July 16, 2018 Korea Morning Focus Company News & Analysis Major Indices Close Chg Chg (%) CJ CheilJedang (097950/Buy/TP: W460,000) KOSPI 2,310.90 25.84 1.13 Business overhauls and profitability enhancements continue KOSPI 200 298.65 4.24 1.44 KOSDAQ 827.89 8.60 1.05 Turnover ('000 shares, Wbn) Volume Value KOSPI 286,351 6,388 KOSPI 200 87,214 4,569 KOSDAQ 572,114 3,136 Market Cap (Wbn) Value KOSPI 1,543,892 KOSDAQ 272,433 KOSPI Turnover (Wbn) Buy Sell Net Foreign 1,725 1,501 224 Institutional 1,364 1,458 -94 Retail 3,265 3,402 -137 KOSDAQ Turnover (Wbn) Buy Sell Net Foreign 360 345 15 Institutional 170 160 10 Retail 2,602 2,628 -26 Program Buy / Sell (Wbn) Buy Sell Net KOSPI 1,351 1,144 207 KOSDAQ 154 133 21 Advances & Declines Advances Declines Unchanged KOSPI 574 256 62 KOSDAQ 829 301 103 KOSPI Top 5 Most Active Stocks by Value (Wbn) Price (W) Chg (W) Value Samsung Electronics 46,500 1,000 507 Hynix 88,800 3,200 401 Hyosung Corp. 56,500 -22,800 352 SAMSUNG BIOLOGICS 402,000 -27,000 322 KODEX LEVERAGE 14,725 290 240 KOSDAQ Top 5 Most Active Stocks by Value (Wbn) Price (W) Chg (W) Value Daea TI 6,760 550 89 UST 9,440 1,120 81 NATURECELL 15,550 350 61 Celltrion Healthcare 99,800 1,600 54 Icure Pharm. Inc. 59,200 -1,400 49 Note: As of July 13, 2018 Mirae Asset Daewoo Research This document is a summary of a report prepared by Mirae Asset Daewoo Co., Ltd. (“Mirae Asset Daewoo”) and published on our website. Please review the compliance notices contained in the original report. Information and opinions contained herein have been compiled in good faith from sources deemed to be reliable. However, the information has not been independently verified. Mirae Asset Daewoo makes no guarantee, representation or warranty, express or implied, as to the fairness, accuracy or completeness of the information and opinions contained in this document. Mirae Asset Daewoo accepts no responsibility or liability whatsoever for any loss arising from the use of this document or its contents or otherwise arising in connection therewith. Information and opinions contained herein are subject to change without notice. This document is for informational purposes only. It is not and should not be construed as an offer or solicitation of an offer to purchase or sell any securities or other financial instruments. This document may not be reproduced, further distributed or published in whole or in part for any purpose. CJ CheilJedang (097950 KS) Business overhauls and profitability enhancements continue Food & Beverage 2Q18 preview: Turnaround in foodstuff and feed/livestock For 2Q18, we forecast CJ CheilJedang (CJCJ) to deliver a 10.6% YoY gain in revenue and a Earnings Preview 11.2% YoY increase in operating profit. For the company’s mainstay businesses July 13, 2018 (processed food, foodstuff, bio, and feed/livestock; excluding CJ Korea Express and the recently sold CJ HealthCare), we expect a 7.0% YoY rise in revenue and a 47.9% YoY increase in operating profit. We expect a benign performance from the core processed food and bio segments but see a rebound in profits from the foodstuff and feed/livestock segments, where the company has been carrying out business overhauls (Maintain) Buy and profitability enhancements. In processed food (34% of revenue), we estimate revenue and operating profit grew Target Price (12M, W) 460,000 only 5.9% and 4.2% YoY, respectively, affected by 1) price resistance for items whose prices were raised in early March (6-9% for Hetbahn, Spam, frozen dumplings, fish cakes, etc.), and 2) increased promotional spending. On a positive note, we believe Share Price (07/13/18, W) 342,000 growth remained robust for home meal replacements (HMR; +30% YoY) and overseas processed food (+20% YoY). In bio (25.6% of revenue), we estimate revenue and Expected Return 35% operating profit grew 32.4% and 87.5% YoY, respectively, driven by 1) volume growth and cost savings, which likely offset the impact of 5-18% declines in the spot prices of key products (lysine, methionine, tryptophan, and threonine), and 2) the consolidation of Selecta’s earnings (since September 2017). OP (18F, Wbn) 821 Consensus OP (18F, Wbn) 836 In foodstuff (18.3% of revenue), we estimate revenue slipped 8.7% YoY on the reduction of low-margin businesses (as part of the business overhaul), but operating EPS Growth (18F, %) 109.9 profit likely grew 91.7% YoY thanks to 1) lower raw material prices (raw sugar), and 2) a recovery in the actual selling price of flour (due to reduced discounts). In feed/livestock Market EPS Growth (18F, %) 10.7 (20.9% of revenue), where the company has been focusing on enhancing profitability P/E (18F, x) 6.4 due to continued losses since 1Q17, we expect a small profit, supported by higher hog Market P/E (18F, x) 9.0 prices in Vietnam and cost declines in Indonesia. KOSPI 2,310.90 Overseas processed food, domestic HMR, and overseas food M&As will be key Market Cap (Wbn) 5,148 Looking at the 2018-19 outlook for overseas processed food, we expect CJCJ to 1) grow Shares Outstanding (mn) 16 more than 15% in the US on the back of channel expansion and broader product Free Float (%) 51.8 offerings (more Bibigo products), 2) focus on expanding B2B and online channels in China, 3) build an integrated manufacturing base and tap into the channels of its Foreign Ownership (%) 21.4 acquisitions in Vietnam, and 4) invest in establishing a production/distribution base in Beta (12M) 0.97 Russia. 52-Week Low 319,500 For domestic HMR, we see revenue expanding from W240bn in 2017 to W350bn in 52-Week High 416,000 2018. We think it may take longer than expected for the HMR business to turn a profit, as the company’s focus is on product development and capex, rather than margins. (%) 1M 6M 12M Absolute -10.4 -11.5 -3.7 We believe overseas M&As in the food space could alter CJCJ’s enterprise value. If CJCJ th th Relative -4.2 -4.4 0.4 decides to acquire US food processor Schwan’s (see June 7 and July 6 regulatory filings), the company will gain access to distribution networks (logistics, factories, and retail channels) in the US Midwest and Southern regions. Schwan’s could also see 120 CJ CheilJedang KOSPI synergies related to manufacturing efficiency (facility replacements), cost-saving 110 expertise, and sales of CJCJ’s products. 100 Retain Buy and TP of W460,000 90 We believe CJCJ has the potential to deliver sustainable growth, on the back of 1) the growth of overseas processed food and domestic HMR, 2) profitability enhancements 80 7.17 11.17 3.18 7.18 in bio and feed/livestock, 3) business overhaul in foodstuff, and 4) overseas food M&As. At a 2019F P/E of 16x, valuation also looks inexpensive. Mirae Asset Daewoo Co., Ltd. [ F&B/Tobacco] FY (Dec.) 12/15 12/16 12/17 12/18F 12/19F 12/20F Revenue (Wbn) 12,924 14,563 16,477 17,883 19,421 21,130 Woon-mok Baek +822-3774-1679 OP (Wbn) 751 844 777 821 918 996 [email protected] OP margin (%) 5.8 5.8 4.7 4.6 4.7 4.7 Susie Hong NP (Wbn) 189 276 370 866 348 371 +822-3774-1853 EPS (W) 13,073 19,044 25,536 53,599 21,265 22,626 [email protected] ROE (%) 6.2 8.4 10.9 21.2 7.0 7.1 P/E (x) 28.9 18.8 14.3 6.4 16.1 15.1 P/B (x) 1.7 1.5 1.5 1.1 1.1 1.0 Dividend yield (%) 0.7 0.7 0.8 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 Analysts who prepared this report are registered as research analysts in Korea but not in any other jurisdiction, including the U.S. PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES & DISCLAIMERS IN APPENDIX 1 AT THE END OF REPORT. July 13, 2018 CJ CheilJedang Table 1. 2Q18 preview (Wbn, %) 2Q18F Growth 2Q17 1Q18 Mirae Asset Consensus YoY QoQ Daewoo Revenue 3,909 4,349 4,323 4,310 10.6 -0.6 Operating profit 164 210 183 185 11.2 -13.1 Pretax profit 70 112 1,062 1,032 - - Net profit 21 63 646 699 - - OP margin 4.2 4.8 4.2 4.3 - - Net margin 0.5 1.4 14.9 16.2 - - Notes: Due to the sale of the healthcare business (closed on April 18, 2018), healthcare earnings are not included from 2Q18 onwards; in 2017, the healthcare business generated revenue of W520.8bn, operating profit of W81.4bn, and net profit of W46.9bn; gains on the sale of the healthcare business (sale price of W1.31tr vs. book value of W300bn) are expected to be around W1tr (one-time non-operating profit) and are reflected in our 2Q18 pretax profit and net profit estimates Source: 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 3,867 3,909 4,411 4,291 4,349 4,323 4,671 4,540 16,477 17,883 19,421 Operating profit 192 164 269 150 210 183 260 168 777 821 918 Pretax profit 125 70 364 24 112 1,062 155 106 584 1,436 581 Net profit 82 21 256 11 63 646 102 55 370 866 348 OP margin 5.0 4.2 6.1 3.5 4.8 4.2 5.6 3.7 4.7 4.6 4.7 Net margin 2.1 0.5 5.8 0.2 1.4 14.9 2.2 1.2 2.2 4.8 1.8 Revenue growth 9.4 8.3 19.9 14.7 12.5 10.6 5.9 5.8 13.1 8.5 8.6 OP growth -17.3 -21.9 10.7 -4.2 9.2 11.2 -3.3 11.7 -7.9 5.8 11.8 Pretax profit growth -38.6 -47.0 120.4 -8.1 -10.4 - -57.3 335.0 10.6 145.8 -59.6 Net profit growth -33.1 -50.0 130.9 TTB -23.8 - -60.1 418.2 34.2 133.9 -59.8 Source: Company data, Mirae Asset Daewoo Research estimates Table 3.