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CJ Korea Express (000120 KS) Transportation June 11, 2012 Company Report CJ Korea Express (000120 KS) Transportation Daewoo Securities Co., Ltd. Ride the express to future growth Jay JH Ryu +822-768-4175 Initiate coverage with Buy rating and TP of W90,000 [email protected] We initiate our coverage on CJ Korea Express (Korex) with a Buy call and a target price of W90,000. We applied a residual income model (RIM) in deriving our target price, which corresponds to a P/B (intangible assets not adjusted) of 1.1x. Our target multiple appears reasonable, as we expect: 1) the firmÊs pricing power to recover on the back of its structural advantage in the parcel delivery sector; 2) margins to gradually improve; and 3) its traditional logistics businesses to continue steady growth. It should also be noted that we see strong upside potential to the companyÊs parcel Buy (Initiate) delivery rates in 2013, following the expected completion of parcel delivery Target Price (12M, W) 90,000 logistics terminals and the launch of same day delivery services. Although Share Price (06/07/12, W) 67,700 prospective M&As with foreign logistics firms represent attractive top-line growth Expected Return (%) 32.9 in the long term, we did not factor this into our conservative valuation. EPS Growth (12F, %) 23.8 Market EPS Growth (12F, %) 18.9 A marriage between two giants P/E (12F, x) 14.8 The joint operation of Korex and CJ GLS under the CJ Group umbrella is likely to Market P/E (12F, x) 9.3 speed up industry consolidation, eventually helping to boost the currently low KOSPI 1,847.95 parcel delivery rates. Even if the pricing power of large logistics firms struggles to Market Cap (Wbn) 1,544 quickly recover, we believe KorexÊs same day service targeted at the Seoul Shares Outstanding (mn) 23 metropolitan area could be a game changer that improves the companyÊs sales mix Avg Trading Volume (60D, '000) 26 and thus drives up the blended ASP for parcel delivery service. Avg Trading Value (60D, Wbn) 2 Dividend Yield (12F, %) 0.0 We believe the higher rates, combined with a possible merger between Korex and Free Float (%) 36.1 CJ GLS, will enable the firm to sustain 10% of EPS growth ushering in a new 52-Week Low (W) 61,400 period of strong growth for the logistics company. If done correctly, its M&A with 52-Week High (W) 152,500 CJ GLS could lead to additional multiple expansion, but we are ruling this out for Beta (12M, Daily Rate of Return) 1.0 now. Price Return Volatility (12M Daily, %, SD) 3.3 Foreign Ownership (%) 2.6 Aggressive investment is essential to avoid valuation trap Major Shareholder(s) CJ CheilJedang et al. (40.17%) We believe Korex intends to invest around W1.8tr in acquiring some twenty foreign Treasury shares (23.77%) logistics firms through 2020, in addition to W2.3tr in infrastructure spending. Asiana Airlines et al. (17.39%) Estimated at W450bn annually, the firmÊs planned investments are sizeable, but Price Performance seem manageable given their sound cash flow. (%) 1M 6M 12M The companyÊs advance into overseas markets has yet to yield visible results, but Absolute -8.5 -11.4 -37.9 we are bullish on its basic strategy of starting with small-sized forwarding Relative -3.0 -7.7 -25.9 companies before carefully moving on to bigger M&A targets. If the acquisition Key Business price proves reasonable, M&A events should be seen as opportunities rather than Main business divisions: TPL, stevedoring, risks, with the potential to lead to multiple expansion via a higher ROE. parcel delivery, inland transportation, forwarding, and logistics consulting. § Earnings & Valuation Metrics Share price FY Revenues OP OP Margin NP EPS EBITDAFCF ROE P/E P/B EV/EBITDA 160 KOSPI (Wbn) (Wbn) (%) (Wbn) (Won) (Wbn) (Wbn) (%) (x) (x) (x) 140 12/10 2,555 155 6.1 69 3,003 266 2 3.7 31.4 1.2 12.1 120 12/11 2,588 123 4.7 85 3,703 199 -376 4.1 20.3 1.0 12.1 100 12/12F 2,718 160 5.9 105 4,584 237 -237 4.6 14.8 0.8 10.6 80 60 12/13F 2,976 186 6.2 112 4,928 266 -134 4.7 13.7 0.8 10.0 40 12/14F 3,350 213 6.4 128 5,592 296 -83 5.1 12.1 0.7 9.4 5/11 9/11 1/12 5/12 Note: All figures are based on consolidated K-IFRS; NP refers to net profit attributable to controlling interests Source: Company data, KDB Daewoo Securities Research estimates Analysts who prepared this report are registered as research analysts in Korea but not in any other jurisdiction, including the U.S. I. Investment summary ...................................................................................................................3 1. Ride the express to future growth .............................................................................................3 II. Valuation ......................................................................................................................................4 1. Valuation: Initiate coverage with Buy rating and TP of W90,000 .............................................4 2. Peer valuation ...........................................................................................................................5 III. Parcel delivery business to take a leap forward.....................................................................7 1. Growth of the parcel delivery business.....................................................................................7 2. Market competition ....................................................................................................................8 IV. Logistics unit to drive growth and margins............................................................................9 1. Largest ground carrier in Korea ................................................................................................9 2. Recovering cargo volume and sustained market share gains................................................10 V. Earnings forecasts....................................................................................................................12 1. 1Q12 Review...........................................................................................................................12 VI. Merger into the CJ Group and its impact..............................................................................14 1. Acquired by the CJ Group at high premium............................................................................14 3. Higher parcel delivery profitability and greater market share .................................................15 4. Merger with CJ GLS and treasury shares...............................................................................16 VII. Risks.........................................................................................................................................17 1. Overseas expansion: Opportunities as well as risks ..............................................................17 2. Will capex expansion be positive or negative? .......................................................................18 2 June 11, 2012 CJ Korea Express I. Investment summary 1. Ride the express to future growth Initiate coverage with a We initiate our coverage on CJ Korea Express (Korex) with a Buy call and a target price of Buy rating and a TP of W90,000. We applied a residual income model (RIM) in deriving our target price, which W90,000 corresponds to a P/B of 1.1x. Although KorexÊs shares may not seem attractive, currently trading at a P/B of 0.8x based on a 2012F ROE, we believe that our target multiple is reasonable, as the firmÊs top and bottom lines are anticipated to improve from 2013. ASP expected to Earnings from KorexÊs parcel delivery business are recovering, brightening the companyÊs increase on market long-term outlook. The parcel delivery industry has undergone restructuring since 2008, integration and same- gradually relieving downward pressures on delivery rates. We expect industry consolidation day delivery service to continue, with Korex being placed under the CJ Group umbrella (to which CJ GLS belongs). Average market rates (and KorexÊs rates) are already edging up. KorexÊs market share is steadily rising, and should rise further if Korex and CJ GLS integrate their systems, leading to earnings improvements. Once the Gwangju parcel terminal (in Gyeonggi Province) is completed after 2013, the company is anticipated to launch same-day delivery services, which should command a higher rate vs. current services, leading to an ASP improvement. Logistics unit to The logistics unit is also anticipated to see its profitability finally improve on the back of a larger freight experience profitability volume, market share gains and higher delivery rates. Revenues declined in 2000, but the freight improvement volume has since steadily increased as the market has picked up. Although stevedoring rates remain depressed due to intensifying competition, Korex should still be able to achieve economies of scale on gradual market share gains. The TPL unit is also performing strongly, securing nearly W20bn worth of orders in the first quarter alone. As the unit is steadily attracting prime customers, profitability should continue to recover. We believe that the unitÊs healthy 1Q earnings signal further earnings improvement going forward. Aggressive investment Meanwhile, Korex recently announced its long-term plan to invest W1.8tr in acquiring plan, both an opportunity overseas companies, and W2.3tr in expanding facilities by 2020. This amounts to roughly and a risk W450bn per year, which is significant even considering the companyÊs large cash holdings and strong cash generating capabilities. Such an aggressive move is risky,
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