August 30, 2011 Company Report Lotte Confectionery (004990 KS) Food & Beverage Expecting overseas momentum Woon-mok Baek +822-768-4158
[email protected] Trim TP to W2,000,000; Maintain Buy rating Amy Lee We trim our target price for Lotte Confectionery to W2,000,000 (from W2,200,000) +822-768-3066 because: 1) the companyÊs 2Q11 domestic earnings were weaker than expected
[email protected] due to unfavorable weather and cost increases, and 2) our 2011 earnings forecasts were cut to reflect the companyÊs bleak 3Q outlook (low temperatures are likely to dampen strong seasonality for the ice cream business). Although the companyÊs overseas operations remain brisk, their earnings contribution is still insufficient to offset domestic sluggishness. However, we maintain our Buy rating, taking into account: 1) an expected earnings rebound in 2012 and 2) the rosy secular growth prospects for the companyÊs overseas business. Buy (Maintain) 2Q11 Review: Weak at home, but brisk overseas Target Price (12M, W) 2,000,000 Share Price (11/08/29,W) 1,538,000 Lotte Confectionery reported lower-than-expected 2Q11 results (under consolidated Expected Return (%) 30.0 K-IFRS). Revenues and operating profit expanded only 9.3% YoY and 3.1% YoY, EPS Growth (11F, %) -33.5 respectively. Despite strong confectionery sales, domestic revenues fell below our Market EPS Growth (11F, %) 2.3 estimate, growing only 6.6% YoY, due to tepid ice cream sales (caused by frequent P/E(11F, x) 23.2 rains). With the companyÊs COGS climbing 15.2% YoY, operating profit growth Market P/E(11F, x) 9.7 KOSPI 1,829.50 lagged behind revenue growth in 2Q.