15 6.15 to see profit growth in 2015 and 2016. We maint ain our Buy rating and target price of W3,100,000.
Daewoo Securities CCo.,o., Ltd. FY (Dec.) 12/12 12/13 12/14 12/15F 12/16F 12/17F Revenue (Wbn) 2,199 2,216 2,264 2,401 2,501 2,594 [F&B/Tobacco] OP (Wbn) 150 172 102 143 152 164
Woon-mok Baek OP margin (%) 6.8 7.8 4.5 6.0 6.1 6.3 +822-768-4158 NP (Wbn) 83 101 19 74 85 92 [email protected] EPS (W) 61,201 74,438 13,763 54,434 62,269 67,507 ROE (%) 3.8 4.3 0.8 3.2 3.6 3.8 Jungyeon Kwon +822-768-4161 P/E (x) 24.8 20.5 107.9 45.1 39.4 36.4 [email protected] P/B (x) 0.9 0.9 0.9 1.5 1.4 1.4 Notes: All figures are based on consolidated K-IFRS; NP refers to net profit attributable to controlling interests 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 t he U.S. PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES & DISCLAIMERS IN APPENDIX 1 AT THE END OF REPORT.
Economic Note Policy direction for 2H15
Economy Report Government to introduce new stimulus measures in 2H June 25, 2015 The government laid out its 2H economic policy direction on June 25 th , indicating that it would strengthen stimulus going forward. In addition , the government lowered its 2015
Daewoo Securities CCo.,o., Ltd. GDP and CPI growth estimates to 3.1% (from 3.8% in December 2014) and 0.7% (from 2.0% in December 2014), respectively, on the belief that the economi c recovery was [Economy] falling well short of expectations.
Dae-Il Suh The government’s economic data forecasts show that the growth estimate for f acilities +822-768-3069 investment was revised down less sharply than projections for private consumption , [email protected] construction investment, and exports