Duty-free Time to shop!
Duty-free market expands rapidly - Having expanded at a CAGR of 20% in the past decade, South Korea’s travel-retail industry is now a $12.8bn market (as of 2017). - Last year, 74% of revenue came from foreign shoppers, especially package tourists from China, whose numbers started to balloon in 2012.
- Foreign tourists also tend to spend more than local shoppers. As of 1H18, foreign shoppers spent six times more than local customers (based on a per-customer basis), mainly driven by Chinese free-spending middlemen so-called daigou, who have emerged as a top customer for Korea’s duty-free operators.
More players join the growing market - Local retail giant Hyundai Department Store is set to open a duty-free store this November in Gangnam, the southern part of Seoul where another travel retailer Shinsegae rolled out a new outlet in July. (There are two Lotte duty-free stores also
Cindy Yu operating in the region.)
[email protected] - The cluster of duty-free shops will help attract daigou, helping the new locations break even more easily. But given the limited range of products and promotion expenses spent at the time of the launch, it will take a while before they start generating stable Rating profits.
OVERWEIGHT Impacts of China-US trade tension - Shares of Korea’s duty-free operators are under heavy pressure as China faces an escalating trade fight with the US that is depressing its currency and hurting consumer upgrade confidence. - With the China risk largely priced in, the share prices might rebound strongly once the tension between the world’s two largest economies unwinds. In addition, earnings will Company Rating TP (W) likely prove immune to the government’s proposed regulation on Chinese grey-market Hotel Shilla (008770 KS) BUY 140,000 resellers, an issue the sector has faced every year. Shinsegae (004170 KS) BUY 480,000 - Therefore, investors would be well-advised to increase exposure to the sector Hyundai Dept. Store (069960 KS) BUY 125,000 incrementally, while monitoring how China’s economic situation unfolds. F&F (007700 KS) BUY 115,000 Shinsegae Int’l (031430 KS) BUY 235,000
Company TP (W) CP (W) Investment highlights - Enjoys scale advantage in both downtown and airport duty-free businesses Hotel Shilla 140,000 107,000 - Free of start-up cost burden being a well-established player - Share price to likely rebound most strongly among peers once the industry regains health - Uncertain outlook for new stores - Offers deep value Shinsegae 480,000 305,500 - Share price to likely rise gradually after the third-quarter earnings season - Successfully shifted its business portfolio from low-margin clothes Shinsegae to lucrative cosmetics 235,000 205,500 International - Stronger brand-extension potential - Undervalued relative to cosmetics peers
This report has been prepared by Daishin Securities Co., Ltd. SEE APPENDIX FOR IMPORTANT DISCLOSURES AND ANALYST CERTIFICATION. Industry Analysis 2018.08.29 www.daishin.com
Contents
Duty-free business expands rapidly 3
More players join the growing travel-retail market 5
Outlook: Shinsegae’s new air-port duty-free outlets 7
Impacts of China-US trade war 10
Company Analysis 12
Hotel Shilla (008770 KS) 15
Shinsegae (004170 KS) 23
Hyundai Department Store (069960 KS) 28
F&F (007700 KS) 32
Shinsegae International (031430 KS) 38
DAISHIN SECURITIES
Duty-free business expands rapidly
A decade of 20% After a decade of solid growth (20% a year on average), travel retailing in South Korea CAGR is now a $12.8bn market (as of 2017). The industry used to generate an equal amount of revenue from domestic and foreign shoppers, but that changed in 2012 when a large number of Chinese group tourists started flowing into Korea. The share of foreign shoppers in the country’s duty-free sales surged to 74% in 2017 as Chinese middlemen so-called daigou started to snap up Korea’s duty-free goods for resale in their home country a couple of years ago.
Thanks to daigou, Korea’s downtown duty-free business is also thriving. Last year, the downtown operation constituted 78% of total domestic duty-free sales, up from 50% in 2012.
Foreign travelers shell Amid diplomatic friction between Seoul and Beijing last year, the number of foreign out more on duty-free arrivals to Korea shrank (down 23% yoy), which led to a decline in traffic to duty-free goods than local customers stores (down 27% yoy for foreign customers). Yet, foreign tourists’ spending on duty- free goods increased thanks to free-spending daigou. On a per-customer basis, foreign travelers spent six times more on duty-free goods than local customers in 1H18.
Fig 1. Korea’s duty-free industry: Global market Fig 2. Korea’s duty-free industry: Market size share
(USDbn) (%) (W조원tn) ) Global글로벌duty면세점-free market시장 규모(좌) 시내Downtown면세점 70 21 16 Korea’s한국 면세점market share점유율(우) Incheon인천공항AiRpoRt 기타OtheR 60 18 14 12 2010~2017년 CAGR 50 15 전체 18.1%, 인천공항 6.3%, 10 시내면세점 24.1% 40 12 8 30 9 6 20 6 4
10 3 2
0 0 0 2010 2011 2012 2013 2014 2015 2016 2010 2011 2012 2013 2014 2015 2016 2017
Source: Korea Duty Free Shops Association, The Generation research, Daishin Source: Korea Duty Free Shops Association, Daishin Securities Research Center Securities Research Center
3
Duty-free
Fig 3. Duty-free purchase: Domestic customers Fig 4. Duty-free purchase: Foreign travelers
(달러($) ) (%) ((달러$) ) (%) 150 P내국인urchase인당value구매액(좌) 20 1,000 P외국인urchase인당value구매액(좌) 120 YoYyoy((RHS)우) YoYyoy((RHS)우)
120 10 800 90
90 0 600 60
60 -10 400 30
30 -20 200 0
0 -30 0 -30 15.1 15.7 16.1 16.7 17.1 17.7 18.1 18.7 15.1 15.7 16.1 16.7 17.1 17.7 18.1 18.7
Source: Korea Duty Free Shops Association, Daishin Securities Research Center Source: Korea Duty Free Shops Association, Daishin Securities Research Center
Fig 5. Foot traffic: Domestic customers Fig 6. Foot traffic: Foreign travelers
(mn(백만person명s)) (%) (mn(백만person명s)) (%) Foot내국인traffic인원수(좌) Foot외국인traffic인원수(좌) 3.5 Yyoy(oY (RHS)우) 50 2.5 Yyoy(oY (RH우)S) 200
3.0 40 150 2.0 2.5 30 100 1.5 2.0 20 50 1.5 10 1.0 0 1.0 0 0.5 0.5 -10 -50
0.0 -20 0.0 -100 15.1 15.7 16.1 16.7 17.1 17.7 18.1 18.7 15.1 15.7 16.1 16.7 17.1 17.7 18.1 18.7
Source: Korea Duty Free Shops Association, Daishin Securities Research Center Source: Korea Duty Free Shops Association, Daishin Securities Research Center
Fig 7. Duty-free sales mix: Koreans vs. Foreigners Fig 8. Number of Chinese tourists visiting Korea
(%) 내국인Koreans Foreigner외국인 s (1K(per천s명on)s) Chine방한s중국인e visitor(s좌) (%) 100 1,200 %비중(RHS)(우) 60
80 50 900
60 40 600 40 30
300 20 20
0 0 10 09 10 11 12 13 14 15 16 17 18 11 12 13 14 15 16 17 18 19
Note: From Jan.-July, 2018 Source: Korea Tourism Organization, Daishin Securities Research Center Source: Korea Duty Free Shops Association, Daishin Securities Research Center
4
DAISHIN SECURITIES
More players join the growing travel-retail market
More companies Lotte and Hotel Shilla were the two dominant forces leading the Korea’s duty-free keen for a slice of the industry. In May 2016, retail titan Shinsegae entered the travel retail market by opening growing duty-free pie a duty-free shop in Myeongdong, a shopping mecca in northern Seoul. In July this
year, the company launched another duty-free outlet in Gangnam, the southern part of Seoul. This November, Hyundai Department Store will open its tax-free store in the same neighborhood, which by that time will be a home to four duty-free stores (including two Lotte duty-free stores already operating in the region).
Time needed for new Clustered in the same neighborhood, the new stores will be able to attract more stores to generate tourists, most importantly daigou, helping them break even earlier. But with the limited stable profits number of brands they carry and early investments they made to draw traffic, it will take a while before they can get on stable footing.
Fig 9. Duty-free stores in downtown Seoul
(143)
(322) (444)
(1,351) (3,162)
(2,124)
(833) (331)
(572)
(216)
Note: Numbers in blue indicate 2017 duty-free sales (Wbn). Source: Korea Duty Free Shops Association, the companies, Daishin Securities Research Center
5
Duty-free
Region # Operator Store Launch Retail space Seoul 1 Hotel Lotte Lotte Duty-Free (flagship) 1980 13,236 ㎡ 2 Hotel Lotte Lotte Duty-Free 2000 5,828 ㎡ 3 Hotel Shilla Shilla Duty-Free 1986 7,270 ㎡ 4 Dongwha Duty-Free Dongwha Duty-Free 1973 6,460 ㎡
5 HDCShilla Duty-Free Shilla IPark Duty-Free 2015 27,400 ㎡
6 Hanwha Galleria TimeWorld Galleria Duty-Free 2015 10,072
7 SM Duty-Free SM Duty-Free 2016 9,977 ㎡
8 ShinsegaeDF Shinsegae Duty-Free 2016 13,884 ㎡
9 Doosan Doota Duty-Free 2016 05 16,825 ㎡
10 Hotel Lotte Lotte Duty-Free(World Tower) 1989/2017 17,334 ㎡
11 ShinsegaeDF Central City 2018 13,350 ㎡
12 Hyundai Dept. Duty-Free (Trade Center) Set for end-2018 14,005 ㎡
13 Top-city Duty-Free (City Plus) Top-city Duty-Free Set for end-2018 - Busan 1 Hotel Lotte Lotte Duty-Free 1995 5,600 ㎡ 2 Shinsegae ChosunHotel Shinsegae Duty-Free 2009 8,600 ㎡
3 Busan Duty-Free Busan Duty-Free 2018 1,500 ㎡ Jeju 1 Lotte Duty-FreeJeju Lotte Duty-Free 2000 6,612 ㎡ 2 Hotel Shilla Shilla Duty-Free 1989/2017 6,765 ㎡
3 JTO JTO Duty-Free 2016 2,634 ㎡ Incheon 1 Entas Duty Free IncheonEntas downtown Duty-Free 2015 4,300 ㎡ Ulsan 1 Jinsan Sunmoo Jinsan Duty-Free 2013 1,296 ㎡ Changwon 1 Daedong Dept. Daedong Duty-Free 2013 930 ㎡ Daejeon 1 Shinwoo Shinwoo Duty-Free 2013 852 ㎡ Daegu 1 Grand Hotel Grand Duty-Free 2013 1,224 ㎡ Chungnam 1 DF Korea DF Korea Duty-Free 2016 - Suwon 1 Hotel Angkor Angkor Duty-Free 2013 1,646 ㎡ Cheongju 1 Joongwon Joongwon Duty-Free 2013 1,030 ㎡ Gangwon 1 Alpensia Alpensia Duty-Free 2017 1,086 ㎡
6
DAISHIN SECURITIES
Outlook: Shinsegae’s new airport duty-free outlets
Scale advantage In June this year, Shinsegae won a bid to run duty-free stores at Incheon International expected; profit Airport. The retailer will operate two stores, one in DF1 (cosmetics and perfume) and decline inevitable one in DF5 (fashion and accessories) in Terminal 1 of the world’s busiest airport. With the deal, Shinsegae’s share in the domestic duty-free market will jump from 13% to 19%, giving the company scale needed to compete against bigger rivals such as Lotte (market share 36%) and Shilla (30%).
On the downside, the high rents will likely weigh on the company’s bottom line in the early stage. In the June bid, the retailer offered to pay W337bn (W276.2bn for the DF1 slot and W60.8bn for the DF5 slot) a year. (Lotte Duty Free, which previously ran those lucrative spots (over W1tn sales in 2016), gave up the license due to the heavy cost burden). Further weighing on the outlook is the newly opened Terminal 2 (launched in January this year) which will drive some of customer traffic away from Terminal 1.
To quell those concerns, the new stores’ combined sales will have to top W900bn a year.
Fig 10. Domestic duty-free market share Fig 11. Incheon airport rental fees as % of revenue
(W십억원bn) ) (%) 롯데Lotte 신라Shilla 신세계Shinsegae (%) 1,500 Sale매출액s (,HS)(좌) 45 Rental임차료비중Fees as(우%)oF sales 1,200 42 43 35.9 41.9 900 41 39
600 38 39 37 29.7 37 29.7 300 37
18.7 0 35 12.7 ,롯데otte Shilla신라 Shin신세계segae 신세계ShinsegaeDF 신세계ShinsDFegae (舊 조선호텔 운영) (DF가정 (1)1) (가정DF2) (2) 2016 2018F
Source: the companies, Daishin Securities Research Center Note: (1) annual sales are estimated at W800bn (2) annual sales are estimated at W900bn Source: Korea Tourism Organization, Daishin Securities Research Center
7
Duty-free
Fig 12. Duty-Free stores at Incheon Airport Terminal 1
Source: Incheon International Airport Corporation, Daishin Securities Research Center
Tab 1. Duty-free stores at Terminal 1 of Incheon International Airport Retail space Store Zone Operator Product category Location From-To (㎡) count Conglomerates DF1 Shinsegae DF Perfume/Cosmetics 1,324 3 Terminal 1 (east) 18.07.07-23.07.06 DF2 Hotel Shilla Perfume/Cosmetics 1,106 4 Terminal 1 (west) 15.09.01-20.08.31 DF3 Hotel Lotte Liquor/Tobacco 506 5 Terminal 1 (east) 15.09.01-20.08.31 DF4 Hotel Shilla Liquor/Tobacco 486 5 Terminal 1 (west) 15.09.01-200.8.31 DF5 Shinsegae DF Boutique 1,814 4 Terminal 1 (center) 18.07.07-23.07.06 DF6 Hotel Shilla Fashion/Accessories 1,909 11 Terminal 1 (east) 15.09.01-20.08.31 DF7 Shinsegae Fashion/Accessories 2,856 12 Terminal 1 (west) 15.09.01-20.08.31 DF8 Shinsegae DF All categories 4,767 19 Entire terminal 18.07.07-23.07.06 Total 14,768 63 SMEs DF9 SM Duty-Free All categories 859 4 Terminal 1 (east) 15.09.01-20.08.31 DF10 City Plus All categories 924 5 Terminal 1 (west) 15.09.01-20.08.31 Perfume/Cosmetics / DF11 Samik 234 1 Terminal 1 (center) 15.12.01-18.09.07 Accessories Liquor/Tobacco/ DF12 Entas 171 1 Terminal 1 (center) 15.09.01-20.08.31 Accessories Total 2,188 11 Total 16,956 74 Source: Incheon International Airport Corporation, Daishin Securities Research Center
8
DAISHIN SECURITIES
Fig 13. Duty-Free stores at Incheon Airport Terminal 2
Source: Incheon International Airport Corporation, Daishin Securities Research Center
Tab 2. Duty-free stores at Terminal 2 of Incheon International Airport
Zone Operator Product category Retail space (㎡) Store count Location From-To
rd 18.01.18- Conglomerates DF1 Hotel Shilla Perfume/Cosmetics 2,105 6 Terminal 2 (3 floor) 23.01.17 rd 18.01.18- DF2 Hotel Lotte Liquor/Tobacco/Food 1,407 8 Terminal 2 (3 floor) 23.01.17 rd 18.01.18- DF3 Shinsegae DF Fashion/Accessories 4,889 14 Terminal 2 (3 floor) 23.01.17 rd 18.01.18- SMEs DF4 SM Duty-Free All categories 825 2 Terminal 2 (3 floor) 23.01.17 rd 18.01.18- DF5 Entas All categories 741 1 Terminal 2 (3 floor) 23.01.17 rd 18.01.18- DF6 City Plus Fashion/Accessories/Food 741 2 Terminal 2 (3 floor) 23.01.17 Total 10,708 33 Source: Incheon International Airport Corporation, Daishin Securities Research Center
9
Duty-free
Impacts of China-US trade war
Sentiment on duty- Most of Korea’s duty-free retailers saw their share prices fall sharply in the past month, free stocks weaker pressured by rising concerns over China’s economy as the trade tension between Beijing and Washington continued to escalate. Those companies, which benefited from
large purchases made by Chinese middlemen, took a hit as Chinese currency fell against the dollar and the country’s consumer sentiment soured.
Those two headwinds will need to be resolved for share prices to regain ground. On the bright side, the current share prices largely reflect those headwinds, which means
they will rebound strongly once the tension between the world’s two largest economies eases.
Meanwhile, the proposed regulation on Chinese grey-market resellers will not likely have a significant impact on duty-free companies who have faced the same regulatory issue every year. Historically, those stocks suffered a selloff when the regulatory issue resurfaced, but rallied back in a matter of months.
In all, we advise investors to increase exposure to duty-free shares in an incremental manner, while monitoring developments in China’s economy.
Fig 15. Hotel Shilla share price vs. China consumer Fig 14. Hotel Shilla share price vs. RMB sentiment
((W천원1K)) (W(1천원K) ) (p) 150 호텔신라Share price주가(LHS)(좌) 7.2 150 호텔신라Share price주가(LHS)(좌) 130 위안Yuan/Dollar/달러 환율(우) 중국Consu소비자mer sentiment심리지수(우)
120 120 6.8 120
90 90 6.4 110 60 60
6.0 100 30 30
0 5.6 0 90 12.1 13.1 14.1 15.1 16.1 17.1 18.1 19.1 12.1 13.1 14.1 15.1 16.1 17.1 18.1 19.1
Source: Wisefn, Bloomberg, Daishin Securities Research Center Source: Wisefn, CEIC, Daishin Securities Research Center
10
DAISHIN SECURITIES
Fig 16. Hotel Shilla share price vs. Domestic regulation
((W천원1K)) 2014.9 2018.7 150
120 2017.3 2012.5 2016.4 2017.7 90
60 2015.5
30
2016.10 0 12.1 12.7 13.1 13.7 14.1 14.7 15.1 15.7 16.1 16.7 17.1 17.7 18.1 18.7 19.1 Source: Hotel Shilla, Daishin Securities Research Center
Investment highlights
Top pick: We present Hotel Shilla as our top pick for the duty-free sector. Shinsegae and Hotel Shilla Shinsegae International are also under our watch.
Under watch: Hotel Shilla (BUY; TP W140,000) With no need to plow money into new store Shinsegae, launches, the No. 2 duty-free operator (by market share) boasts the highest operational Shinsegae efficiency among rivals. Despite renewed regulation on Chinese daigou, expectations International for stronger earnings in 3Q18 and 2H18 remain intact. Recent stock retreat offers a good buying opportunity.
Shinsegae (BUY; TP W480,000) While late to the game, the retail giant has successfully gained a foothold in the duty-free world. Its share price, however, has been hammered by concerns over start-up costs that could weigh on third-quarter earnings. We believe the stock will rebound at the end of this year or early next year, as investors get clarity on the performance of new duty-free stores.
Shinsegae International (BUY; TP W235,000) and F&F (BUY; TP W115,000). Both having a knack for pursuing new businesses and building up brand equity, the two companies have emerged as winners of Korea’s booming downtown duty-free business. Their brands will continue to grow as the domestic duty-free market continues to expand. We see stronger stock upside for Shinsegae International which has a bigger brand-extension potential than F&F.
11
Duty-free
Tab 3. Promising bets
Company Code TP (W) CP (W) Investment highlights
- Enjoys scale advantages in both downtown and airport duty-free businesses Hotel Shilla 008770 140,000 107,000 - Free of start-up cost burden, being a well-established player - Share price to likely rebound most strongly among peers once the industry regains health
- Uncertain outlook for new stores Shinsegae 004170 480,000 305,500 - Offers deep value - Share price to likely rise gradually after the third-quarter earnings season
Hyundai Department - Set to open its first duty-free outlet in November at COEX Mall in Samsung-dong 069960 125,000 98,300 Store - Early losses inevitable, but the new business to help boost valuation in 1H19
- Successfully shifted its business portfolio from low-margin clothes to lucrative cosmetics Shinsegae International 031430 235,000 205,500 - Stronger brand-extension potential - Undervalued relative to cosmetics peers - Boasts excellent brand-building capability (e.g. Discovery and MLB) F&F 007700 115,000 97,200 - MLB brand’s overseas brand sales to match those of duty-free sales Note: Based on Aug. 27 closing prices Source: Daishin Securities Research Center
Tab 4. Valuation comparison Japan Airport China Int’l Company Hotel Shilla Shinsegae Dufry Lagardere Terminal Travel (008770 KS) (027390 KS) (DUFN SW) (MMB FP) (9706 JP) (601888 CH)
Share price (W, $) 107,000 305,500 124 30 45 10
Market cap (Wbn, $mn) 4,242 3,008 6,688 18,615 3,946 3,826 Sales 17A 4,011 3,871 8,511 7,986 2,039 4,139 (Wbn, $mn) 18F 4,836 5,592 8,927 8,361 2,480 6,273 19F 5,509 6,937 9,395 8,722 2,570 7,504 OP 17A 73 346 427 338 121 520 (Wbn, $mn) 18F 234 415 551 465 202 879 19F 306 437 626 479 194 1150 PER 17A 133.3 16.2 136.7 19.4 28.0 33.5 (x) 18F 27.1 11.3 13.3 14.4 12.6 34.1 19F 20.1 10.7 11.6 13.4 39.0 27.1 PBR 17A 5.1 0.9 2.5 1.9 2.5 6.0 (x) 18F 5.3 0.8 2.2 1.7 2.5 7.6 19F 4.3 0.7 2.2 1.7 2.4 6.3 EV/EBITDA 17A 26.0 10.8 10.8 8.1 14.7 20.3 (x) 18F 15.3 9.2 9.3 7.6 12.5 20.1 19F 12.0 8.5 8.6 7.4 12.7 15.9 ROE 17A 3.8 5.5 1.8 9.7 9.2 19.0 (%) 18F 21.0 7.4 12.8 11.6 22.1 23.0 19F 23.0 7.3 16.4 12.5 6.1 23.7 Note: Based on Aug. 27 closing prices, Japan airport terminal: 18A, 19F, 20F Source: Bloomberg, Daishin Securities Research Center
12
DAISHIN SECURITIES
Fig 17. EPSG-PER Fig 18. ROE-PBR
(19FDtERPDx) (19FDPfR, x) ghinaD 30 8 international travel China internationalDtravel 6 20 호텔신라Shi((a Lagardere 4 Japan airportD 호텔신라Sh%((a terminal 10 Dufry Shins신세계EgaE 2 Dufry Lagardere (19F EPS growth, %) Sh신세계%nsegae (19FDROE,D%) 0 0 0 5 10 15 20 25
0 10 20 30 40
Source: Bloomberg, Daishin Securities Research Center Note: Based on 2020F for Japan Airport Terminal. Source: Bloomberg, Daishin Securities Research Center
13
Duty-free
Company
Analysis
Initiation
14
DAISHIN SECURITIES
Hotel Strong portfolio of duty-free Shilla stores is something to boast (008770 KS) about
Cindy Yu Coverage initiated with BUY and 6M TP of W140,000 [email protected] - We begin to cover Hotel Shilla with a BUY rating and a six-month target price of W140,000 (based on a 12-month forward P/E of 25x). The target Rating BUY multiple is derived from the average EPS growth expected in 2019-2020. Meanwhile, our residual income model values Hotel Shilla at W134,523 initiate per share, which is similar to the target price.
TP (W) 140,000 initiate A strong portfolio of duty-free stores CP (W) (18.08.27) 107,000 - Duty-free business requires economies of scale, and in this sense, Hotel Shilla has a strong portfolio of duty-free stores in both downtown and Leisure airports. Its rivals are seeing substantial earnings fluctuations: 1) Lotte, the market leader, has withdrawn from Incheon International Airport; and 2) KOSPI 2299.3 Shinsegae, now the third largest player, replaced Lotte at Incheon Market cap (Wbn) 4,242 International Airport, albeit at the expense of high rents. In contrast, Hotel Market cap portion (%) 0.28 Shilla is enjoying stable earnings from its Changchoong downtown store Paid-in capital (common; Wbn) 196 and the Incheon International Airport store, while achieving economies of 52w high/low (W) 132,000 / 52,600 scale. 120d avg. trading volume (Wbn) 48.2 - Foreign ownership (%) 34.91 Its Changchoong downtown store, a must-go place for daigou (Chinese Major Samsung Life Inc.+5: 17.36% shuttle traders), posts yearly revenue of more than W2tn at the highest shareholders National Pension Service: level of efficiency. Shinsegae’s Myeongdong store is catching up rapidly in 12.71% terms of revenue, but still lags far behind the Changchoong store in size and efficiency. Furthermore, being the market’s dominant player, Hotel (%) 1M 3M 6M 12M Shilla does not need to be aggressive when it comes to capex investments Abs. return 9.2 -11.9 28.9 65.4 in airport duty-free stores (unlike Shinsegae). Rel. return 9.0 -5.7 37.7 71.1 - In 2Q18, companywide revenue and OP expanded 47% and 57% yoy,
(W(천원1K) ) H호텔신라Otel ShIlla (LH좌S)) (%) respectively, with duty-free revenue and OP surging 53% and 302% yoy, 140 RelatRelativeIve tO KO toS PIKOSPI(우) 120 respectively. Duty-free unit’s OP margin widened 5.0%p yoy to 6.1% 100 owing to a 1.1%p yoy fall in commissions paid to tour guides who bring 117 80 customers to downtown duty-free stores. Such a cut in commission would 60 help boost earnings, but as 2Q18 results show, revenue expansion is key 95 40 to earnings growth. 20 72 0 - As for downtown duty-free stores, it is not a stretch to say that revenue -20 expansion contributes up to 80% of earnings growth as their fixed cost 49 -40 burden is not heavy relative to airport duty-free stores. 17.08 17.11 18.02 18.05 18.08
Share price will start to recover as US-China trade tensions ease - A drop in China’s consumer sentiment index (stemming from the trade tensions between the US and China), coupled with the depreciation of the Chinese yuan against the greenback, has dragged down the shares in Hotel Shilla. But investors may want to consider a buy approach on Hotel Shilla. Given that many negative catalysts are already baked into the share price, investors should be prepared for a possible easing of the trade frictions between the two countries.
15
Duty-free
Operating results and major financial data (Wbn, W, x, %) 2016A 2017A 2018F 2019F 2020F Revenue 3,715 4,011 4,836 5,509 6,014 OP 79 73 234 306 328 Pretax profit 52 45 222 298 322 NP 28 25 155 209 225 NP (controlling int.) 28 25 155 209 225 EPS 702 637 3,953 5,311 5,730 PER 68.6 133.3 27.1 20.1 18.7 BPS 16,539 16,687 20,241 25,128 30,425 PBR 2.9 5.1 5.3 4.3 3.5 ROE 4.0 3.8 21.0 23.0 20.3 Note: EPS, BPS, and ROE are based only on the controlling interest.
Source: Hotel Shilla, Daishin Securities Research Center
Hotel Shilla boasts a strong portfolio of duty-free stores
Strong portfolio of Duty-free business requires economies of scale, and in this sense, Hotel Shilla has an downtown and airport strong portfolio of duty-free stores in both downtown and airports. Its rivals are seeing duty-free stores substantial earnings fluctuations: 1) Lotte, the market leader, has withdrawn from Incheon International Airport; and 2) Shinsegae, now the third largest player, replaced Lotte at Incheon International Airport, albeit at the expense of high rents. In contrast, Hotel Shilla is enjoying stable earnings from its Changchoong downtown store and the Incheon International Airport store, while achieving economies of scale
Its Changchoong downtown store, a must-go place for daigou (Chinese shuttle traders), posts yearly revenue of more than W2tn at the highest level of efficiency. Shinsegae’s Myeongdong store is catching up rapidly in terms of revenue, but still lags far behind the Changchoong store in size and efficiency. Furthermore, being the market’s dominant player, Hotel Shilla does not need to be aggressive when it comes to capex investments in airport duty-free stores (unlike Shinsegae).
In duty-free business, In 2Q18, companywide revenue and OP expanded 47% and 57% yoy, respectively, revenue expansion is with duty-free revenue and OP surging 53% and 302% yoy, respectively. Duty-free key to earnings unit’s OP margin widened 5.0%p yoy to 6.1% owing to a 1.1%p yoy fall in growth commissions paid to tour guides who bring customers to downtown duty-free stores. Such a cut in commission would help boost earnings, but as 2Q18 results show, revenue expansion is key to earnings growth. As for downtown duty-free stores, it is not a stretch to say that revenue expansion contributes up to 80% of earnings growth as their fixed cost burden is not heavy relative to airport duty-free stores.
16
DAISHIN SECURITIES
Fig 19. Three duty-free store operators’ revenue vs. OP margin
(Wbn) (%) 6,000 Duty-free revenue (LHS) 10 OP margin (RHS) 5,000 5
4,000 0
3,000 -5
2,000 -10
1,000 -15
0 -20 2016 2017 2018F 2016 2017 2018F 2016 2017 2018F Hotel Shilla Hotel Lotte Shinseg
Note: Hotel Shilla’s 2018 forecasts are the annualized value of its 1H18 results. Source: individual companies, Daishin Securities Research Center
Fig 20. Hotel Shilla’s revenue breakdown by business Fig 21. Hotel Shilla’s OP breakdown by business
(%) Leisure 150 TR Hotels 2% 8% Hotel & Leisure 120
90
Downtown 60 duty-free stores 30 Airport duty- 52% free stores 37% 0
-30
-60 2015 2016 2017 2018F 2019F
Source: Hotel Shilla, Daishin Securities Research Center Source: Hotel Shilla, Daishin Securities Research Center
Fig 22. OP margin by business unit Fig 23. Commission rates vs. OP margin
(%) (%) Commission rates (%) 6 TR 16 OP margin (RHS) 6 Hotel Leisure 5 4 12 4
2 8 3
2 0 4 1
-2 0 0
2015 2016 2017 2018F 2019F 2015 2016 2017 2018F 2019F
Source: Hotel Shilla, Daishin Securities Research Center Source: Hotel Shilla, Daishin Securities Research Center
17
Duty-free
Fig 24. Annual revenue and revenue growth Fig 25. Hotel’s room occupancy rates
(Wbn) (%) (%) 6,000 Revenue (LHS) 25 100 Seoul YoY chg Jeju 5,000 Shilla Stay 20 90
4,000 15 80 3,000 10 70 2,000
5 60 1,000
0 0 50
2015 2016 2017 2018F 2019F 2014 2015 2016 2017 2018F
Source: Hotel Shilla, Daishin Securities Research Center Source: Hotel Shilla, Daishin Securities Research Center
Share price will start to recover as US-China trade tensions ease
Risks already baked As mentioned above, a drop in China’s consumer sentiment index (stemming from the into the share price to trade tensions between the US and China), coupled with the depreciation of the a considerable Chinese yuan against the greenback, has dragged down the shares in Hotel Shilla. extent; investors Earnings are continuing to improve thanks to revenue growth from daigou (Chinese should take a buying shuttle traders) and enhanced operating efficiency, but with the investor sentiment approach to Hotel dampened by the aforesaid catalysts, shares in Hotel Shilla are showing limited growth. Shilla, which stands to benefit from an Against this backdrop, we advise investors to consider a buy approach on Hotel Shilla easing of US-China as many negative catalysts are already priced in though it is hard to predict when the trade tensions trade dispute between the US and China and the risks associated with it will ease or end.
Furthermore, the number of Chinese tourists visiting Korea, which had plunged due to the THAAD standoff, is gradually recovering. We believe that the gradually recovering investor sentiment will drive the earnings momentum in the duty-free sector, and rapidly lift the share price.
18
DAISHIN SECURITIES
Fig 26. Hotel Shilla’s share price vs. China’s consumer Fig 27. Hotel Shilla’s share price vs. dollar-yuan rates sentiment index
(W(1천원K) ) (p) ((W천원1K)) 150 호텔신라Share price주가(LHS)(좌) 130 150 호텔신라Share price주가(LHS)(좌) 7.2 중국Consu소비자mer sentiment심리지수(우) 위안Yuan/Dollar/달러 환율(우)
120 120 120 6.8
90 90 110 6.4 60 60
100 6.0 30 30
0 90 0 5.6 12.1 13.1 14.1 15.1 16.1 17.1 18.1 19.1 12.1 13.1 14.1 15.1 16.1 17.1 18.1 19.1
Source: Wisefn, Bloomberg, Daishin Securities Research Center Source: Wisefn, CEIC, Daishin Securities Research Center
Fig 28. Chinese tourists to Korea (yoy) Fig 29. Chinese tourists to Korea (mom)
(1K ppl.) (1K ppl.) 1,000 Asia China (LHS) 300 1,000 Asia China (LHS) 120 Yoy chg in Chinese visitors to Korea Mom chg in Chinese visitors to Korea 250 90 800 800 200 60 150 600 600 100 30
400 50 400 0 0 200 200 -30 -50
0 -100 0 -60
10 11 12 13 14 15 16 17 18 19 10 11 12 13 14 15 16 17 18 19 Source: Korea Tourism Organization, Daishin Securities Research Center Source: Korea Tourism Organization, Daishin Securities Research Center
19
Duty-free
Coverage initiated with BUY and 6M TP of W140,000
We begin to cover Hotel Shilla with a BUY rating and a six-month target price of W140,000 (based on a 12-month forward P/E of 25x). The target multiple is derived
from the average EPS growth expected in 2019-2020. Our residual income model values Hotel Shilla at W134,523 per share, which is similar to the target price.
For the share price to recover, China’s economic growth momentum would have to draw attention, although valuation levels are also relevant. Hotel Shilla’s current valuation level (i.e., 19x 2019E EPS) reflects only a portion of its growth potential for 2018-2020. Unless China’s economy dips as a result of the escalating trade wars with the US, we believe the current valuation level is clearly attractive.
Tab 5. Hotel Shilla’s earnings results and forecast (Wbn, %)
2017 2018F 2017 2018F 2019F 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q Revenue 1,021 900 1,067 1,023 1,126 1,175 1,346 1,189 4,011 4,835 5,509 Travel retail 925 790 949 908 1,014 1,055 1,193 1,063 3,572 4,324 4,967 Hotel 71 86 95 93 82 92 125 99 344 398 423 Leisure 25 24 23 23 29 28 28 28 95 113 119 OP 10 17 30 16 44 70 70 50 73 234 306 Travel retail 17 8 24 10 48 64 61 43 59 216 283 Hotel & Leisure -7 9 7 6 -3 6 10 7 15 19 24 OP margin 1.0 1.9 2.8 1.5 3.9 5.9 5.2 4.2 1.8 4.8 5.6 Travel retail 1.8 1.0 2.5 1.1 4.7 6.1 5.1 4.1 1.6 5.0 5.7 Hotel & Leisure -7.2 8.3 5.8 4.8 -3.1 4.6 6.4 5.2 3.3 3.6 4.3 YoY Revenue 15.2 -5.7 13.8 9.5 10.2 30.6 26.1 16.2 8.1 20.5 13.9 OP -48.2 -7.9 19.8 -0.6 342.2 302.6 132.2 222.9 -7.4 220.4 30.7 Note: K-IFRS (consolidated) Source: Hotel Shilla, Daishin Securities Research Center
Fig 30. Hotel Shilla P/E band Fig 31. Hotel Shilla P/B band
((W천원1K)) ((W천원1K)) 7.5 x 150 26.0 x 150 6.3 x 24.0 x 22.0 x 5.0 x 120 120 20.0 x 18.0 x 3.8 x 90 90
2.5 x 60 60
30 30
0 0 12 13 14 15 16 17 18 19 12 13 14 15 16 17 18 19
Source: Hotel Shilla, Daishin Securities Research Center Source: Hotel Shilla, Daishin Securities Research Center
20
DAISHIN SECURITIES
RIM valuation
Per share intrinsic value Residual Income Model (Wbn, W, x, %) 2018F 2019F 2020F 2021F 2022F 2023F 2024F 2025F 2026F 2027F
Ⅰ NP (contr. int.)(Note 2) 167 224 260 278 297 318 340 364 390 417
Ⅱ Shareholders’ equity (contr. int.)(Note 2) 926 1,154 1,404 1,656 1,908 2,160 2,412 2,664 2,916 926
Estimated ROE 22.4% 24.2% 22.5% 19.8% 18.0% 16.7% 15.8% 15.1% 14.6% 14.3%
Ⅲ Required rate of return (Note 3) 6.4
Risk free rate of return (Note 4) 2.4
Market risk premium (Note 5) 4.0
Beta 1.00
Ⅳ Spread (estimated ROE – required rate of return) 16.0% 17.8% 16.1% 13.4% 11.6% 10.3% 9.4% 8.7% 8.3% 7.9%
Ⅴ Required income 42 52 66 81 97 113 129 145 161 177
Ⅵ Residual income ( l -Ⅴ) 124 171 194 197 200 205 211 219 228 240
Present value factor 0.98 0.92 0.87 0.81 0.77 0.72 0.68 0.64 0.60 0.56
PV of residual income 122 158 168 160 153 147 143 139 137 135
Ⅶ Sum of residual income 1,461
Ⅷ PV of residual income following forecasting period 3,151
Terminal growth (g)(Note 6) 0.0
Ⅸ Beginning shareholders’ equity 667
Ⅹ Fair market cap (Ⅶ+Ⅷ+Ⅸ) 5,280
Total number of shares (thousands) 39,248
Ⅹl Per share value (W) 134,523
Current share price (W) 107,000
TP (W) 140,000 Note 1: Under the residual income model (RIM), we add the current shareholders’ equity to the residual income based on the earnings forecast for the next ten years before adding the result to the residual income after the forecasting period to derive the value of shareholders’ stakes. The RIM is considered less subjective than similar valuation models such as DDM, DCF, and EVA. Note 2: The RIM reflects consolidated subsidiaries’ earnings not in their entirety but only for the stake controlled by the company. Note 3: The required rate of return (i.e., cost of equity) is the rate of return expected by the shareholders who take risks. It is derived by the capital asset price model: Cost of equity = Risk-free interest rate + Beta * Market risk premium. Note 4: The yield on five-year government bonds was used as the proxy for the risk-free interest rate. Note 5: Market risk premium refers to the gap between the expected return on the market portfolio and the risk-free interest rate. It has been lowered from 6-8% to 3-5% in reflection of the current low-growth environment. Note 6: The terminal growth was assumed to be zero.
21
Duty-free
Financial Statements
Income statement (Wbn) Balance sheet (Wbn)
2016A 2017A 2018F 2019F 2020F 2016A 2017A 2018F 2019F 2020F
Revenue 3,715 4,011 4,836 5,509 6,014 Current assets 1,079 1,198 1,107 1,261 1,390
Cost of goods sold 2,040 2,363 1,411 3,043 3,347 Cash & cash equiv. 347 474 325 447 594
Gross profit 1,676 1,649 3,424 2,466 2,668 Trade & other receive. 201 176 197 215 215
S&A expenses 1,597 1,576 3,190 2,160 2,339 Inventories 471 500 537 551 547
OP 79 73 234 306 328 Other current assets 60 48 48 48 35
OP margin 2.1 1.8 4.8 5.6 5.5 Long-term assets 962 1,051 1,076 1,088 1,103
EBITDA 153 145 301 373 393 Tangible assets 707 693 695 697 699
Non-OP -27 -28 -12 -8 -7 Investments in affiliates 35 33 38 43 49
Income from affiliates 0 0 0 0 0 Other long-term assets 220 326 342 347 355
Financial revenue 22 8 8 8 8 Total assets 2,041 2,250 2,183 2,349 2,494
FX related gains 23 25 23 23 23 Current liabilities 740 910 701 668 652
Financial expense -32 -22 -17 -17 -15 Payables & other liab. 511 595 590 597 595
FX related losses 0 0 0 0 0 Borrowings 53 22 22 0 0
Others -16 -13 -3 1 1 Current portion of LT debts 100 200 0 0 0
Income before taxes 52 45 222 298 322 Other current liabilities 77 94 89 71 57
Income tax expense -25 -19 -67 -89 -97 Long-term liabilities 639 672 681 689 638
Income from cont. op. 28 25 155 209 225 Borrowings 599 649 659 669 619
Income from discont. op. 0 0 0 0 0 Convertible securities 0 0 0 0 0
NP 28 25 155 209 225 Other long-term liab. 41 23 22 21 20
NP margin 0.7 0.6 3.2 3.8 3.7 Total liabilities 1,379 1,582 1,382 1,358 1,290
NP for non-contr. interest 0 0 0 0 0 Controlling interest 662 667 810 1,005 1,217
NP for contr. interest 28 25 155 209 225 Capital stock 200 200 200 200 200
Valuation of AFS fin. assets 0 0 0 0 0 Capital surplus 197 197 197 197 197
Other compreh. income 0 -1 -1 -1 -1 Retained earnings 371 382 524 719 931
Comprehensive income 32 19 149 202 219 Other capital changes -106 -111 -111 -111 -111
Comp. income for non-contr. Int. 0 0 0 0 0 Non-controlling interest 0 1 1 1 1
Comp. income for contr. int. 32 19 149 202 219 Total shareholder’s equity 662 668 810 1,006 1,218
Net borrowings 404 392 352 218 20
10 11 12 13 14
Valuation metrics (W, x, %) Cash flow statement (Wbn)
2016A 2017A 2018F 2019F 2020F 2016A 2017A 2018F 2019F 2020F
EPS 702 637 3,953 5,311 5,730 Operating cash flows 121 207 171 262 304
PER 68.6 133.3 27.1 20.1 18.7 NP 28 25 155 209 225
BPS 16,539 16,687 20,241 25,128 30,425 Non-cash items 139 130 157 180 184
PBR 2.9 5.1 5.3 4.3 3.5 Depreciation 74 71 67 67 65
EBITDAPS 3,910 3,682 7,672 9,509 10,026 FX gains 1 0 -6 -6 -6
EV/EBITDA 15.1 26.0 15.3 12.0 10.8 Equity method gain 0 0 0 0 0
SPS 92,883 100,287 120,889 137,733 150,360 Others 64 58 97 119 125
PSR 0.5 0.8 0.8 0.7 0.7 Chg in assets & liab. -23 66 -66 -29 -1
CFPS 4,166 3,889 7,819 9,722 10,229 Other cash flows -23 -15 -76 -98 -104
DPS 350 350 350 350 350 Investing cash flow 148 -162 -90 -79 -80
Investment assets 183 -103 -31 -19 -20
Financial ratios (W, x, %) Tangible assets -67 -60 -60 -60 -60
2016A 2017A 2018F 2019F 2020F Others 32 1 1 1 1
Growth potential Financing cash flows -245 85 -225 -47 -85
Revenue growth 14.3 8.0 20.5 13.9 9.2 Short-term borrowings 43 -29 0 -22 0
OP growth 2.4 -7.4 220.4 30.7 7.3 Bonds payable 0 249 10 10 -50
NP growth 50.6 -9.1 514.8 34.3 7.9 Long-term borrowings 0 0 0 0 0
Profitability Rights offering 0 0 0 0 0
ROIC 3.8 3.9 16.1 20.2 21.4 Cash dividends -14 -13 -13 -13 -13
ROA 3.7 3.4 10.6 13.5 13.6 Others -274 -122 -222 -22 -22
ROE 4.0 3.8 21.0 23.0 20.3 Net chg in cash 21 128 -140 127 147
Stability Beginning cash balance 326 347 474 334 461
Debt ratio 208.5 236.7 170.5 134.9 105.9 Ending cash balance 347 474 334 461 609
Net borrowings ratio 61.1 58.7 43.4 21.6 1.7 NOPLAT 42 41 164 214 230
Interest coverage ratio 2.4 3.3 13.8 18.3 21.2 FCF 49 48 166 217 230
Source: Hotel Shilla, Daishin Securities Research Center
22
DAISHIN SECURITIES
Issues & News Earnings from new duty-free Shinsegae stores to help stock rebound in
(004170 KS) late 2018 Cindy Yu BUY and 6M TP of W480,000 maintained [email protected] - We keep BUY on Shinsegae, while reiterating its target price of W480,000 (17x 12MF EPS). With the 2019E P/E having fallen to about 11x following Rating BUY the recent stock price correction, the current valuation level already reflects maintain a considerable portion of the losses related to the newly launched duty- free stores. The share price will gradually climb in starting in 4Q18 as the 3Q18 earnings season nears. TP (W) 480,000 maintain CP (W) 305,500 Earnings to remain stable in 2019 as increased earnings from (18.08.27) Myeongdong free store offsets loss from IIA store Retail - The opening of the Myeongdong store in May 2016 raised concerns in the market. It had to compete against the then-market-leader Lotte and it KOSPI 2299.3 lacked competitiveness as a new entrant. But about one year into Market cap (Wbn) 3,008 operation, Shinsegae’s new duty-free store emerged as a strong player Market cap portion (%) 0.20% delivering game-changing results. Paid-in capital (common; Wbn) 49 - The Myeongdong store reported revenue of W1,164.7bn in 2017. It 52w high/low (W) 465,500 / 179,500 recorded an operating loss in 1H17, but quickly swung to profit later that 29.1 120d avg. trading volume (Wbn) year. It posted an OP margin of 3% in 2H17, before climbing further to 6% 31.63 Foreign ownership (%) range in 1H18, closing in on Hotel Shilla’s Changchoong store (8-10%). Its Major Lee Myeong-hee+2: 28.06% shareholders National Pension Service: location, once considered a weakness (i.e., three major duty-free stores in downtown Seoul stand close together north of Han River, with Shinsegae’s 12.60% Myeongdong store located near Lotte’s store), rather helped win over (%) 1M 3M 6M 12M customers. Furthermore, using its strong negotiating power, it successfully Abs. return -8.5 -30.4 -8.5 56.7 attracted luxury brands such as Louis Vuitton and Chanel. Though late to Rel. return -8.7 -25.5 -2.3 62.1 the game, the Myeongdong store was the only new duty-free store to achieve this, once again proving its competitiveness. (W(천원1K) ) Sh신세계Insegae(좌(LHS)) (%) 480 RelatRelativeIve tO KOSPI to KOSPI(우) 140 - When Shinsegae opened its Gangnam store in July and two more stores 120 at Incheon International Airport (DF1 & DF5) in August, concerns of 403 100 potential operating losses began to emerge. Furthermore, with Lotte 80 expanding marketing efforts for its Sogong store and Hyundai Department 325 60 Store planning to open a new duty-free store at COEX this November, the 40 risk of rising competition also surfaced. But we believe that the duty-free 248 20 operator can significantly reduce its rent burden should its DF1 and DF5 0 stores generate about W900bn in yearly revenue (Fig 10). Downtown 170 -20 duty-free stores will face ever-increasing competition, but its Myeongdong 17.08 17.11 18.02 18.05 18.08 store is expected to deliver strong results thanks to its geographical advantage, fully making up for the loss from the new Gangnam store.
Other businesses are also showing growth - Other businesses such as department stores and Shinsegae International are also faring well in their respective areas, which will boost Shinsegae’s brand value. - Shinsegae Department Store’s same-store sales growth is always exceeding that of rivals by 1-2%p owing to the high traffic of young customers and the network of department stores operating in major districts across the nation that outperform rival brands. - Shinsegae International (031430 KS, BUY, TP W235,000), a subsidiary, is doing well in the cosmetics market, taking advantage of the department store and duty-free store channels.
23
Duty-free
Operating results and major financial data (Wbn, W, x, %) 2016A 2017A 2018F 2019F 2020F Revenue 2,947 3,871 5,592 6,937 7,596 OP 251 346 415 437 525 Pretax profit 415 291 400 426 514 NP 323 214 312 332 401 NP (controlling int.) 227 182 265 282 341 EPS 23,071 18,513 26,948 28,683 34,643 PER 7.6 16.2 11.3 10.7 8.8 BPS 328,499 347,557 378,011 410,739 450,025 PBR 0.5 0.9 0.8 0.7 0.7 ROE 7.3 5.5 7.4 7.3 8.0 Note: EPS, BPS, and ROE are based only on the controlling interest./ Source: Shinsegae, Daishin Securities Research Center
Yearly earnings forecast revisions (Wbn, W, %, %p) Previous Revised Chg
2018F 2019F 2018F 2019F 2018F 2019F Net sales 5,592 6,937 5,592 6,937 0.0 0.0 OP 415 437 415 437 0.0 0.0 NP (contr. int.) 265 282 265 282 0.0 0.0 OP margin 7.4 6.3 7.4 6.3 NP margin 4.7 4.1 4.7 4.1 Source: Shinsegae, Daishin Securities Research Center
Tab 6. Shinsegae consolidated earnings results and forecast (Wbn, %)
2017 2018F 2017 2018F 2019F 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q Gross revenue 1,771 1,700 1,814 2,082 2,007 2,020 2,422 2,718 7,367 9,166 10,107 Shinsegae 1,133 1,111 1,103 1,288 1,181 1,089 1,139 1,327 4,635 4,735 4,221 Shinsegae DF 182 171 271 305 340 401 726 767 929 2,234 3,509 Other consoli. subs 638 589 711 794 826 530 557 624 1,803 2,197 2,378 OP 78 41 74 152 113 80 71 151 345 415 450 Shinsegae 52 37 39 92 59 42 45 94 220 240 210 Shinsegae DF -2 -4 10 11 24 23 12 10 15 68 109 Other consoli. subs 27 8 25 49 30 15 14 46 110 106 131 OP margin 4.4 2.4 4.1 7.3 5.6 3.9 2.9 5.6 4.7 4.5 4.5 YoY Gross revenue 38.9 29.1 24.9 16.1 13.3 18.8 33.5 30.6 26.2 24.4 10.3 OP 25.0 -3.6 79.7 43.4 45.9 93.2 -4.0 -0.6 36.9 20.4 8.4 Note: K-IFRS (consolidated) Source: Shinsegae, Daishin Securities Research Center
24
DAISHIN SECURITIES
Fig 32. Shinsegae’s duty-free store market share Fig 33. Shinsegae’s duty-free revenue & OP margin
(Wbn) (%) Lotte Shilla Shinsegae (%) Airports (LHS) 5,000 Downtown (LHS) 3.0 OP margin (RHS)
2.5 4,000 35.9 41.9 2.0 3,000 1.5
29.7 2,000 29.7 1.0
1,000 0.5 18.7 12.7 0 0.0
2016 2018F 2017 2018F 2019F 2020F
Source: individual companies, Daishin Securities Research Center Source: Shinsegae, Daishin Securities Research Center
Fig 34. Shinsegae’s OP contribution by business Fig 35. Top-20 department store operators’ revenue
(%) (Wbn) 100 7,000 Shinsegae Dept. stores Duty-free stores Others Lotte Shopping +16% yoy 80 6,000 Hyundai Dept. Store
60 5,000 +0.5% yoy
40 4,000 -17% yoy
20 3,000
0 2,000
-20 1,000
-40 0 2016 2017 2018F 2019F 2020F 2016 2017 Source: Shinsegae, Daishin Securities Research Center Source: individual companies, Daishin Securities Research Center
Fig 36. Shinsegae P/E band Fig 37. Shinsegae P/B band
(W(천원1K)) ((W천원1K)) 500 500 16.0 x 1.1 x
400 14.0 x 400 1.0 x
12.0 x 0.8 x 300 300 10.0 x 0.7 x 8.0 x 200 200 0.5 x
100 100 12 13 14 15 16 17 18 19 12 13 14 15 16 17 18 19
Source: Shinsegae, Daishin Securities Research Center Source: Shinsegae, Daishin Securities Research Center
25
Duty-free
RIM valuation
Per share intrinsic value Residual Income Model (Wbn, W, x, %) 2018F 2019F 2020F 2021F 2022F 2023F 2024F 2025F 2026F 2027F Ⅰ NP (contr. int.)(Note 2) 265 291 321 337 354 372 390 410 430 452
Ⅱ Shareholders’ equity (contr. int.)(Note 2) 3,562 3,868 4,217 4,597 4,994 5,399 5,814 6,239 6,675 7,124
Estimated ROE 6.9% 7.5% 7.6% 7.0% 6.8% 6.6% 6.5% 6.3% 6.2% 6.1%
Ⅲ Required rate of return (Note 3) 4.6
Risk free rate of return (Note 4) 2.4
Market risk premium (Note 5) 4.0
Beta 0.6
Ⅳ Spread (estimated ROE – required rate of return) 2.3% 2.9% 3.0% 2.4% 2.2% 2.0% 1.8% 1.7% 1.6% 1.5%
Ⅴ Required income 159 172 187 204 222 241 260 280 299 320
Ⅵ Residual income ( l -Ⅴ) 88 119 134 133 132 131 130 130 131 132
Present value factor 0.98 0.93 0.88 0.83 0.79 0.75 0.71 0.67 0.64 0.60
PV of residual income 86 110 118 111 104 98 92 87 83 79
Ⅶ Sum of residual income 968
Ⅷ PV of residual income following forecasting period 1,713
Terminal growth (g)(Note 6) 0.0%
Ⅸ Beginning shareholders’ equity 3,422
Ⅹ Fair market cap (Ⅶ+Ⅷ+Ⅸ) 6,102
Total number of shares (thousands) 9,845
Ⅹl Per share value (W) 619,844
Current share price (W) 305,500
TP (W) 480,000 Note 1: Under the residual income model (RIM), we add the current shareholders’ equity to the residual income based on the earnings forecast for the next ten years before adding the result to the residual income after the forecasting period to derive the value of shareholders’ stakes. The RIM is considered less subjective than similar valuation models such as DDM, DCF, and EVA. Note 2: The RIM reflects consolidated subsidiaries’ earnings not in their entirety but only for the stake controlled by the company. Note 3: The required rate of return (i.e., cost of equity) is the rate of return expected by the shareholders who take risks. It is derived by the capital asset price model: Cost of equity = Risk-free interest rate + Beta * Market risk premium. Note 4: The yield on five-year government bonds was used as the proxy for the risk-free interest rate. Note 5: Market risk premium refers to the gap between the expected return on the market portfolio and the risk-free interest rate. It has been lowered from 6-8% to 3-5% in reflection of the current low-growth environment. Note 6: The terminal growth was assumed to be zero.
26
DAISHIN SECURITIES
Financial Statements
Income statement (Wbn) Balance sheet (Wbn)
2016A 2017A 2018F 2019F 2020F 2016A 2017A 2018F 2019F 2020F
Revenue 2,947 3,871 5,592 6,937 7,596 Current assets 988 1,269 1,695 2,335 3,116
Cost of goods sold 1,057 1,559 2,811 3,914 4,363 Cash & cash equiv. 78 175 575 967 1,627
Gross profit 1,890 2,312 2,781 3,022 3,233 Trade & other receive. 296 354 450 537 579
S&A expenses 1,639 1,966 2,366 2,585 2,708 Inventories 393 464 670 831 910
OP 251 346 415 437 525 Other current assets 220 275 0 0 0
OP margin 8.5 8.9 7.4 6.3 6.9 Long-term assets 8,967 8,883 8,734 8,567 8,370
EBITDA 460 615 694 708 786 Tangible assets 6,626 6,632 6,456 6,286 6,079
Non-OP 164 -54 -15 -12 -10 Investments in affiliates 274 297 334 373 411
Income from affiliates 187 21 22 23 23 Other long-term assets 2,068 1,954 1,944 1,909 1,880
Financial revenue 53 50 48 48 48 Total assets 9,955 10,152 10,429 10,902 11,487
FX related gains 0 0 0 0 0 Current liabilities 2,435 2,892 2,935 2,965 2,985
Financial expense -79 -142 -88 -86 -85 Payables & other liab. 1,187 1,102 1,151 1,184 1,200
FX related losses 12 8 8 8 8 Borrowings 284 245 253 260 268
Others 3 17 3 3 3 Current portion of LT debts 465 1,006 955 908 862
Income before taxes 415 291 400 426 514 Other current liabilities 499 540 575 613 654
Income tax expense -92 -78 -88 -94 -113 Long-term liabilities 2,827 2,340 2,144 2,123 2,132
Income from cont. op. 323 214 312 332 401 Borrowings 1,791 1,298 1,092 1,062 1,062
Income from discont. op. 0 0 0 0 0 Convertible securities 0 0 0 0 0
NP 323 214 312 332 401 Other long-term liab. 1,036 1,042 1,052 1,061 1,070
NP margin 11.0 5.5 5.6 4.8 5.3 Total liabilities 5,262 5,232 5,079 5,088 5,117
NP for non-contr. interest 96 31 47 50 60 Controlling interest 3,234 3,422 3,722 4,044 4,431
NP for contr. interest 227 182 265 282 341 Capital stock 49 49 49 49 49
Valuation of AFS fin. assets 1 5 5 5 5 Capital surplus 400 400 400 400 400
Other compreh. income -1 -3 -3 -3 -3 Retained earnings 2,100 2,246 2,499 2,769 3,098
Comprehensive income 328 239 338 358 427 Other capital changes 685 727 774 826 884
Comp. income for non-contr. Int. 96 30 42 44 64 Non-controlling interest 1,459 1,498 1,629 1,770 1,939
Comp. income for contr. int. 232 209 296 313 363 Total shareholder’s equity 4,693 4,920 5,351 5,814 6,370
Net borrowings 2,310 2,170 1,726 1,263 565
10 11 12 13 14
Valuation metrics (W, x, %) Cash flow statement (Wbn)
2016A 2017A 2018F 2019F 2020F 2016A 2017A 2018F 2019F 2020F
EPS 23,071 18,513 26,948 28,683 34,643 Operating cash flows 359 357 388 453 622
PER 7.6 16.2 11.3 10.7 8.8 NP 323 214 312 332 401
BPS 328,499 347,557 378,011 410,739 450,025 Non-cash items 171 436 487 482 491
PBR 0.5 0.9 0.8 0.7 0.7 Depreciation 209 269 278 271 261
EBITDAPS 46,735 62,448 70,450 71,944 79,822 FX gains 4 -17 -3 -3 -3
EV/EBITDA 12.0 10.8 9.2 8.5 7.0 Equity method gain 0 0 0 0 0
SPS 299,384 393,230 568,033 704,558 771,524 Others -42 184 211 215 233
PSR 0.6 0.8 0.5 0.4 0.4 Chg in assets & liab. 27 -143 -262 -210 -100
CFPS 50,225 66,004 81,139 82,745 90,623 Other cash flows -162 -150 -149 -152 -170
DPS 1,250 1,250 1,250 1,250 1,250 Investing cash flow -896 -265 128 -82 -42
Investment assets -72 77 -8 -15 -19
Financial ratios (W, x, %) Tangible assets -665 -353 -89 -89 -45
2016A 2017A 2018F 2019F 2020F Others -158 11 225 22 22
Growth potential Financing cash flows 570 4 -245 -68 -34
Revenue growth 15.0 31.3 44.5 24.0 9.5 Short-term borrowings -290 -35 7 8 8
OP growth -4.1 37.5 20.1 5.4 19.9 Bonds payable 545 13 -201 -27 0
NP growth -25.4 -33.9 46.1 6.4 20.8 Long-term borrowings 346 47 -4 -4 0
Profitability Rights offering 0 0 0 0 0
ROIC 3.2 3.6 4.6 4.8 5.9 Cash dividends -30 -36 -12 -12 -12
ROA 2.8 3.4 4.0 4.1 4.7 Others -1 16 -35 -32 -30
ROE 7.3 5.5 7.4 7.3 8.0 Net chg in cash 34 97 399 392 660
Stability Beginning cash balance 44 78 175 575 967
Debt ratio 112.1 106.4 94.9 87.5 80.3 Ending cash balance 78 175 575 967 1,627
Net borrowings ratio 49.2 44.1 32.3 21.7 8.9 NOPLAT 196 253 324 341 409
Interest coverage ratio 4.0 4.5 5.2 5.7 6.9 FCF -396 114 470 480 583
Source: Shinsegae, Daishin Securities Research Center
27
Duty-free
Issues & News Hyundai
Department Valuation re-rating likely Store in 1H19 (069960 KS)
Cindy Yu BUY and 6M TP of W125,000 maintained - We keep BUY on Hyundai Department Store while maintaining the target [email protected] price of W125,000 (11x 12MF EPS). The stock is undervalued. Tangible results of the newly launched duty-free business would unlock its value, Rating BUY which we believe will materialize in 2H19. maintain
TP (W) 125,000 COEX duty-free store to open in November maintain - This November, Hyundai Department Store will open a 10,902 square- meter duty-free store at the COEX mall, in which it invested about W200bn CP (W) 98,300 (18.08.27) in total (W110bn in operating costs, W66.0bn in interior design, W10.0bn in IT, and W15.0bn in other infrastructure). Retail - The company aims to generate W1bn in daily revenue from the new store in the early stage, while predicting an operating loss of W5.0bn on revenue KOSPI 2299.3 of W55-60bn during the November-December period. These figures don’t Market cap (Wbn) 2,300 look unreasonable given that Shinsegae’s Gangnam duty-free store, which Market cap portion (%) 0.15 opened in July, is bringing in a daily revenue of about W0.8bn and Paid-in capital (common; Wbn) 117 considering the COEX store’s depreciation charges (an estimated 52w high/low (W) 119,500 / 85,700 W15.0bn/year), rent payments (W10bn/year), and other operating 120d avg. trading volume (Wbn) 11.4 expenses. Foreign ownership (%) 28.49 Major Jeong Mong-geun+3: 36.08% - Commissions paid to tour guides who bring customers to the store is likely shareholders National Pension Service: 12.62% the biggest factor determining earnings, while the range of marketing activities rolled out in the early stage affects the amount of operating (%) 1M 3M 6M 12M losses. Abs. return 0.4 -5.5 7.0 3.3 Rel. return 0.2 1.2 14.3 6.8 - Even assuming that domestic duty-free store operators will enjoy growth in demand from daigou (Chinese shuttle traders) as well as tourists (both (W(천원1K) ) Hy현대백화점undaI DePt. St(좌ORe)(LHS) (%) individual and group tourists), it will take 2-3 years before Hyundai 130 RelatRelativeIve tO KOSPI to KOSPI(우) 25 Department Store generates yearly revenue of W600-700bn (the 20 company’s 2019 target), as evidenced by the fact that Lotte’s World 15 118 Towers store, which is larger in size, is generating yearly revenue of about 10 5 W570bn (as of 2017). But the company may achieve this sooner than 106 0 expected once Shinsegae launches its Gangnam store and a cluster of -5 duty-free stores is created in Gangnam area. 93 -10 -15 81 -20 17.08 17.11 18.02 18.05 18.08 Valuation re-rating could take some time
- The aggressive advertisements and sales promotions rolled out in connection to the newly launched duty-free business will inevitably weigh on the company’s earnings, but the new business venture will also provide an opportunity for Hyundai Department Store to escape value trap status as a department store operator. That said, it will take some time for Hyundai Department Store to attract sufficient customer traffic and close the gap with market leaders.
28
DAISHIN SECURITIES
Operating results and major financial data (Wbn, W, x, %) 2016A 2017A 2018F 2019F 2020F Revenue 1,832 1,848 1,981 2,558 2,758 OP 383 394 332 374 412 Pretax profit 436 446 360 402 443 NP 321 302 263 293 324 NP (controlling int.) 276 254 226 252 278 EPS 11,784 10,841 9,653 10,779 11,889 PER 9.2 9.6 10.2 9.1 8.3 BPS 157,840 169,016 179,645 192,488 208,208 PBR 0.7 0.6 0.5 0.5 0.5 ROE 7.7 6.6 5.5 5.8 5.9 Note: EPS, BPS, and ROE are based only on the controlling interest.
Source: Hyundai Department Store, Daishin Securities Research Center
Yearly earnings forecast revisions (Wbn, W, %, %p)
Previous Revised Chg
2018F 2019F 2018F 2019F 2018F 2019F Net revenue 2,038 2,558 1,981 2,558 -2.9 0.0 OP 344 374 332 374 -3.6 0.0 NP (contr. int.) 235 252 226 252 -3.8 0.0 OP margin 16.9 14.6 16.8 14.6 NP margin 11.5 9.9 11.4 9.9 Source: Hyundai Department Store, Daishin Securities Research Center
Tab 7. Hyundai Department Store consolidated earnings results and forecast (Wbn, %)
2017 2018 2017 2018F 2019F 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q Gross revenue 1,376 1,360 1,347 1,591 1,432 1,415 1,360 1,655 5,674 5,862 6,362 Dept. store 1,376 1,360 1,347 1,591 1,432 1,415 1,360 1,607 5,674 5,814 5,934 Duty-free ------48 - 48 428 OP 138 69 70 117 103 93 71 106 394 373 374 Dept. store 138 69 70 117 103 93 71 114 394 385 393 Duty-free ------8 - -8 -19 OP margin 10.1 5.1 5.2 7.3 7.2 6.6 5.2 6.4 6.9 6.4 5.9 YoY (%) Gross revenue 3.9 3.5 6.7 8.1 4.1 4.0 1.0 4.0 5.6 3.3 8.5 Dept. store 3.9 3.5 6.7 8.1 4.1 4.0 1.0 1.0 2.8 -2.3 2.1 Duty-free ------791.0 42.6 OP 35.3 -11.3 -15.1 -3.6 -25.7 34.6 2.1 -9.3 2.7 -5.4 0.3 Note: K-IFRS (consolidated)
Source: Hyundai Department Store, Daishin Securities Research Center
29
Duty-free
RIM valuation
Per share intrinsic value Residual Income Model (Wbn, W, x, %) 2018F 2019F 2020F 2021F 2022F 2023F 2024F 2025F 2026F 2027F Ⅰ NP (contr. int.)(Note 2) 264 252 278 292 307 322 338 355 373 392
Ⅱ Shareholders’ equity (contr. int.)(Note 2) 4,098 4,399 4,741 5,147 5,644 6,285 7,157 8,406 10,265 13,117
Estimated ROE 6.4% 6.1% 5.9% 5.7% 5.4% 5.1% 4.7% 4.2% 3.6% 3.0%
Ⅲ Required rate of return (Note 3) 4.5
Risk free rate of return (Note 4) 2.4
Market risk premium (Note 5) 4.0
Beta 0.5
Ⅳ Spread (estimated ROE – required rate of return) 1.9% 1.6% 1.4% 1.2% 0.9% 0.6% 0.2% -0.3% -0.9% -1.5%
Ⅴ Required income 178 191 205 222 242 266 299 345 412 512
Ⅵ Residual income ( l -Ⅴ) 85 77 73 71 65 56 39 10 -38 -120
Present value factor 0.96 0.89 0.83 0.77 0.72 0.67 0.62 0.58 0.54 0.50
PV of residual income 81 68 61 55 47 37 24 6 -21 -60
Ⅶ Sum of residual income 299
Ⅷ PV of residual income following forecasting period -1,339
Terminal growth (g)(Note 6) 0.0%
Ⅸ Beginning shareholders’ equity 3,955
Ⅹ Fair market cap (Ⅶ+Ⅷ+Ⅸ) 2,916
Total number of shares (thousands) 23,402
Ⅹl Per share value (W) 124,584
Current share price (W) 98,300
TP (W) 125,000 Note 1: Under the residual income model (RIM), we add the current shareholders’ equity to the residual income based on the earnings forecast for the next ten years before adding the result to the residual income after the forecasting period to derive the value of shareholders’ stakes. The RIM is considered less subjective than similar valuation models such as DDM, DCF, and EVA. Note 2: The RIM reflects consolidated subsidiaries’ earnings not in their entirety but only for the stake controlled by the company. Note 3: The required rate of return (i.e., cost of equity) is the rate of return expected by the shareholders who take risks. It is derived by the capital asset price model: Cost of equity = Risk-free interest rate + Beta * Market risk premium. Note 4: The yield on five-year government bonds was used as the proxy for the risk-free interest rate. Note 5: Market risk premium refers to the gap between the expected return on the market portfolio and the risk-free interest rate. It has been lowered from 6-8% to 3-5% in reflection of the current low-growth environment. Note 6: The terminal growth was assumed to be zero.
30
DAISHIN SECURITIES
Financial Statements
Income statement (Wbn) Balance sheet (Wbn)
2016A 2017A 2018F 2019F 2020F 2016A 2017A 2018F 2019F 2020F
Revenue 1,832 1,848 1,981 2,558 2,758 Current assets 1,150 1,003 1,231 1,436 1,694
Cost of goods sold 315 312 487 852 952 Cash & cash equiv. 70 86 189 133 263
Gross profit 1,517 1,536 1,495 1,705 1,806 Trade & other receive. 610 633 696 912 1,019
S&A expenses 1,133 1,143 1,163 1,331 1,394 Inventories 60 60 65 84 90
OP 383 394 332 374 412 Other current assets 411 223 281 307 322
OP margin 20.9 21.3 16.7 14.6 14.9 Long-term assets 5,437 5,774 5,762 5,943 6,158
EBITDA 527 536 543 568 613 Tangible assets 4,577 4,811 4,731 4,818 4,899
Non-OP 53 52 28 28 31 Investments in affiliates 582 641 641 641 641
Income from affiliates 39 47 30 30 30 Other long-term assets 278 323 389 483 617
Financial revenue 10 9 9 9 12 Total assets 6,587 6,777 6,993 7,378 7,852
FX related gains 0 0 0 0 0 Current liabilities 1,326 1,745 1,532 1,721 1,824
Financial expense -16 -12 -16 -16 -16 Payables & other liab. 793 864 610 752 802
FX related losses 0 0 0 0 0 Borrowings 180 40 30 20 10
Others 20 7 6 6 6 Current portion of LT debts 100 580 591 603 615
Income before taxes 436 446 360 402 443 Other current liabilities 253 261 301 346 398
Income tax expense -115 -143 -97 -108 -120 Long-term liabilities 951 414 553 398 339
Income from cont. op. 321 302 263 293 324 Borrowings 579 0 180 100 100
Income from discont. op. 0 0 0 0 0 Convertible securities 0 0 0 0 0
NP 321 302 263 293 324 Other long-term liab. 372 414 373 298 239
NP margin 17.5 16.4 13.3 11.5 11.7 Total liabilities 2,277 2,160 2,085 2,119 2,163
NP for non-contr. interest 45 49 37 41 45 Controlling interest 3,694 3,955 4,204 4,505 4,873
NP for contr. interest 276 254 226 252 278 Capital stock 117 117 117 117 117
Valuation of AFS fin. assets -1 2 2 2 2 Capital surplus 612 612 612 612 612
Other compreh. income 0 1 1 1 1 Retained earnings 3,035 3,287 3,495 3,729 3,989
Comprehensive income 313 334 294 325 355 Other capital changes -70 -61 -20 46 154
Comp. income for non-contr. Int. 45 48 44 49 53 Non-controlling interest 617 662 704 754 816
Comp. income for contr. int. 268 286 250 276 302 Total shareholder’s equity 4,311 4,618 4,908 5,259 5,689
Net borrowings 405 338 359 311 156
10 11 12 13 14
Valuation metrics (W, x, %) Cash flow statement (Wbn)
2016A 2017A 2018F 2019F 2020F 2016A 2017A 2018F 2019F 2020F
EPS 11,784 10,841 9,653 10,779 11,889 Operating cash flows 442 437 595 411 492
PER 9.2 9.6 10.2 9.1 8.3 NP 321 302 263 293 324
BPS 157,840 169,016 179,645 192,488 208,208 Non-cash items 262 280 455 300 314
PBR 0.7 0.6 0.5 0.5 0.5 Depreciation 143 143 211 194 200
EBITDAPS 22,504 22,923 23,184 24,275 26,178 FX gains 0 0 0 0 0
EV/EBITDA 6.8 6.4 6.2 5.9 5.3 Equity method gain 0 0 0 0 0
SPS 78,274 78,972 84,654 109,286 117,851 Others 119 137 244 106 114
PSR 1.4 1.3 1.2 0.9 0.8 Chg in assets & liab. -42 -42 -18 -66 -22
CFPS 24,923 24,864 30,670 25,351 27,254 Other cash flows -99 -103 -105 -116 -124
DPS 700 800 800 800 800 Investing cash flow -524 -146 2 -254 -268
Investment assets -3 -4 -36 -46 -57
Financial ratios (W, x, %) Tangible assets -333 -314 0 -280 -280
2016A 2017A 2018F 2019F 2020F Others -188 173 39 72 69
Growth potential Financing cash flows 108 -275 161 -99 -19
Revenue growth 10.6 0.9 7.2 29.1 7.8 Short-term borrowings 139 -140 -10 -10 -10
OP growth 5.6 2.7 -15.7 12.7 10.3 Bonds payable 0 0 0 0 0
NP growth 14.6 -5.9 -13.1 11.7 10.3 Long-term borrowings 0 0 180 -80 0
Profitability Rights offering 0 0 0 0 0
ROIC 6.3 5.7 5.1 5.7 6.2 Cash dividends -16 -16 -18 -18 -18
ROA 6.0 5.9 4.8 5.2 5.4 Others -15 -119 9 9 9
ROE 7.7 6.6 5.5 5.8 5.9 Net chg in cash 26 16 102 -56 130
Stability Beginning cash balance 44 70 86 189 133
Debt ratio 52.8 46.8 42.5 40.3 38.0 Ending cash balance 70 86 189 133 263
Net borrowings ratio 9.4 7.3 7.3 5.9 2.7 NOPLAT 282 267 242 273 301
Interest coverage ratio 24.5 33.5 20.7 23.4 25.8 FCF 92 95 453 187 221
Source: Hyundai Department Store, Daishin Securities Research Center
31
Duty-free
Initiation
F&F Earnings blossom with MLB (007700 KS) brand
Cindy Yu Coverage initiated with BUY and 6M TP of W115,000 - We begin to cover F&F with a BUY rating and a target price of W115,000 [email protected] (15x 2019E EPS). Duty-free store related stocks such as F&F have been undergoing corrections due to the regulatory issue on Chinese shuttle Rating BUY traders or middlemen known as daigou and weakening Chinese consumer initiate sentiment amid the escalating trade dispute between the US and China. But these stocks will rebound once the tensions between the two largest economies simmer. Furthermore, the strong sales of F&F’s brands at TP (W) 115,000 initiate major channels that are offsetting the various catalysts pushing down share prices are providing strong upside potential. CP (W) 97,200 (18.08.27)
Textile & Apparels A strong entry into outdoor wear market with DISCOVERY - DISCOVERY, a “lifestyle outdoor wear” brand, achieved revenue growth KOSPI 2299.3 of 10% in 1H18, even though it launched more than six years ago. When it Market cap (Wbn) 1,497 was first launched, the brand offered a fresh outdoor wear concept to Market cap portion (%) 0.10 consumers exhausted with the once popular heavy down jackets. Paid-in capital (common; Wbn) 8 - Following six years of rapid growth, revenue growth slowed to 10% in 52w high/low (W) 97,200 / 34,750 1H18, with store count growth and per-store revenue growth coming in at 120d avg. trading volume (Wbn) 4.3 4% and 6%, respectively – a phenomenon commonly seen among brand Foreign ownership (%) 22.68 in the maturing stage. The brand is expected to grow 7-10% over the next Major Kim Chang-soo+8: 58.82% 2-3 years as F&F increases its store count from some 210 to 250 and as shareholders inflation and expansion into new product lines such kids’ wear and travel bags boost per-store revenue. (%) 1M 3M 6M 12M Abs. return 19.6 64.2 136.5 179.7 Rel. return 19.3 75.7 152.6 189.3 Focusing on achieving a balanced revenue mix ((W천원1K) ) &F&F(&& (LHS)좌) (%) - MLB’s annual per-store revenue soared from W0.7-0.8bn to over W1.0bn 100 RelatRelativeIve tO KOSPI to KOSPI(우) 300 in 2017, mainly driven by the revenue hike at duty-free stores, and it is 250 forecast to jump to W1.7bn in 2018. In order to achieve a balanced 82 200 revenue mix, the company has begun exporting MLB to nine Asian countries including Hong Kong, Macau, and Taiwan, or directly entering 63 150 those markets. The company is targeting overseas sales of about W25bn 100 in 2019. This does not appear difficult to achieve given that its overseas 45 sales increased to W4.5bn in 2Q18. If successful, MLB will be generating 50 6% of revenue from overseas sales, significantly offsetting the slowdown in 26 0 17.08 17.11 18.02 18.05 18.08 domestic duty-free revenue.
32
DAISHIN SECURITIES
Operating results and major financial data (Wbn, W, x, %) 2016A 2017A 2018F 2019F 2020F Revenue 439 561 731 865 1,020 OP 46 98 116 146 173 Pretax profit 41 99 165 152 179 NP 30 75 126 117 138 NP (controlling int.) 30 75 126 117 138 EPS 1,963 4,863 8,175 7,593 8,932 PER 8.9 8.6 11.9 12.8 10.9 BPS 14,721 19,218 26,743 33,686 41,968 PBR 1.2 2.2 3.6 2.9 2.3 ROE 14.2 28.7 35.6 25.1 23.6 Note: EPS, BPS, and ROE are based only on the controlling interest.
Source: F&F, Daishin Securities Research Center
A strong entry into outdoor wear market with DISCOVERY
DISCOVER continues DISCOVERY, a “lifestyle outdoor wear” brand, achieved revenue growth of 10% in to grow as a lifestyle 1H18, even though it launched more than six years ago. When it was first launched, outdoor wear brand the brand offered a fresh outdoor wear concept to consumers exhausted with the once popular heavy down jackets. This concept has made it relatively easy for DISCOVERY to expand its product lines (such as rash guards and travel bags).
Following six years of rapid growth, revenue growth slowed to 10% in 1H18 (much lower than the 40% sales growth seen during the past couple of years), with store count growth and per-store revenue growth coming in at 4% and 6%, respectively – a phenomenon commonly seen among brand in the maturing stage. The brand is expected to grow 7-10% over the next 2-3 years as F&F increases its store count from some 210 to 250 and as inflation and expansion into new product lines such kids’ wear and travel bags boost per-store revenue.
Fig 38. Brand sales breakdown Fig 39. DISCOVERY: sales, per-store sales growth
MLB (Wbn) Sales (LHS) (%) Others overseas 1,200 35 1% Per store sales growth (RHS) 2% MLB KIDs 10% 1,000 30
25 800 20 600 15 400 DIsCoverY 10 MLB 46% 40% 200 5
0 0
2015 2016 2017 2018F 2019F 2020F Source: F&F, Daishin Securities Research Center Source: F&F, Daishin Securities Research Center
33
Duty-free
Earnings blossom with MLB brand
Foray into Asia will Introduced to Korea in 1997, MLB emerged as a bread-and-butter brand for F&F late last help achieve year, driven by strong results in the duty-free sector. Its annual per-store revenue soared balanced revenue from W0.7-0.8bn to over W1.0bn in 2017, mainly driven by the revenue hike at duty-free mix stores, and as things stand, it is forecast to jump to W1.7bn in 2018. As of now, MLB has presence in 17 duty-free stores (including those located in downtown Seoul), with the number expected to rise by one or two by the end of 2018. We predict revenue to grow at the current rapid pace, given that daigou have just begun buying MLB products at duty-free stores.
In order to achieve a balanced revenue mix, the company has begun exporting MLB to nine Asian countries including Hong Kong, Macau, and Taiwan, or directly entering those markets. The company is targeting overseas sales of about W25bn in 2019. This does not appear difficult to achieve given that its overseas sales increased to W4.5bn in 2Q18. If successful, MLB will be generating 6% of revenue from overseas sales, significantly offsetting the slowdown in domestic duty-free revenue.
Fig 40. MLB store at a downtown duty-free store Fig 41. MLB: sales, per-store sales growth
(Wbn) (%) 600 Sales (LHS) 80 Per store sales growth (RHS) 500 60 400
300 40
200 20 100
0 0
2015 2016 2017 2018F 2019F 2020F Source: F&F, Daishin Securities Research Center Source: F&F, Daishin Securities Research Center
34
DAISHIN SECURITIES
Coverage initiated with BUY and target price of W115,000
Very solid earnings, We begin to cover F&F with BUY and a target price of W115,000 (derived from the despite regulatory 2019E P/E of 15x considering its growth potential at duty-free stores and in overseas issues on daigou; markets). share price to continue upward Shares in F&F have shown bullish movements without any major corrections, with its trend P/E remaining low (at 10x) relative to other duty-free-related stocks despite the regulatory issue on Chinese shuttle traders or middlemen known as daigou and weakening Chinese consumer sentiment amid the escalating trade dispute between the US and China. They are likely to continue rising without signficant corrections as they could get re-rated if the tensions ease. The strong sales of F&F’s brands at major retail channels are offsetting the various catalysts pushing down share prices, strongly supporting the share price.
Tab 8. F&F consolidated earnings results and forecast (Wbn, %)
2017 2018 2017 2018F 2019F 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q Revenue 112 103 103 243 133 148 144 307 561 731 765 Discovery 48 40 47 171 53 44 52 188 306 337 341 MLB 42 44 39 50 57 79 70 90 175 295 318 MLB Kids 19 16 15 19 20 18 16 21 70 76 78 MLB overseas 0 0 0 2 2 4 5 5 2 16 19 Others 3 2 2 0 1 3 2 2 7 8 9 OP 15 15 15 54 18 19 20 59 98 116 124 OP margin 13 14 14 22 14 13 14 19 17.5 15.9 16.2 YoY (%) Revenue 18.3 43.8 40.2 26.4 25.3 20.2 18.8 14.0 27.7 30.5 18.2 OP 22.3 32.8 35.1 9.2 43.1 29.5 35.4 15.7 115.1 18.5 25.6 Note: K-IFRS (consolidated) Source: Daishin Securities Research Center
Fig 42. F&F P/E band Fig 43. F&F P/B band
(천원(W) ) ((W천원1K)) 120 120 3.2 x 100 13.0 x 100 2.6 x 80 10.5 x 80
2.0 x 60 8.0 x 60
1.3 x 40 5.5 x 40
0.7 x 20 3.0 x 20
0 0 12 13 14 15 16 17 18 19 12 13 14 15 16 17 18 19
Source: F&F, Daishin Securities Research Center Source: F&F, Daishin Securities Research Center
35
Duty-free
RIM valuation
Per share intrinsic value Residual Income Model (Wbn, W, x, %) 2018F 2019F 2020F 2021F 2022F 2023F 2024F 2025F 2026F 2027F Ⅰ NP (contr. int.)(Note 2) 126 117 138 144 152 159 167 176 184 194
Ⅱ Shareholders’ equity (contr. int.)(Note 2) 412 519 646 635 623 611 599 587 575 562
Estimated ROE 35.6% 25.1% 23.6% 22.5% 24.1% 25.8% 27.6% 29.6% 31.7% 34.0%
Ⅲ Required rate of return (Note 3) 6.4
Risk free rate of return (Note 4) 2.4
Market risk premium (Note 5) 4.0
Beta 0.6
Ⅳ Spread (estimated ROE – required rate of return) 29.2% 18.8% 17.3% 16.2% 17.7% 19.4% 21.3% 23.2% 25.4% 27.7%
Ⅴ Required income 19 26 33 41 40 40 39 38 37 37
Ⅵ Residual income ( l -Ⅴ) 107 91 105 103 111 120 128 137 147 157
Present value factor 0.99 0.97 0.95 0.94 0.92 0.90 0.88 0.86 0.85 0.83
PV of residual income 106 88 100 97 102 108 113 119 125 130
Ⅶ Sum of residual income 1,088
Ⅷ PV of residual income following forecasting period 2,052
Terminal growth (g)(Note 6) 0.0%
Ⅸ Beginning shareholders’ equity 296
Ⅹ Fair market cap (Ⅶ+Ⅷ+Ⅸ) 3,436
Total number of shares (thousands) 15,400
Ⅹl Per share value (W) 223,110
Current share price (W) 97,200
TP (W) 115,000 Note 1: Under the residual income model (RIM), we add the current shareholders’ equity to the residual income based on the earnings forecast for the next ten years before adding the result to the residual income after the forecasting period to derive the value of shareholders’ stakes. The RIM is considered less subjective than similar valuation models such as DDM, DCF, and EVA. Note 2: The RIM reflects consolidated subsidiaries’ earnings not in their entirety but only for the stake controlled by the company. Note 3: The required rate of return (i.e., cost of equity) is the rate of return expected by the shareholders who take risks. It is derived by the capital asset price model: Cost of equity = Risk-free interest rate + Beta * Market risk premium. Note 4: The yield on five-year government bonds was used as the proxy for the risk-free interest rate. Note 5: Market risk premium refers to the gap between the expected return on the market portfolio and the risk-free interest rate. It has been lowered from 6-8% to 3-5% in reflection of the current low-growth environment. Note 6: The terminal growth was assumed to be zero.
36
DAISHIN SECURITIES
Financial Statements
Income statement (Wbn) Balance sheet (Wbn)
2016A 2017A 2018F 2019F 2020F 2016A 2017A 2018F 2019F 2020F
Revenue 439 561 731 865 1,020 Current assets 163 255 381 495 629
Cost of goods sold 183 192 239 280 332 Cash & cash equiv. 10 32 97 180 280
Gross profit 256 368 492 584 689 Trade & other receive. 62 96 124 130 134
S&A expenses 210 270 376 438 516 Inventories 90 104 136 161 190
OP 46 98 116 146 173 Other current assets 0 22 23 25 26
OP margin 10.4 17.5 15.9 16.9 16.9 Long-term assets 143 145 149 152 156
EBITDA 53 106 124 154 182 Tangible assets 77 82 85 88 90
Non-OP -5 1 48 6 6 Investments in affiliates 0 0 0 0 0
Income from affiliates -3 0 0 0 0 Other long-term assets 65 63 64 65 67
Financial revenue 0 1 2 2 2 Total assets 306 400 530 648 786
FX related gains 0 0 0 0 0 Current liabilities 65 104 118 129 139
Financial expense -1 -1 0 0 0 Payables & other liab. 52 80 94 104 114
FX related losses 0 0 0 0 0 Borrowings 0 0 0 0 0
Others 0 2 46 4 4 Current portion of LT debts 0 0 0 0 0
Income before taxes 41 99 165 152 179 Other current liabilities 13 24 24 25 25
Income tax expense -11 -25 -39 -35 -41 Long-term liabilities 14 0 0 0 0
Income from cont. op. 30 75 126 117 138 Borrowings 0 0 0 0 0
Income from discont. op. 0 0 0 0 0 Convertible securities 0 0 0 0 0
NP 30 75 126 117 138 Other long-term liab. 14 0 0 0 0
NP margin 6.9 13.4 17.2 13.5 13.5 Total liabilities 79 104 118 129 139
NP for non-contr. interest 0 0 0 0 0 Controlling interest 227 296 412 519 646
NP for contr. interest 30 75 126 117 138 Capital stock 8 8 8 8 8
Valuation of AFS fin. assets 0 0 0 0 0 Capital surplus 3 3 3 3 3
Other compreh. income 0 0 0 0 0 Retained earnings 216 286 402 509 636
Comprehensive income 30 75 126 117 137 Other capital changes 0 0 0 0 0
Comp. income for non-contr. Int. 0 0 0 0 0 Non-controlling interest 0 0 0 0 0
Comp. income for contr. int. 30 75 126 117 137 Total shareholder’s equity 227 296 412 519 646
Net borrowings -10 -53 -119 -203 -304
10 11 12 13 14
Valuation metrics (W, x, %) Cash flow statement (Wbn)
2016A 2017A 2018F 2019F 2020F 2016A 2017A 2018F 2019F 2020F
EPS 1,963 4,863 8,175 7,593 8,932 Operating cash flows 56 67 81 98 116
PER 8.9 8.6 11.9 12.8 10.9 NP 30 75 126 117 138
BPS 14,721 19,218 26,743 33,686 41,968 Non-cash items 22 30 43 40 46
PBR 1.2 2.2 3.6 2.9 2.3 Depreciation 7 8 8 8 9
EBITDAPS 3,421 6,878 8,071 10,028 11,787 FX gains 0 0 0 0 0
EV/EBITDA 4.9 5.6 11.1 8.4 6.6 Equity method gain 0 0 0 0 0
SPS 28,505 36,397 47,495 56,156 66,244 Others 15 22 35 31 38
PSR 0.6 1.2 2.0 1.7 1.4 Chg in assets & liab. 13 -26 -50 -24 -27
CFPS 3,408 6,785 10,965 10,162 11,921 Other cash flows -10 -12 -38 -34 -40
DPS 350 650 650 650 650 Investing cash flow 17 -39 -17 -17 -17
Investment assets 21 0 0 0 0
Financial ratios (W, x, %) Tangible assets -4 -11 -11 -11 -11
2016A 2017A 2018F 2019F 2020F Others -1 -28 -6 -6 -6
Growth potential Financing cash flows -63 -5 -10 -10 -10
Revenue growth 18.6 27.7 30.5 18.2 18.0 Short-term borrowings -29 0 0 0 0
OP growth 143.2 115.1 18.5 25.6 18.3 Bonds payable 0 0 0 0 0
NP growth 143.0 147.7 68.1 -7.1 17.6 Long-term borrowings -12 0 0 0 0
Profitability Rights offering 0 0 0 0 0
ROIC 17.7 37.5 37.4 41.2 45.0 Cash dividends -3 -5 -10 -10 -10
ROA 14.3 27.8 25.0 24.8 24.1 Others -19 0 0 0 0
ROE 14.2 28.7 35.6 25.1 23.6 Net chg in cash 10 22 65 83 100
Stability Beginning cash balance 0 10 32 97 180
Debt ratio 34.8 35.2 28.6 24.9 21.6 Ending cash balance 10 32 97 180 280
Net borrowings ratio -4.4 -17.9 -28.9 -39.1 -47.1 NOPLAT 34 74 89 112 133
Interest coverage ratio 47.5 2,758.8 0.0 0.0 0.0 FCF 36 68 86 110 131
Source: F&F, Daishin Securities Research Center
37
Duty-free
Issues & News Shinsegae Promising cosmetic brand International company (031430 KS)
Cindy Yu BUY maintained; 6M TP raised 5% to W235,000 - We reiterate our BUY rating on Shinsegae International, while raising the [email protected] target price by 5% to W235,000 (25x 12MF EPS) in view of the change in the base period used in earnings forecast. The company has successfully Rating BUY transformed itself from a low-margin apparel retailer to a high-margin maintain cosmetics brand, which warrants recognition.
TP (W) 235,000 raise Rapid growth as a high-margin cosmetics company - The cosmetics business unit’s revenue jumped from W63.0bn in 2017 to CP (W) 205,500 (18.08.27) W94.7bn in 1H18 alone, with its revenue share climbing from 6% to 16%. Furthermore, it carries a much higher OP margin (20%) than the apparels Textile & Apparels business unit (2-3%). - This success comes from the surge in sales of the Vidi Vici brand driven by Market cap (Wbn) 2299.3 purchases made by daigou. As a result, duty-free sales now account for Market cap portion (%) 1,467 80% of total revenue, with the remaining 20% coming from department Paid-in capital (common; Wbn) 0.10 store sales. Vidi Vici’s presence in duty-free stores is expected to expand, 52w high/low (W) 36 increasing from the current eight sites to 12 sites by the end of this year, 120d avg. trading volume (Wbn) 214,000 / 56,100 which will fuel Vidi Vici’s revenue growth. As things stand, the brand’s duty- Foreign ownership (%) 10.4 free sales are forecast to reach W100bn. This achievement deserves Market cap (Wbn) 4.72 attention, given that Korea’s leading cosmetics brands generate revenue Major Shinsegae+3: 65.15% of W300-400bn at duty-free stores. shareholders National Pension Service: 8.15%
- The company is also preparing to directly enter the Chinese market. (%) 1M 3M 6M 12M Shinsegae International has already obtained sanitation and operating Abs. return 12.0 26.1 153.4 207.2 licenses from the local authorities, but is yet to execute because of its failed Rel. return 11.8 34.9 170.7 217.8 experience in the past (tried but failed to launch an apparel brand in China). (W(천원1K) ) Sh신세계인터내셔날Insegae InteRnatIOnal ((LHS)좌) (%) 220 RelatRelativeIve tO KOSPI to KOSPI(우) 250
200 178 Cosmetics’ OP contribution increased to 66%; Shinsegae needs to 150 make an effort to boost brand recognition in domestic market as well
137 100 - Shinsegae International is targeting cosmetics revenue of W200bn this year, which does not appear to be an aggressive figure, given that 1H18 50 95 cosmetics revenue has already reached W94.7bn. Cosmetics has become 0 an important business unit for the company, making up a surprising 66%
53 -50 of companywide OP (vs. 18% of company revenue). But the large share of 17.08 17.11 18.02 18.05 18.08 cosmetics revenue generated from duty-free stores means that the company is relying heavily on daigou. In order to reduce its dependence on the Chinese economy, the company needs to boost its brand
recognition in the domestic cosmetics market.
38
DAISHIN SECURITIES
Operating results and major financial data (Wbn, W, x, %) 2016A 2017A 2018F 2019F 2020F Revenue 1,021 1,103 1,309 1,379 1,458 OP 27 25 62 72 82 Pretax profit 25 32 77 85 98 NP 17 24 58 65 74 NP (controlling int.) 17 24 59 67 77 EPS 2,432 3,371 8,255 9,390 10,798 PER 27.2 22.0 24.9 21.9 19.0 BPS 66,769 69,236 76,890 85,680 95,878 PBR 1.0 1.1 2.7 2.4 2.1 ROE 3.7 5.0 11.3 11.6 11.9 Note: EPS, BPS, and ROE are based only on the controlling interest.
Source: Shinsegae International, Daishin Securities Research Center
Yearly earnings forecast revisions (Wbn, W, %, %p) Previous Revised Chg
2018F 2019F 2018F 2019F 2018F 2019F Net revenue 1,304 1,372 1,309 1,379 0.4 0.5 OP 61 71 62 72 1.6 1.7 NP (contr. int.) 58 66 59 67 1.3 1.5 OP margin 4.7 5.2 4.7 5.2 NP margin 4.5 4.8 4.5 4.9 Source: Shinsegae International, Daishin Securities Research Center
Tab 9. Shinsegae International earnings trend and forecast (Wbn, %)
2017 2018 2017 2018F 2019F 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q Gross revenue 272 239 269 322 304 283 332 389 1,103 1,309 1,379 Imported apparels 94 89 90 108 91 89 91 111 381 382 397 Domestic apparels 99 74 101 113 89 61 106 118 387 374 393 Cosmetics - - - - 40 55 55 56 - 206 227 Lifestyle 43 48 50 51 45 51 52 54 193 201 211 OP 4 4 1 16 12 14 16 20 25 62 72 Imported apparels 2 1 0 3 3 3 0 3 6 9 8 Domestic apparels 1 0 1 7 2 0 2 7 9 11 11 Cosmetics 0 0 0 0 7 12 11 11 0 42 43 Lifestyle 2 5 3 4 1 4 3 3 14 12 13 OP margin 1.6 1.8 0.3 4.9 3.9 5.0 4.8 5.2 2.3 4.7 5.2 YoY (%) Gross revenue 9.7 1.5 9.8 10.2 11.8 18.3 23.7 20.8 8.0 18.8 5.3 OP 25.5 -41.1 59.2 1.7 169.2 222.1 1,636.9 28.8 -5.9 144.4 15.2 Note: K-IFRS (consolidated), Source: Shinsegae International, Daishin Securities Research Center
39
Duty-free
Fig 44. Major cosmetics firms’ PER-EPSG Fig 45. Major cosmetics firms’ PRB-ROE
(19F PER, x) (19F PBR, x) 35 SHISEIDO 6 SHISEIDO
5 LG H&H 30 SHANGHAI L'OREAL JAHWA L'OREAL ESTEE Amore LAUDER Amore Pacific 4 Pacific 25 Amore G P&G LG H&H SHANGHAI Shinsegae 3 JAHWA Inter Shinsegae 20 Inter P&G 2 Amore G
(19F EPS growth, %) (19F ROE, %) 15 1 0 5 10 15 20 25 30 35 40 5 10 15 20 25
Note: Based on 2020 forecasts for P&G and ESTEE LAUDER Note: Based on 2020 forecasts for P&G and ESTEE LAUDER Source: Bloomberg, Daishin Securities Research Center Source: Bloomberg, Daishin Securities Research Center
40
DAISHIN SECURITIES
RIM valuation
Per share intrinsic value Residual Income Model (Wbn, W, x, %) 2018F 2019F 2020F 2021F 2022F 2023F 2024F 2025F 2026F 2027F Ⅰ NP (contr. int.)(Note 2) 59 67 77 81 85 89 94 98 103 108
Ⅱ Shareholders’ equity (contr. int.)(Note 2) 521 578 644 717 792 866 940 1,013 1,085 1,157
Estimated ROE 11.0% 11.4% 11.6% 12.0% 12.5% 13.2% 13.4% 13.6% 14.0% 14.4%
Ⅲ Required rate of return (Note 3) 4.4%
Risk free rate of return (Note 4) 2.4%
Market risk premium (Note 5) 6.0%
Beta 0.55
Ⅳ Spread (estimated ROE – required rate of return) 6.6% 7.0% 7.2% 7.6% 8.1% 8.8% 9.0% 9.2% 9.6% 10.0%
Ⅴ Required income 22 24 27 30 33 36 40 43 46 49
Ⅵ Residual income ( l -Ⅴ) 35 42 48 56 66 78 86 95 106 118
Present value factor 0.94 0.85 0.76 0.69 0.62 0.56 0.50 0.45 0.41 0.37
PV of residual income 33 35 37 39 41 43 43 43 43 43
Ⅶ Sum of residual income 400
Ⅷ PV of residual income following forecasting period 981
Terminal growth (g)(Note 6) 0.0%
Ⅸ Beginning shareholders’ equity 494
Ⅹ Fair market cap (Ⅶ+Ⅷ+Ⅸ) 1,875
Total number of shares (thousands) 7,140
Ⅹl Per share value (W) 262,605
Current share price (W) 205,500
TP (W) 235,000 Note 1: Under the residual income model (RIM), we add the current shareholders’ equity to the residual income based on the earnings forecast for the next ten years before adding the result to the residual income after the forecasting period to derive the value of shareholders’ stakes. The RIM is considered less subjective than similar valuation models such as DDM, DCF, and EVA. Note 2: The RIM reflects consolidated subsidiaries’ earnings not in their entirety but only for the stake controlled by the company. Note 3: The required rate of return (i.e., cost of equity) is the rate of return expected by the shareholders who take risks. It is derived by the capital asset price model: Cost of equity = Risk-free interest rate + Beta * Market risk premium. Note 4: The yield on five-year government bonds was used as the proxy for the risk-free interest rate. Note 5: Market risk premium refers to the gap between the expected return on the market portfolio and the risk-free interest rate. It has been lowered from 6-8% to 3-5% in reflection of the current low-growth environment. Note 6: The terminal growth was assumed to be zero.
41
Duty-free
Financial Statements
Income statement (Wbn) Balance sheet (Wbn)
2016A 2017A 2018F 2019F 2020F 2016A 2017A 2018F 2019F 2020F
Revenue 1,021 1,103 1,309 1,379 1,458 Current assets 364 368 458 510 574
Cost of goods sold 503 528 599 647 684 Cash & cash equiv. 17 3 48 80 122
Gross profit 518 575 710 732 774 Trade & other receive. 117 134 135 142 148
S&A expenses 491 549 648 660 692 Inventories 224 218 262 276 292
OP 27 25 62 72 82 Other current assets 6 13 12 12 12
OP margin 2.6 2.3 4.7 5.2 5.6 Long-term assets 602 583 589 604 625
EBITDA 61 63 95 103 111 Tangible assets 351 332 325 319 314
Non-OP -2 6 15 14 16 Investments in affiliates 77 88 107 131 157
Income from affiliates 8 9 17 21 24 Other long-term assets 174 163 157 154 153
Financial revenue 16 25 15 11 11 Total assets 966 951 1,047 1,114 1,199
FX related gains 0 0 0 0 0 Current liabilities 329 304 319 323 336
Financial expense -21 -29 -18 -19 -19 Payables & other liab. 118 86 93 96 99
FX related losses 9 3 3 3 3 Borrowings 108 98 102 113 135
Others -5 1 1 1 1 Current portion of LT debts 95 106 110 102 90
Income before taxes 25 32 77 85 98 Other current liabilities 8 14 13 13 12
Income tax expense -8 -8 -18 -20 -24 Long-term liabilities 159 151 176 176 176
Income from cont. op. 17 24 58 65 74 Borrowings 151 142 167 167 167
Income from discont. op. 0 0 0 0 0 Convertible securities 0 0 0 0 0
NP 17 24 58 65 74 Other long-term liab. 7 9 10 10 10
NP margin 1.7 2.2 4.5 4.7 5.1 Total liabilities 488 455 496 500 512
NP for non-contr. interest 0 0 -1 -2 -3 Controlling interest 477 494 549 612 685
NP for contr. interest 17 24 59 67 77 Capital stock 36 36 36 36 36
Valuation of AFS fin. assets 0 0 0 0 0 Capital surplus 121 121 121 121 121
Other compreh. income 0 0 0 0 0 Retained earnings 320 337 392 455 528
Comprehensive income 17 22 56 63 72 Other capital changes 0 0 0 0 0
Comp. income for non-contr. Int. 0 0 0 0 0 Non-controlling interest 2 2 2 2 3
Comp. income for contr. int. 17 22 56 63 72 Total shareholder’s equity 479 496 551 614 687
Net borrowings 336 335 324 294 263
10 11 12 13 14
Valuation metrics (W, x, %) Cash flow statement (Wbn)
2016A 2017A 2018F 2019F 2020F 2016A 2017A 2018F 2019F 2020F
EPS 2,432 3,371 8,255 9,390 10,798 Operating cash flows 54 10 42 69 75
PER 27.2 22.0 24.9 21.9 19.0 NP 17 24 58 65 74
BPS 66,769 69,236 76,890 85,680 95,878 Non-cash items 52 64 70 72 74
PBR 1.0 1.1 2.7 2.4 2.1 Depreciation 34 37 33 31 29
EBITDAPS 8,526 8,787 13,278 14,360 15,563 FX gains 3 -16 -6 -2 -2
EV/EBITDA 13.3 13.8 18.9 17.2 15.6 Equity method gain 0 0 -7 -9 -9
SPS 143,014 154,418 183,403 193,127 204,150 Others 15 43 50 52 55
PSR 0.5 0.5 1.1 1.0 1.0 Chg in assets & liab. -7 -62 -59 -39 -41
CFPS 9,686 12,388 17,954 19,177 20,799 Other cash flows -9 -16 -27 -29 -33
DPS 600 600 600 600 600 Investing cash flow -33 -28 -34 -40 -43
Investment assets -5 -2 -17 -23 -26
Financial ratios (W, x, %) Tangible assets -37 -21 -21 -21 -21
2016A 2017A 2018F 2019F 2020F Others 10 -4 5 5 5
Growth potential Financing cash flows -14 4 29 -3 6
Revenue growth 1.6 8.0 18.8 5.3 5.7 Short-term borrowings -113 -7 5 10 23
OP growth 35.6 -5.9 144.4 15.2 14.0 Bonds payable 67 79 15 5 0
NP growth -16.8 38.3 141.7 10.9 15.0 Long-term borrowings 255 11 9 -5 0
Profitability Rights offering 0 0 0 0 0
ROIC 2.8 2.9 7.0 7.8 8.8 Cash dividends -4 -4 -4 -4 -4
ROA 2.9 2.7 6.2 6.6 7.1 Others -220 -75 4 -8 -12
ROE 3.7 5.0 11.3 11.6 11.9 Net chg in cash 6 -14 45 32 42
Stability Beginning cash balance 10 17 3 48 80
Debt ratio 101.9 91.6 90.0 81.4 74.6 Ending cash balance 17 3 48 80 122
Net borrowings ratio 70.1 67.5 58.8 47.9 38.2 NOPLAT 19 19 47 54 62
Interest coverage ratio 3.3 2.9 6.6 7.5 8.3 FCF 10 20 47 53 59
Source: Shinsegae International, Daishin Securities Research Center
42
Appendix
[Compliance Notice]
In accordance with Subparagraph 5 of Paragraph 1 of Article 4-20 of the supervisory regulations for the financial investment industry, we confirm that no information or content has been shared prior to its release on Daishin’s website, and that the analyst has not received nor will receive direct or indirect compensation in exchange for expressing specific opinions. Daishin is not affiliated with the company presented in this report. This report has been presented without any undue external influence or interference, and accurately reflects the personal views of the analyst who is responsible for its content. This report is distributed for the purpose of helping investors make informed decisions. This report has been prepared from the data and information believed to be correct and reliable, but Daishin Securities does not make any guarantee as to the accuracy thereof. Investors reading this report should make final decisions based on their own judgment.
For U.S. persons only: For U.S. persons only: This independent third party research report is a product of Daishin Securities, which is the employer of the research analyst(s) who has prepared the research report. The research analyst(s) preparing the research report is/are resident outside the United States (U.S.) and are not associated persons of any U.S. regulated broker-dealer and therefore the analyst(s) is/are not subject to supervision by a U.S. broker-dealer, and is/are not required to satisfy the regulatory licensing requirements of FINRA or required to otherwise comply with U.S. rules or regulations regarding, among other things, communications with a subject company, public appearances and trading securities held by a research analyst account.
This independent third-party research report is distributed in the United States (“US”) to Major US Institutional Investors (as defined in Rule 15a-6 under the Securities and Exchange Act of 1934, as amended) by Maybank Kim Eng Securities USA Inc. (“Maybank KESUSA”) and Auerbach Grayson and Company LLC, broker-dealers registered in the US (registered under Section 15 of the Securities Exchange Act of 1934, as amended). All responsibility for the distribution of this report by Maybank KESUSA in the US shall be borne by Maybank KESUSA. All responsibility for the distribution of this report by Auerbach Grayson and Company LLC shall be borne by Auerbach Grayson and Company LLC.
If the recipient of this report is not a Major Institutional Investor as specified above, then it should not act upon this report and return the same to the sender. Further, this report may not be copied, duplicated and/or transmitted onward to any U.S. person, which is not the Major Institutional Investor. In reliance on the exemption from registration provided by Rule 15a-6 of the Exchange Act and interpretations thereof by the SEC in order to conduct certain business with Major Institutional Investors, Daishin Securities has entered into an agreement with two U.S. registered broker- dealers, Maybank Kim Eng Securities USA Inc and Auerbach Grayson and Company LLC. All U.S. persons receiving and/or accessing this report and wishing to effect transactions in any security mentioned within must do so with: Maybank Kim Eng Securities USA Inc. 777 Third Avenue 21st Floor New York, New York 1- (212) 688-8886 or Auerbach Grayson and Company LLC 25 West 45th Street, New York, NY 10036 and not with the issuer of this report.
Analyst Certification of Independence The views expressed in this research report accurately reflect the analyst’s personal views about any and all of the subject securities or issuers; and no part of the research analyst’s compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in this report.
[Investment ratings framework] Sector ratings breakdown Company ratings breakdown - Overweight: industry indicators are expected to outperform the market - Buy: the stock is expected to outperform the market by at least 10%p over the next six months. over the next six months. - Neutral: industry indicators are expected to be in line with the market - Marketperform: the stock is expected to either outperform or over the next six months. underperform the market by less than 10%p over the next six months. - Underweight: industry indicators are expected to underperform the - Underperform: the stock is expected to underperform the market by at market over the next six months. least 10%p over the next six months.
[Investment rating breakdown] BUY MARKETPERFORM UNDERPERFORM Ratio 77.9% 20.1% 0.5% (As of Aug 25, 2018)
Appendix
[Investment rating & Target price history] Hotel Shilla (008770 KS) Shinsegae (004170 KS)
((원W)) Adj. Price Adj. Target Price (원(W)) Adj. Price Adj. Target Price 150,000 600,000 500,000
100,000 400,000 300,000 50,000 200,000 100,000
0 0 16.08 16.12 17.04 17.08 17.12 18.04 18.08 16.08 16.12 17.04 17.08 17.12 18.04 18.08
Date 18.08.28 Analyst 18.05.13 17.12.17 17.11.19 17.11.13 Date 18.08.28 18.06.24 18.05.10 18.04.11 18.01.11 17.11.06 Rating Buy changed 6M passed. Buy Buy Buy Rating Buy Buy Buy Buy Buy Buy Target price 140,000 100,000 100,000 100,000 100,000 Target price 480,000 480,000 520,000 460,000 380,000 300,000 Diff. (avr. %) 11.74 (7.56) (15.05) (18.60) Diff. (avr. %) (30.80) (17.41) (13.00) (11.57) (7.02)
Diff. (max./min., %) (9.20) 25.00 (11.00) (17.30) Diff. (max./min., %) (12.60) (10.48) (8.48) 5.00 4.17 Date 17.10.30 17.10.11 17.07.26 17.07.11 17.07.09 17.04.04 Date 17.10.11 17.08.11 17.06.12 17.04.05 16.10.05 Rating Buy Marketperform Marketperform Marketperform 6M passed. Marketperform Rating Buy Buy Buy 6M passed. Buy Target price 80,000 63,000 63,000 48,000 48,000 48,000 Target price 267,000 300,000 330,000 270,000 270,000 Diff. (avr. %) (0.35) (3.54) (4.47) 21.27 9.38 6.14 Diff. (avr. %) (19.13) (36.87) (29.36) (18.83) (32.20) Diff. (max./min., %) 3.88 11.27 5.71 15.21 9.38 30.21 Diff. (max./min., %) (12.73) (33.50) (24.39) (6.85) (24.26) Date 17.03.03 17.01.09 16.11.21 16.10.31 16.10.11 16.08.29 Date Rating Marketperform Marketperform Buy Buy Buy Buy Rating Target price 48,000 48,000 64,000 76,000 81,000 81,000 Target price Diff. (avr. %) (4.68) (3.38) (23.20) (30.26) (22.73) (20.83) Diff. (avr. %) Diff. (max./min., %) (10.83) (10.83) (18.44) (27.50) (14.94) (14.94) Diff. (max./min., %) Date Date Rating Rating Target price Target price Diff. (avr. %) Diff. (avr. %) Diff. (max./min., %) Diff. (max./min., %)
Hyundai Department Store (069960 KS) F&F (007700 KS)
(원(W)) Adj. Price Adj. Target Price (W)(원) Adj. Price Adj. Target Price 200,000 140,000 120,000 150,000 100,000 80,000 100,000 60,000
50,000 40,000 20,000 0 0 16.08 16.12 17.04 17.08 17.12 18.04 18.08 16.08 16.12 17.04 17.08 17.12 18.04 18.08
Date 18.08.28 18.07.12 18.06.03 18.05.13 18.04.11 18.01.11 Date 18.08.28 Rating Buy Buy 6M passed. Buy Buy Buy Rating Buy Target price 125,000 125,000 125,000 125,000 125,000 125,000 Target price 115,000 Diff. (avr. %) (21.74) (10.68) (20.27) (21.19) (20.77) Diff. (avr. %) 18.08.28
Diff. (max./min., %) (18.80) (4.40) (7.60) (11.60) (11.60) Diff. (max./min., %) Buy Date 17.12.03 17.11.20 17.10.11 17.08.09 17.07.16 17.07.11 Date Rating Buy Buy Buy Buy 6M passed. Buy Rating Target price 125,000 100,000 100,000 130,000 130,000 130,000 Target price Diff. (avr. %) (16.66) (9.32) (10.92) (28.83) (16.43) (19.77) Diff. (avr. %) Diff. (max./min., %) (12.40) 1.50 (6.30) (22.31) (13.08) (8.85) Diff. (max./min., %) Date 17.05.11 17.03.03 17.02.10 17.01.16 17.01.09 16.12.18 Date Rating Buy Buy Buy Buy Buy Buy Rating Target price 130,000 130,000 130,000 130,000 165,000 165,000 Target price Diff. (avr. %) (19.85) (23.14) (25.48) (25.31) (33.41) (32.57) Diff. (avr. %) Diff. (max./min., %) (8.85) (14.23) (23.08) (23.38) (27.88) (27.88) Diff. (max./min., %) Date 16.12.10 16.12.04 16.11.29 16.11.27 16.11.20 16.11.14 Date Rating Buy Buy Buy Buy Buy Buy Rating Target price 165,000 165,000 165,000 165,000 165,000 165,000 Target price Diff. (avr. %) (31.56) (31.50) (30.85) (30.06) (29.76) (28.79) Diff. (avr. %) Diff. (max./min., %) (27.88) (27.88) (27.88) (27.88) (27.88) (27.88) Diff. (max./min., %)
44
Appendix
Shinsegae International (031430 KS)
(원(W)) Adj. Price Adj. Target Price 250,000
200,000
150,000
100,000
50,000
0 16.08 16.12 17.04 17.08 17.12 18.04 18.08
Date 18.08.28 18.07.05 18.06.06 18.04.04 17.10.19 17.04.19 Rating Buy Buy Buy Buy 6M passed. Buy Target price 235,000 220,000 220,000 130,000 90,000 90,000 Diff. (avr. %) (17.19) (15.16) 10.28 (14.75) (24.29)
Diff. (max./min., %) (2.73) (2.73) 38.08 25.56 (12.56) Date 17.01.30 17.01.16 17.01.09 16.12.10 16.12.04 16.11.27 Rating Marketperform Marketperform Marketperform Marketperform Marketperform Marketperform Target price 70,000 80,000 80,000 80,000 80,000 80,000 Diff. (avr. %) (4.75) (18.93) (18.02) (17.40) (16.68) (15.61) Diff. (max./min., %) 7.00 (8.63) (8.63) (8.63) (8.63) (8.63) Date 16.11.20 16.11.14 16.11.07 Rating Marketperform Marketperform Marketperform Target price 80,000 80,000 80,000 Diff. (avr. %) (14.30) (12.13) (10.28) Diff. (max./min., %) (8.63) (8.63) (8.63) Date Rating Target price Diff. (avr. %) Diff. (max./min., %)
45