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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.
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