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LOTTE Corporation [Korea] Conglomerates Lotte Corp. Buy (004990 KS) (Maintain) Key investment points TP: W40,000 ▼ Upside: 27.6% Mirae Asset Daewoo Co., Ltd. Dae-ro Jeong [email protected] Recent developments Acquisition of additional subsidiary stakes; inheritance tax report due by end of July Lotte Corp. recently acquired additional stakes in Lotte Foods (002270 KS/CP: W333,000; 23.1% 36.4%) and Lotte Global Logistics (44.6% 46.0%). Individual inheritance taxes on the assets of the late honorary chairman Shin Kyuk-ho must be filed by the end of this month. Regardless of the inheritance outcome, we believe Chairman Shin Dong-bin will maintain stable control over the group; we see limited risks of a battle for control. Investment points Consolidated earnings to recover in 2021; unlisted subsidiaries may be headed for IPOs We expect operating earnings of key subsidiaries—including Lotte Shopping (023530 KS/Trading Buy/TP: W105,000/CP: W78,000) and Lotte Chemical (011170 KS/Buy/TP: W240,000/CP: W171,500)—to recover in 2021 after bottoming in 2H20. We believe Lotte Corp.’s unlisted subsidiaries, such as Lotte Global Logistics and Korea Seven, will pursue IPOs. Lotte Group is likely to resume its push to list Hotel Lotte and subsequently merge the company with Lotte Corp., thereby completing its ownership structure overhaul. Investment recommendation Maintain Buy, but cut TP to W40,000 and valuation We cut our target price on Lotte Corp. to W40,000 (from W52,000) due to a drop in the value of the company’s stakes in affiliates (including Lotte Shopping). The stock is currently trading at a 43.6% discount to its NAV. The company is likely to gradually retire its treasury shares (32.5% based on common shares). If all of the company’s treasury shares are cancelled, we estimate NAV per share would increase 21.6%. Key data Current price (7/28/20, W) 31,350 Market cap (Wbn) 3,289 120 LOTTE Corporation KOSPI OP (20F, Wbn) 180 Shares outstanding (mn) 106 100 Consensus OP (20F, Wbn) 151 Free float (%) 24.9 80 EPS growth (20F, %) - Foreign ownership (%) 11.4 60 P/E (20F, x) 17.0 Beta (12M) 1.37 40 Market P/E (20F, x) 15.4 52-week low (W) 20,350 7.19 11.19 3.20 7.20 KOSPI 2,256.99 52-week high (W) 40,100 Share performance Earnings and valuation metrics (%) 1M 6M 12M (Dec.) 2017 2018 2019 2020F 2021F 2022F Absolute -3.2 -17.3 -13.9 Revenue (Wbn) 1,869 7,271 8,856 9,028 9,365 9,509 Relative -8.5 -20.2 -21.2 OP (Wbn) -7 98 175 180 220 228 OP margin (%) -0.4 1.3 2.0 2.0 2.3 2.4 NP (Wbn) 469 185 -360 196 486 522 EPS (W) 10,602 1,746 -3,395 1,848 4,591 4,926 ROE (%) 11.0 2.8 -5.2 2.9 6.8 6.9 P/E (x) 6.1 30.2 - 17.0 6.8 6.4 P/B (x) 0.7 0.6 0.5 0.4 0.4 0.3 Dividend yield (%) 0.0 1.5 2.8 2.6 2.6 2.6 Notes: Under consolidated K-IFRS; NP is attributable to owners of the parent 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 US. PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES AND DISCLAIMERS IN APPENDIX 1 AT THE END OF REPORT. July 29, 2020 LOTTE Corporation Figure 1. Lotte Group’s corporate structure Lotte Holdings Shin Dong-bin & (Japan) affiliates 100% L inv estment 20.7% company 72.7% 2.3% 11.1% Lotte Corp. Hotel Lotte 19.1% [004990 KS] 38.2% 31.1% 42.0% 39.4% 30.0% Lotte Lotte Property Lotte Lotte Rental Lotte Capital Aluminium & Dev elopment Accelerator 24.0% 41.4% 46.0% 65.0% 40.0% 48.4% 26.5% 36.4% 79.7% 54.4% 68.7% Lotte Daehong Lotte Chemical Lotte Global Lotte Data Lotte Lotte Chilsung Lotte Foods Korea Sev en Lotte GRS Lotte Trading Communication Shopping Confectionery Comm. [011170 KS] Logistics [005300 KS] [002270 KS] [286940 KS] [023530 KS] [280360 KS] Lotte 93.9% 43.8% 31.1% 65.3% 53.0% 86.4% 50.0% Members Lotte Fine Lotte Himart Woori Home Lotte Culture Lotte REIT Lotte Asset Lotte Station Lotte E&C chemical Lotte AMC [071840 KS] shopping Works [330590 KS] Dev elopment Building 43.1% [004000 KS] 100% 60.5% 44.5% Source: DART, Mirae Asset Daewoo Research Figure 2. Lotte Group’s Japanese corporate structure Shin Dong-bin: 4.0% Shin Dong-joo: 50.0%+1 Seo Mi-ky ung & Shin Yu-mi (Kyung-yu Corp.): 3.2% Shin Dong-bin: 38.8% Shin Young-ja (Clear Sky): 3.0% Shigemitsu Hatsuko: 10.0% Shin Dong-joo: 1.6% Shin Ky uk-ho: 0.8% Shin Ky uk-ho: 0.4% Lotte Green Lotte Foundation: 0.4% Lotte Foundation: 0.2% Serv ice Family Family & Holdings under Kojunsha ESOP Executives foundations other names Midori 28.1% 13.5% 27.8% (31.1%) 6.0% (6.7%) 13.9% (15.6%) (31.5%) (15.1%) Other 47.7% (v oting shares: 53.4%) Lotte Holdings (Japan) 10.7% (non-v oting shares) 100% 31.0% L2 inv estment Lotte Strategic Company Inv estment 19.8% 100% 100% L3 inv estment company L1 inv estment company L7 inv estment company L4 inv estment company L8 inv estment company L9 inv estment company L5 inv estment company L10 inv estment company L11 inv estment company L6 inv estment company L12 inv estment company 19.1% 25.5% 46.1% Hotel Lotte 5.5% Source: DART, Mirae Asset Daewoo Research Mirae Asset Daewoo Research 2 July 29, 2020 LOTTE Corporation Table 1. Inheritance of late honorary chairman Shin Kyuk-ho’s holdings (Wbn) Stakes Shin Dong-bin Shin Dong-joo Shin Young-ja Company No. of Stak Share No. of Stake No. of Stake No. of Stake Value Tax (est.) Tax (est.) Tax (est.) shares e (%) price (W) shares (%) shares (%) shares (%) Lotte Corp. 3,245,425 3.1 31,350 101.7 Lotte Corp. (preferred) 139,847 14.2 68,400 9.6 Lotte Shopping 262,438 0.9 78,000 20.5 Lotte Confectionery 287,408 4.5 105,500 30.3 Inheritance taxes must be filed by end-July. Lotte Chilsung 104,080 1.3 100,000 10.4 Lotte Chilsung 109,780 14.2 63,900 7.0 (preferred) Lotte Property & 4,085,850 6.9 50,579 206.7 1,021,462 1.7 30.5 1,021,462 1.7 30.5 2,04 2,926 3.4 61.5 Development Total 386.2 Notes: Based on Jul. 28 closing prices Source: DART, Mirae Asset Daewoo Research Table 2. Lotte Group controlling family’s shareholdings (Wbn, %) Breakdown Title Company No. of shares Stake (%) Value (%) (%) Shin Dong-bin Lotte Corp. 12,330,941 11.8 387 49.3 (1955) Lotte Shopping 2,783,700 9.8 217 27.7 Lotte Chemical 90,705 0.3 16 2.0 Lotte Foods 22,232 2.0 7 0.9 Lotte Chilsung (preferred) 18,120 2.3 1 0.1 Lotte Property & Development 1,026,758 1.7 58 7.4 Korea Seven 3,242,835 8.8 34 4.3 Lotte Group Lotte Station Building 314,400 8.7 27 3.5 chairman Lotte E&C 188,660 0.6 20 2.6 Lotte Capital 284,704 0.9 5 0.6 Lotte Accelerator 1,000,000 20.0 5 0.6 Lotte Trading 16,549 8.0 4 0.6 Fujifilm 2,051 9.8 2 0.3 Lotte Members 6,687 0.3 0 0.0 Total 784 100.0 Shin Dong-joo Lotte Corp. 171,673 0.2 5 9.6 (1954) Lotte Shopping 133,953 0.5 10 18.6 SDJ Lotte Station Building 314,400 8.7 27 49.0 chairman Lotte E&C 120,557 0.4 13 22.8 Lotte Members 1,534 0.1 0 0.0 Total 56 100.0 Shin Young-ja Lotte Corp. 2,352,422 2.2 74 47.0 (1942) Lotte Shopping 210,174 0.7 16 10.5 Lotte Confectionery 106,228 1.7 11 7.1 Lotte Chilsung 212,380 2.7 21 13.5 Lotte Chilsung (preferred) 11,620 1.5 1 0.5 Director of Lotte Foods 12,374 1.1 4 2.6 Lotte Daehong Comm. 261 6.2 10 6.1 Samdong Korea Seven 894,144 2.4 9 6.0 Welfare Foundation Lotte E&C 46,014 0.1 5 3.1 Lotte Capital 177,936 0.5 3 2.0 Fujifilm 736 3.5 1 0.6 Lotte Aluminium 1,315 0.1 1 0.5 Lotte Trading 2,753 1.3 1 0.5 Lotte Members 4,194 0.2 0 0.0 Total 157 100.0 Source: DART, Mirae Asset Daewoo Research Mirae Asset Daewoo Research 3 July 29, 2020 LOTTE Corporation Table 3. Lotte Corp.’s major shareholders (Wbn) No. of shares Stake (%) Value Voting rights (%) Hotel Lotte 11,644,662 11.1 365.1 16.4 Lotte Aluminium 5,313,478 5.1 166.6 7.5 Lotte Holdings 2,613,965 2.5 81.9 3.7 L2 investment company 1,548,547 1.5 48.5 2.2 Hotel Lotte Busan 989,749 0.9 31.0 1.4 L12 investment company 823,865 0.8 25.8 1.2 Subtotal (1) 22,934,266 21.9 719.0 32.4 Shin Dong-bin 12,330,941 11.8 386.6 17.4 Shin Kyuk-ho 3,245,425 3.1 101.7 4.6 Shin Young-ja 2,352,422 2.2 73.7 3.3 Shin Dong-joo 171,673 0.2 5.4 0.2 Jang Jeong-an 77,037 0.1 2.4 0.1 Shin Yu-mi 42,254 0.0 1.3 0.1 Jang Sun-yoon 801 0.0 0.0 0.0 Lotte Scholarship Foundation 3,394,589 3.2 106.4 4.8 Lotte Foundation for Arts 90,869 0.1 2.8 0.1 Lotte Samdong Welfare Foundation 54,807 0.1 1.7 0.1 Subtotal (2) 21,760,818 20.7 682.2 30.7 (1) + (2) 44,695,084 42.6 1,401.2 63.1 Treasury shares 34,103,935 32.5 1,069.2 - Total 104,909,237 100.0 3,288.9 100.0 Note: Based on Jul.
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