IT Services Growth potential remains robust
Recommend Overweight; Large players to display differentiated growth We present an Overweight rating on the IT services sector in light of the strong Overweight (Maintain) quantitative and qualitative growth outlooks for large IT service providers. Indeed, we note that major corporate groups are expanding IT investments in areas including cloud computing, smart factories, AI, and Big Data. On the back of stable orders from Industry Report affiliates, IT services firms belonging to large corporate groups are expected to April 11, 2019 maintain double-digit top-line growth this year. Enjoying both stability and growth potential, the IT services sector should provide attractive investment opportunities. • Top-down: Earnings stability to improve on declining economic sensitivity
Mirae Asset Daewoo Co., Ltd. The IT services industry tends to display high sensitivity to economic conditions, with [Conglomerates/Software] orders moving closely in line with customers’ capex. However, as IT spending is increasingly being viewed as essential to survival, the industry’s economic sensitivity is Dae-ro Jeong declining steadily. +822-3774-1634 [email protected] • Bottom-up: Earnings growth based on captive demand
Large IT service providers affiliated with corporate groups (conglomerates) are expected to maintain steady revenue growth based on captive demand from affiliates.
Most of them are the exclusive providers of IT services to affiliates, as they are better positioned (vs. external competitors) to ensure group-level security and swiftly respond to unexpected events.
We forecast that large IT service firms will display differentiated growth going forward. Indeed, their scale and market positioning have given them the upper hand in: 1) building up strong and diversified track records; 2) accumulating experience in managing a technical workforce and relevant projects; 3) strengthening capital power; and 4) increasingly winning the favor of customers. Such competitive advantages should further improve the prospects of their business expansion efforts and overseas projects.
Top picks: Samsung SDS and Lotte Data Communication * Samsung SDS (018260 KS/Buy/TP: W290,000/CP: W233,500): Increased revenue contributions from strategic businesses; additional growth via M&As - Revenue contributions from strategic businesses, including smart factories and cloud computing, are anticipated to rise to 33% in 2019 from 30% in 2018. - The company will aggressively use its cash holdings (W3.6tr) to pursue M&As and secure additional growth drivers.
* Lotte Data Communication (286940 KS/Buy/TP: W63,000/CP: W48,300; initiate): Expecting 10% CAGR through 2025 - The Lotte Group plans to make W50tr in investments by 2023, which should benefit the company by boosting demand for IT services. - Margin growth is expected to accelerate thanks to an increasing mix of high- margin projects and a steady rise in software engineer service fees.
Increasing IT investments by group affiliates to drive growth potential of large IT service providers
(Wtr) Revenue (L) Affiliate revenue contribution (R) (%) 10 100
8 80
6 60
4 40
2 20
0 0
Note: Based on consolidated 2017 financial statements Source: DART, Mirae Asset Daewoo Research 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. April 11, 2019 IT Services
C O N T E N T S
Key charts 3
Analysis of the IT services industry 4 1. Industry structure 4 2. 2019 market outlook 5 3. Investment points 6
Issues 9 1. Impact of related-party transaction regulations to be limited 9 2. Public projects are increasingly being opened up to large IT service providers 11
Samsung SDS (018260 KS) 12 Lotte Data Communication (286940 KS) 18
Mirae Asset Daewoo Research 2 April 11, 2019 IT Services
Key charts
Figure 1. Major countries’ markets for IT services (2018) Figure 2. IT investments as % of revenue
(US$bn) (%) 3.3% 56.5 600 Market size (L) 60 Contribution to global market (R) 500 50
400 40
300 30
200 20 0.6% 6.6 8.0 100 4.2 10 1.2 0 0 Korea China Germany Japan US Domestic Global
Source: Gartner, KRG, Mirae Asset Daewoo Research Source: KRG, Deloitte, Mirae Asset Daewoo Research
Figure 3. Major IT service firms’ revenue and revenue Figure 4. Major domestic IT service firms’ M/S contributions from group affiliates
(Wtr) (%) Revenue (L) Affiliate revenue contribution (R) Lotte Data 10 100 POSCO ICT Asiana IDT 4.0 Communication 1.1 3.5 Hyundai 8 80 AutoEver 6.2 6 60 SK C&C Samsung SDS 6.5 38.9 4 40
2 20 LG CNS 12.6 0 0
Other 27.3
Note: Based on consolidated 2017 financial statements Note: Based on consolidated 2017 financial statements Source: DART, Mirae Asset Daewoo Research Source: DART, Mirae Asset Daewoo Research
Figure 5. Samsung SDS’s cash and equivalents Figure 6. Lotte Data Communication’s cash and equivalents
(Wtr) (Wbn) 5 250 Cash and equivalents IPO capital 4.3
4 3.7 200
2.9 127.7 3 150 2.5
2.0 2 1.7 100
1.1 1 0.8 50 86.1 91.5
0 0 12 13 14 15 16 17 18 19F 17 18
Source: DART, Mirae Asset Daewoo Research Source: DART, Mirae Asset Daewoo Research
Mirae Asset Daewoo Research 3 April 11, 2019 IT Services
Analysis of the IT services industry
1. Industry structure
IT service firms provides customers with a wide array of solutions, including consulting, demand analysis, system design, system component development, system integration testing/deployment, and system management/maintenance. Broadly speaking, IT services are largely divided between system integration (SI) and system management (SM; outsourcing).
SI providers design, develop, administer, and manage IT systems. The scope of SI services includes system design, hardware selection, order placement, procurement, application software development, and maintenance. Notably, actual system buildout can be executed by a consortium of SI firms specialized in different areas, and software development can be outsourced.
SM providers manage and operate equipment, human resources, and hardware related to customers’ IT systems on an outsourced basis. The scope of SM services includes the operation and management of data centers, network outsourcing services (administration and management of network infrastructure), application services (new IT system development and operation), desktop services (from PC purchase to disposal), disaster recovery (minimization of damage to IT systems in the event of a natural or human-induced disaster), and security.
Table 1. Scope of domestic IT services Type Details -Long-term IT planning; implementation and management of enterprise solutions; IT consulting networking/device solutions; equipment management consulting -Management and consulting services for security, etc. -Project planning; scheduling; technology planning SI -Task analysis; program design; application development; coding System -Database development; hardware selection; network design; operating system integration standardization - Heterogeneous integration (packages, hardware, networks) - Post-development testing, maintenance, etc. IT SM infrastructure Data center/hardware/network management (outsourcing) management SM System management/maintenance on an outsourced basis Source: ITSA, Mirae Asset Daewoo Research
Figure 7. Domestic IT services (SI + SM)
(Wtr) 12 SM SI
10 5.1 5.2 4.9 5.1 8 4.6 4.8
6
4 6.4 5.6 5.8 5.9 6.1 6.2 2
0 13 14 15 16 17 18
Source: KRG, Mirae Asset Daewoo Research
Mirae Asset Daewoo Research 4 April 11, 2019 IT Services
2. 2019 market outlook
For 2019, KRG forecast that the Korean IT services market would expand 3.5% YoY to US$11.8bn, and that the global market would grow 4.8% YoY to US$1.034tr.
The domestic IT services market has displayed relatively slow growth of 3-4% since 2015 and accounts for a mere 1.2% of the global market, as Korean companies tend to spend less on IT than global peers. Indeed, total IT spending as a percentage of revenue is very low for Korean firms.
However, given the growing focus on IT’s importance in driving competitiveness, we look for a steady increase in IT spending going forward; as such, we believe that expansion of the domestic IT services market is likely to accelerate. Notably, in addition to traditional IT services, we expect explosive growth in demand for high-tech services (e.g., IoT, cloud computing, Big Data, mobility) related to the Fourth Industrial Revolution and digitalization, which will create new opportunities for IT service providers.
We expect IT demand to grow not just in the private sector but also in the public sector. We project demand for IT services to be driven by policy supports for the IT service industry, as the government has been establishing institutional frameworks for new businesses and opening up public project bidding to large conglomerate-affiliated IT services companies equipped with new technologies.
Figure 8. Domestic IT services market trend and outlook Figure 9. Global IT services market trend and outlook
(US$bn) (%) (US$bn) (%) 16 Market size (L) 8 1,600 Market size (L) 8 Growth (R) CAGR (19-22) Growth (R) CAGR (19-22) +4.8% +12.5% 12 6 1,200 6
8 4 800 4
4 2 400 2
0 0 0 0 15 16 17 18 19F 20F 21F 22F 15 16 17 18 19F 20F 21F 22F
Source: KRG, Mirae Asset Daewoo Research Source: KRG, Mirae Asset Daewoo Research
Figure 10. IT services market size by country and % of global Figure 11. Total IT spending as % of revenue: Korean vs. market global companies
3.3% (US$bn) (%) 56.5 600 Market size (L) 60 Contribution to global market (R) 500 50
400 40
300 30
200 20 0.6% 6.6 8.0 100 4.2 10 1.2 0 0 Korea China Germany Japan US Domestic Global
Note: Based on 2018 data Source: KRG, Deloitte, Mirae Asset Daewoo Research Source: Gartner. KRG, Mirae Asset Daewoo Research
Mirae Asset Daewoo Research 5 April 11, 2019 IT Services
3. Investment points
1) Earnings stability supported by lower sensitivity to economic cycle
The IT services industry has traditionally been highly sensitive to economic conditions, tracking the economic cycle with a lag. Indeed, IT investments hinge on corporate demand for assets such as equipment, which has historically shown a high correlation with the economic cycle.
In general, companies budget conservatively in the face of an economic slowdown, scaling back or delaying capex. And IT spending has traditionally been the first item to be trimmed during sluggish times and the last thing to be increased during periods of recovery, with other investments being considered more instrumental to competiveness. As such, in the past, it has taken some time for economic recovery to give way to a pickup in IT demand growth.
However, companies are increasingly endeavoring to use IT strategically to enhance competitiveness, making related investments an essential part of their business plans. As a result, the IT services industry’s sensitivity to the economic cycle has been declining, while the IT market’s growth rate has been seeing reduced volatility. Against this backdrop, we expect IT service providers to display steady earnings amid a reduction in earnings volatility caused by changes in external conditions and lower risk of economic slowdown-related downside.
Figure 12. Domestic economic/IT market growth and facility investments
(%) 8 Economic growth IT market growth 6
4
2
0
-2
-4 07 08 09 10 11 12 13 14 15 16 17 18
(Wtr) 200 Manufacturing Non-manufacturing
150
100
50
0 07 08 09 10 11 12 13 14 15 16 17 18
Source: KRG, Statistics Korea, Mirae Asset Daewoo Research
Mirae Asset Daewoo Research 6 April 11, 2019 IT Services
2) Earnings growth potential based on captive demand
Korea’s largest IT service providers were established through spin-offs of large conglomerates’ IT businesses. Being the exclusive providers of IT services to their respective groups, these companies generally focus on captive IT investment demand to drive revenue growth. Notably, they are better positioned (vs. external competitors) to ensure group-level security and swiftly and efficiently respond to unexpected events.
Building a mission-critical IT system requires in-depth knowledge of a customer’s entire workflow and operational structure. In Korea, large IT service providers are well positioned to win consulting/design orders from affiliates, as they are more knowledgeable than outside companies about internal processes and can use their group ties to assuage concerns over data security. In addition, we note that the company responsible for initially setting up an IT system is better positioned to win contracts for maintenance and/or integration down the line, adding to lock-in.
Among the top seven IT service providers affiliated with large conglomerates, revenue exposure to captive customers was as high as 77.9% (based on 2017 data). Armed with steady revenue and profitability streams from group companies, group-affiliated IT services providers maintain leadership positions in the domestic market.
Figure 13. Major Korean IT services players: Revenue and revenue exposure to group companies
(Wtr) Revenue (L) Affiliate revenue contribution (R) (%) 10 100
8 80
6 60
4 40
2 20
0 0
Note: Based on consolidated 2017 financial statements Source: DART, Mirae Asset Daewoo Research
Figure 14. Major Korean IT services companies: M/S Figure 15. Captive vs. non-captive market characteristics breakdown
Classification Captive market Non-captive market POSCO ICT Lotte Data 4.0 Communication Asiana IDT 3.5 1.1 1. Competition Low High Hyundai Special ties with AutoEver High Low 6.2 customers SK C&C Samsung SDS Lock-in High Low 6.5 38.9 2. Threats from new Low High entrants
LG CNS Entry barriers High Low 12.6 3. Bargaining power vs. Relatively high Low customers 4. Bargaining power vs. Relatively high Low suppliers Other Conglomerate- Independent SME SI 5. Company type 27.3 affiliated SI company company Note: Based on consolidated 2017 financial statements Source: NICE, Mirae Asset Daewoo Research Source: DART, Mirae Asset Daewoo Research
Mirae Asset Daewoo Research 7 April 11, 2019 IT Services
3) Growth oriented toward major players
Given the current market structure (which is tilted heavily toward captive demand), we believe that IT service players’ earnings and access to new business opportunities will be largely determined by the assets and investment strategies of their respective group affiliates.
However, the ultimate growth strategy for IT service providers should involve market share expansion via increasing revenue exposure to non-captive customers amid steady revenue from captive customers. Notably, as the non-captive market is characterized by nearly perfect competition, we think customers will increasingly turn to major IT service providers boasting proven track records. And as conglomerate-affiliated IT service providers boast diverse talent pools equipped with skills and know-how developed through years of executing projects for group companies, we believe they are well-positioned to dominate the non-captive market going forward.
All in all, we prefer larger IT service providers. As the Fourth Industrial Revolution and digital transformation will accelerate the introduction of new IT systems, we look for a steady increase in IT spending across the board (i.e., by both captive and non-captive customers). And we expect major IT services providers to stand out with in terms of both revenue growth and margin improvement.
Figure 16. Top 10 IT service providers: Revenue Figure 17. Top four vs. other players: Earnings comparison
(Wtr) 5 4.5
4
3 (Wbn, %) 2.4 2016 2017 2 1.6 OP OP 1.2 Revenue OP Revenue OP 0.9 margin margin 1 0.6 0.5 0.4 0.4 0.4 15 companies 15,487.2 1,056.2 6.8 17,140.7 1,250.6 7.3 0 Top four 13,447.9 1,026.7 7.6 14,876.0 1,214.9 8.2 Ex-top four 2,039.3 29.5 1.4 2,264.7 41.2 1.8
Source: Mirae Asset Daewoo Research Note: The top four players on Samsung SDS, LG CNS, SK C&C, and POSCO ICT. Source: Mirae Asset Daewoo Research
Figure 18. Top 10 conglomerates: Total assets Figure 19. Top 10 conglomerates: Revenue
(Wtr) (Wtr) 500 350
300 400 250 300 200
200 150 100 100 50
0 0
Note: Based on 2017 data Note: Based on 2017 data Source: Mirae Asset Daewoo Research Source: Mirae Asset Daewoo Research
Mirae Asset Daewoo Research 8 April 11, 2019 IT Services
Issues
1. Impact of related-party transaction regulations to be limited
Domestic IT service firms belonging to large corporate groups are currently highly dependent on orders from affiliates. Accordingly, they are exposed to risks related to changes in related-party transactions. Under the Monopoly Regulation and Fair Trade Act (MRFTA), related-party transactions refer to cases in which a conglomerate (with total assets worth W5tr or more) makes an unfair transaction involving a subsidiary/affiliate—in which a specially-related person owns, individually or together with family members, no less than 30% of issued shares (20% for unlisted subsidiaries or affiliates)—for the specific purpose of funneling profits to said specially-related person.
Unfair trade practices include: 1) transactions under considerably favorable terms and conditions; 2) the provision of business opportunities generating excessively large profits; and 3) large-scale transactions made without reasonable consideration or comparison. However, transactions that are essential to improving efficiency, ensuring security, and/or meeting urgent needs are exempt from the regulations. Given the importance of IT security for corporate groups, most transactions involving major IT services providers and their group affiliates are unlikely to be subject to the MRFTA regulations.
Table 2. Major MRFTA regulations on related-party transactions Regulation Details
No conglomerate (with total asset value of over W5tr) shall commit any act that could generate unfair profits for a specially-related person or a subsidiary/affiliate in which a specially-related person holds a stake in excess of the percentage set forth by presidential Article 23-2-1 of the MRFTA decree, via any one of the following acts: (Prohibition of Unfair Trade 1. Transactions under substantially favorable terms Practices) 2. Provision of opportunities for business activities (under unfair terms) 3. Transactions of money or other financial products under considerably favorable terms and conditions 4. Transactions of a considerably large scale without reasonable consideration or comparison
Article 38-2 of Enforcement Decree of the MRFTA Affiliates whose shares are held by a specially-related person in at least the percentage prescribed by presidential decree means an (Prohibition on Provision, affiliate in which said person alone or together with his/her relatives holds at least 30% (or 20% in the case of a company which is not a etc. of Undue Benefits to listed corporation) of issued shares. Related Parties) 1. Transactions under substantially favorable terms Exemption: Cases in which the price difference with an arm’s-length transaction is less than 7% and annual transaction value is less than W5bn (or W20bn for goods/services) 2. Provision of opportunities for business activities Exemptions: Cases in which only the related party is capable of performing the job; cases in which the related party won a contract in a fair manner; cases in which non-related companies reject a business opportunity for valid reasons 3. Transactions of money or other financial products under considerably favorable terms and conditions Article 38-3 of Enforcement Exemption: Cases in which the price difference with an arm’s-length transaction is less than 7% and annual transaction value is less Decree of the MRFTA than W5bn (Prohibition on Provision, 4. Transactions of a considerably large scale without reasonable consideration or comparison etc. of Undue Benefits to Exemptions: Cases in which annual transaction value is less than 12% of the transacting party’s revenue and less than W20bn; cases in Related Parties) which the transaction is necessary for one of the following reasons: 1) Efficiency A transaction that is clearly acknowledged to reduce costs, improve quality, increase sales volume, and contribute to technological development (vs. an arm’s-length transaction) 2) Security A transaction that could lead to the leakage of key technologies or information, if made with a non-related party 3) Urgent need A transaction that is required to meet an urgent need, including issues related to sudden economic changes, financial crises, natural disasters, hacking, or IT system errors owing to computer viruses.
Source: FTC, Mirae Asset Daewoo Research
Mirae Asset Daewoo Research 9 April 11, 2019 IT Services
Figure 20. Determination of related-party transactions
Source: Mirae Asset Daewoo Research
Table 3. Penalties for breach of related-party transaction regulations Classification Corrective action Penalties Criminal penalties
Discontinuance of provision of unfair profits to related parties, and Providing introduction of measures to prevent - An amount not exceeding 5% of revenue company, recurrence of similar practices - Imprisonment of up to three years, or a - Notice on penalties given on May 30, 2014 controlling - Deletion of relevant contract terms fine of up to W200mn - Up to W2bn, absent revenue (Article 24-2, Paragraph 2 families, and - Disclosure of corrective orders (Article 66, Paragraph 1 of MRFTA) of MRFTA) related parties - Other necessary measures (Article 24 of MRFTA)
Discontinuance of provision of unfair profits to related parties, and introduction of measures to prevent - An amount not exceeding 5% of revenue recurrence of similar practices - Notice on penalties pronounced on May 30, 2014 Beneficiary - Deletion of relevant contract terms Not applicable - Up to W2bn, absent revenue (Article 24-2, Paragraph 2 - Disclosure of correct orders of MRFTA) - Other necessary measures (Article 24 of MRFTA)
Source: FTA, Mirae Asset Daewoo Research
Mirae Asset Daewoo Research 10 April 11, 2019 IT Services
2. Public projects are increasingly being opened up to large IT service providers
Under a revision to the Software Industry Promotion Act implemented in 2013, IT service companies affiliated with large conglomerates are restricted from bidding on new public projects. The act was designed to make public projects more accessible to SMEs in line with the Ministry of Knowledge Economy’s strategy (announced in 2011) to promote a software industry ecosystem where both small and big businesses could thrive. For IT service companies affiliated with large conglomerates, public projects account for a relatively small share of total revenue and yield low margins. However, participation in various government projects helps IT service providers build track records and technological expertise, which could be leveraged to win new overseas orders. As such, this regulation is generally unfavorable to IT service providers affiliated with conglomerates.
However, the regulation includes certain exceptions, allowing conglomerate-affiliated IT service providers to take part in projects in the fields of national defense, foreign relations, public safety, and utilities. In addition, high-tech project bidding is increasingly being opened up to large IT service providers, as SMEs are not yet capable of supporting the shift of public services/institutions toward high-tech solutions such as cloud computing, IoT, Big Data, and IT convergence. Indeed, in 2015, the government announced new guidelines for software project tendering, allowing large IT service companies to bid for high-tech software projects for public agencies as well as the government (at both the central and regional levels). As a result, LG CNS was awarded three projects from the Ministry of the Interior and Safety, including an information strategy planning (ISP) project to build a next- generation e-government platform. Samsung SDS won a blockchain project from the customs office, SK C&C won a cloud computing project from the Ministry of the Interior and Safety’s National Information Resources Service, and KT (030200 KS/Buy/TP: W36,500/CP: W27,450) and Shinsegae I&C (035510 KS/CP: W152,500) won Big Data projects from the Supreme Court and the Korea Forest Service, respectively.
In 2018, a new clause on private financing for public software projects was introduced to the Software Industry Promotion Act. Under the revision, software development or convergence projects focused on public services such as smart city and transportation systems can now be funded by private companies, creating new opportunities for major IT services companies.
Table 4. Restrictions on bidding for public IT service projects Related regulations Details - The Ministry of Knowledge Economy set a minimum size for public projects accessible to IT service providers Article 24-2 of Software Industry Promotion Act affiliated with conglomerates (To support SME’s participation in software projects) - Companies subject to cross-shareholding restrictions can be restricted from taking part in a public project, regardless of the project size The minimum size for projects accessible to software companies affiliated with conglomerates Ministry of Science and ICT’s notice - Conglomerates with W800bn or more in revenue: W8bn or higher No. 2017-7, August 24, 2017. - Conglomerates with less than W800bn in revenue: W4bn or higher Source: Mirae Asset Daewoo Research
Table 5. Exceptions to bidding restrictions Project Details 1. Weapon system projects National defense 2. Military support system projects (non-weapon equipment and resources) 3. Military support system projects (other) 1. Projects related to international trade negotiations, international agreements, and the protection and support of Koreans living abroad 2. Projects related to the handling, transmission, and receipt of diplomatic documents and other information related to foreign affairs and trade Foreign relations 3. ODA projects as set forth under Article 2 (5) of the Framework Act on International Development Cooperation 4. Projects related to international activities significant to national interests 1. Projects designed to prevent, suppress, and investigate criminal activities 2. Projects designed to aid in the filing of charges and sentence enforcement Public safety 3. Confidential national security projects 4. Projects directly related to the public well-being and law and order (e.g., immigration control) 1. Projects related to power generation/transmission/transformation/distribution, the energy market, power system management, power sales, demand forecasts, and customer charges Utilities 2. Electricity facility projects for power generation/transmission/transformation/distribution/use 3. Power system-related projects that power generation and supply - Projects that have as significant an impact on the well-being of the public as national defense, foreign relations, security, and utilities Other - Projects where participation by conglomerates is necessary Source: Ministry of Science & ICT, Mirae Asset Daewoo Research
Mirae Asset Daewoo Research 11 April 11, 2019 IT Services
Samsung SDS (018260 KS) M&As to boost valuation
Software 2019 outlook: Increased revenue contributions from strategic businesses; Additional growth via M&As For 2019, we project that Samsung SDS will report revenue of W10.9tr (+9.0% YoY) and (Maintain) Buy operating profit of W975.9bn (+11.2% YoY).
Target Price (12M, W) 290,000 1) IT services: We expect revenue of W6.2tr (+9.8% YoY) and operating profit of W928.8bn (+8.8% YoY). Share Price (04/08/19, W) 233,500 ① The revenue contribution from strategic businesses, including smart factories, cloud computing, and AI analytics, are anticipated to rise to 33% in 2019 from 30% in 2018. Expected Return 24% ② The execution of Samsung Electronics’ (SEC; 005930 KS/Buy/TP: W56,000/CP: W46,650) ERP system replacement project (W700bn; through 2020) should support revenue growth. OP (19F, Wbn) 976 2) Logistics BPO: Revenue and operating profit are estimated at W4.7tr (+8.0% YoY) and Consensus OP (19F, Wbn) 999 W47.1bn (+96.2% YoY), respectively. OP margin is anticipated to improve to the 1% level EPS Growth (19F, %) 12.9 on the back of stronger operating cost efficiency and a higher mix of external orders. Market EPS Growth (19F, %) -12.8 3) Inorganic growth via M&As: We believe Samsung SDS will aggressively pursue M&A P/E (19F, x) 25.4 deals using its cash holdings (W3.6tr) to secure additional growth drivers. Market P/E (19F, x) 11.5 KOSPI 2,210.60 1Q19F OP of W205.8bn (+13.2% YoY); IT services earnings to remain on a stable Market Cap (Wbn) 18,068 growth path Shares Outstanding (mn) 77 For 1Q19, we expect Samsung SDS to record W2.5tr (+6.2% YoY) in revenue, W205.8bn Free Float (%) 42.6 (+13.2% YoY) in operating profit, and W149.7bn (+11.2% YoY) in net profit attributable to Foreign Ownership (%) 13.1 controlling interests, slightly below consensus expectations. Considering unfavorable Beta (12M) 1.26 seasonality in 1Q, IT services revenue should be viewed as being on a steady upward 52-Week Low 181,000 curve. 52-Week High 245,000 We believe that Samsung SDS’s IT services business will continue to display structural (%) 1M 6M 12M growth for some time, as IT spending is increasingly viewed as essential to enhancing Absolute 4.9 7.4 -2.5 business competitiveness. We also think the company will see various opportunities Relative 1.5 9.5 7.2 through its collaboration with SEC (e.g., Big Data, AI, blockchain), which should support further growth momentum.
110 Samsung SDS KOSPI 100 Reaffirm Buy and TP of W290,000; To benefit from structural growth of IT services 90 We reaffirm our Buy call and target price of W290,000 on Samsung SDS. For 2019, revenue 80 growth is expected to be around 10%, driven by IT services and potential M&A deals.
70 In our view, the company’s high valuation (2019F P/E of 25.2x; 2018 P/E of 20-30x) is 60 justifiable, given: 1) the ongoing revenue growth of the IT services division; and 2) the 3.18 7.18 11.18 3.19 wide range of potential business opportunities arising from its platform.
Of note, we see ample upside to current valuations in light of expectations for revenue growth driven by M&As, the expansion of new businesses and customer acquisition opportunities, and the increasing sophistication of IT.
메일@ miraeasset.com FY (Dec.) 12/15 12/16 12/17 12/18 12/19F 12/20F Revenue (Wbn) 7,853 8,180 9,299 10,034 10,940 11,960 OP (Wbn) 588 627 732 877 976 1,101 OP Margin (%) 7.5 7.7 7.9 8.7 8.9 9.2 NP (Wbn) 439 464 530 629 711 801 EPS (W) 5,674 5,995 6,854 8,134 9,185 10,352 ROE (%) 10.1 9.5 9.9 10.9 11.4 11.7 P/E (x) 44.8 23.3 29.2 25.1 25.2 22.6 P/B (x) 4.3 2.1 2.8 2.6 2.8 2.5 Dividend Yield (%) 0.2 0.5 1.0 1.0 1.2 1.2 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
Mirae Asset Daewoo Research 12 April 11, 2019 IT Services
Figure 21. Quarterly OP and OP margin Figure 22. IT services revenue from SEC
(Wbn) (%) (Wtr) (Wtr) 300 OP (L) 12 300 SEC revenue (L) IT services revenue from SEC (R) 3.0 OP margin (R) 250 10 250 2.5
200 8 200 2.0
150 6 150 1.5
100 4 100 1.0
50 2 50 0.5
0 0 0 0.0 1Q16 3Q16 1Q17 3Q17 1Q18 3Q18 09 10 11 12 13 14 15 16 17 18 19F
Source: DART, Mirae Asset Daewoo Research Source: DART, Mirae Asset Daewoo Research
Figure 23. New businesses as % of IT services revenue Figure 24. IT services revenue and OP margin
(Wtr) (%) (Wtr) (%) Consulting/SI (L) 8 IT services revenue (L) 80 8 Outsourcing (L) 16 New business revenue (L) IT services OP margin (R) New business revenue contribution (R) 14 6 60 6
12 4 40 4 10
2 20 2 8
0 0 0 6 16 17 18 19 20F 16 17 18 19F 20F
Source: Company data, Mirae Asset Daewoo Research Source: Company data, Mirae Asset Daewoo Research
Figure 25. % of non-affiliate orders in logistics BPO revenue Figure 26. Cash and equivalents
(Wbn) (%) (Wtr) 1,000 Non-affiliate revenue (L) 20 5 Contribution to logistics BPO (R) 4.3 800 4 3.7 15 2.9 600 3 2.5 10 2.0 400 2 1.7
5 1.1 200 1 0.8
0 0 0 14 15 16 17 18 19F 20F 12 13 14 15 16 17 18 19F
Source: Mirae Asset Daewoo Research Source: Mirae Asset Daewoo Research
Mirae Asset Daewoo Research 13 April 11, 2019 IT Services
Table 6. 1Q19 preview (Wbn, %, %p) 1Q19F Growth 1Q18 4Q18 Preliminary Consensus QoQ YoY Revenue 2,356.9 2,782.1 2,502.3 2,533.6 -10.1 6.2 OP 181.8 258.3 205.8 217.7 -20.3 13.2 NP (controlling) 134.7 172.7 149.7 149.0 -13.3 11.2 OP margin (%) 7.7 9.3 8.2 8.6 -1.1 0.5 Net margin (%) 5.71 6.2 6.0 5.9 -0.2 0.3 Source: FnGuide, company data, Mirae Asset Daewoo Research
Table 7. Quarterly and annual earnings (Wbn, %) 1Q18 2Q18 3Q18 4Q18 1Q19F 2Q19F 3Q19F 4Q19F 2017 2018 2019F Revenue 2,356.9 2,472.2 2,423.0 2,782.1 2,502.3 2,683.4 2,665.9 3,088.8 9,299.1 10,034.2 10,940.3 IT services 1,345.7 1,416.4 1,335.8 1,558.8 1,446.7 1,565.6 1,486.3 1,713.5 5,129.5 5,656.7 6,212.0 Consulting/SI 317.5 383.4 331.7 483.9 335.2 433.0 377.1 540.3 1,243.8 1,516.5 1,685.6 Outsourcing 1,028.2 1,033.0 1,004.1 1,074.9 1,111.5 1,132.6 1,109.2 1,173.1 3,885.7 4,140.2 4,526.4 Logistics BPO 1,011.2 1,055.8 1,087.2 1,223.3 1,055.6 1,117.8 1,179.6 1,375.3 4,169.6 4,377.5 4,728.3 Revenue breakdown 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 IT services 57.1 57.3 55.1 56.0 57.8 58.3 55.8 55.5 55.2 56.4 56.8 Logistics BPO 42.9 42.7 44.9 44.0 42.2 41.7 44.2 44.5 44.8 43.6 43.2 OP 181.8 237.7 199.6 258.3 205.8 250.3 235.4 284.4 731.6 877.4 975.9 OP margin 7.7 9.6 8.2 9.3 8.2 9.3 8.8 9.2 7.9 8.7 8.9 IT services 182.8 227.0 198.3 245.3 197.2 238.8 223.6 269.3 659.1 853.4 928.8 OP margin 13.6 16.0 14.8 15.7 13.6 15.3 15.0 15.7 12.8 15.1 15.0 Logistics BPO -1.0 10.7 1.3 13.0 8.6 11.5 11.8 15.1 72.5 24.0 47.1 OP margin -0.1 1.0 0.1 1.1 0.8 1.0 1.0 1.1 1.7 0.5 1.0 Pretax profit 192.2 271.1 221.2 272.0 213.8 285.1 264.5 289.0 752.1 956.5 1,052.4 Net profit 131.6 186.8 142.9 177.4 146.3 196.5 181.5 197.2 541.8 638.8 721.5 Net profit (controlling) 134.7 183.1 138.9 172.7 149.7 192.6 176.4 192.0 530.3 629.4 710.7 Growth (YoY) Revenue 9.6 4.1 4.9 12.8 6.2 8.5 10.0 11.0 13.7 7.9 9.0 IT services 10.2 8.2 4.7 17.8 7.5 10.5 11.3 9.9 8.2 10.3 9.8 Consulting/SI 7.8 14.3 15.5 48.1 5.6 12.9 13.7 11.7 -6.6 21.9 11.2 Outsourcing 10.9 6.1 1.6 7.9 8.1 9.6 10.5 9.1 14.0 6.6 9.3 Logistics BPO 9.0 -0.9 5.2 7.0 4.4 5.9 8.5 12.4 21.3 5.0 8.0 OP 23.7 27.9 3.8 25.1 13.2 5.3 17.9 10.1 16.7 19.9 11.2 IT services 52.6 41.8 9.4 23.9 7.9 5.2 12.8 9.8 45.3 29.5 8.8 Logistics BPO TTR -58.4 -88.2 51.2 TTB 7.8 807.6 16.4 -58.2 -66.9 96.2 Pretax profit 33.6 34.7 7.0 35.8 11.2 5.2 19.6 6.3 0.0 27.2 10.0 Net profit 45.2 30.2 -4.1 11.9 11.2 5.2 27.0 11.1 5.3 17.9 13.0 Net profit (controlling) 50.1 30.9 -4.7 11.4 11.2 5.2 27.0 11.1 14.3 18.7 12.9 Source: DART, Mirae Asset Daewoo Research
Mirae Asset Daewoo Research 14 April 11, 2019 IT Services
Table 8. Dividend payout overview (Wbn, W, %) Item 2013 2014 2015 2016 2017 1Q18 2Q18 3Q18 4018 2018 2019F Total debt 53 20 11 7 1 3 3 5 1 1 1 Cash and cash equivalents 1,075 1,652 1,951 2,456 2,925 3,236 3,361 3,559 3,672 3,672 4,272 Net debt -1,021 -1,632 -1,940 -2,449 -2,925 -3,233 -3,358 -3,555 -3,671 -3,671 -4,271 Consolidated net profit 312 413 439 464 530 135 183 139 173 629 711 Net profit (parent) 243 311 350 242 370 107 146 111 138 502 567 DPS 250 500 500 750 2,000 2,000 2,500 Dividend yield - 0.2% 0.2% 0.5% 1.0% 1.0% 1.1% Total payout 19 39 39 58 155 155 193 Payout ratio (consolidated) 6.2% 9.4% 8.8% 12.5% 29.2% 24.6% 27.2% Source: DART, Mirae Asset Daewoo Research
Table 9. TP calculation (Wbn, W) Value Notes 1. Operating value 18,438 IT services 17,515 Target EV/EBITDA of 14.0x Logistics IT 924 Target EV/EBITDA of 15.0x 2. Asset value 41 Listed 0 Unlisted 1 Book value Stakes in affiliates 39 Book value 3. Total asset value (1+2) 18,479 4. Net debt -3,671 End-2018 5. Net asset value (3-4) 22,150 6. No. of shares (‘000 shares) 77,350 No. of outstanding shares (ex-treasury stock) NAV per share 286,359 7. Target price 290,000 Current price 233,500 April 8, 2019 closing price Expected return 24.2% Buy rating Source: Mirae Asset Daewoo Research
Figure 27. P/E band Figure 28. P/B band
(Wbn) (Wbn) 28 28 4.0x 24 24 32x 3.5x
29x 20 20 3.0x 26x
16 23x 16 2.5x 20x 2.0x 12 12
8 8 1/15 7/15 1/16 7/16 1/17 7/17 1/18 7/18 1/19 1/15 7/15 1/16 7/16 1/17 7/17 1/18 7/18 1/19
Source: Mirae Asset Daewoo Research Source: Mirae Asset Daewoo Research
Mirae Asset Daewoo Research 15 April 11, 2019 IT Services
Table 10. Global peer group valuation (Wbn, x)
Market Revenue P/E P/B EV/EBITDA cap 2019F 2020F 2019F 2020F 2019F 2020F 2019F 2020F IT services (average) - - - 19.3 17.7 8.4 7.2 12.8 11.9 Microsoft. 919,822 124,859 137,676 27.0 23.8 9.8 7.9 16.7 14.7 Oracle. 184,314 39,364 40,287 15.7 14.3 9.0 8.0 10.9 10.5 IBM 127,500 77,987 78,414 10.3 10.1 6.5 5.5 8.4 8.1 Accenture 113,801 43,094 46,134 24.4 22.4 8.5 7.4 15.3 14.2 Logistics BPO (average) - - - 27.0 22.7 10.8 8.3 14.5 12.7 Amazon 902,477 274,949 324,631 50.2 36.8 13.6 9.5 21.4 16.6 UPS 98,344 75,799 79,921 15.1 13.9 15.6 9.8 11.1 10.2 Kuehne + Nagel Int’l 17,094 26,104 27,236 21.1 19.5 7.1 6.8 11.7 10.9 Expeditors Int’l 13,424 8,639 9,139 21.7 20.6 6.9 6.9 14.0 13.2 Note: Based on April 8, 2019 data Source: Bloomberg
Mirae Asset Daewoo Research 16 April 11, 2019 IT Services
Samsung SDS (018260 KS/Buy/TP: W290,000)
Comprehensive Income Statement (Summarized) Statement of Financial Condition (Summarized) (Wbn) 12/17 12/18 12/19F 12/20F (Wbn) 12/17 12/18 12/19F 12/20F Revenue 9,299 10,034 10,940 11,960 Current Assets 5,117 5,882 7,063 8,295 Cost of Sales 7,805 8,370 9,084 9,877 Cash and Cash Equivalents 931 1,162 1,822 2,304 Gross Profit 1,494 1,664 1,856 2,083 AR & Other Receivables 1,962 1,501 1,666 1,905 SG&A Expenses 763 787 881 982 Inventories 25 19 21 24 Operating Profit (Adj) 732 877 976 1,101 Other Current Assets 2,199 3,200 3,554 4,062 Operating Profit 732 877 976 1,101 Non-Current Assets 2,160 2,132 1,874 1,534 Non-Operating Profit 20 80 76 85 Investments in Associates 41 44 49 56 Net Financial Income 41 65 80 80 Property, Plant and Equipment 1,029 1,069 841 609 Net Gain from Inv in Associates 2 3 3 3 Intangible Assets 935 845 836 722 Pretax Profit 752 957 1,052 1,186 Total Assets 7,278 8,014 8,936 9,829 Income Tax 210 318 331 373 Current Liabilities 1,325 1,575 1,748 1,999 Profit from Continuing Operations 542 639 722 813 AP & Other Payables 511 640 710 812 Profit from Discontinued Operations 0 0 0 0 Short-Term Financial Liabilities 1 1 1 1 Net Profit 542 639 722 813 Other Current Liabilities 813 934 1,037 1,186 Controlling Interests 530 629 711 801 Non-Current Liabilities 233 291 473 519 Non-Controlling Interests 11 9 11 12 Long-Term Financial Liabilities 0 0 150 150 Total Comprehensive Profit 478 586 722 813 Other Non-Current Liabilities 233 291 323 369 Controlling Interests 467 580 712 802 Total Liabilities 1,558 1,865 2,221 2,517 Non-Controlling Interests 11 6 9 11 Controlling Interests 5,558 5,983 6,538 7,123 EBITDA 1,064 1,186 1,313 1,456 Capital Stock 39 39 39 39 FCF (Free Cash Flow) 643 945 1,028 974 Capital Surplus 1,297 1,297 1,297 1,297 EBITDA Margin (%) 11.4 11.8 12.0 12.2 Retained Earnings 4,347 4,822 5,378 5,962 Operating Profit Margin (%) 7.9 8.7 8.9 9.2 Non-Controlling Interests 161 166 177 189 Net Profit Margin (%) 5.7 6.3 6.5 6.7 Stockholders' Equity 5,719 6,149 6,715 7,312
Cash Flows (Summarized) Forecasts/Valuations (Summarized) (Wbn) 12/17 12/18 12/19F 12/20F 12/17 12/18 12/19F 12/20F Cash Flows from Op Activities 835 1,197 1,028 1,114 P/E (x) 29.2 25.1 25.2 22.6 Net Profit 542 639 722 813 P/CF (x) 13.3 11.8 13.7 12.4 Non-Cash Income and Expense 622 696 595 649 P/B (x) 2.8 2.6 2.8 2.5 Depreciation 214 207 227 241 EV/EBITDA (x) 11.9 10.4 10.5 8.9 Amortization 119 101 109 114 EPS (W) 6,854 8,134 9,185 10,352 Others 289 388 259 294 CFPS (W) 15,045 17,251 17,019 18,891 Chg in Working Capital -195 -4 -38 -55 BPS (W) 71,854 77,335 84,521 92,074 Chg in AR & Other Receivables -122 -101 -142 -205 DPS (W) 2,000 2,000 2,800 2,800 Chg in Inventories 0 0 -2 -3 Payout ratio (%) 28.6 24.2 30.0 26.6 Chg in AP & Other Payables 33 92 61 88 Dividend Yield (%) 1.0 1.0 1.2 1.2 Income Tax Paid -164 -196 -331 -373 Revenue Growth (%) 13.7 7.9 9.0 9.3 Cash Flows from Inv Activities -970 -819 -387 -411 EBITDA Growth (%) 7.3 11.5 10.7 10.9 Chg in PP&E -191 -250 0 -8 Operating Profit Growth (%) 16.7 19.8 11.3 12.8 Chg in Intangible Assets -31 -26 -100 0 EPS Growth (%) 14.3 18.7 12.9 12.7 Chg in Financial Assets -733 -504 -277 -399 Accounts Receivable Turnover (x) 8.2 8.0 8.0 7.8 Others -15 -39 -10 -4 Inventory Turnover (x) 453.8 461.0 552.3 535.5 Cash Flows from Fin Activities -68 -156 -5 -217 Accounts Payable Turnover (x) 18.7 16.8 15.6 15.0 Chg in Financial Liabilities -6 0 150 0 ROA (%) 7.7 8.4 8.5 8.7 Chg in Equity 0 0 0 0 ROE (%) 9.9 10.9 11.4 11.7 Dividends Paid -60 -157 -155 -217 ROIC (%) 17.7 20.8 26.5 32.7 Others -2 1 0 0 Liability to Equity Ratio (%) 27.2 30.3 33.1 34.4 Increase (Decrease) in Cash -259 230 661 482 Current Ratio (%) 386.3 373.5 404.0 415.0 Beginning Balance 1,190 931 1,162 1,822 Net Debt to Equity Ratio (%) -51.1 -59.7 -66.4 -73.0 Ending Balance 931 1,162 1,822 2,304 Interest Coverage Ratio (x) 384.8 526.3 585.4 660.6 Source: Company data, Mirae Asset Daewoo Research estimates
Mirae Asset Daewoo Research 17 April 11, 2019 IT Services
Lotte Data Communication (286940 KS) Expecting 10% CAGR through 2025
Initiate coverage with Buy and TP of W63,000 We initiate coverage on Lotte Data Communication with a Buy rating and target price of (Initiate) Buy W63,000. We derived our target price by applying a P/E of 26.4x (10% premium to peer multiple of 24x) to our 2019F EPS. We believe that Lotte Data Communication deserves a Target Price (12M, W) 63,000 valuation premium, as its revenue will likely grow at a CAGR of more than 10% through 2025, backed by the Lotte Group’s aggressive IT investment plans. Share Price (04/08/19, W) 48,300 The stock is currently trading at 20.2x 2019F P/E and 17.8x 2020F P/E. Assuming 10% revenue CAGR, the company is trading at 10x 2025F P/E. Expected Return 31% Investment points: Combination of stability and solid growth OP (19F, Wbn) 46 Consensus OP (19F, Wbn) 46 1) Largest beneficiary of massive IT investments
EPS Growth (19F, %) 8.0 Acting as the Lotte Group’s IT control tower, Lotte Data Communication generates 90% Market EPS Growth (19F, %) -12.8 of its parent revenue (80% of consolidated revenue) from affiliates. We expect the P/E (19F, x) 20.3 company to continue to secure massive affiliate deals, as it is better positioned to Market P/E (19F, x) 11.5 provide more secure and efficient IT services for group affiliates than external firms. KOSPI 2,210.60 Of note, the Lotte Group announced a five-year plan to invest W50tr in its domestic and Market Cap (Wbn) 690 overseas businesses in October 2018. We think that Lotte Data Communication will Shares Outstanding (mn) 14 benefit from the initiative, as it should take charge of most IT infrastructure projects, Free Float (%) 24.0 including the construction of smart factories and logistics systems. Foreign Ownership (%) 1.6 Beta (12M) 0.02 2) Robust margin improvement 52-Week Low 25,850 Given that high-margin affiliate IT demand related to the Fourth Industrial Revolution 52-Week High 49,800 (IoT, cloud computing, Big Data, mobility, etc.) and digital transformation is increasing, (%) 1M 6M 12M margins will likely improve more rapidly than revenue. Absolute 3.2 34.4 0.0 Relative -0.2 37.0 0.0 3) Inorganic growth via M&As
190 LOTTE DATA KOSPI The company, which is sitting on massive cash holdings (W219.2bn as of end-2018), is 170 currently mulling M&As for overseas expansion. As such, we expect the company to 150 secure overseas growth drivers, in addition to domestic affiliate demand. 130 110 90 70 3.18 7.18 11.18 3.19
FY (Dec.) 12/15 12/16 12/17 12/18 12/19F 12/20F Revenue (Wbn) - - 149 812 929 1,052
OP (Wbn) - - 5 39 46 56 OP Margin (%) - - 3.4 4.8 5.0 5.3 NP (Wbn) - - 2 26 34 40 EPS (W) - - 1,139 2,205 2,382 2,824 ROE (%) - - 1.0 9.6 9.4 10.4 P/E (x) - - - 16.1 20.2 17.8 P/B (x) - - - 1.4 1.8 1.7 메일@ miraeasset.com Dividend Yield (%) - - - 1.8 1.3 1.3 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
Mirae Asset Daewoo Research 18 April 11, 2019 IT Services
Valuation
Initiate coverage with Buy and TP of W63,000
We initiate coverage on Lotte Data Communication with a Buy rating and target price of W63,000. We derived our target price by applying a P/E of 26.4x (10% premium to peer multiple of 24x) to our 2019F EPS. We believe that Lotte Data Communication deserves a valuation premium, as its revenue will likely grow at a CAGR of more than 10% through 2025, backed by the Lotte Group’s aggressive IT investment plans.
In addition to top-line growth arising from affiliate-related business, the company will likely secure additional growth drivers via new technologies/platforms and M&As. If earnings improve on such additional growth drivers, the current valuation burden should ease gradually.
The stock is currently trading at 20.2x 2019F P/E and 17.8x 2020F P/E. Assuming 10% revenue CAGR, the company is trading at 10x 2025F P/E.
Table 11. TP calculation (W, x, %) 2019F 2020F Notes EPS 2,382 2,824 Target P/E 26.4 26.4 10% premium to 2019F peer multiple of 24x 12MF TP 62,875 74,554 Target price 63,000 75,000 Current price 48,300 48,300 April 8, 2019 closing price Upside 30.7 55.6 Source: Mirae Asset Daewoo Research
Table 12. Peer valuation comparison and target P/E calculation (Wbn, x) Samsung SDS Shinsegae I&C POSCO ICT 2019F net revenue 753 15 60 Market cap 17,913 262 906 2019F P/E 24.0 17.6 15.1 2019F target P/E of 26.4x Target P/E Samsung SDS’s 2019F P/E is 24.0x (based on consensus) 10% premium based on annual growth exceeding 10% through 2025 Note: Based on April 8, 2019 closing price Source: FnGuide consensus data, Mirae Asset Daewoo Research
Table 13. Major global IT services companies valuations (Wbn, x) Revenue P/E P/B EV/EBITDA Market cap 2019F 2020F 2019F 2020F 2019F 2020F 2019F 2020F IT services (average) - - - 19.3 17.7 8.4 7.2 12.8 11.9 Microsoft. 919,822 124,859 137,676 27.0 23.8 9.8 7.9 16.7 14.7 Oracle 184,314 39,364 40,287 15.7 14.3 9.0 8.0 10.9 10.5 IBM 127,500 77,987 78,414 10.3 10.1 6.5 5.5 8.4 8.1 Accenture 113,801 43,094 46,134 24.4 22.4 8.5 7.4 15.3 14.2 Source: Bloomberg
Mirae Asset Daewoo Research 19 April 11, 2019 IT Services
Earnings and forecasts
Steady revenue growth of more than 10% annually
As the only IT service firm under the Lotte Group’s umbrella, Lotte Data Communication will likely deliver steady revenue growth of more than 10% annually through 2025, backed by the group’s recently announced five-year IT investment plan.
In particular, given that high-margin affiliate IT demand related to the Fourth Industrial (IoT, cloud computing, Big Data, mobility, etc.) and digital transformation is increasing, margins will likely improve more rapidly than revenue.
Furthermore, the company, which is sitting on massive cash holdings (W219.2bn as of end- 2018), is currently mulling M&As for overseas expansion. As such, we expect the company to secure overseas growth drivers, in addition to domestic affiliate demand.
The company’s IT services are composed of the system management (SM) and system integration (SI) businesses. The SM business manages/runs enterprise customers’ IT systems, staff, and hardware, while the SI business devises IT system establishment plans and operational strategies as well as supports system design/development. SM accounts for 23% of revenue, while SI generates the remaining 77%.
Table 14. Quarterly and annual earnings (Wbn, %) 1Q18 2Q18 3Q18 4Q18 1Q19F 2Q19F 3Q19F 4Q19F 2015 2016 2017 2018 2019F 2020F Revenue 183.9 200.0 192.1 235.7 197.5 237.0 217.3 277.0 734.9 768.8 819.7 811.7 928.8 1,052.4 SM 41.1 42.8 45.2 48.8 46.1 52.7 51.2 58.7 127.0 138.1 151.1 177.9 208.8 233.4 SI 142.8 157.2 146.9 186.9 151.4 184.3 166.0 218.2 607.9 630.7 668.6 633.8 720.0 819.0 Revenue breakdown 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% SM 22.3% 21.4% 23.5% 20.7% 23.3% 22.2% 23.6% 21.2% 17.3% 18.0% 18.4% 21.9% 22.5% 22.2% SI 77.7% 78.6% 76.5% 79.3% 76.7% 77.8% 76.4% 78.8% 82.7% 82.0% 81.6% 78.1% 77.5% 77.8% OP 5.8 9.0 7.3 16.8 6.8 13.8 9.1 15.9 29.0 18.9 34.2 39.0 45.6 56.3 OP margin 3.2 4.5 3.8 7.1 3.5 5.8 4.2 5.7 3.9 2.5 4.2 4.8 4.9 5.3 SM 4.1 3.8 4.4 6.5 4.9 5.0 5.3 6.8 11.5 12.7 14.1 18.8 21.9 25.2 OP margin 10.0 8.9 9.7 13.3 10.7 9.4 10.3 11.5 9.1 9.2 9.4 10.6 10.5 10.8 SI 1.7 5.2 2.9 10.3 1.9 8.9 3.8 9.1 17.4 6.2 20.1 20.2 23.7 31.1 OP margin 1.2 3.3 2.0 5.5 1.3 4.8 2.3 4.2 2.9 1.0 3.0 3.2 3.3 3.8 Pretax profit 6.7 8.9 7.3 11.7 7.2 13.7 9.0 16.8 23.7 15.1 27.6 34.6 46.7 57.6 Net profit 4.5 6.3 4.4 8.2 4.8 9.3 6.1 11.3 16.9 11.9 20.6 23.4 31.5 40.5 Net profit (controlling) 5.4 6.6 4.7 9.6 5.7 9.8 6.5 12.1 16.9 11.9 20.8 26.3 34.0 40.3 Growth (YoY) Revenue 7.4 18.5 13.1 17.5 2.4 4.6 6.6 -1.0 14.4 13.3 SM 12.1 23.2 13.3 20.4 4.7 8.7 9.4 17.7 17.4 11.8 SI 6.0 17.2 13.0 16.7 1.9 3.8 6.0 -5.2 13.6 13.8 OP 17.9 53.0 23.4 -5.3 2.1 -34.7 80.7 14.0 17.0 23.3 SM 19.9 30.8 20.0 4.2 8.1 10.3 11.2 32.9 16.7 14.9 SI 13.2 69.1 28.6 -11.5 -1.5 -64.4 223.4 0.7 17.3 31.0 Pretax profit 6.7 54.0 23.6 43.5 1.0 -36.3 82.8 25.4 34.9 23.4 Net profit 7.3 48.2 38.9 37.8 1.0 -29.6 73.1 13.4 34.9 28.5 Net profit (controlling) 4.8 48.2 38.9 25.4 1.0 -29.6 74.8 26.5 29.3 18.6 Source: Company data, Mirae Asset Daewoo Research
Mirae Asset Daewoo Research 20 April 11, 2019 IT Services
Investment points
1. Largest beneficiary of massive IT investments
1) The only IT service firm under the Lotte Group’s umbrella
Acting as the Lotte Group’s IT control tower, Lotte Data Communication generates 90% of its parent revenue (80% of consolidated revenue) from affiliates.
We expect the company to continue to secure massive affiliate deals, as: 1) it is better positioned to provide swift and efficient IT services for group affiliates compared to external firms; and 2) the need to ensure security in dealing with sensitive data, including business strategies and customer information, is increasing.
The company’s five major affiliate customers, Lotte Shopping (023530 KS/Trading Buy/TP: W220,000/CP: W178,500), Lotte Card, Lotte E&C, Hotel Lotte, and Woori Home Shopping, account for 46.2% of its total revenue.
Figure 29. Lotte Group’s assets and revenue; Lotte Data Communication’s revenue
(Wtr) (Wbn) 140 Lotte Group total assets (L) 700 Lotte Group revenue (L) 120 Lotte Data Communication revenue (non-consolidated, R) 600
100 500
80 400
60 300
40 200
20 100
0 0 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18
Source: DART, Mirae Asset Daewoo Research
Figure 30. Affiliate revenue and contribution Figure 31. Revenue breakdown by customer (2017)
(Wbn)Affiliate revenue (L) (%) Non-affiliate affiliate (L) Non-affiliates 800 100 Affiliate revenue contribution (R) 7.1% Lotte Shopping 20.1% 90 600
80 Lotte Card
400 8.6% 70 Other affiliates 46.7% Lotte Hotel 200 60 7.6% Lotte E&C Woori Home 6.6% 0 50 Shopping 14 15 16 17 18 3.2%
Source: Company data, Mirae Asset Daewoo Research Source: DART, Mirae Asset Daewoo Research
Mirae Asset Daewoo Research 21 April 11, 2019 IT Services
2) Lotte Group’s five-year investment plan
The Lotte Group announced a plan to invest W50tr in its domestic and overseas businesses in October 2018. The group aims to support its affiliates’ pursuit of digitalization to provide new value to customers and create additional growth opportunities. In particular, the group plans to focus on enhancing the competitiveness of its flagship retail and chemicals arms, as well as identifying new businesses, through 2023.
We think that Lotte Data Communication will benefit from the initiative, as it should take charge of most IT infrastructure projects, including the construction of smart factories and logistics systems.
① Retail: Online business expansion led by Lotte Shopping
In retail, the Lotte Group is set to invest heavily in bolstering the competitiveness of online channels by building out a leading e-commerce platform. The group already announced a five-year W3tr investment plan (W500bn for online mall integration and payment system development, W1tr for the establishment of an integrated logistics system, and W1.5tr for marketing campaigns) in May 2018. In addition, the group has created an e-commerce business unit by integrating its eight online shopping malls (including those of Lotte Department Store, Lotte Mart, and Lotte Home Shopping). Based on this plan, the group has set a goal of increasing online revenue from W7tr (18% of total retail revenue) in 2018 to W20tr (30%) in 2022.
② F&B
In F&B, the group plans to focus on developing market-leading products by identifying changes in consumer needs/preferences. As such, the group is expected to expand investments in AI for more aggressive trend analysis and product development.
③ Chemicals
The group plans to strengthen economies of scale and cost competitiveness via steady facility investments in major domestic production sites in Yeosu, Ulsan, and Daesan. In addition, the group should also carry out massive facility investments overseas. As such, we expect Lotte Data Communication to see rising demand for smart factory-related IT services.
④ Tourism/services
For tourism/services, the group plans to strengthen its brand value via: 1) the expansion of overseas businesses, particularly in Indonesia and Vietnam; 2) new market penetration; and 3) M&As.
Table 15. Lotte Group’s five-year investment plan (2019-23) (Wbn) Details Proportion Value ㆍOnline business expansion Retail - Digital transformation (AI, Big Data, etc.) 25% 12.5 ㆍDevelopment of an integrated online shopping mall ㆍNew product development (AI utilization to increase) F&B 10% 5.0 ㆍExpansion of production facilities ㆍCapacity expansion at home and abroad Chemicals/ ㆍStrengthening of cost competitiveness via feedstock 40% 20.0 construction diversification ㆍExpansion of value-added products Tourism/services ㆍSteady domestic and overseas expansion 25% 12.5 Total 100% 50.0 Source: Lotte Group, Mirae Asset Daewoo Research
Mirae Asset Daewoo Research 22 April 11, 2019 IT Services
3) Platform business undergoing digital transformation
Under the Lotte Group’s IT investment plans, Lotte Data Communication is establishing an integrated smart ecosystem encompassing smart factories, logistics, and retail. We believe these efforts will bolster competitiveness, increasing the company’s prospects for winning non-affiliate deals and driving sustainable growth.
① Smart factory
The smart factory business builds smart production facilities yielding higher productivity, quality, and customer satisfaction, applying ICT-based digital automation solutions to product design, development, manufacturing, distribution, and logistics. Recently, we have started to see full-swing construction of IoT-based smart factories in the manufacturing sector.
Of note, the Lotte Group is also pursuing smart factory conversion for its F&B affiliates, including Lotte Chilsung (035300 KS/CP: W1,715,000) and Lotte Confectionery (280360 KS/CP: W180,500), chemicals affiliates, including Lotte Chemical (011170 KS/Buy/TP: W380,000/CP: W298,500) and Lotte Fine Chemical (004000 KS/CP: W50,600), and manufacturing affiliates, including Lotte Aluminium. Targeting a total of 88 factories (48 domestic, 40 overseas), the smart factory conversion project is set to be executed through 2022, with investments totaling around W140bn (W36bn in 2019-20 and W104bn in 2021- 22).
② Smart logistics
Smart logistics covers integrated intelligent systems that control/manage logistics in real time via IT. As the Lotte Group is currently developing an integrated logistics platform (to support the merger between Lotte Global Logistics and Lotte Logistics and e-commerce business expansion), Lotte Data Communication is likely to see additional revenue from the development, deployment, maintenance, and operation of related systems.
Figure 32. IT investments-to-revenue ratio by major business Figure 33. Lotte Data Communication’s smart factory group business plan
Group revenue (Wbn) 316 (Wtr) Group IT investments 120 F&B Chemicals Other manufacturing/non-affiliates
158 127 100 68 5.1 23.9 3.0 1.6 0.8 80 10.7 Lotte Samsung LG SK 60 (%) 3.0 Lotte Samsung LG SK 2.5 40 3.3 69.4 2.0 1.61 1.34 1.5 0.97 1.01 20 1.0 32.7 0.5 0.0 0 Lotte Samsung LG SK 19-20 21-22
Source: Company data, Mirae Asset Daewoo Research Source: Company data, Mirae Asset Daewoo Research
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Figure 34. Lotte Data Communication’s smart logistics Figure 35. Lotte Group’s smart logistics project business plan
2H19 2019-20
Next-generation 1 2 3 Yangsan parcel services Logistics warehouse Logistics platform Smart logistics Parcel system automation integration Warehouse automation
Equipment BPO platform Logistics robots consulting Smart logistics platform
Integrated Blockchain Data hub control solutions management
BPO platform Mega hub Next-generation Logistics/ Corporate logistics IT Drones/picking terminal parcel services equipment standardization Warehouse automation
1H20 2019-22
Source: Company data, Mirae Asset Daewoo Research Source: Company data, Mirae Asset Daewoo Research
③ Smart retail
The smart retail business provides/manages retail platforms that can facilitate the entire smart shopping experience—from customer visit to purchasing decision—via cutting-edge IT. For smart retail, Lotte Data Communication is currently overseeing the Lotte Group’s online/offline platform integration and digital transformation. Based on the company’s smart retail solutions, customers will likely be able to convert existing stores to smart stores and implement omni-channel services, thus laying the foundation for sustainable growth.
In the e-commerce business, the Lotte Group plans to offer a cutting-edge shopping environment by focusing on an AI-based interactive voice commerce leveraging recommendation engines.
④ Other
Lotte Data Communication is also likely to secure a variety of smart city-related business opportunities, based on its track record in high-rise smart buildings and next-generation cooperative intelligent transport systems (C-ITS). In addition, the company should be able to generate additional revenue via AI- and Big Data-based business opportunities and recurring income business models (such as cloud service brokerage).
Furthermore, Lotte Data Communication is expected to start construction on a key customer’s fourth data center in April 2019. And based on its experience providing IT infrastructure/service platforms to affiliate customers, the company is likely to win non- affiliate projects, particularly in Indonesia and Vietnam.
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Figure 36. Lotte Data Communication’s smart retail platform Figure 37. Lotte Group’s retail store count (as of Jan. 2019) overview
(Units)
Store Purchasing 12,000 2019 rollout plan No. of stores Customer visit experience decision 550 10,000
Coupon AI robot Kiosk 8,000
L.Message Electronic shelf labels Hand Pay 6,000
Kakao Smart Order Video recognition ARA Self-POS 9,377 4,000
2,000 12
Payment 1,643 Marketing High-tech DT store 126 automation 0 7-Eleven Lotte Super Lotte Mart
Source: Company materials, Mirae Asset Daewoo Research Note: Department stores and outlet stores are excluded, Source: Company data, Mirae Asset Daewoo Research
Figure 38. Lotte Data Communication’s smart building/city Figure 39. Lotte Data Communication’s cloud service projects brokerage business
Source: Company materials, Mirae Asset Daewoo Research Source: Company materials, Mirae Asset Daewoo Research
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2. Margins to improve full swing
Going forward, we expect Lotte Data Communication to deliver solid revenue growth, aided by the Lotte Group’s increasing IT investments. Meanwhile, margins will likely improve more rapidly than revenue, as demand for low-margin IT projects is decreasing, while demand for high-margin platform projects based on IoT, cloud computing, and AI is expanding.
In addition, the company will likely enjoy additional margin improvement thanks to a hike in software engineer service fees. Lotte Data Communication’s main businesses are SI (for system stabilization/improvement/efficiency) and the subsequent management of deployed systems (maintenance, upgrades, etc.). As such, if SI projects increase, it would also expand SM revenue opportunities. Therefore, the major determinant of the company’s overall profitability is margin improvement in the SM business, which generally hinges on software engineer service fees paid by customers.
Currently, IT service wages are based on the software engineer service fee table set annually by the Korea Software Industry Association (KOSA). KOSA service fee rates have been raised by 3-5% annually. While Samsung SDS and SK C&C currently receive the highest rates in the table Lotte Data Communication charges only around 80% of the highest rates, suggesting ample room for fee increases. As such, we believe that gradual hikes will lead to margin improvement.
Table 16. Software engineer rate table (W’000/day)
2013 2014 2015 2016 2017 Classification 2013 2014 2015 2016 2017 Growth Growth. Growth Growth Growth
Early career 115 117 119 119 115 7.0% 1.8% 1.7% 0.4% -3.6% Technician Mid-career 126 141 141 147 158 12.4% 11.3% 0.5% 4.5% 7.5% Advanced 155 172 177 187 191 7.9% 11.6% 2.9% 5.5% 2.2% Early career (Staff) 182 189 191 191 191 5.4% 3.8% 0.9% 0.0% 0.3% (Assistant Mid-career 219 221 221 227 240 5.7% 0.9% 0.0% 2.3% 5.7% Engineer manager) Advanced (Manager) 267 272 276 284 305 4.6% 2.1% 1.5% 3.0% 7.4% Expert (Director) 357 376 374 382 391 2.3% 5.3% -0.7% 2.1% 2.5% Licensed engineers 398 409 412 437 453 1.7% 2.7% 0.6% 6.2% 3.5% Source: KOSA, Mirae Asset Daewoo Research
Figure 40. In 2018, margin improvement outpaced revenue Figure 41. OP and OP margin growth
(%) (Wbn) (%) 25 Revenue growth 60 OP (L) 6 OP growth OP margin (R) 20 50 5
15 40 4
10 30 3
5 20 2
0 10 1
-5 0 0 18 19F 20F 21F 22F 16 17 18 19F 20F
Source: Company data, Mirae Asset Daewoo Research Source: Company data, Mirae Asset Daewoo Research
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3. Inorganic growth via M&As
In its IPO in July 2018, Lotte Data Communication raised W127.7bn, issuing 4,286,000 new shares at a price of W29,800. As a result, the company’s cash and equivalents rose to W219.2bn on a consolidated basis as of end-2018.
The company plans to use its ample cash to advance technologies for existing businesses, develop IT platforms for IoT, cloud computing, Big Data, mobile communications, and blockchain services, and further expand into Indonesia and Vietnam. We believe that the company will likely seek M&A opportunities to accelerate its penetration into Southeast Asia.
Lotte Data Communication has already established business footholds in Vietnam, Indonesia, and Russia to meet IT investment demand from overseas group affiliates and look for global business opportunities. Given that overseas revenue made just a single-digit contribution to total revenue in 2018, we see room for growth going forward. If the company clinches some global M&A deals, it will be able to secure additional drivers.
Table 17. Lotte Data Communication’s plans to use capital raised via IPO (Wbn) Targets Details 2018 2019 2020 Total Development of integrated logistics/SCM Logistics IT standardization; development of integrated logistics 6.0 4.0 1.0 11.0 solutions platform led by Lotte Global Logistics Development of POS-based retail payment 360 barcode scanners (unmanned POS); finger vein payments 8.0 4.0 2.0 14.0 I solutions Development of integrated security control AI-based analysis of fraud detection patterns; improvement in IoT 2.0 2.0 1.0 5.0 solutions sensors Total (I) 16.0 10.0 4.0 30.0 Development of integrated AI/Big Data platforms Establishment of AI-based call centers and integrated AI/Big Data 5.0 10.0 8.0 23.0 for marketing, R&D, chatbots, call centers, etc. platforms Development of integrated IoT/blockchain Platforms for tracking agricultural/livestock/fisheries products, platforms for tracking agricultural/ livestock/ 8.0 7.0 7.0 22.0 electronic certification, and blockchain services fishery products, contract verification, etc. II Cloud equipment purchases and infrastructure investment Cloud server and infrastructure capacity expansion; investment in 1.0 5.0 9.0 15.0 Network expansion, energy saving equipment network expansion installation Development of mobile coupon system System development for entry into the mobile coupon market 8.0 2.0 - 10.0 Total (II) 22.0 24.0 24.0 70.0 Retail solution and electronic payment system Entry into the total store operation solution market 1.0 6.0 3.0 10.0 businesses in Indonesia III Retail solution, smart city, and stock trading Electronic payment and stock trading solutions; investment in 4.0 11.0 2.7 17.7 solution businesses in Vietnam smart city-related businesses Total (III) 5.0 17.0 5.7 27.7 Total 43.0 51.0 33.7 127.7 Source: Company materials, Mirae Asset Daewoo Research
Figure 42. Overseas revenue contribution Figure 43. Cash and equivalents
(Wbn)Revenue (L) (%) (Wbn) 1,000 Overseas revenue (L) 10 250 Cash and equivalents IPO capital Overseas revenue contribution (R)
800 8 200
600 6 150 127.7
400 4 100
50 200 2 86.1 91.5
0 0 0 15 16 17 18 19F 17 18
Source: DART, Mirae Asset Daewoo Research Source: DART, Mirae Asset Daewoo Research
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Corporate structure
Split off from Lotte IT Tech in November 2017, Lotte Data Communication was listed on the KOSPI on July 27, 2019. Lotte Corp. (004990 KS/CP: W50,600) is the company’s largest shareholder (70% of total issued shares).
Lotte Data Communication holds a 59.7% stake in its consolidated subsidiary Hyundai Information Technology (026180 KS/CP: W2,245). Notably, Lotte Data Communication acquired the company in 2011 in an effort to diversify its revenue structure, which was excessively dependent on group affiliate orders. Hyundai Information Technology mainly engages in the IT outsourcing (ITO) and SI businesses and has displayed competitiveness in non-affiliate projects in public services, healthcare, and SOC. As the subsidiary has steadily streamlined its cost structure via human resources/business restructuring, we believe earnings will improve slightly this year on the back of robust overseas and transportation project orders.
For 2018, Lotte Data Communication’s DPS and dividend yield came in at W650 and 1.8%, respectively, with total dividend payout of W9.3bn (consolidated dividend payout ratio of 35.3%). If the dividend payout ratio remains unchanged for this year, DPS is expected to rise to W800 in 2019.
Table 18. Current ownership structure (No. of shares, %) Shareholder Status No. of shares Stake Lotte Corp. Largest shareholder 10,000,000 70.0 ESOP - 822,891 5.8 Other - 3,463,109 24.2 Total no. of issued shares 14,286,000 100.0 Source: DART, Mirae Asset Daewoo Research
Figure 44. Lotte Group’s ownership structure (simplified)
Source: DART, Mirae Asset Daewoo Research
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Lotte Data Communication (286940 KS/Buy/TP: W63,000)
Comprehensive Income Statement (Summarized) Statement of Financial Condition (Summarized) (Wbn) 12/17 12/18 12/19F 12/20F (Wbn) 12/17 12/18 12/19F 12/20F Revenue 149 812 929 1,052 Current Assets 280 404 511 615 Cost of Sales 137 741 845 953 Cash and Cash Equivalents 76 163 227 288 Gross Profit 12 71 84 99 AR & Other Receivables 131 132 155 178 SG&A Expenses 6 32 38 43 Inventories 17 12 14 17 Operating Profit (Adj) 5 39 46 56 Other Current Assets 56 97 115 132 Operating Profit 5 39 46 56 Non-Current Assets 303 299 264 240 Non-Operating Profit -2 -4 1 2 Investments in Associates 0 0 0 0 Net Financial Income 0 -1 -1 -1 Property, Plant and Equipment 210 217 194 175 Net Gain from Inv in Associates 0 0 0 0 Intangible Assets 32 27 21 17 Pretax Profit 3 35 47 58 Total Assets 583 704 774 855 Income Tax 0 11 15 17 Current Liabilities 327 311 355 399 Profit from Continuing Operations 2 23 32 41 AP & Other Payables 162 193 227 261 Profit from Discontinued Operations 0 0 0 0 Short-Term Financial Liabilities 123 61 61 61 Net Profit 2 23 32 41 Other Current Liabilities 42 57 67 77 Controlling Interests 2 26 34 40 Non-Current Liabilities 38 27 31 36 Non-Controlling Interests 1 -3 -2 0 Long-Term Financial Liabilities 3 1 1 1 Total Comprehensive Profit 3 23 32 41 Other Non-Current Liabilities 35 26 30 35 Controlling Interests 3 26 40 52 Total Liabilities 365 337 386 435 Non-Controlling Interests 0 -3 -9 -11 Controlling Interests 197 348 374 405 EBITDA 10 71 75 80 Capital Stock 50 71 71 71 FCF (Free Cash Flow) -16 79 78 81 Capital Surplus 143 248 248 248 EBITDA Margin (%) 6.7 8.7 8.1 7.6 Retained Earnings 3 29 54 85 Operating Profit Margin (%) 3.4 4.8 5.0 5.3 Non-Controlling Interests 21 18 15 15 Net Profit Margin (%) 1.3 3.2 3.7 3.8 Stockholders' Equity 218 366 389 420
Cash Flows (Summarized) Forecasts/Valuations (Summarized) (Wbn) 12/17 12/18 12/19F 12/20F 12/17 12/18 12/19F 12/20F Cash Flows from Op Activities -10 107 78 81 P/E (x) - 16.1 20.2 17.8 Net Profit 2 23 32 41 P/CF (x) - 4.8 9.0 8.4 Non-Cash Income and Expense 10 64 45 41 P/B (x) - 1.4 1.8 1.7 Depreciation 4 26 24 19 EV/EBITDA (x) - 5.1 6.3 5.0 Amortization 1 6 6 5 EPS (W) 1,139 2,205 2,382 2,824 Others 5 32 15 17 CFPS (W) 7,380 7,353 5,385 5,736 Chg in Working Capital -22 25 16 16 BPS (W) 19,679 24,419 26,150 28,324 Chg in AR & Other Receivables -23 -2 -23 -23 DPS (W) 0 650 650 650 Chg in Inventories 4 4 -2 -2 Payout ratio (%) 0.0 39.7 29.5 22.9 Chg in AP & Other Payables -5 31 18 18 Dividend Yield (%) - 1.8 1.3 1.3 Income Tax Paid 0 -5 -15 -17 Revenue Growth (%) - 445.0 14.4 13.2 Cash Flows from Inv Activities 1 -77 -8 -8 EBITDA Growth (%) - 610.0 5.6 6.7 Chg in PP&E -6 -28 0 0 Operating Profit Growth (%) - 680.0 17.9 21.7 Chg in Intangible Assets -3 -4 0 0 EPS Growth (%) - 93.6 8.0 18.6 Chg in Financial Assets -18 -40 -10 -10 Accounts Receivable Turnover (x) 1.1 6.3 6.6 6.5 Others 28 -5 2 2 Inventory Turnover (x) 8.9 56.0 69.2 67.5 Cash Flows from Fin Activities -6 57 -12 -12 Accounts Payable Turnover (x) 1.5 7.6 7.6 7.3 Chg in Financial Liabilities 126 -64 0 0 ROA (%) 0.4 3.6 4.3 5.0 Chg in Equity 193 126 0 0 ROE (%) 1.0 9.6 9.4 10.4 Dividends Paid 0 0 -9 -9 ROIC (%) 1.9 12.5 19.9 33.2 Others -325 -5 -3 -3 Liability to Equity Ratio (%) 167.8 92.1 99.2 103.6 Increase (Decrease) in Cash -15 87 64 61 Current Ratio (%) 85.5 130.1 144.1 153.9 Beginning Balance 91 76 163 227 Net Debt to Equity Ratio (%) 18.5 -42.9 -59.5 -71.9 Ending Balance 76 163 227 288 Interest Coverage Ratio (x) 27.4 12.1 14.6 18.0 Source: Company data, Mirae Asset Daewoo Research estimates
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APPENDIX 1
Important Disclosures & Disclaimers 2-Year Rating and Target Price History
Company (Code) Date Rating Target Price Company (Code) Date Rating Target Price Samsung SDS(018260) HIT(026180) 07/29/2018 Buy 290,000 04/11/2019 Hold - 02/04/2018 Trading Buy 280,000 LOTTE(004990) 07/19/2017 Buy 240,000 04/09/2019 Buy 21,000,000 01/24/2017 Buy 200,000 LOTTE DATA (286940) 04/11/2019 Buy 63,000
(W) Samsung SDS (W) LOTTE DATA (W) HIT (W) LOTTE 400,000 80,000 4,000 25,000,000
20,000,000 300,000 60,000 3,000
15,000,000 200,000 40,000 2,000 10,000,000
100,000 20,000 1,000 5,000,000
0 0 0 0 Apr 17 Apr 18 Apr 19 Apr 17 Apr 18 Apr 19 Apr 17 Apr 18 Apr 19 Apr 17 Apr 18 Apr 19
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 83.52% 8.24% 8.24% 0.00% Investment Banking Services 82.61% 4.35% 13.04% 0.00% * Based on recommendations in the last 12-months (as of March 31, 2019)
Disclosures As of the publication date, Mirae Asset Daewoo Co., Ltd. has acted as a liquidity provider for equity-linked warrants backed by shares of Samsung SDS as an underlying asset; other than this, Mirae Asset Daewoo has no other special interests in the covered companies. We managed the IPO of LOTTE DATA within the past one year.
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.
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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 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.
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