Lotte Shopping (023530 KS ) Offline Leader Eyes Online Space

Lotte Shopping (023530 KS ) Offline leader eyes online space

Retail Initiate coverage with Buy and TP of W265,000 Company Report We initiate our coverage on Lotte Shopping with a Buy call and target price of June 11, 2018 W265,000, reflecting: 1) likely earnings improvement, with an exit from the Chinese hypermarket market in 2018; and 2) positive changes in the online business. M ajor investment points for 2018 include: 1) the company’s forays into the online space; and 2) the recovery of the offline business. (Initiate) Buy Lo tte Shopping boasts strong market share in the retail segment, robust capital power, and superior logistics infrastructure. Going forward, the company is expected to Target Price (12M, W) 265,000 display outstanding performances in content shopping, based on successful online investments and synergies between businesses. Share Price (06/08/18, W) 216,000 Efforts to beef up the online business Expected Return 23% Lotte Group’s retail companies including Lotte Shopping’s plan to invest W3tn over the next five years to consolidate online retail platforms and systems. Through the investment, the company is expected to establish a competitive platform that could OP (18F, Wbn) 720 encourage additional purchases and improve competitiveness in online shipping. In its Consensus OP (18F, Wbn) 721 effort to strengthen e-commerce competitiveness, Lotte Group will likely consolidate customer and offline logistics data as the first step. In light of Lotte Shopping’s EPS Growth (18F, %) - advanced infrastructure and strong capital power, the company should be able to Market EPS Growth (18F, %) 13.4 create an online platform differentiated from those of other retail and online players. P/E (18F, x) 27.6 Market P/E (18F, x) 9.4 That said, Lotte Shopping will inevitably see an increase in investment and SG&A costs KOSPI 2,451.58 in the near term, while engaged in the process of beefing up the online business.

Market Cap (Wbn) 6,074 Preparing to resume growth in offline Shares Outstanding (mn) 28 We believe Lotte Shopping’s offline business is poised for renewed growth in 2018. Free Float (%) 39.4 After having struggled with the sluggish hypermarket business in China and economic Foreign Ownership (%) 20.6 slowdown in Korea over the past two years, the offline channel business is likely to see Beta (12M) 0.91 earnings improvement in 2018. We expect hypermarket earnings to improve rapidly, 52-Week Low 191,500 thanks to the disposal of Chinese hypermarkets , and department store revenue to 52-Week High 303,420 recover YoY, aided by well-performing designer brands and lifestyle categories.

(%) 1M 6M 12M Potential to become retail trend setter Absolute -7.9 5.6 -25.9 Lotte Shopping should be able to lead the domestic retail market trend, if the company Relative -8.0 6.2 -28.6 can successfully carry out investments in online and generate synergies between

120 Lotte Shopping KOSPI businesses. Having a content producer under its umbrella , the company is particularly 110 well-positioned to stand out in content shopping. Lotte Shopping is expected to 100 become the leader in both the on- and offline space, given the company’s investment 90 plans and its potential to become a trend setter in the retail industry. 80 70 60 5.17 9.17 1.18 5.18

Mirae Asset Daewoo Co., Ltd.

[] FY () 12/14 12/15 12/16 12/17 12/18F 12/19F Revenue (Wbn) 28,100 29,128 24,114 18,180 18,166 18,522 Myoungjoo Kim +822 -3774 -1458 OP (Wbn) 1,188 854 763 530 720 837 [email protected] OP margin (%) 4.2 2.9 3.2 2.9 4.0 4.5

NP (Wbn) 527 -383 168 -136 220 493 EPS (W) 16,724 -12,164 5,341 -4,437 7,817 17,513 ROE (%) 3.2 -2.3 1.0 -0.9 1.7 3.8

P/E (x) 15.4 - 39.2 - 27.6 12.3 P/B (x) 0.5 0.4 0.4 0.4 0.5 0.5 Dividend yield (%) 0.8 0.9 1.0 2.6 2.4 2.4 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

June 11, 2018 Lotte Shopping

I. Investment recommendation

Initiate Buy and TP of W265,000 We initiate our coverage on Lotte Shopping with a Buy call and target price of W265,000, reflecting: 1) likely earnings improvement, with an exit from the Chinese hypermarket market in 2018; and 2) positive changes in the online business. In light of the different nature of each business, we derived our target price base on the sum-of-the-parts methodology.

- Department store: We applied a P/E of 7.6x, a 15% premium to 2018F multiple (6.7x based on our estimate) of Hyundai Department Store, reflecting a market share difference (40% for Lotte Department Store, versus an estimated 26% for Hyundai Department Store in 2017).

- Hypermarket/supermarket: In light of Emart’s presence in both hypermarket and supermarket space, we applied a 20% discount to Emart’s 2018F multiple of 9.6x (based on our estimate), reflecting a market share difference (46% for Emart, versus 24% for Lotte in 2017).

- Cinema: We applied a P/E of 7.8x, a 20% discount to CJ CGV’s 2018F multiple of 9.7x (based on market forecast), in light of a market share difference (47% for CJ CGV, versus 30% for Lotte Cinema in 2017).

Table 1. Lotte Shopping’s target price calculation (Wbn, x, %) Value Note

1) Operating value 6,584 Lotte Department Store’s 2018F EBITDA 647 x 7.6 4,948

Lotte Mart’s 2018F EBITDA (Domestic) 158 x 7.7 1,216

Lotte Supermarket’s 2018F EBITDA 22 x 7.7 169

Lotte Cultureworks’ 2018F EBTIDA 32 x 7.8 252 2) Investment value 3,873 Lotte Himart (Equity stake: 65%) 1,386 Applied equity stakes to market cap based on our TP of W90,000 Lotte Home Shopping (Equity stake: 53%) 143 x 3.3 254 2018F average multiple of three listed home-shopping companies Other related companies & investment assets 2,243 30% discount to BV, excluding the value of the hypermarket business in China 3) Net debt 2,917 On a parent basis, as of 1Q18 Fair market cap. 7,511 No. of shares (‘000) 28,104 Target price 265,000 Current share price 216,000 Share price as of June 8, 2018 Upside (%) 23 Note: In calculating EBITDA of each business unit, depreciation expenses of respective businesses are estimated based on gross revenue Source: Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 2 June 11, 2018 Lotte Shopping

II. 2018 Earnings Forecast

2018 earnings estimates

For 2018, we expect Lotte Shopping to post revenue of W18.17tr (-0.1% YoY) and operating profit of W720bn (+35.8% YoY), given: 1) earnings improvement resulting from the disposal of the hypermarket business in China; and 2) profit growth in the domestic department store business, supported by brisk revenue contribution from designer brands and lifestyle categories.

Risk factors include: 1) an increase in investments and related expenses to increase the competitiveness of the online business; 2) a temporary slowdown in hypermarket revenue, due to shorter opening hours; and 3) renewal expenses related to a new store concept in the supermarket business and revenue slowdown resulting from fewer business days.

In our view, it is worth noting that Lotte Cultureworks (an operator of Lotte Cinema established on June 1 through split-off) is scheduled to launch OTT (Over the Top: video content service through internet) in June. Lotte Home Shopping is also set to open a mobile content broadcast network in 2H18.

1) Department store: 2018F gross revenue of W8.53tr (+1.4% YoY) and OP of W446.9bn (+12.8% YoY)

Revenue is likely to recover YoY, with revenue growth in the luxury brands and lifestyle categories offsetting lackluster traditional categories (e.g., accessories). However, investments and SG&A expenses are expected to increase in 2H18, as Lotte Department Store is taking the lead in system integration and web renewal to enhance online competitiveness.

For 2Q18, we project gross revenue at W2.03tr (+1% YoY) and operating profit at W52.1bn (+30.4% YoY). Gross revenue growth likely slowed down YoY in in April, due to fewer weekend days (10 days in 2017, versus nine days in 2018), but is expected to have been flat YoY in May. Despite sluggish sales of fashion accessories, luxury goods and lifestyle product sales remain on the rise.

Figure 1. Lotte Department Store’s gross revenue trend Figure 2. Lotte Department Store’s OP trend

(Wbn) (Wbn) 8,900 700

8,800 600

8,700 500

8,600 400

8,500 300

8,400 200

8,300 100

8,200 - 2015 2016 2017 2018F 2019F 2015 2016 2017 2018F 2019F

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

Mirae Asset Daewoo Research 3 June 11, 2018 Lotte Shopping

2) Hypermarket: 2018F gross revenue of W7.35tr (-5.4% YoY) and operating loss of W38.9bn (remaining in the red)

The disposal of remaining hypermarkets in China is expected to be completed this year. Revenue is forecast to stagnate in 2018, in light of: 1) higher labor expenses from minimum wage increases; and 2) a continuous decline in revenue from everyday items (e.g., clothes, household products), due to competition from online players. Moreover, revenue will inevitably decline, albeit to a limited extent, as 117 stores (excluding Seoul Station Store and five VIC Market stores currently operating until 22:00) will cut back opening hours by an hour (to 23:00 from 24:00) from June 2018. According to media reports, revenue generated after 23:00 accounts for 1.5% of total revenue.

For 2Q18, we forecast gross revenue of W1.82tr (-4.8% YoY) and operating loss of W28.9bn (remaining in the red). We expected to see a decline in both revenue and operating profit, due to weak results of anniversary promotions in April, a minimum wage hike, and low yields of some agricultural products.

3) Supermarket: 2018F gross revenue of W2.18tr (-3.7% YoY) and operating loss of W29.1bn (remaining in the red)

We are bearish on the outlook for 2018, given 1) renewal expenses related to the expansion of premium supermarkets and neighborhood-targeted stores, and downside to revenue, due to fewer operating days; and 2) higher labor expenses (about W20bn annually) from a minimum wage increase.

We estimate 2Q18 gross revenue at W557.8bn (-4% YoY) and operating loss at W5.1bn (turning to red YoY). Store renewals for the expansion of premium supermarkets and customer-targeted stores (currently underway in 15 sites), as well as fewer operating days, will likely depress 2Q results.

Figure 3. Lotte Mart’s gross revenue trend Figure 4. Lotte Mart’s OP trend

(Wbn) (Wbn) 9,000 100

50 8,500 0

8,000 -50

-100 7,500

-150 7,000 -200

6,500 -250 2015 2016 2017 2018F 2019F 2015 2016 2017 2018F 2019F

Source: Company data, Mirae Asset Daewoo Research Source: Company data, Mirae Asset Daewoo Research Figure 5. Lotte Super’s gross revenue trend Figure 6. Lotte Super’s OP trend

(Wbn) (Wbn) 2,350 15 10 2,300 5 0 2,250 -5 -10 2,200 -15 -20 2,150 -25 -30 2,100 -35 2015 2016 2017 2018F 2019F 2015 2016 2017 2018F 2019F

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

Mirae Asset Daewoo Research 4 June 11, 2018 Lotte Shopping

Table 2. Lotte Shopping’s earnings estimates (Wbn, % ) 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18F 3Q18F 4Q18F 2016 2017 2018F 2019F Gross revenue 7,461 7,504 7,872 7,958 7,462 7,401 7,578 6,660 5,902 6,052 6,167 6,360 30,795 29,101 24,482 24,962 Dep. Store 2,166 2,126 1,973 2,557 2,075 2,008 1,902 2,428 2,108 2,028 1,931 2,464 8,822 8,413 8,531 8,659 Lotte Mart 2,191 2,070 2,184 2,063 2,075 1,906 1,945 1,841 1,781 1,815 1,932 1,822 8,508 7,767 7,350 7,492 Lotte Himart 888 951 1,121 980 896 1,064 1,182 957 953 1,093 1,207 1,005 3,939 4,098 4,257 4,432 Lotte Super 577 577 603 574 566 581 591 525 539 558 573 509 2,331 2,263 2,179 2,190 Others 1,639 1,780 1,991 1,784 1,850 1,842 1,958 909 522 558 525 559 7,194 6,560 2,164 2,189 Net revenue 7,179 7,230 7,575 2,130 7,059 6,923 2,853 1,345 4,347 4,540 4,719 4,561 24,114 18,180 18,166 18,522 OP 208 171 176 209 207 87 -37 272 165 118 164 274 763 530 720 837 Dep. Store 145 90 62 318 114 40 57 185 143 52 63 189 614 396 447 450 Lotte Mart 2 -63 -26 -9 -20 -77 -85 -47 -44 -29 7 27 -97 -229 -39 55 Lotte Himart 28 41 66 39 36 61 81 29 41 63 80 37 175 207 221 234 Lotte Super 1 -1 -2 3 2 1 -3 -6 -10 -5 -5 -9 1 -6 -29 -25 Others 32 104 76 -142 75 62 -86 111 34 37 19 30 70 161 120 124 Pretax profit 130 149 138 -98 190 56 -649 233 59 71 121 257 320 -170 508 864 Net profit 58 65 48 -2 90 -33 -559 366 -36 41 69 146 168 -136 220 493 YoY (%) Gross revenue 4 1 2 2 0 -1 -4 -16 -21 -18 -19 -4 2 -5 -16 2 Revenue 4 0 1 -72 -2 -4 -62 -37 -38 -34 65 239 -17 -25 -0.1 2 OP -22 -15 -10 10 0 -49 -121 30 -21 35 TTB 1 -11 -31 36 16 Net profit -45 0 2601 -100 54 TTR TTR TTB TTR TTB TTB -60 TTB TTR TTB 124 Note: We assumed that the remaining hypermarkets in China will be entirely disposed of this year Source: Consolidated basis, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 5 June 11, 2018 Lotte Shopping

III. Investment points

1. Online: Off-line leader’s advance to the online market

We look for changes in Lotte Shopping’s online business. Lotte Group’s retail companies including Lotte Shopping plan to invest W3tn over the next five years to integrate eight online retail platforms operated by different subsidiaries and enhance the competitiveness of the online business. We believe enhancing online competitiveness is essential, given the continuous expansion of the online market and slowing growth in offline channels (e.g., department stores, hypermarkets), which are Lotte Shopping’s key markets.

The integration of platforms and systems is likely to cause an increase in investments and expenses. Moreover, it cannot be ruled out that related marketing spend would drive up SG&A expenses in the platform integration process. We believe enhancing the online business is not without cost.

Figure 7. Domestic online market outlook & online penetration in retail market

(Wtr) (%) 120 Market size (L) 35 Online penetration rate (R) 100 Growth (R) 30

25 80 20 60 15 40 10

20 5

- 0 12 13 14 15 16 17 18F 19F

Note: Our estimates are based on statistics before the KOSIS system overhaul to enable a trend analysis; After the overhaul, data is available only from 2015 and onwards Source: KOSIS, Mirae Asset Daewoo Research

Figure 8. Growth rates by channel in retail market

(YoY, %) \ 35 Department stores Hypermarkets 30 Supermarkets 25 Convenience stores

-5 11 12 13 14 15 16 17 18F 19F

Note: Our estimates are based on statistics before the KOSIS system overhaul to enable a trend analysis; after the overhaul, data is available only from 2015 and onwards Source: KOSIS, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 6 June 11, 2018 Lotte Shopping

1) Enhancing online competitiveness through platform integration

Lotte Group announced a five-year plan to invest W3tr in integrating platforms and enhancing competitiveness in the online business, which signals a huge change in the online business of the group’s retail operation. We believe Lotte Shopping is at the center and beginning of the change.

Lotte Shopping announced the acquisitions of an integrated online back-office system (W10.1bn) in April and Lotte.com (W42bn) in May 2018 to make its online business more efficient.

Lotte.com, which launched the first online shopping mall in Korea, is hosting elLOTTE (Lotte Department Store’s online platform), Lotte Supermarket Mall, and Lotte Duty Free platform. In addition, prior to the acquisition by Lotte Shopping, Lotte.com had a consignment contract with Lotte Shopping and Lotte Department Store and collected a commission fee of 50% of Lotte Shopping’s profit on merchandise sale. Lotte Shopping’s acquisition of Lotte.com signals that Lotte Group’s online retail operations are heading for change with Lotte Shopping playing a central role.

From a medium and long-term perspective, investment is needed to enhance the online business. However, it adds to cost burden in the near term. Currently, Lotte Department Store, under Lotte Shopping, is taking the lead in the integration of online back-office operation and the renewal of an online platform. The renewal of elLOTTE, Lotte Department Store’s online platform, and the integration of back-office operation are scheduled for completion in June and October, 2018, respectively. Given 1) investments in back-office operation and infrastructure and 2) an increase in marketing spend and promotion expenses before and after the online platform renewal, we believe the short-term burden on Lotte Shopping is unavoidable.

Figure 9. Lotte Group ’’’s online mall integration Figure 10. Lotte Group ’’’s revenue target in online mall

(Wtr) 25

20 20 16.3

15 13.2

10.6 10 8.6

0 2018F 2019F 2020F 2021F 2022F

Source: Media reports, Mirae Asset Daewoo Research Source: Media reports, Mirae Asset Daewoo Research Figure 11. Lotte.com ’’’s revenue trend Figure 12. Lotte.com ’’’s operating profit trend

(Wbn) (Wbn) 2,500 40

20 2,000 0

1,500 -20 -40

1,000 -60

-80 500 -100

0 -120 2010 2011 2012 2013 2014 2015 2016 2017 2010 2011 2012 2013 2014 2015 2016 2017

Source: DataGuide, Mirae Asset Daewoo Research Source: DataGuide, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 7 June 11, 2018 Lotte Shopping

2) Keys to successful changes in Lotte Group’s online retail business

Considering the growth potential of the e-commerce market and a slowdown in off-line channels, we believe enhancing the competitiveness of the online business is essential. However, it is difficult for market players in the domestic e-commerce market to differentiate themselves, due to: 1) fierce competition from portal sites (price searches); and 2) a relatively small market (compared with the US and China).

A successful change in Lotte Group’s online retail operation with Lotte Shopping at the center requires: 1) securing a competitive platform; and 2) enhancing competitiveness in the delivery service for online orders.

Figure 13. Domestic e-commerce market’s characteristics; Lotte Group’s retail operation should differentiate itself to succeed in the online market

Source: Mirae Asset Daewoo Research

Table 3. Lotte’s key to success in the retail market Key factor 1) Competitive platform 2) Competitiveness in online delivery

Correlated purchases (or additional purchases) Purpose Differentiation from exiting online players by visitors One -stop delivery service encompassing various distribution Method Extensive product categories channels Purchase-inducing UI Competitive online fresh food delivery service Customer-attracting content offering

Source: Mirae Asset Daewoo Research

Competitive platform which generates correlated purchases (or additional purchases)

Lotte Group’s online retail operation should establish a competitive platform, which could generate correlated purchases (additional purchases), to: 1) reduce reliance on portal sites; and 2) increase transaction values. We believe a competitive platform requires: 1) offering products from various categories; 2) building customer data-based UI to induce purchases; and 3) providing content that attracts customers and encourage purchases.

First of all, the launch of an integrated platform enables Lotte Shopping to offer products from various categories. Going forward, we believe a successful establishment of a competitive platform hinges on: 1) how much correlated purchases (or additional purchases) the company can generate by creating a UI-based on customer information accumulated by Lotte Group ’s retail operations; and 2) how effective the company ’s content offerings are to attract customers, leveraging its ties with Lotte Cultureworks and Lotte Home Shopping.

Mirae Asset Daewoo Research 8 June 11, 2018 Lotte Shopping

More competitive delivery service in online segment

We believe Lotte Group’s retail operation will be able to distinguish itself from existing e- commerce players, when it offers a more competitive service by delivering products from various categories across channels at one go.

Given the absence of plans to establish logistics centers dedicated to the online business, Lotte Group’s retail operation is expected to use existing offline stores and logistics centers to offer more competitive delivery service in the online segment. Offering one-stop delivery of different products from various channels requires integrated inventory management between distribution channels. Accordingly, we look for integrated inventory management (integrated logistics data system) with a focus on direct-purchase retail channels (hypermarket, supermarket). We believe logistics data integration based on 11,000 offline stores is the first step for Lotte Group’s retail operations to enhance e-commerce.

We estimate that Lotte Shopping has a market share of 10% in the online segment, ahead of Shinsegae Group (3%). However, we believe Shinsegae Group is leading Lotte Group, in terms of market share growth in the online segment and related performances.

We believe future leadership in the online market hinges on which company will be the first to build a competitive integrated platform, and establish efficient, competitive online logistics.

Figure 14. Domestic e-commerce market share breakdown

(%) 20 18 16 14 12 10 8 6 4 2 - eBay Korea Lotte shopping SK planet Coupang Wemakeprice Ticketmonster Shinsegae group

Note: Our estimates are based on media reports on transaction values Source: Mirae Asset Daewoo Research

Table 4. Lotte vs. Shinsegae Group’s online strategies Lotte Group Shinsegae Group

Overview Build an integrated retail platform within Lotte Group Establish a new online subsidiary to operate the group’s online business (SSG.com) Investment W3tr (Lotte Shopping W1.5tr + Lotte Group W1.5tr) More than W1tr (PEF investments) Customer marketing: W1.5tr Hanam Logistics Center (estimated capacity of 40,000~50,000), Allocation Online platform integration: W1tr with an estimated investment of W400~500bn System development: W0.5tr A new online subsidiary’s IPO Integrated inventory system with a focus on direct purchase Future scenario Possible acquisition of an e-commerce market platform to secure a market share distribution channels in the online market Source: Media reports, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 9 June 11, 2018 Lotte Shopping

3) Online traffic: Lotte’s online retail platform vs. SSG.com

Lotte iMall (Lotte Home Shopping) has the largest number of unique visitors among Lotte Group’s online retail platforms. However, Lotte iMall’s online traffic has been declining lately. On the other hand, Lotte Himart, which displays rapid online revenue growth through an omni-channel strategy, sees a marked net increase in traffic to its online platform, compared with Lotte’s other online retail platforms.

Frequency at most of Lotte’s retail channels has remained unchanged or increased slightly, supported by the expansion of the online market. Lotte Himart has seen a sharp increase in both unique visitors and frequency. LOHB’s, where revenue is expanding rapidly, driven by aggressive store rollouts, has also displayed an increase in frequency.

Figure 15. Unique visitors to online platforms: SSG.com vs. Lotte

('000 persons) lotteimall lotte lottemart ellotte lottedfs 12,000 lottesuper.co.kr lohbs.co.kr e-himart.co.kr ssg

10,000

8,000

6,000

4,000

2,000

0 15.07 15.11 16.03 16.07 16.11 17.03 17.07 17.11 18.03

Note: Based on the combined figures of web and app Source: Koreanclick, Mirae Asset Daewoo Research

Figure 16. Online platform frequency trends: SSG.com vs. Lotte

(number) e-himart.co.kr lohbs.co.kr lottesuper.co.kr lotte lottemart 8.00 lotteimall ssg ellotte lottedfs

7.00

6.00

5.00

4.00

3.00

2.00

1.00

- 15.07 15.11 16.03 16.07 16.11 17.03 17.07 17.11 18.03

Note 1: Based on the combined figures of web and app Note 2: Frequency refers to the number of visits by unique visitors during the survey period (month) Source: Koreanclick, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 10 June 11, 2018 Lotte Shopping

2. Offline: Preparation for a new start

We believe Lotte Shopping’s offline business is poised for renewed growth in 2018. After having struggled with an industry slump in China and economic slowdown in Korea over the past two years, the offline channel business is likely to see earnings improvement in 2018. We expect hypermarket earnings to improve rapidly, and department store revenue to recover YoY, aided by well-performing designer brands and lifestyle categories. While YoY improvements in earnings are projected in the hypermarket and department store segments, the supermarket segment is likely to be dragged down in the near term by an inevitable increase in spending on the conversion of stores to premium supermarkets and service expansion to increase online competitiveness.

We believe that 2018 will mark the beginning of a renewed growth for Lotte Shopping. We expect Lotte Shopping to develop its unique competitiveness, gearing up for renewed growth based on rapid improvement in offline earnings.

Figure 17. Operating profit from offline businesses: 2017 vs. 2018

(Wbn) 500

400

300

200 Supermarkets 100 Hypermarkets Department stores 0

-100

-200

-300 2017 2018F

Note 1: Based on the combined operating profits from the off-line business by hypermarkets, department stores, and supermarkets Note 2: 2018 figure is based on our estimate Source: Lotte Shopping, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 11 June 11, 2018 Lotte Shopping

1) Lotte Department Store: Revenue recovery driven by designer brands and lifestyle categories

Revenue from designer brands and lifestyle categories, Lotte Department Store’s key revenue drivers, should continue to expand rapidly in 2018. Moreover, revenue from Chinese tourists, which plunged in the wake of the THAAD event, is showing signs of recovery and expected to make a small contribution to revenue growth in 2018. (Chinese tourists’ revenue contribution: 3.5% in 2016, versus an estimated 2% at present)

Accordingly, YoY recovery in Lotte Department Store’s revenue is projected for 2018. In addition, efforts to lower SG&A expenses (advertising and promotional costs, in particular) should boost operating leverage. It targets a 10-15% YoY cut in SG&A expenses in 2018.

However, Lotte Department Store faces an increase in investments and SG&A expenses, as the firm is taking the lead in system integration and web page renewals to enhance competitiveness in the online business.

Figure 19. Revenue mix of Chinese tourists at Lotte Figure 18. Chinese tourists to Korea Department Store’s main store

('000 persons) (YoY) (%) 1,000 Chinese inbound tourists (L) 300 25 900 YoY growth (R) 250 800 20 200 700 150 600 15 500 100

400 50 10 300 0 200 5 100 -50 0 -100 0 16.01 16.05 16.09 17.01 17.05 17.09 18.01 2016 1Q 17 2Q 17 3Q 17 4Q 17 1Q 18

Source: TOURGO, Mirae Asset Daewoo Research Source: Lotte Shopping, Mirae Asset Daewoo Research

Figure 20. Revenue mix by department store category; Figure 21. Lotte Department Store’s revenue growth trend by marked increase in revenue contribution from foreign category; marked increase in revenue contribution from designer brands and lifestyle categories over past two to foreign designer brands and lifestyle categories over past three years two to three years

(%, YoY chg) (%) Food Miscellaneous Ladies' suits Women's casual 4 Miscellaneous Ladies' suits 15 Menswear Kids, sports Women's wear Menswear Living Luxury 3 Kids, sports Living 2 Luxury Food 10

1 5 0

-1 0 -2

-3 -5 -4

-5 -10 2014 2015 2016 2017 2018 2015 2016 2017 2018

Note: Lifestyle revenue mix in 2018 is simple average of lifestyle revenue for one to Note: Based on a simple average of monthly revenue growth three months Source: Ministry of Trade, Industry and Energy, Mirae Asset Daewoo Research Source: Ministry of Trade, Industry and Energy, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 12 June 11, 2018 Lotte Shopping

Revenue from department stores over the past two to three years has been characterized by a rapid increase in lifestyle revenue. Lifestyle revenue continues to expand at a brisk pace, aided by an increase in the number of move-in-ready apartments and movement rates. Given that 1) move-in ready apartments are estimated to reach 448,000 units (+16% YoY) in 2018, and 2) environmental electronics revenue continues to expand, due to fine- dust pollution problems, lifestyle revenue is likely to continue expanding through 2018.

Revenue from designer brands is also rapidly increasing. Those in their 30s, especially males, spend more on designer brands, due to: 1) a rise in single-person households and increase in the average age at first marriage; and 2) a decline in the number of children per couple. Designer brands’ revenue is likely to continue to grow, with those in their 30s emerging as key customers.

Figure 22. Move-in ready apartments and revenue mix of lifestyle (of department store revenue)

('000 units) (%) 500 Apartment moved in amounts (L) 14 450 % living category sales in total sales (R) 12 400 350 10 300 8 250 6 200

150 4 100 2 50 0 0 2013 2014 2015 2016 2017 2018F

Note: Lifestyle revenue mix in 2018 is the simple average of lifestyle revenue for one to three months Source: Real Estate 114, Ministry of Trade, Industry and Energy, Mirae Asset Daewoo Research

Figure 23. Shinsegae Department Store: Designer brand Figure 24. Shinsegae Department Store: Designer brand purchases by 30-39 age group vs. other age groups purchase by 30-39 age group and gender

(%) Except 30s 30s (%) 100 20 30s men 30s women 90 80 18 70 60 16 50 40 14 30 20 12 31 33 36 10 - 10 2015 2016 2017 2015 2016 2017

Source: Media reports, Mirae Asset Daewoo Research Source: Media reports, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 13 June 11, 2018 Lotte Shopping

2) Hypermarket: Withdrawal from China

We expect Lotte Shopping to complete its withdrawal from the Chinese hypermarket market in 2018, starting with the disposal of its subsidiaries in Huabei and Huadong. Lotte Shopping’s exit from China is likely to drive strong earnings improvement in the hypermarket segment.

We expect hypermarket earnings to display sharp YoY improvement with the withdrawal from the Chinese market. However, the domestic hypermarket business is unlikely to display rapid earnings improvement, due to: 1) increased cost burden from minimum wage increases (an expected increase in expenses of W35bn); and 2) lack of competitiveness by Lotte Mart in overcoming revenue erosion caused by increasing online penetration rates.

Going forward, Lotte Mart is likely to improve its fundamentals, as long as: 1) the Fresh Food Innovation Center’s utilization rate increases, thus driving product margin improvement (currently running at 30%, start up in March); and 2) the new business, Market D, yields margins as high as those of its competitors.

Figure 25. Chinese hypermarket business: revenue and Figure 26. Stores in China (1Q18) operating profit by year

(Wbn) 1,600 Sales Operating profit 1,400 1,200 1,000 800 600 400 200 0 -200 -400 2014 2015 2016 2017

Source: Lotte Shopping, Mirae Asset Daewoo Research Source: Lotte Shopping, Mirae Asset Daewoo Research

Figure 27. Fresh Food Innovation Center in Jeungpyeong Figure 28. Market D’s first store in Suwon

Source: Lotte Shopping Live, Mirae Asset Daewoo Research Source: Google images, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 14 June 11, 2018 Lotte Shopping

3) Supermarket: Still-uphill battle

Lotte Super posted an operating loss of W10bn in 1Q18 (versus W2bn in 1Q17), with same- store sales (SSS) growth slowing for a second consecutive quarter, due to store renewals and fewer operating days. In contrast, competitors (e.g., Emart Everyday, GS Supermarket) posted operating profit in 1Q18, supported by growing grocery shopping demand resulting from a rise in move-in-ready apartments and enhanced competitiveness.

We expect Lotte Super to struggle for the time being. The opening of premium supermarkets and close-to-home stores is needed to secure new growth momentum, but store renewal is likely to lead to an increase in SG&A expenses and a decline in the number of operating days. Lotte Super is also not immune to the impact of minimum wage hikes, with the wage increase forecast to drive up its annual labor cost by W20-30bn. Currently, Lotte Super’s online revenue contribution stands at the mid-5% level, which is too small to create economies-of-scale effects. Given this, the establishment of distribution centers dedicated to online sales and expansion of early morning delivery is expected to put upside pressure on costs in the near term.

A slowdown in the super supermarket (SSM) business requires Lotte Super to make new investments and efforts to identify a long-term growth driver. At the same time, the firm also needs fundamental improvement to drive SSS growth.

Figure 29 . Operating profit comparison: Lotte Super, GS Supermarket, and Emart Everyday

(Wbn) 40

-20

-40

-60 Lotte Super -80 Emart Everyday -100 GS Super

-120 1Q17 2Q17 3Q17 4Q17 1Q18

Source: Respective companies, Mirae Asset Daewoo Research

Figure 30. Lotte Super’s premium supermarket (Munjeong); Figure 31. Lotte Freesia (Banpo): Two stores as of 1Q18, and five stores in 1Q18 and eight store openings scheduled for four store openings scheduled for 2018 2018

Source: Google images, Mirae Asset Daewoo Research Source: Google images, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 15 June 11, 2018 Lotte Shopping

IV. Well positioned to drive a retail trend

Potential to become retail trend setter

Lotte Shopping is Korea’s largest retailer, which owns department stores, hypermarkets, supermarkets, and a content production company. The company has a significant clout in the domestic retail market, given that its market share stood at around 8.1% in 2017 (versus 7.5% for the Shinsegae Group).

Given its high market share and robust retail infrastructure, Lotte Shopping should be able to lead the domestic retail market trend, if the company can successfully carry out investments in online and generate synergies between businesses. Having a content producer under its umbrella, the company is particularly well-positioned to stand out in content shopping. Lotte Shopping is expected to become the leader in both the on- and offline space, given the company’s investment plans and its potential to become a trend setter in the retail industry.

Figure 32. Combined market share of top two domestic Figure 33. Lotte Shopping’s retail market share retailers

(%) (%) 20 12 18 10 16 14 8 12 10 6 8 4 6 4 2 2 - 0 2011 2012 2013 2014 2015 2016 2017 2011 2012 2013 2014 2015 2016 2017

Note: Top two domestic retailers are Lotte Shopping and Shinsegae Group (Emart and Note: Some of Lotte Shopping’s affiliates were placed under Lotte Holdings in 2017, Shinsegae); based on gross revenue for Lotte Shopping and Shinsegae and revenue for reducing its influence in the retail market Emart; the retail market excludes the auto and fuel segments Source: KOSIS, Mirae Asset Daewoo Research Source: KOSIS, Dart, company IR materials, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 16 June 11, 2018 Lotte Shopping

Full-blown era of content shopping

We expect the expansion of content shopping to gain momentum in offline retail channels, as well as online channels. Content shopping refers to inducing consumer traffic and purchases via a variety of content, including video and events.

We expect to see an era of full-blown content shopping, as retailers should increase their platform competitiveness and the conversion of walk-in customers into buyers by providing differentiated content.

Lotte Shopping has the infrastructure that can allow the company to lead the content shopping era, including: 1) an online platform (Lotte Home Shopping, Lotte.com, etc.); 2) an offline platform (department stores); and 3) content production companies (Lotte Cultureworks, Lotte Home Shopping). Among domestic retailers, we believe that Lotte Shopping and CJ ENM (to be launched on July 1 st , after the merger of CJ E&M and CJ O Shopping) will lead the content shopping era.

Currently, homing shopping is a major content shopping channel in the domestic retail market. Going forward, not only home shopping, but also online retail platform and offline stores are likely to see the expansion of content shopping.

In the retail industry, content, which was offered by major retailers mainly for sales purposes, is likely to be provided by not only large retailers, but also individuals for fun, as well as sales, in an interactive way.

Figure 34. Evolution of content shopping

Source: Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 17 June 11, 2018 Lotte Shopping

For online platform, retailers can increase the conversion of walk-in customers into buyers and platform competitiveness by providing differentiated content. A case in point is Alibaba’s Taobao Live, an online platform that allows companies to offer their products (often by hiring broadcast Jockeys, also known as BJs) via live-streaming. Taobao Live’s conversion of walk-in customers into buyers is estimated at around 32% (based on media reports in 2016), with the conversion rate for popular live content reaching 90%.

Lotte Shopping has in-house malls (Ellotte.com and Lotteimall.com), as well as an open market site (Lotte.com). The company is likely to enhance content for its in-house malls, for which product management are relatively easy, and home shopping, a traditional content shopping channel, thus leading the content shopping trend.

For offline channels, content offering can boost consumer traffic and the average ticket size. Previously, offline content shopping consisted mostly of one-off, participatory events (such as demonstrations, makeup shows at department stores, etc.). Going forward, content shopping is likely to be based on the steady offering of content that can be enjoyed by participants.

For example, LOHB's, Lotte’s health/beauty store chain, has created a beauty LAB studio within its Itaewon store in Seoul. LOHB's holds beauty classes in the beauty LAB studio, as well as offers free space for influencers (trend-leading individuals with massive SNS followers) to take pictures. As the beauty LAB studio is also offered as a rest area, we believe the studio itself attracts customer traffic, even without content offering, in light of its location. In addition, the advertising effects via influencers are also significant, in our view.

Figure 35. Alibaba’s Taobao Live: Interactive between sellers Figure 36. Beauty class at LOHB's beauty LAB studio and consumers

Source: Google image, Mirae Asset Daewoo Research Source: Google image, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 18 June 11, 2018 Lotte Shopping

V. Investment strategy and risks

Investment strategy

In 2018, we believe Lotte Shopping is poised for renewed growth, thanks to: 1) the disposal of Chinese hypermarkets; and 2) earnings improvements at department stores, which make up the lion’s share of the company’s offline business. In addition, we expect to see positive developments in the company’s online business, based on its advanced infrastructure and strong capital power. In particular, the company is expected to establish a competitive platform, as: 1) the company plans to consolidate its eight online platforms based on online/offline customer data integration; and 2) the company should bolster its delivery competitiveness via logistics data consolidation.

Figure 37. Lotte Shopping’s investment strategy

Source: Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 19 June 11, 2018 Lotte Shopping

Risks

We expect Lotte Shopping’s share performance to improve in 2018. Likely earnings growth, with an expected exit from the Chinese hypermarket market in 2018 and positive changes in the online business are anticipated to boost valuation. However, we also see some risks to share performance.

Offline: Potential continuation of offline earnings slump

If Lotte Shopping fails to sell its remaining hypermarkets in China (two out of six stores disposed so far) this year, the company should continue to see hypermarket losses in China. However, the company is highly likely to complete store disposals this year, given that: 1) it is now undergoing negotiations with potential buyers; and 2) China is steadily easing retaliatory measures taken after the THAAD dispute.

Lotte Department Store is expected to be the only offline channel to report earnings growth this year. However, its earnings could be negatively affected by: 1) unexpected economic slowdown; or 2) higher-than-expected expenses related to its efforts to strengthen online competiveness.

In addition, if Lotte Mart sees a greater-than-expected sales decline resulting from shorter operating hours (formerly, stores closed at midnight, now 11pm; the percentage of sales from 11p.m. to midnight was only 1.5%, according to media reports), it could suffer a sharper drop in revenue than the market forecast in the near term.

Online: potential delay or failure in platform consolidation

Potential delay or failure in Lotte Group’s consolidation of online retail platforms could depress Lotte Shopping’s valuation. Out of the group’s investment of W3tr, Lotte Shopping, as an operator of a consolidated online platform) is expected to bear the lion’s share of the burden (W1.5tr).

Currently, eight online retail platforms are operating under the umbrella of Lotte Group. In order to create a highly integrated and competitive platform that could encourage correlated (or additional) purchases, the group is required to consolidate customer and logistics data first.

Mirae Asset Daewoo Research 20 June 11, 2018 Lotte Shopping

Appendix: Global peer valuation

In 2018, the department store and hyper/supermarket businesses are expected to generate 35% and 40% of Lotte Shopping’s revenue, respectively. Major domestic peers for Lotte Department Store include Hyundai Department Store and Shinsegae, while Nordstrom, Macy’s, and Isetan are considered as major global peers. For hyper/supermarkets, domestic peers are Emart and Home plus (unlisted), while major global peers include Walmart, Kroger, and Costco.

- Department store: Excluding Shinsegae, which secured a new growth driver via the launch of the duty-free store business, domestic and overseas department stores have displayed sluggish share performances over the past three years. Their weak share performances are largely attributable to: 1) the strong growth of new retail channels (namely online); and 2) their lack of new growth engines. If traditional department stores fail to acquire new growth drivers, they should continue seeing depressed share performances going forward.

- Hypermarket: Emart and Costco have enjoyed solid share price growth over the past three years on the back of new businesses (online and Emart Traders) and its warehouse-club business model, respectively. However, Lotte Shopping and traditional hypermarket players, like Walmart and Kroger, have displayed sluggish share performances. Going forward, the hypermarket industry is expected to remain in a slump, amid the emergence of new retail channels (e.g., online, convenience stores, etc.). Thus, Lotte Shopping and traditional should make intense efforts to secure new growth drivers.

Figure 38. Relative share performance of Lotte Shopping and Figure 39. Relative share performance of Lotte Shopping and department store peers hypermarket peers

(15.1.1=100) (15.1.1=100) 300 Lotte Shopping Hyundai Department Store 180 Kroger Lotteshopping Emart Walmart Shinsegae Macy's 160 250 Nordstrom Isetan Kroger Costco Takashimaya 140 200 120

100 150 80

100 60

40 50 20

- - 15.01 15.07 16.01 16.07 17.01 17.07 18.01 15.01 15.07 16.01 16.07 17.01 17.07 18.01

Source: Bloomberg, Mirae Asset Daewoo Research Source: Bloomberg, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 21 June 11, 2018 Lotte Shopping

Table 5. Valuation of retail firms in Mirae Asset aewooD Universe and global peers Wbn, ( US$mn, JPYbn, x, %) Lotte Hyundai Emart Lotte Himart Shinsegae GS Retail BGF Retail Wal-Mart Kroger Costco Best Buy Nordstrom Macy's Isetan Seven&I Family Mart Lawson Shopping Dep ’t. Store Price (local currency ) 216,000 248,500 79,400 415,500 117,000 41,500 196,000 84 25 204 72 52 40 1,402 4,908 11,850 6,970 Market cap (local 6,074 6,927 1,874 4,091 2,738 3,196 3,388 248,933 20,389 89,357 20,203 8,783 12,218 554 4,351 1,502 699 currency ) Market cap (US$mn ) 5,647 6,440 1,743 3,803 2,545 2,971 3,149 248,933 20,389 89,357 20,203 8,783 12,218 5,064 39,732 13,713 6,384 Revenue 2016 24,114 14,615 3,939 2,947 1,832 7,402 - 485,873 115,337 118,719 39,403 14,757 26,566 1,253 4,646 844 254 2017 18,180 15,877 4,099 3,871 1,848 8,267 939 500,343 122,662 129,025 42,151 15,478 25,643 1,269 4,808 1,275 265 2018F 18,166 16,501 4,257 4,583 1,838 8,880 6,032 513,364 122,226 140,338 42,286 15,704 25,121 1,223 6,628 1,268 707 2019F 18,522 17,432 4,432 4,771 1,920 9,316 6,333 530,038 123,189 150,507 42,820 16,104 25,223 1,233 6,844 1,276 746 Operating 2016 763 569 175 251 383 218 - 22,764 3,436 3,672 1,854 805 1,372 24 365 32 74 profit 2017 530 567 207 346 394 166 27 20,437 2,085 4,111 1,843 926 1,817 24 392 27 66 2018F 720 630 221 444 392 185 231 21,613 2,828 4,493 1,896 923 1,758 28 417 63 61 2019F 837 707 234 498 401 201 266 21,701 2,980 4,821 1,955 955 1,596 31 448 72 63 Net profit 2016 168 376 121 227 276 274 - 13,643 1,975 2,350 1,228 354 628 15 97 22 36 2017 -136 616 148 182 254 118 28 9,862 1,907 2,679 1,000 437 1,555 -1 181 34 27 2018F 220 458 163 303 277 151 176 13,882 1,751 3,059 1,409 588 1,180 16 214 37 29 2019F 493 534 175 329 283 168 204 14,063 1,838 3,386 1,441 609 1,079 20 249 43 32 PER 2016 148.6 14.4 8.2 7.6 9.0 13.4 - 15.4 15.6 30.8 12.4 13.6 10.5 31.9 40.2 35.2 21.3 2017 - 14.1 11.0 16.2 9.3 26.3 21.7 24.1 17.7 27.2 16.1 16.9 9.1 - 21.8 30.4 26.1 2018F 27.6 15.1 11.5 13.5 9.9 21.1 19.3 17.7 12.2 29.4 14.5 15.1 10.4 39.4 20.3 40.9 24.0 2019F 12.3 13.0 10.7 12.4 9.7 19.0 16.6 17.4 11.3 26.5 13.5 14.6 11.5 31.1 17.6 35.0 21.7 PBR 2016 0.4 0.7 0.5 0.5 0.7 1.8 - 2.6 4.6 5.9 2.9 8.4 2.0 0.8 1.7 1.7 2.8 2017 0.4 0.9 0.8 0.9 0.6 1.5 9.3 4.0 3.7 6.4 5.6 8.2 1.3 0.8 1.6 1.9 2.5 2018F 0.5 0.8 0.9 1.1 0.6 1.5 6.0 3.2 3.1 7.0 6.5 6.7 1.9 0.9 1.7 2.7 2.5 2019F 0.5 0.8 0.8 1.0 0.6 1.4 4.5 3.1 2.6 6.2 6.4 6.0 2.0 0.9 1.6 2.5 2.4 EV 2016 10.6 7.5 6.2 11.2 6.5 10.3 - 7.4 7.7 14.7 4.4 6.2 5.9 12.1 6.6 15.5 7.2 /EBITDA 2017 7.1 9.5 7.3 10.3 6.0 9.7 77.3 11.4 9.0 12.8 7.3 6.0 4.3 10.3 6.1 14.7 7.3 2018F 6.5 9.6 7.4 11.4 6.7 9.3 10.3 9.1 6.6 15.0 7.4 6.2 6.0 11.4 6.7 13.9 6.5 2019F 5.8 9.6 6.5 10.5 6.2 8.8 9.4 9.1 6.3 13.8 7.3 5.9 6.1 10.9 6.5 13.0 6.3 ROE 2016 1.0 5.0 6.6 7.3 7.7 14.5 - 17.2 29.0 20.7 27.0 40.7 14.6 2.6 4.1 5.5 13.5 2017 (1.0) 7.6 7.6 5.5 6.6 5.9 7.2 12.7 27.7 23.4 24.0 47.3 30.7 -0.2 7.6 6.3 9.7 2018F 1.7 5.5 7.7 8.5 6.8 7.3 36.9 17.5 24.9 25.1 37.6 48.7 18.9 2.4 8.5 6.4 10.5 2019F 3.8 6.1 7.8 8.5 6.5 7.8 31.0 21.7 24.9 24.3 46.2 41.3 15.2 2.9 9.2 7.2 11.2 EPS 2016 - -22.0 13.9 -43.5 14.7 67.0 - -3.9 -0.5 -0.9 62.7 -36.3 -37.4 -43.2 -39.9 4.2 16.0 Growth 2017 - 50.6 22.2 -19.8 -7.1 -56.9 - -25.2 1.4 14.0 -12.1 27.8 148.0 - 87.2 36.3 -26.3 2018F - -25.7 9.5 66.5 9.3 27.9 - 7.6 1.7 19.3 13.0 22.6 1.5 - 20.5 10.7 9.1 2019F 124.0 16.7 7.6 8.5 2.0 11.2 16.1 2.0 8.2 10.9 7.4 3.1 -9.1 26.8 15.0 16.6 10.8 Note 1: Aside from Lotte Himart data, all figuresre a consolidated; data for companies under our coverage are our estimate; at end-2017, BGF Retail wasplit s into a holding company and an operating subsidiary (BGF Retail), with the subsidiary being listed Note 2: Current prices and market cap are based onprices on June 8 2018; for global companies, FY2018 has ended and 2018F data are based on FY2019 data Source : Bloomberg, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 22 June 11, 2018 Lotte Shopping

Lotte Shopping (023530 KS/Buy/TP: W265,000)

Comprehensive Income Statement (Summarized) Statement of Financial Condition (Summarized) (Wbn) 12/16 12/17 12/18F 12/19F (Wbn) 12/16 12/17 12/18F 12/19F Revenue 24,114 18,180 18,166 18,522 Current Assets 16,932 6,295 7,498 8,802 Cost of Sales 16,243 10,544 10,458 10,678 Cash and Cash Equivalents 2,269 2,626 3,733 4,952 Gross Profit 7,871 7,636 7,708 7,844 AR & Other Receivables 1,031 870 877 897 SG&A Expenses 7,108 7,106 6,988 7,007 Inventories 3,324 1,354 1,475 1,508 Operating Profit (Adj) 763 530 720 837 Other Current Assets 10,308 1,445 1,413 1,445 Operating Profit 763 530 720 837 Non-Current Assets 24,984 21,653 19,236 17,070 Non-Operating Profit -443 -700 -212 27 Investments in Associates 1,337 443 1,503 1,537 Net Financial Income -152 -158 -130 47 Property, Plant and Equipment 15,932 14,918 7,470 5,225 Net Gain from Inv in Associates 61 68 55 61 Intangible Assets 3,357 2,426 2,338 2,255 Pretax Profit 320 -170 508 864 Total Assets 41,916 27,948 26,734 25,872 Income Tax 195 273 176 207 Current Liabilities 13,386 8,545 7,349 6,942 Profit from Continuing Operations 125 -444 331 657 AP & Other Payables 5,785 3,494 3,436 3,512 Profit from Discontinued Operations 122 423 0 0 Short-Term Financial Liabilities 5,110 3,131 2,383 2,385 Net Profit 247 -21 331 657 Other Current Liabilities 2,491 1,920 1,530 1,045 Controlling Interests 168 -136 220 493 Non-Current Liabilities 11,266 6,053 5,947 4,982 Non-Controlling Interests 79 116 111 164 Long-Term Financial Liabilities 9,478 4,691 4,385 3,385 Total Comprehensive Profit 242 -84 338 657 Other Non-Current Liabilities 1,788 1,362 1,562 1,597 Controlling Interests 166 -183 214 493 Total Liabilities 24,652 14,597 13,297 11,924 Non-Controlling Interests 75 99 124 164 Controlling Interests 16,304 12,658 12,660 13,006 EBITDA 1,736 1,435 1,356 1,164 Capital Stock 157 141 141 141 FCF (Free Cash Flow) 300 685 318 502 Capital Surplus 3,911 3,506 3,506 3,506 EBITDA Margin (%) 7.2 7.9 7.5 6.3 Retained Earnings 11,996 11,730 11,744 12,090 Operating Profit Margin (%) 3.2 2.9 4.0 4.5 Non-Controlling Interests 960 693 778 942 Net Profit Margin (%) 0.7 -0.7 1.2 2.7 Stockholders' Equity 17,264 13,351 13,438 13,948

Cash Flows (Summarized) Forecasts/Valuations (Summarized) (Wbn) 12/16 12/17 12/18F 12/19F 12/16 12/17 12/18F 12/19F Cash Flows from Op Activities 1,507 1,569 428 502 P/E (x) 39.2 - 27.6 12.3 Net Profit 247 -21 331 657 P/CF (x) 3.6 4.1 4.4 5.3 Non-Cash Income and Expense 1,588 1,529 1,056 487 P/B (x) 0.4 0.4 0.5 0.5 Depreciation 836 779 533 244 EV/EBITDA (x) 5.9 7.1 6.5 5.8 Amortization 137 126 103 83 EPS (W) 5,341 -4,437 7,817 17,513 Others 615 624 420 160 CFPS (W) 58,282 49,050 49,318 40,662 Chg in Working Capital -619 -78 -858 -434 BPS (W) 517,811 450,265 450,327 462,643 Chg in AR & Other Receivables -117 -131 59 -15 DPS (W) 2,000 5,200 5,200 5,200 Chg in Inventories -47 295 -118 -33 Payout ratio (%) 23.9 -708.2 44.1 22.3 Chg in AP & Other Payables 39 358 -163 45 Dividend Yield (%) 1.0 2.6 2.4 2.4 Income Tax Paid -252 -251 -108 -207 Revenue Growth (%) -17.2 -24.6 -0.1 2.0 Cash Flows from Inv Activities -968 -1,263 3,054 2,115 EBITDA Growth (%) -5.7 -17.3 -5.5 -14.2 Chg in PP&E -1,150 -848 6,894 2,000 Operating Profit Growth (%) -10.7 -30.5 35.8 16.3 Chg in Intangible Assets -102 -69 -3 0 EPS Growth (%) - - - 124.0 Chg in Financial Assets -538 9,326 -3,948 -152 Accounts Receivable Turnover (x) 39.1 26.4 26.4 27.8 Others 822 -9,672 111 267 Inventory Turnover (x) 7.3 7.8 12.8 12.4 Cash Flows from Fin Activities -21 75 -1,405 -1,365 Accounts Payable Turnover (x) 4.3 3.5 5.0 5.2 Chg in Financial Liabilities 413 -6,765 -1,054 -998 ROA (%) 0.6 -0.1 1.2 2.5 Chg in Equity 0 -422 0 0 ROE (%) 1.0 -0.9 1.7 3.8 Dividends Paid -78 -81 -59 -146 ROIC (%) 1.7 8.5 5.0 8.7 Others -356 7,343 -292 -221 Liability to Equity Ratio (%) 142.8 109.3 98.9 85.5 Increase (Decrease) in Cash 518 357 1,106 1,220 Current Ratio (%) 126.5 73.7 102.0 126.8 Beginning Balance 1,751 2,269 2,626 3,733 Net Debt to Equity Ratio (%) 13.8 29.7 14.3 -2.3 Ending Balance 2,269 2,626 3,733 4,952 Interest Coverage Ratio (x) 3.4 2.2 2.9 3.8 Source: Company data, Mirae Asset Daewoo Research estimates

Mirae Asset Daewoo Research 23 June 11, 2018 Lotte Shopping

APPENDIX 1

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

Company (Code) Date Rating Target Price (W) Lotte Shopping Lotte Shopping (023530) 06/10/2018 Buy 265,000 400,000 08/31/2017 No Coverage 05/14/2017 Trading Buy 253,322 300,000 03/28/2017 After 1yr 03/28/2016 Trading Buy 267,501 200,000

100,000

0 Jun 16 Jun 17 Jun 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 74.13% 15.92% 9.95% 0.00% Investment Banking Services 75.00% 11.11% 13.89% 0.00% * Based on recommendations in the last 12-months (as of March 31, 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 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 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 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 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 24 June 11, 2018 Lotte Shopping

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.

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Mirae Asset Daewoo Co., Ltd. (Seoul) Mirae Asset Securities (HK) Ltd. Mirae Asset Securities (UK) Ltd. Global Equity Sales Team Suites 1109-1114, 11th Floor 41st Floor, Tower 42 Mirae Asset Center 1 Building Two International Finance Centre 25 Old Broad Street, 26 Eulji-ro 5-gil, Jung-gu, Seoul 04539 8 Finance Street, Central London EC2N 1HQ Korea Hong Kong United Kingdom China Tel: 82-2-3774-2124 Tel: 852-2845-6332 Tel: 44-20-7982-8000

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