Company Note (008770.KS) M.PERFORM / TP KRW95,000 July 30, 2019 Retail/Trading Companies/Paper Park Jong-ryeol +822-3787-2099 [email protected]

Earnings momentum to weaken in 2H19

Share price (KRW, Jul 29) 79,700 1) Investment highlights

Upside (%) 19.2 - 2Q19 earnings will likely miss the consensus estimate. DFS sales, which have been growing sharply, are

Market cap (KRW bn) 3,128 likely to lose steam in 2H19 due to weak outbound demand and the slowing growth in Chinese inbound

Shares outstanding (’000) 39,248 travelers amid the downturn of the Chinese economy.

Paid-in capital (KRW bn)/ Face value (KRW) 200/5,000 - We revise down our earnings forecasts in light of unfavorable sector fundamentals. We also trim our

52-week high/low (KRW) 115,000/69,500 target price from KRW116,000 to KRW95,000 while keeping our rating at Marketperform. 60-day avg. daily T/O (KRW bn) 49 Foreign ownership (%) 28.39 2) Major issues and earnings outlook Major shareholders (%) Life Insurance - 2Q19 results were slightly below consensus estimates, with consolidated sales of KRW1.35tn (+15% and 5 others 17.34 YoY) and operating profit of KRW79.2bn (+14% YoY). Price performance 1M 3M 6M - DFS sales rose 16% YoY as downtown DFS and airport DFS sales grew 23% and 6% YoY respectively. DFS Absolute (%) -11.8 -22.5 2.7 operating profit increased only 9.1% YoY to KRW69.8bn on a 5.7% operating margin, down 0.4%p YoY. Relative (%p) -9.8 -18.3 8.3 Broker commissions to attract tourists continued to fall, which is positive, but SG&A costs including rent K-IFRS, consolidated and marketing costs rose, which worked to squeeze margins. (KRW) 18F EPS 19F EPS TP - Hotel and leisure sales grew 7% YoY to KRW128.4bn, led by an increase in the room occupancy ratio Previous 4,993 5,388 116,000 across all hotel chains, spending per customer, and the travel business’s growing sales. Operating profit Revised 4,391 4,737 95,000 jumped to KRW9.4bn from the KRW5.5bn seen in the same period last year, thanks to a higher Consensus 4,932 5,878 131,000 occupancy rate and customer spending at Hotel Shilla and the Shilla Stay chain. Difference (%) -11.0 -19.4 -27.5 Earnings momentum is expected to slow in 2H19. The fall of -bound tourists and the overall - slowdown of outbound travelers amid the economic slump are likely to weigh on airport DFS sales. Also, 12-month price performance the growth in Chinese inbound travelers is likely to lose steam due to the Chinese economic downturn. Hotel Shilla 140 Intensifying competition in the DFS space will likely stifle growth in profitability. In all, unfavorable KOSPI 120 sector fundamentals are expected to weaken earnings momentum. 100

80 3) Share price outlook and valuation 60 - The stock currently trades at 17.4x P/E and 3.2x P/B on 12-month-forward earnings. 40 - In addition to a demanding valuation, slowing earnings momentum in 2H19 will likely prevent the stock 20 from rallying. 0 18.07 18.09 18.11 19.01 19.03 19.05 19.07 Source: WiseFn, Hyundai Motor Securities

Earnings forecasts and valuations Sales OP NP EBITDA EPS Growth P/E P/B EV/EBITDA ROE Div. yield (KRW bn) (KRW bn) (KRW bn) (KRW bn) (KRW) (%YoY) (x) (x) (x) (%) (%) 2017 3,515 73 25 145 637 -9.2 133.3 5.1 26.0 3.8 0.4 2018 4,714 209 110 284 2,803 340.3 27.3 4.0 12.0 15.4 0.5 2019F 5,363 293 173 376 4,391 56.6 18.2 3.5 13.1 20.6 0.4 2020F 5,725 316 186 401 4,737 7.9 16.8 2.9 11.8 18.6 0.4 2021F 5,953 333 203 420 5,168 9.1 15.4 2.5 11.0 17.2 0.4 Note: K-IFRS, consolidated

COMPANY NOTE

Fig 1. 2Q18 review (consolidated) Quarterly earnings Change HMS estimates Consensus (KRW bn) 2Q18 1Q19 2Q19P %YoY %QoQ 2Q19P %diff 2Q19P %diff Sales 1,175 1,343 1,355 15.3 0.9 1,354 0.1 1,385 -2.2 Operating profit 70 82 79 14.0 -3.1 79 0.3 83 -4.1 Pretax profit 65 67 68 4.6 2.0 63 7.8 75 -10.1 Net profit (CI) 53 52 52 -1.0 0.4 48 7.6 53 -2.4 Note: K-IFRS, non-consolidated; TB=turn to black, Source: Company data, WiseFn, Hyundai Motor Securities

Fig 2. Earnings revisions (consolidated) Revised Previous %difference (KRW bn) 19F 20F 19F 20F 19F 20F Sales 5,363 5,725 5,338 5,545 0.5 3.3 Operating profit 293 316 311 335 -5.8 -5.7 Pretax profit 223 241 254 275 -12.1 -12.2 Net profit (CI) 173 186 196 212 -11.9 -12.2 Source: Company data, Hyundai Motor Securities

Fig 3. Fair target price valuation (KRW bn) 2017F 2018F 12M forward Note 1. Business value 4,869 5,201 5,063 EBITDA 376 401 EV/EBITDA 13.0 13.0 18% discount to average of recent five-year lows (15.8x) 2. Investment value 183 183 183 30% discount to NAV 1) Affiliates 24 24 2) LT available-for-sale securities 0 0 3) Other financial assets 159 159 3. Enterprise value (1+2) 5,051 5,384 5,246 4. Net cash 1,628 1,446 1,522 5. Non-controlling interest 1 1 1 6. Fair shareholders’ equity value ( 3-4-5) 3,423 3,938 3,723 Shares outstanding (‘000 shares) 39,248 39,248 39,248 Fair per-share value (KRW) 87,220 100,328 94,866 Current price (KRW) 79,700 79,700 79,700 Upside potential (%) 9.4 25.9 19.0

Source: Hyundai Motor Securities

2 Retail /Trading Companies/Education/Paper Park Jong-ryeol +822-3787-2099 / [email protected]

Fig 4. Earnings forecasts 2018 2019F (KRW bn, %) 2018 2019F 2020F 1Q 2Q 3Q 4Q 1Q 2Q 3QP 4QF Sales 1,126 1,175 1,220 1,193 1,34 1,355 1,362 1,303 4,714 5,363 5,725 TR 1,014 1,055 1,094 1,072 1,225 1,227 1,232 1,179 4,234 4,863 5,215 Hotel & Leisure 112 120 127 121 118 128 130 124 480 500 510 Gross sales 531 575 589 556 591 603 614 578 2,252 2,385 2,537 Operating profit 44 69 68 27 82 79 69 63 209 2 3 316 TR 48 64 59 25 82 70 67 60 196 279 301 Hotel & Leisure -3 6 9 2 0 9 2 3 13 14 15 Pretax profit 42 65 66 -25 67 68 50 39 147 223 241 Net profit 32 53 47 -21 52 52 39 30 110 173 186 Profitability (%) GPM 47.2 48.9 48.3 46.6 44.0 44.5 45.1 44.4 47.8 44.5 44.3 OPM 3.9 5.9 5.6 2.3 6.1 5.9 5.1 4.8 4.4 5.5 5.5 RPM 3.7 5.5 5.4 -2.1 5.0 5.0 3.7 3.0 3.1 4.2 4.2 NPM 2.8 4.5 3.9 -1.8 3.9 3.9 2.9 2.3 2.3 3.2 3.3 Growth (%YoY) Sales 10.2 46.7 14.4 16.6 19.3 15.3 11.6 9.2 20.5 13.8 6.8 TR 9.6 52.6 15.2 18.1 20.9 16.3 12.7 10.0 21.9 14.9 7.2 Hotel & Leisure 16.6 9.4 7.5 4.7 5.5 7.0 2.1 2.1 9.2 4.1 2.1 Operating profit 342.2 302.6 124.2 77.0 85.0 14.1 2.0 128.2 186.1 40.1 7.8 TR 181.7 680.5 152.8 153.5 72.7 9.1 12.9 137.3 235.2 42.1 8.1 Hotel & Leisure RR -39.6 26.5 -56.7 TB 70.4 -73.1 28.7 -10.1 9.0 3.1 Pretax profit 683.1 818.0 220.2 TR 60.3 4.6 -23.2 TB 228.4 51.9 8.1 Net profit 1,074.1 1,668.0 274.9 TR 63.7 -0.7 -17.7 TB 336.3 56.5 7.9 Key assumptions (%YoY) GDP growth (real) 2.8 2.8 2.0 3.1 2.6 2.5 2.6 2.4 2.7 2.5 2.5 Private consumption 3.5 2.8 2.5 2.4 2.4 2.4 2.4 2.3 2.8 2.4 2.4 CPI growth 1.3 1.5 1.5 1.8 1.2 1.4 1.5 1.7 1.3 1.5 1.7

Note: K-IFRS, non-consolidated; TB=turn to black, RR=remain in red Source: Company data, Hyundai Motor Securities

3 COMPANY NOTE

Income statement Balance sheet (KRW bn) 2017 2018 2019F 2020F 2021F (KRW bn) 2017 2018 2019F 2020F 2021F Sales 3,515 4,714 5,363 5,725 5,953 Current assets 1,168 1,272 1,562 1,689 1,912 Change (%) -5.4 34.1 13.8 6.8 4.0 Cash and cash equivalents 474 282 300 482 623 Cost of goods sold 1,866 2,462 2,977 3,188 3,300 Short-term investment assets 4 19 17 17 17 % of sales 53.1 52.2 55.5 55.7 55.4 Accounts receivable 77 95 158 149 162 Gross profit 1,649 2,252 2,385 2,537 2,653 Inventory assets 469 704 899 853 922 Gross margin (%) 46.9 47.8 44.5 44.3 44.6 Other current assets 143 169 185 185 185 Change (%) -1.6 36.6 5.9 6.4 4.6 Non-current assets 1,051 1,032 2,294 2,302 2,310 SG&A expenses 1,576 2,042 2,092 2,221 2,320 Tangible assets 693 697 700 708 716 % of sales 44.8 43.3 39.0 38.8 39.0 Intangible assets 44 48 48 48 47 EBITDA 145 284 376 401 420 Investment assets 286 253 262 262 262 EBITDA margin (%) 4.1 6.0 7.0 7.0 7.1 Other non-current assets 28 34 1,284 1,284 1,284 Change (%) -5.8 96.3 32.5 6.8 4.6 Other financial assets 0 0 0 0 0 Operating profit 73 209 293 316 333 Total assets 2,219 2,304 3,856 3,991 4,222 Operating margin (%) 2.1 4.4 5.5 5.5 5.6 Current liabilities 879 1,003 1,523 1,484 1,524 Change (%) -7.4 186.1 40.1 7.8 5.5 Short-term debt 22 10 15 15 15 Non-operating profit -28 -62 -74 -75 -70 Accounts payable 241 284 423 384 424 Interest income 8 11 13 18 22 Current portion of long-term debt 200 150 150 150 150 Interest expenses 22 19 70 77 77 Other current debt 417 559 936 936 936 Other non-operating income -13 -54 -17 -16 -16 Non-current liabilities 672 536 1,420 1,421 1,422 Subsidiaries/affiliate income 0 0 5 0 0 Bonds 649 499 499 499 499 Pretax profit from cont ops 45 147 223 241 263 Long-term debt 0 0 0 0 0 Pretax margin (%) 1.3 3.1 4.2 4.2 4.4 LT financial debt (incl. lease) 0 0 881 881 881 Change (%) -14.6 228.4 51.9 8.1 9.1 Other non-current debt 23 37 40 41 41 Income tax 19 37 51 55 60 Other financial liabilities 0 0 0 0 0 Profit from continuing ops 25 110 173 186 203 Total liabilities 1,551 1,539 2,943 2,905 2,946 Profit from discontinuing ops 0 0 0 0 0 Owners of parent equity 667 764 912 1,085 1,275 Net profit 25 110 173 186 203 Paid-in capital 200 200 200 200 200 Net margin (%) 0.7 2.3 3.2 3.3 3.4 Capital surplus 197 197 197 197 197 Change (%) -9.1 336.2 56.5 7.9 9.1 Capital adjustment, etc. -104 -104 -104 -104 -104 NP from controlling interest 25 110 173 186 203 Other accumul earnings and comp income -6 -3 -1 -1 -1 NP from non-controlling interest 0 0 0 0 0 Retained earnings 382 475 621 794 984 Other comprehensive income -6 0 2 0 0 Non-controlling interest 1 1 1 1 1 Total comprehensive income 19 110 174 186 203 Total equity 668 765 913 1,086 1,276

Cash flow Key financial data (KRW bn) 2017 2018 2019F 2020F 2021F (KRW, x, %) 2017 2018 2019F 2020F 2021F Operating cash flow 207 154 282 365 325 EPS (based on net profit) 637 2,803 4,391 4,737 5,168 Net profit 25 110 173 186 203 EPS (based on parent net profit) 637 2,803 4,391 4,737 5,168 Depreciation on tangible assets 58 62 69 71 73 BPS (based on total equity) 16,703 19,127 22,825 27,148 31,894 Amortization on intangible assets 13 12 14 14 14 BPS (based on owners of parent equity) 16,687 19,110 22,808 27,132 31,878 FX-related profit 0 -2 0 0 0 DPS 350 350 350 350 350 Dec (inc) in working capital 66 -117 -156 17 -41 P/E (based on net profit) 133.3 27.3 18.2 16.8 15.4 Others 44 88 183 77 77 P/E (based on parent net profit) 133.3 27.3 18.2 16.8 15.4 Investing cash flow -162 -103 -95 -94 -94 P/B (based on total equity) 5.1 4.0 3.5 2.9 2.5 Dec (inc) in investment assets -83 34 -9 0 0 P/B (based on owners of parent equity) 5.1 4.0 3.5 2.9 2.5 Decrease in tangible assets 4 6 0 0 0 EV/EBITDA (reported) 26.0 12.0 13.1 11.8 11.0 Increase in tangible assets -65 -78 -78 -80 -80 Dividend yield 0.4 0.5 0.4 0.4 0.4 Others -19 -65 -8 -14 -14 Growth (%) Financing cash flow 85 -245 -169 -90 -90 EPS (based on net profit) -9.2 340.2 56.7 7.9 9.1 Increase (decrease) in debt -31 -12 1,289 0 0 EPS (based on parent net profit) -9.2 340.3 56.6 7.9 9.1 Increase (decrease) in bond 50 -149 0 0 0 Profitability (%) Increase in capital 0 0 0 0 0 ROE (based on net profit) 3.8 15.4 20.6 18.6 17.2 Dividend -13 -13 -13 -13 -13 ROE (based on parent net profit) 3.8 15.4 20.6 18.6 17.2 Others 80 -70 -1,445 -77 -77 ROA 1.2 4.9 5.6 4.7 4.9 Other cash flow -3 1 1 0 0 Stability (%) Increase (decrease) in cash 128 -193 19 182 141 Total liabilities/equity 232.1 201.1 322.3 267.6 230.9 Beginning cash 347 474 282 300 482 Net debt/equity 58.7 46.3 178.3 133.2 102.3 Ending cash 474 282 300 482 623 Interest coverage 3.3 11.3 4.2 4.1 4.4 Note: K-IFRS, consolidated

4 Retail /Trading Companies/Education/Paper Park Jong-ryeol +822-3787-2099 / [email protected]

Investment rating and target price history Two-year price chart Difference (%) Date Rating TP Average High/Low 17/10/30 M.PERFORM 76,000 8.6 -0.1 KRW’000 17/11/30 M.PERFORM 76,000 13.0 -0.1 140 18/01/26 M.PERFORM 86,000 8.2 -6.3 120 18/04/30 M.PERFORM 110,000 5.1 -17.5 18/07/31 BUY 123,000 -20.3 -11.4 100 18/10/30 BUY 108,000 -28.5 -20.1 80 19/01/29 BUY 91,000 -1.1 18.1 60 19/04/29 M.PERFORM 116,000 -18.5 -29.4 19/07/30 M.PERFORM 95,000 - - 40 Hotel Shilla

20 Target Price

0 17.07 17.10 18.01 18.04 18.07 18.10 19.01 19.04 19.07

Compliance note • The author(s) of this report does(do) not have any interests in the company(ies) covered herein. • Hyundai Motor Securities has not disclosed the material contained in this report to any institutional investor or third party prior to its publication. • Hyundai Motor Securities has no special interest in the subject company as of the date of recommendation. • This report accurately reflects the author(s)’s professional views and was written without any undue external influence or interference.

Investment rating Hyundai Motor Securities offers three sector investment ratings based on six-month forward fundamentals and share price outlook. • OVERWEIGHT: Sector-wide fundamentals and share prices are expected to turn up. • NEUTRAL: No meaningful fundamental improvement is expected. • UNDERWEIGHT: Sector-wide fundamentals and share prices are expected to turn down.

Hyundai Motor Securities offers three company investment ratings based on the relative return expected in the following six months, based on the closing price on the date of rating declaration. • BUY: Excess return of +15%p or more • MARKETPERFORM (M.PERFORM): Excess return of between -15%p and +15%p • SELL: Excess return of -15%p or less

Stock ratings distribution (July 01, 2018-June 30, 2019) Rating Count % of rating category BUY 148 89.16 MARKETPERFORM 18 10.84 SELL 0 0

• This report has been prepared for informational purposes only and thus may not be reproduced or distributed without the prior written consent of Hyundai Motor Securities. • The information and statistical data contained herein were taken from sources believed to be reliable but in no way can be guaranteed and, therefore, final investment decisions should be made based on each client’s own judgment. • This report cannot be used as evidence in any legal disputes related to the client’s investment decisions.

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