Ottogi (007310 KS ) Steady earnings to continue

Food & beverage 2Q18 preview: and frozen food drive strength Earnings Preview For 2Q18, we expect Ottogi to post a 7.0% YoY increase in revenue and an 18.4% gain in operating profit. We believe revenue growth was robust, driven by the continu ation July 19, 2018 of strong growth (7-9%) in (ramen, vermicelli, etc.), frozen food (dumplings, pizza, rice, HMR, etc.), and seafood (canned tuna, etc.). Following some softness in 1Q18, we estimate revenue from sauces (curry, “three-minute” series), condiments (ketchup, mayonnaise, etc.), rice (cooked rice, pre-washed rice, etc.) , and oil (sesame oil, edible oil, etc.) also rose around 3-5% in 2Q18. (Maintain) Buy Particularly worth noting is the growth of ramen, which we attribute to: 1) increased sales of new products; 2) strong sales of existing products (Jin Ramen); and 3) a rise in Target Price (12M, W) ▲ 1,050,000 actual selling prices owing to reduced discounts. We estimate Ottogi’s ramen market share reached a record 26.5% in 2Q18. We believe operating profit growth was Share Price (07/19/18, W) 820,000 supported by: 1) strong revenue growth; 2) stabilizing raw material prices; and 3) price hikes in major products (canned tuna, cooked rice, and soybean oil for restaurants). Expected Return 28% Three reasons why earnings are likely to remain steady 1) Ottogi’s new products and product extensions have been well received by the OP (18F, Wbn) 169 market. Targeting the cold bibim market, the company released new products like Real Jjolmyeon and Chuncheon Makguksu, which we think could bring in monthly Consensus OP (18F, Wbn) 164 sales of around W10bn during the summer, given the positive reception so far . Sales of EPS Growth (18F, %) 4.7 frozen food (cup rice, rice bowls, dumplings, etc.) and frozen pizza ( round/square Market EPS Growth (18F, %) 10.4 pizzas, pizza cups, etc.) are continuing to grow, while Jin Jjambbong extensions, such as stir-fried and oyster-flavored versions, are also doing well. P/E (18F, x) 20.5 Market P/E (18F, x) 9.0 2) We expect raw material prices to stabilize. Ottogi annually purchases around KOSPI 2,282.29 W750bn worth of raw materials, 60% of which are imported (soybeans, raw sugar, palm oil, tuna, etc.) and 40% of which are sourced domestically ( eggs, corn syrup, Market Cap (Wbn) 2,821 ethanol, etc.). After rising in 2017, both international and domestic prices of the Shares Outstanding (mn) 3 company’s key raw materials are likely to stabilize lower in 2H18-1H19. In particular, Free Float (%) 35.6 international prices are falling materially amid concerns of a US-China trade war. Foreign Ownership (%) 17.1 Further, Ottogi is continuing its efforts to enhance its raw material processing efficiency and sourcing capabilities (bulk purchasing and centralized purchasing). Beta (12M) 0.56 52-Week Low 684,000 3) We see potential for price hikes. Unlike its competitors (which hiked prices in late 2016 52-Week High 890,000 and early 2017), Ottogi has not raised its ramen prices, as sales and market share have been rising on the back of price competitiveness (Jin Ramen) and new releases (higher- (%) 1M 6M 12M priced items like Jin Jjambbong and Jjolmyeon). The company is currently raising its actual Absolute -2.1 5.3 10.5 selling price by reducing discounts. We think Ottogi could increase ramen prices later this Relative 0.3 16.2 17.7 year, as it already has raised prices for some of its processed food products (16 items).

120 Ottogi KOSPI Maintain Buy and raise TP to W1,050,000

110 We believe Ottogi’s strong sales and product development capabilities make it well- positioned to capitalize on the growing HMR market and thus deliver steady growth. In 100 order to preempt related-party transaction risks, the company has announced that it will overhaul its ownership structure by merging with affiliates Sangmi Foods Holdings 90 (food manufacturer; revenue of W59.5bn and net profit of W4.5bn), and Poonglim P&P

80 Holdings (packaging firm; revenue of W32.8bn and net profit of W3.5bn) (to be close d 7.17 11.17 3.18 7.18 on September 27 th ). Over the long term, we think there is also a chance of Ottogi Ramen eventually becoming a consolidated subsidiary. We maintain our Buy rating on Ottogi and raise our target price to W1,050,000 (from W1,000,000). Mirae Asset Daewoo Co., Ltd.

[ F&B/Tobacco ] FY (Dec.) 12/15 12/16 12/17 12/18F 12/19F 12/20F Revenue (Wbn) 1,883 2,011 2,126 2,268 2,379 2,484 Woon -mok Baek +822 -3774 -1679 OP (Wbn) 133 143 146 169 184 198 [email protected] OP margin (%) 7.1 7.1 6.9 7.5 7.7 8.0

Susie Hong NP (Wbn) 104 138 131 137 150 164 +822 -3774 -1853 EPS (W) 30,365 39,977 38,161 39,964 43,595 47,689 [email protected] ROE (%) 11.9 13.9 12.3 11.9 11.7 11.6

P/E (x) 40.3 16.6 21.1 20.5 18.8 17.2 P/B (x) 4.4 2.2 2.4 2.2 2.0 1.8 Dividend yield (%) 0.4 1.0 0.9 0.9 1.0 1.0 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

July 19, 2018 Ottogi

Table 1. 2Q18 preview (Wbn, %) 2Q18F Growth 2Q17 1Q18 Mirae Asset Daewoo Consensus YoY QoQ Revenue 513.4 577.3 549.4 552.0 7.0 -4.8 Operating profit 41.5 38.5 49.1 47.4 18.4 27.5 Pretax profit 45.8 41.6 54.9 52.2 19.9 31.9 Net profit 35.7 30.3 41.3 39.4 15.7 36.1 OP margin 8.1 6.7 8.9 8.6 - - Net margin 7.0 5.3 7.5 7.1 - - Source: WISEfn, company data, Mirae Asset Daewoo Research estimates

Table 2. Quarterly and annual earnings (Wbn, %) 17 18F 17 18F 19F

1Q 2Q 3Q 4Q 1Q 2QF 3QF 4QF Annual Annual Annual Revenue 532 513 564 517 577 549 600 541 2,126 2,268 2,379 Operating profit 30 42 44 30 39 49 52 29 146 169 184 Pretax profit 41 46 63 30 42 55 57 31 180 184 202 Net profit 32 36 47 16 30 41 42 23 131 137 150 OP margin 5.6 8.1 7.9 5.8 6.7 8.9 8.7 5.3 6.9 7.4 7.7 Net margin 6.1 7.0 8.3 3.2 5.3 7.5 7.1 4.3 6.2 6.1 6.3 Revenue growth 3.1 5.2 9.3 5.3 8.5 7.0 6.4 4.8 5.7 6.7 4.9 OP growth -15.7 2.6 -2.1 42.7 28.5 18.4 18.0 -4.4 2.5 15.6 9.0 Pretax profit growth -18.7 2.1 30.6 -23.6 1.0 19.9 -10.0 3.1 -1.7 2.3 9.4 Net profit growth -33.8 38.8 31.2 -39.6 -6.4 15.7 -9.4 42.9 -4.5 4.7 9.1 Source: Company data, Mirae Asset Daewoo Research estimates

Table 3. 2018-19 earnings forecast revisions (Wbn, %) Previous Revised % chg. Notes 18F 19F 18F 19F 18F 19F Revenue 2,245 2,347 2,268 2,379 1.0 1.4 Frozen food sales growth Operating profit 161 174 169 184 4.9 5.8 New ramen product sales growth Pretax profit 179 195 184 202 3.2 3.3 Net profit 133 145 137 150 3.2 3.3 OP margin 7.2 7.4 7.4 7.7 - - Net margin 5.9 6.2 6.1 6.3 - - Source: Company data, Mirae Asset Daewoo Research estimates

Figure 1. OP margin comparison of major processed food Figure 2. Share price performance of major processed food companies companies (since Jan. 2017)

(%) (1/17=100) 8 18F 19F 160 Dongwon F&B CJCJ Daesang Lotte Foods Pulmuone Ottogi

6 130 Ottogi 4

100 2

0 70 Ottogi Dongwon F&B Daesang Lotte Foods CJCJ 1/17 5/17 9/17 1/18 5/18 9/18

Source : WISEfn , Mirae Asset Daewoo Research Source : Thomson Reuters, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 2 July 19, 2018 Ottogi

Figure 3. International and domestic prices of Ottogi’s key Figure 4. Domestic prices of Ottogi’s key raw materials raw materials

(Cents/lb, US$/bushel) (US$/tonne) (US$/tonne) (2010=100) 40 Raw sugar (L) 1600 2500 Tuna price (L) 200 Soybeans (L) Eggs (R) Corn syrup (R) Palm oil (R) 2000 160 30 1200

1500 120 20 800 1000 80

10 400 500 40

0 0 0 0 09 11 13 15 17 00 02 04 06 08 10 12 14 16 18

Source : Thomson Reuters, Mirae Asset Daewoo Research Source : Company data , KOSIS , Mirae Asset Daewoo Research

Figure 5. Domestic ramen CPI trend Figure 6. Ottogi’s ramen market share (by volume)

(2015=100) (%) (%) 120 Ramen CPI (L) YoY (R) 10 27 Ottogi's ramen market share

8 110 24 6

4 100 21 2

0 90 18 -2

80 -4 15 08 10 12 14 16 18 14 15 16 17 18

Source : KOSIS , Mirae Asset Daewoo Research Source: Company data, Mirae Asset Daewoo Research

Figure 7. OP of Ottogi Ramen (equity-method affiliate) Figure 8. Ottogi’s frozen pizza revenue

(Wbn) (%) (Wbn) 140 30 Ottogi ramen OP (L) 6 Frozen pizza total market size OP margin (R) Ottogi 120 25 5

100 20 4 80 15 3 60 10 2 40

5 1 20

0 0 0 03 05 07 09 11 13 15 17 16 17 18F

Source: Company data, Mirae Asset Daewoo Research Source : Press , Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 3 July 19, 2018 Ottogi

Ottogi (007310 KS/Buy/TP: W1,050,000)

Comprehensive Income Statement (Summarized) Statement of Financial Condition (Summarized) (Wbn) 12/17 12/18F 12/19F 12/20F (Wbn) 12/17 12/18F 12/19F 12/20F Revenue 2,126 2,268 2,379 2,484 Current Assets 676 803 923 1,032 Cost of Sales 1,649 1,763 1,840 1,915 Cash and Cash Equivalents 136 238 327 410 Gross Profit 477 505 539 569 AR & Other Receivables 174 182 192 200 SG&A Expenses 331 337 355 371 Inventories 150 157 166 173 Operating Profit (Adj) 146 169 184 198 Other Current Assets 216 226 238 249 Operating Profit 146 169 184 198 Non-Current Assets 1,046 1,115 1,161 1,202 Non-Operating Profit 34 15 18 23 Investments in Associates 227 238 251 262 Net Financial Income 1 1 2 3 Property, Plant and Equipment 768 828 862 893 Net Gain from Inv in Associates 17 13 13 17 Intangible Assets 43 42 41 39 Pretax Profit 180 184 202 221 Total Assets 1,722 1,918 2,083 2,234 Income Tax 48 46 50 55 Current Liabilities 434 486 513 524 Profit from Continuing Operations 132 139 151 165 AP & Other Payables 255 268 282 294 Profit from Discontinued Operations 0 0 0 0 Short-Term Financial Liabilities 95 131 139 134 Net Profit 132 139 151 165 Other Current Liabilities 84 87 92 96 Controlling Interests 131 137 150 164 Non-Current Liabilities 136 158 164 165 Non-Controlling Interests 1 1 1 1 Long-Term Financial Liabilities 25 41 41 36 Total Comprehensive Profit 132 147 157 165 Other Non-Current Liabilities 111 117 123 129 Controlling Interests 132 145 155 163 Total Liabilities 570 644 677 689 Non-Controlling Interests 1 2 2 2 Controlling Interests 1,098 1,220 1,351 1,489 EBITDA 194 221 239 255 Capital Stock 17 17 17 17 FCF (Free Cash Flow) 31 86 122 137 Capital Surplus 10 10 10 10 EBITDA Margin (%) 9.1 9.7 10.0 10.3 Retained Earnings 1,104 1,220 1,345 1,482 Operating Profit Margin (%) 6.9 7.5 7.7 8.0 Non-Controlling Interests 54 54 55 56 Net Profit Margin (%) 6.2 6.0 6.3 6.6 Stockholders' Equity 1,152 1,274 1,406 1,545

Cash Flows (Summarized) Forecasts/Valuations (Summarized) (Wbn) 12/17 12/18F 12/19F 12/20F 12/17 12/18F 12/19F 12/20F Cash Flows from Op Activities 109 181 210 224 P/E (x) 21.1 20.5 18.8 17.2 Net Profit 132 139 151 165 P/CF (x) 14.0 11.9 11.1 10.3 Non-Cash Income and Expense 66 98 103 109 P/B (x) 2.4 2.2 2.0 1.8 Depreciation 46 51 54 56 EV/EBITDA (x) 13.5 11.7 10.5 9.4 Amortization 1 1 1 1 EPS (W) 38,161 39,964 43,595 47,689 Others 19 46 48 52 CFPS (W) 57,670 68,900 73,899 79,636 Chg in Working Capital -45 1 6 6 BPS (W) 339,039 374,650 412,647 452,505 Chg in AR & Other Receivables 9 -10 -10 -8 DPS (W) 7,000 7,500 8,000 8,000 Chg in Inventories 5 -5 -8 -7 Payout ratio (%) 17.8 18.2 17.8 16.3 Chg in AP & Other Payables -37 12 12 10 Dividend Yield (%) 0.9 0.9 1.0 1.0 Income Tax Paid -45 -57 -50 -55 Revenue Growth (%) 5.7 6.7 4.9 4.4 Cash Flows from Inv Activities -85 -102 -97 -90 EBITDA Growth (%) 4.9 13.9 8.1 6.7 Chg in PP&E -77 -94 -88 -87 Operating Profit Growth (%) 2.1 15.8 8.9 7.6 Chg in Intangible Assets 0 0 0 0 EPS Growth (%) -4.5 4.7 9.1 9.4 Chg in Financial Assets 9 -10 -11 -10 Accounts Receivable Turnover (x) 13.6 12.8 12.8 12.7 Others -17 2 2 7 Inventory Turnover (x) 14.0 14.7 14.7 14.7 Cash Flows from Fin Activities -50 26 -21 -41 Accounts Payable Turnover (x) 7.8 8.0 8.0 7.9 Chg in Financial Liabilities -16 52 8 -10 ROA (%) 8.0 7.6 7.6 7.7 Chg in Equity 0 0 0 0 ROE (%) 12.3 11.9 11.7 11.6 Dividends Paid -22 -23 -25 -27 ROIC (%) 14.5 15.5 16.0 16.5 Others -12 -3 -4 -4 Liability to Equity Ratio (%) 49.5 50.6 48.2 44.6 Increase (Decrease) in Cash -9 102 89 83 Current Ratio (%) 155.8 165.3 179.9 196.8 Beginning Balance 145 136 238 327 Net Debt to Equity Ratio (%) -19.1 -21.9 -26.4 -30.7 Ending Balance 136 238 327 410 Interest Coverage Ratio (x) 46.1 49.9 50.6 54.7 Source: Company data, Mirae Asset Daewoo Research estimates

Mirae Asset Daewoo Research 4 July 19, 2018 Ottogi

APPENDIX 1

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

Company (Code) Date Rating Target Price (W) Ottogi Ottogi (007310) 07/19/2018 Buy 1,050,000 1,500,000 05/25/2018 After 1yr 05/25/2017 Buy 1,000,000 1,000,000 12/05/2016 Buy 880,000 06/01/2016 Buy 1,200,000 500,000

0 Jul 16 Jul 17 Jul 18

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 & Investment Banking Services Buy Trading Buy Hold Sell Equity Ratings Distribution 73.40% 14.78% 11.82% 0.00% Investment Banking Services 77.42% 9.68% 12.90% 0.00% * Based on recommendations in the last 12-months (as of June 30, 2018)

Disclosures As of the publication date, Mirae Asset Daewoo Co., Ltd. and/or its affiliates do not have any special interest with the subject company and do not own 1% or more of the subject company's shares outstanding.

Analyst Certification The research analysts who prepared this report (the “Analysts”) are registered with the 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 or regulations thereof. Each Analyst responsible for the preparation of this report certifies that (i) all views expressed in this report accurately reflect the personal views of the Analyst about any and all of the issuers and securities named in this report and (ii) no part of the compensation of the Analyst was, is, or will be directly or indirectly related to the specific recommendations or views contained in 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. 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 was prepared by Mirae Asset Daewoo, a broker-dealer registered in the Republic of Korea and a member of the . 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 . 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 or regulations or subject Mirae Asset Daewoo or any of 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

Mirae Asset Daewoo Research 5 July 19, 2018 Ottogi

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 the investments referred to in this report and the income from them may depreciate or appreciate, and investors may incur losses on investments. Past performance is not a guide to future performance. Future returns are not guaranteed, and a loss of original capital may occur. Mirae Asset Daewoo, its affiliates and their directors, officers, employees and agents do not accept any liability for any loss arising out of the use hereof. Mirae Asset Daewoo may have issued other reports that are inconsistent with, and reach different conclusions from, the opinions presented in this report. The reports may reflect different assumptions, views and analytical methods of the analysts who prepared them. Mirae Asset Daewoo may make investment decisions that are inconsistent with the opinions and views expressed in this research report. Mirae Asset Daewoo, its affiliates and their directors, officers, employees and agents may have long or short positions in any of the subject securities at any time and may make a purchase or sale, or offer to make a purchase or sale, of any such securities or other financial instruments from time to time in the open market or otherwise, in each case either as principals or agents. Mirae Asset Daewoo and its affiliates may have had, or may be expecting to enter into, business relationships with the subject companies to provide investment banking, market-making or other financial services as are permitted under applicable laws and regulations. No part of this document may be copied or reproduced in any manner or form or redistributed or published, in whole or in part, without the prior written consent of Mirae Asset Daewoo.

Distribution United Kingdom: This report is being distributed by Mirae Asset Securities (UK) Ltd. in the United Kingdom only to (i) investment professionals falling within Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (the “Order”), and (ii) high net worth companies and other persons to whom it may lawfully be communicated, falling within Article 49(2)(A) to (E) of the Order (all such persons together being referred to as “Relevant Persons”). This report is directed only at Relevant Persons. Any person who is not a Relevant Person should not act or rely on this report or any of its contents. United States: Mirae Asset Daewoo is not a registered broker-dealer in the United States and, therefore, is not subject to U.S. rules regarding the preparation of research reports and the independence of research analysts. This report is distributed in the U.S. by Mirae Asset Securities (USA) Inc., a member of FINRA/SIPC, to “major U.S. institutional investors” in reliance on the exemption from registration provided by Rule 15a-6(b)(4) under the U.S. Securities Exchange Act of 1934, as amended. All U.S. persons that receive this document by their acceptance hereof represent and warrant that they are a major U.S. institutional investor and have not received this report under any express or implied understanding that they will direct commission income to Mirae Asset Daewoo or its affiliates. Any U.S. recipient of this document wishing to effect a transaction in any securities discussed herein should contact and place orders with Mirae Asset Securities (USA) Inc. Mirae Asset Securities (USA) Inc. accepts responsibility for the contents of this report in the U.S., subject to the terms hereof, to the extent that it is delivered to a U.S. person other than a major U.S. institutional investor. Under no circumstances should any recipient of this research report effect any transaction to buy or sell securities or related financial instruments through Mirae Asset Daewoo. The securities described in this report may not have been registered under the U.S. Securities Act of 1933, as amended, and, in such case, may not be offered or sold in the U.S. or to U.S. persons absent registration or an applicable exemption from the registration requirements. Hong Kong: This report is distributed in Hong Kong by Mirae Asset Securities (HK) Limited, which is regulated by the Hong Kong Securities and Futures Commission. The contents of this report have not been reviewed by any regulatory authority in Hong Kong. This report is for distribution only to professional investors within the meaning of Part I of Schedule 1 to the Securities and Futures Ordinance of Hong Kong (Cap. 571, Laws of Hong Kong) and any rules made thereunder and may not be redistributed in whole or in part in Hong Kong to any person. All Other Jurisdictions: Customers in all other countries who wish to effect a transaction in any securities referenced in this report should contact Mirae Asset Daewoo or its affiliates only if distribution to or use by such customer of this report would not violate applicable laws and regulations and not subject Mirae Asset Daewoo and its affiliates to any registration or licensing requirement within such jurisdiction.

Mirae Asset Daewoo Research 6 July 19, 2018 Ottogi

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Mirae Asset Daewoo Research 7