CFA Institute Research Challenge Hosted in CFA Society Korea Korea University
Korea University Consumer Products - Student Research
This report is published for educational purposes only by students competing in the CFA Institute Research Challenge Amorepacific
Close Price: KRW 2,220,000 Recommendation: BUY Date: Dec. 30, 2014 Target Price: KRW 3,000,000 Upside Potential: 35.1% Ticker: 090430 KS Equity
Analysts
LEE, Dongjin [email protected] Amorepacific: Beautifying China PARK, Jeongu [email protected] We initiate our coverage on Amorepacific (AP) with a buy recommendation suggesting one-year JANG, Dongbin [email protected] target price of KRW 3,000,000, which gives 35.1% upside from the closing price of KRW 2,220,000 on SHIN, Eugene [email protected] December 30th, 2014. AP is expected to show a solid business performance with strongly recurring JANG, Jihye [email protected] cash flows, attributable to the growing demand from Chinese customers. Investment Summary Target Price Breakdown 1. China: the Unique Positioning By 2020, AP is expected to gain market share (M/S) of 4.3% within China, the world’s second DCF (50%) KRW 3,300,000 largest and fastest growing market. AP is expected to experience 26.3% annual sales growth to Multiple (50%) KRW 2,700,000 generate KRW 1.8 trillion from China segment in 2020 due to its unique competitive positioning: 1) Asian origin, preferred by consumers due to the suitability for Chinese skin type Target Price KRW 3,000,000 2) Trendy manufacturer that captures the growing consumer demand for herb-medicinal and naturalistic cosmetics 3) Reliable brand distinguished from the Chinese local producers As a result, AP generates strong forward purchasing intent from customers in China. Market Profile 2. Korea: Dynamics of Distribution Close Price KRW 2,200,000 AP’s duty-free and ecommerce sales are projected to grow due to: (1) the increase in both number and expenditure of inbound Chinese tourists in duty-free channel and (2) the promising prospects KRW 2,520,000 / 52Wk High / Low KRW 857,000 of mobile shopping market along with the rising foreign direct purchases via online channel. Furthermore, the increasing contribution of the two highly lucrative channels will enhance the Market Cap. KRW 12,978 bil overall operating profit margin of AP’s domestic segment, from 14.7% in 2013 to 18.3% in 2020. Trade Volume 15,348 3. Strong Cash Position AP will remain attractive for the expected cash stock of KRW 703 billion in 2020. Increased As % of shares 0.26% operating cash flows will exceed investment needs while AP’s debt-free structure minimizes Shares Outstanding 5,842,556 financial cash outflows. The abundant cash stacked on the balance sheet will grant the firm a great financial flexibility to either increase investment or dividend payouts in near future. Valuation Share Price & Relative Performance We applied the Discounted Cash Flow Model (DCF) and the P/E multiples method, each with the (KRW) equal weighting, to compute the one-year target price of KRW 3,000,000. 3,000,000 For the DCF valuation, we applied the sum-of-the-parts method by separately estimating two
2,500,000 components segmented by Korea and Overseas, with different discount periods and rates.
2,000,000 For the Multiples valuation, we computed the benchmark P/E multiple of 36.1x by the historical mean of the peers during their periods of rapid growth similar to AP between 2014 and 2016. 1,500,000 By combining two different valuation models, we tried to capture the absolute stock value and to 1,000,000 reflect the market sentiment. 500,000 AP’s Performance and Key Ratios (KRW bil) 0 Jan-11 Nov-11 Sep-12 Jul-13 May-14 2011 2012 2013 2014F 2015F 2016F 2018F 2020F
AP KOSPI 200 Sales 2,555 2,849 3,100 3,675 4,122 4,677 5,905 7,426 Korea 2,227 2,427 2,561 2,921 3,169 3,497 4,113 4,761 Source: Fn Dataguide Duty-free 213 265 348 596 806 1,033 1,449 1,896 Online 177 222 294 354 408 472 616 782 Door-to-door 643 649 562 514 513 502 476 451 Earnings Per Share Movement Other cosmetics 1,194 1,291 1,357 1,457 1,441 1,489 1,572 1,631 (KRW) MC & Sulloc 403 438 468 468 472 484 502 511 180,000 Overseas 327 443 540 754 954 1,181 1,792 2,665 160,000 China 191 262 339 444 572 729 1,155 1,802 140,000 HK/Taiwan/SEA 47 30 79 260 306 365 530 746 120,000 Others 89 150 122 50 76 87 107 117 100,000 OPM 14.6% 12.8% 11.9% 13.7% 14.4% 15.0% 15.7% 16.4% 80,000 NIM 12.8% 9.4% 8.6% 10.1% 10.6% 11.0% 11.5% 12.0% 60,000 EPS (KRW) 56,015 46,086 45,761 63,448 74,684 87,832 116,440 152,534 40,000 EPS YoY 13.8% -17.7% -0.7% 38.7% 17.7% 17.6% 14.4% 14.8% 20,000 ROE 15.3% 11.5% 10.4% 12.8% 13.3% 13.7% 13.9% 13.8% 0 2011 2012 2013 2014E 2015E 2020E Fwd P/E 35.0 29.7 25.3 19.1 14.6 Source: Company data Source: Company data, team estimates 1 Korea University Figure 1. 2013 Revenue Breakdown Business Description Sulloc Amorepacific (AP) is the largest cosmetics supplier in Korea with a concrete market share (M/S) of 32.1% as of 1.9% 2014. Founded in 1945, AP has served a wide range of beauty products including cosmetics, personal care, health care and Green Tea products. A bulk of its sales, however, are earned through the Cosmetics Division, Mass Cosmetics accounting for 84.7%, followed by Mass Cosmetics (13.3%) and Sulloc (1.9%) (Figure 1). 13.3% Business Structure There are three major business divisions under AP: Cosmetics, Mass Cosmetics, and Sulloc. AP serves a Cosmetics variety of cosmetics products with 14 brands and personal care products with 7 brands. In addition, there are 84.7% 3 brands for health care business along with Sulloc for Green Tea products. (Appendix 16)
Cosmetics AP has shown a robust sales growth of its cosmetics products with an annual average of 14.3% over the last 5 years. Source: Company data 1. Diversified Brand Portfolio Figure 2. AP Brand Portfolio Listed from high-end to low-end, AP’s cosmetics brands consists of prestige, masstige and mass. Main brands of AP includes Sulwhasoo, Hera, IOPE, Laneige, and Mamonde. (Figure 2) Prestige 2. Wide Utilization of Domestic Distribution Channels The major domestic distribution channels for AP’s cosmetics products can be largely classified as: online sales(15%), department stores(13%), door-to-door(21%), specialty stores(18%), duty-free shops(25%), and others(9%). All the channels have different operating profit margins; duty-free channel has the highest profit Masstige margin of around 25%, followed by door-to-door and online channels that have margins of around 20%. 3. Heavy Concentration on Skin Care Products Cosmetics market can be segmented by Skin Care, Hair Care, Color, Fragrance, Hygiene and Oral Care market. AP’s production is focused on Skin Care and Color cosmetics; Skin Care products generate 93% of the divisional sales revenue. Mass Mass Cosmetics (Personal Care & Health Care) Source: Company data Mass Cosmetics (MC) refers to the product category served at relatively lower prices than ordinary cosmetics, and therefore, practicality is more valued than brand image. They are usually sold at Figure 3. AP Domestic Distribution supermarkets and discount stores. MC division, highly concentrated on domestic market, consists of 100% personal & health care brands such as Ryoe, Mise-en-scene, Happy Bath, Median, etc. Though AP has Door to Door 90% significant market share of 22.5%, its further growth is expected to be limited with forecasted growth rate of 80% Specialty store less than 2% due to the low growth potential of the market itself. (Appendix 10) 70% Travel Retail 60% Sulloc (Green Tea) Online/Homes Sulloc is a representative Green Tea maker in Korea with a dominant market share of over 50% in domestic 50% hopping tea market. Its business consists of operation of the Green Café and production of Green Tea products. For 40% Department store the past 5 years it has grown rapidly thanks to new product launches, broadening channels and line 30% Discount store expansion. However, its growth is slowing down as forecasted to be less than 5%. Also, with a very small 20% Direct Sale sales contribution(1.9%), it will not meaningfully affect the overall performance of AP. (Appendix 10) 10% 0% Others Corporate Strategies 2007200820092010201120122013 The company mainly focuses on the following three core strategies: Source: Company data Concentration Figure 4. Sales Breakdown by Region AP is heavily focusing its operations on the cosmetics business. Kyung-Bae Suh, the President and CEO of AP, has his management philosophy of ‘Snowballing Theory’. He views beauty and healthcare business as (KRW bil) the core of the entire company. He believes incessantly reinforcing the core is the only way to grow the firm. 8,000 During the Asian Financial Crisis in 1997, Suh executed a series of daring structural reforms by getting rid 7,000 of secondary businesses that had no relevance to beauty enterprise such as security, fashion and sports 6,000 38.5% (Appendix 15). 5,000 4,000 Responsiveness 3,000 Although the domestic demand for cosmetics stays static, the increasing consumption of the inbound 2,000 20.5% 61.5% Chinese tourists is nurturing the Korean cosmetics market. Their demand is particularly conspicuous in the duty-free and online channels. AP has promptly reinforced its sales activities in such channels to capture the 1,000 79.5% ongoing consumption trend. Along with its solid market shares on both channels, AP is fully benefitting 0 from the industrial paradigm shift. (Figure 3) 2013 2020 Domestic Overseas Globalization Source: Company data, team estimates Since domestic demand for cosmetics has a limited upside, it is crucial for the firm to explore the overseas market. AP has caught the high potential of China market, so it has largely customized business strategies Figure 5. Shareholder Structure to attract Chinese customers. With the anticipated growth in China, AP’s overseas sales are projected to increase at such a promising CAGR of 23.4% till 2020 taking 38.5% of the company’s total cosmetics sales. (Figure 4)
Corporate Structure: Vertical Integration Others Amore Amorepacific Group (APG) is the holding company that owns nine subsidiary entities including AP. Aside 44% Group and Suh Family from AP, the group owns two subsidiaries for the manufacture of containers and packages for AP’s products, 49% and another subsidiary for OEM and ODM. With such vertically integrated company structure helps the efficient operation of the company though cost reduction and quality control. (Appendix 15)
Shareholder Structure: Chaebol Structure National Pension Kyung-Bae Suh, the CEO and the chairman of APG, effectively holds 49.4% of AP’s shares along with 9 Service persons with a special relationship. This shows a typical Chaebol structure, widespread among Korean 7% conglomerates, where the owner has an absolute control over the firm’s entire business (Figure 5) (Appendix Source: Company data 15). 2 Korea University Figure 6. Succession Issue Corporate Governance and Social Responsibility Suh Kyung-bae Corporate Governance As one of the typical conglomerates in Korea, AP has distinctive traits as a Chaebol company. Below is further Suh Min-jung evaluation of the quality of AP’s Corporate Governance. (Appendix 21) Chaebol Structure 26.4% 55.7% Kyungbae Suh, the President and CEO of AP, and his family exert absolute influence on the overall corporate governance. Though such family-led management may beget risks of arbitrariness, it aligns the incentive of management with the shareholders’ benefit. Since entering the company in 1987, Suh has Amorepacific Group proven himself with an successful management decisions to transform the company into the dominant 32.2% 10.7% market leader in Korea. Amorepacific Succession Issue Meanwhile, the succession issue is inevitable for AP. From the moment of its foundation by Suh’s father, AP has been owned by Suh family. There is high chance that the firm will be succeeded by one of Suh’s two Source: Company data daughters. Precedent examples of Chaebol companies in Korea show unfavorable acts of devaluing the Figure 7. AP CSR Expenditure companies to facilitate the succession process, for example, by deliberately dropping their short-term performance. But, considering both daughters are in their early 20s yet, it seems the company is free from 12,000 2.85% this issue at least for the next 10 years. (Figure 6) (Appendix 15) 10,000 2.70% Social Responsibility 8,000 AP actively seeks opportunities to share and give back value to the society by involving in various social activities including: (1) a campaign for sending hope to cancer patients since 2007 (Appendix 17), (2) a charity 6,000 2.55% for breast caner, investing KRW 2.6 bil to ‘Korea Breast Cancer Foundation’ (the first Breast Healthcare NGO in 4,000 Korea), and (3) environmental programs of ‘Greencycle’ and ‘M-Garden.’ (Figure 7) 2.40% 2,000 Industry Overview and Competitive Positioning 0 2.25% Common Traits of Cosmetics Market 2010 2011 2012 2013 Cycle Defensive CSR Expense (Mil KRW) CSR Expense/EBIT (R) Cosmetics industry is defensive to economic cycles. It does have a significant correlation with the economic Source: Company data, team estimates growth, yet there is a certain downward ridgidity. This is mainly because consumers perceive cosmetics goods as a necessity for their lives rather than a supplementary or luxury. The world-wide industry beta for Figure 8. World Cosmetics Market Size cosmetics is estimated to be 0.82, lower than the major 14 industrial sectors’ average beta of 0.99. (mil USD) Pricing: Brand Image 350,000 Cosmetics goods require little direct material costs while qualitative differentiation of a product is not easily 300,000 visible. Therefore, the price of a cosmetics product is largely determined by the brand image. Therefore, consumers rather buy the brands they value and trust, and producers have priority in effective marketing 250,000 and advertising their brands. 200,000 Product Classification 150,000 Cosmetics products can be classified into three segments by price range: prestige, masstige, and mass. Each 100,000 market segment generally corresponds with the income groups of consumers; high-income group is 50,000 associated with the prestige segment while low-income group is conspicuos in the mass segment market. - Global Cosmetics Market Market Size and Growth Source: Datamonitor, team estimates 2013 world cosmetics market size reached USD 233.1 bil with the six-year annual average growth of 3.7%. And it is expected to maintain current growth level along with the subsequent growth of emerging markets. Table 1. Cosmetics M/S by Country (2013) (Figure 8) (Appendix 5) Emerging Markets Population Country M/S The U.S. is the largest market with 17.0% M/S, followed by China (10.2%), Brazil (9.9%) and Japan (9.0%) Proportion (Table 1). But, the weight of emerging markets (China, Brazil, Russia) is growing due to the faster market 1 United States 17.0% 4.4% growth facilitated by high economic growth and changing life style of increasing middle class. (Figure 9) 2 China 10.2% 19.1% China: the Fastest Growing Market 3 Brazil 9.9% 2.8% Despite relatively the lowest penetration of cosmetics among the key markets, China boasts the second largest 4 Japan 9.0% 1.8% maket sized USD 21.8 bil (2013). Having shown the highest market growth at 10.2%. China market is expected 5 Germany 4.4% 1.1% to expand at 8.4% CAGR until 2020, outrunning the world growth of 3.7%. Our team estimates China market will become the largest by 2018, exerting a greater influence on the dynamics of world cosmetics industry. 6 France 3.9% 0.9% 7 Russia 3.3% 2.0% Rising Consumption Cosmetics consumption increases proportionately to the income level as witnessed in other markets around 8 Italy 2.8% 0.8% the world. China will not be an exception; the increasing amount of per capita income will grant the people 9 Korea 2.3% 0.7% more purchasing power. On the other hand, the Chinese government has altered its framework for economic development from investment-oriented to consumption-oriented growth, where it keeps on Source: Euromonitor implementing policies designed to encourage consumer spending. Figure 9. Market Growth by Country (2013) Figure 10. 2012 Market Growth and Penetration by Country Growth CAGR 12% 0.12
10% 0.1 CHN BRA Bubble size represents 8% 0.08 market size 2013.
6% 0.06 KOR UK 4% 0.04 DEU JPN 2% 0.02 ITA US FRA 0% 0 -10 40 90 140 190 240 290 340 390 440 Per Capita Cosmetics Spending (mil USD) Source: Datamonitor Source: Datamonitor, team estimates 3 Korea University
Figure 11. China Market Distribution Online Channel Growth Most importantly, an exponential growth of the online channel enables manufacturers to stretch the 100% Hypermarkets distribution coverage within such a vast nation at minimal costs. The online channel accounted for 13.5% of nd Department total market size in 2013, sharply increased from 2.6% in 2010 (Figure 11). With the increasing income, 2 to 80% Stores 3rd-tier cities account for 65% of the nation-wide online transactions (Figure 12); this signifies more Internet Retailing opportunity to come for cosmetics manufacturers to extend their coverage down to low-tier cities without 60% Direct Selling establishing physical infrastructure.
Beauty Specialist 40% Retailers Concentration on Skin Care Market Supermarkets The skin care market accounts 57.2% of the total cosmetics market in China. According to Euromonitor, the 20% Parapharmacies/D weight of skin care market is expected to grow further in China, reaching 61.8% in 2016. rugstores Independent Small Grocers Competitive Environment 0% Others 2004200520062007200820092010201120122013 Eight companies out of the top 12 cosmetics suppliers in China market are foreign-based including AP, L’Oreal, P&G, Estee Lauder. Source: Euromonitor Chinese cosmetics market is under a fierce competition. L’Oreal, the market leader in China, has Figure 12. Online Transaction by Tier Group approximately 14.2% of market share while the runner-up P&G has about 5.6%. Excluding L’Oreal, gaps of M/S among the major players are small (Table 2). In recent years, some of the multinational cosmetics producers including P&G, Shiseido, Amway and Nivea are losing market shares whereas some Chinese local suppliers such as Jala, Jahwa, Inoherb and Proya are Tier 1 Others 16% aggressively gaining market presence. The aggregate M/S of Chinese local manufacturers increased from 21% 7.3% in 2009 to 12.8% in 2013. Korea Cosmetics Market The Cosmetics market in Korea has been matured with the slowing-down of domestic consumption growth. Tier 3 However, the rising demand from inbound Chinese tourists is continuously carrying the market growth. Tier 2 th 25% 38% Korea market reached USD 6.8 bil in 2013, the 9 largest in the world, growing at 5.4% CAGR over the last 5 years. It is forecasted to continue growth at 6.6% per annum until 2020.
Market Growth Led by Chinese Customers Source: Feng Guoqiang The rapid increase both in numbers and purchasing power of inbound Chinese tourists will contribute to the Korea market’s growth. The number of inbound Chinese visitors are expected to increase at 19.6% CAGR by Table 2. Top 12 Companies in China Cosmetics 2020. Per tourist expenditure on cosmetics will also increase by 4.3% annually. Market (2013) Dominance of Local Companies Rank Company Market Share AP is leading the Korean cosmetics company with its market share of 31.6%. Even LG H&H, the nearest 1 L’Oréal 14.2% rival of AP, only has the market share of 14.2%. In contrast to the China market, Korean domestic brands are 2 Shiseido 5.6% rd th 3 Procter & Gamble 5.6% dominant over foreign ones; Estee Lauder is ranked the 3 (4.5%) and L’Oreal the 5 (4%). (Figure 13). 4 Mary Kay 4.8% (Appendix 7) 5 Estée Lauder 3.4% 6 Amway 3.1% Competitor Analysis 7 Jala 2.7% AP has rapidly gained M/S within China over the recent five years (2009-2013), leaping from 1.0% M/S to 2.1% 8 Nu Skin 2.3% (Figure 14) even though AP operates in a highly competitive environment filled with numerous competitors. 9 Shanghai Jahwa 2.3% Considering the growing presence of AP in overseas markets, the company’s major competitors include 10 AmorePacific 2.1% influential gobal players like L’Oreal, Estee Lauder and Shiseido. To account for the rapidly growing Chinese 11 Nivea 1.9% local competitors, we also included Shanghai Jahwa that retains a similar EPS growth rate as AP. Also, AP 12 Inoherb 1.9% faces competition with LG H&H, the runner-up company in Korea with a similar brand portfolio. *Data obtained by aggregating skin care and color cosmetics market L’Oréal Source: Datamonitor, team estimates L’Oréal is a French cosmetics company which entered China in 1997. L’Oréal is the biggest market player in China market with 11.4% and 33.9% market share (M/S) of the skin care and color cosmetics market Figure 13. 2012 Korea Cosmetics Market respectively as of 2013. One of L’Oréal’s biggest strength is the wide coverage from mass to prestige with a well-segmented portfolio across all pricing frontiers. Their popular brands include L’Oréal Paris, Lancôme and L’Oréal Men Expert.
Estée Lauder Amore Others Pacific Estée Lauder is a US-based cosmetics company that entered China in 2002. Estée Lauder, unlike other major 37.4% 31.6% players, focuses solely on prestige segment; their popular brands include Estée Lauder and Clinique. Estée Lauder is currently making an aggressive exploitation of China market through development of China- specific brands while maintaining their premium image. LG Healthcare L'oreal 14.2% Shiseido 4.0% Shiseido is a Japanese cosmetics company with the biggest market share among Asian cosmetics firms, The Face rd Estee holding the 3 largest share in both skin care and color markets in China. Although its biggest strength lies Shop Able C&C Lauder 4.0% with its ‘Asian Beauty’, its popularity has been struck by the anti-Japanese sentiments and safety issues 4.3% 4.5% regarding nuclear accidents. Shiseido’s market share in China dropped from 6.3% to 5.6% between 2009 and Source: Company data, FSS 2013. Figure 14. AP’s M/S in China Skin Care Market LG Household & Healthcare (LG H&H) 2.5% LG H&H is a Korea-based cosmetics company and AP’s biggest rival in Korea. Similar to AP, its brands range from mass to prestige with popular brands such as the History of Whoo, Ohui, Sooryehan and the 2.0% 2.1% Faceshop. LG H&H demonstrates its differentiation strategy with ‘oriental medicine’ cosmetics, which is 1.7% receiving positive responses. Lacking brand awareness, LG H&H has no market presence in China with its 1.5% M/S of less than 0.1%. 1.3% 1.0% 1.2% 1.0% Shanghai Jahwa Shanghai Jahwa is the second biggest local cosmetics company in China and the only listed firm among the 0.5% major local players. Its strength lies in their naturalistic products marketed through its brand Herboris. It’s market share in China has grown from 1.4% to 2.3% over the last 4 years (2009-2013). Jahwa is currently 0.0% going through a hard time with a suspicion over committing accounting fraud. 2009 2010 2011 2012 2013 Source: Company data, team estimates 4 Korea University Figure 15. Suitable for Chinese Skin Type Investment Summary * Respondents were asked whether each brand suits their skin type AP is expected to maintain a robust top-line growth; the company will rise as a main cosmetics brand in China 50% with its expected M/S of 4.3% while its domestic business will also demonstrate a solid performance based on Asian Firms (Avg. 30%) the expansion of duty-free and online sales. Taking advantage of its debt-free structure, AP will be able to 40% Western Firms (Avg. 21%) sustain its strong cash position with greater flexibility. 30% 1. China: the Unique Positioning 20% The Reason More Chinese are Buying AP
10% Our estimates suggest 4.3% M/S of AP in China cosmetics market by 2020, equivalent to the 2013 top fifth position. Only four multinationals gained M/S in China between 2010-2013, and AP was the fastest gainer at 0% 20.4% CAGR. Listed below are the reasons why Chinese customers are bound to purchase AP. 26.3% CAGR of AP’s sales untill 2020 beats 8.6% of China market. Asian Origin Source: Alpha Wise, Morgan Stanley Research Skin types vastly differ across regions; thus, desired functions of cosmetics are also different. Chinese consumers tend to believe Asian brands are more suitable for their skin (Figure 15). Consequently, Asian Figure 16. Perception toward Brand Origin brands are more widely favored by Chinese consumers than Western brands (Figure 16). AP is one of the major Asian cosmetics suppliers after Shiseido of Japan, Jawha and Jala of China; favorable customer * The chart shows which brand origin is most favored perception toward Asia and especially Korea will grant AP an opportunity to raise brand awareness. 1% Reliability 9% Chinese Brands Based on the Asian origin preference and low product price, Chinese local producers have grown throughout the low-end market especially in 2nd to 3rd-tier cities. Six out of 11 M/S gainers in China 28% Korean Brands cosmetics market between 2009 and 2013 were Chinese local suppliers. In comparison, Korean manufactures 25% Japanese Brands are perceived more reliable than the Chinese locals; consumers value brand, quality and even price competitiveness of Korean cosmetics over the Chinese (Figure 17, 18). European Brands Figure 20. AP’s Unique Comparative Positioning American Brands 11% 26% Can't say
Source: Morgan Stanley Research M/S Gainers M/S Figure 17. Competitiveness Perception AsianOrigin : Korea vs. China Reliability * Respondents were asked whether the country was competitive in relevant fields (%) KOR CHN KOR CHN KOR CHN 100.0
34.2 80.0 42.7 59.0 52.0 Source: Company data 60.0 75.3 72.7 Consumer Trends Herbal medicine and naturalism are distinguishable trends in Chinese cosmetics demand. Chinese have 40.0 51.6 relied on herbal medicines found in nature as a means to cure sickness. High exposure to the air pollution 46.4 33.6 20.0 36.9 makes Chinese consumers value the curing effect of cosmetics products. 22.7 24.9 AP has long been investing in herbal medicine and naturalism; now the effort meets recognition. 0.0 Brand Quality Price Sulwhasoo, a representative herb-medicinal cosmetics brand, has been selected as the most beloved Korean Korea China Korea China Korea China Competitiveness Competitiveness Competitiveness luxury cosmetics by Chinese consumers. Positioned at high-end prestige market, Sulwhasoo is expected to Low Middle High grow at 38.2% CAGR in sales by 2020. Innisfree boasts its strong brand identity linked to naturalism. Source: KITA Targeting mid- to low-end market, Innisfree is under the corporate’s full-scale expansion plan where we Figure 18. Impact of National Image on Purchase expect 49.9% of annual sales growth until 2020. * Respondents were asked whether national image Forward Purchase Intent 70% of a brand influences purchasing decision Figure 19 and 20 show how much likely Chinese consumers are willing to switch their most frequently 60% purchased brands for skincare and color cosmetics withing the next 12 months. AP scored the second highest in skincare and the first in color cosmetics, suggesting the increasing brand preference toward AP. 50% Based on the positive response from the consumers, AP can quickly enlarge its customer base in China 40% which will lead to a solid growth in the country (Figure 21).
30% 63% Figure 21. Forward Purchasing Intent: Skincare & Color Cosmetics
20% 30.0% 80% 50.0% 200% 60% 40.0% 150% 10% 20% 17% 20.0% 40% 30.0% 100% 0% 20% Not influential Influential Highly influential 20.0% 50% 10.0% 0% 10.0% 0% Source: KITA -20% 0.0% -40% 0.0% -50% Figure 19. Number of Stores by Brand & China Total Sales (Store) (KRW bil) 8000 2,000 (a) Most frequent purchased % (LHS) (b) Main brand considered % (LHS) Fwd Purchse Intent (RHS) 1,600 * Note: Forward purchasing intent is measured as the % change in (b) main brand considered the next 12 months over (a) brand currently most often purchased 6000 * Note: Current main brand is measured from the respondent number from the question of “which brand do you use the most often?” and next main brand 1,200 from the question of “in the next twelve months, which brand will you use the most often?” 4000 Source: Alpha Wise, Morgan Stanley Research 800 Solid Performance Expected 2000 400 AP established the Beauty Center in Shanghai in 2014 to provide the one-stop R&D, production, and logistics. Production capacity increased by tenfolds compared to its old plant in Shanghai; this granted AP an ability to 0 - capture the growing demands with the products specially designed for Chinese consumers. Furthermore, AP is planning store expansions of Sulwhasoo, Laneige, Innisfree and Etude in China (Figure Mamonde Laneige Innisfree 19). By its responsive strategies towards the distribution channel shift, AP also has increased sales through
Etude Sulhwasoo Total Sales(R) new channels including online, home-shopping and drug-stores from 5% of the total sales in 2013 to 11% in Source: Company data, team estimates 2014. Consequently, AP will enjoy 26.3% CAGR in sales to generate KRW 1.8 trillion in 2020. 5 Korea University Figure 22. AP’s Duty-free & Online Sales 2. Korea: Dynamics of Distribution (KRW bil) AP will enjoy a steady 9.6% CAGR in sales and 12.5% in operating profits in its dometic business segment. 3,000 20% The growing number of inbound Chinese visitors increases duty-free sales revenue. The rapid expansion of 2,500 19% mobile shopping market along with the rising foreign direct purchases via online will heighten AP’s 2,000 ecommerce sales. The increasing contribution of duty-free and ecommerce sales will enhance the domestic 18% operating profit margin from 14.7% to 18.3%(2013-2020) (Figure 22). 1,500 17% 1,000 Exponential Growth of duty-free Sales
500 16% AP’s sales through the duty-free channel will continue to grow mainly due to: (1) the increasing inflow of Chinese tourists, (2) a favorable spending environment facilitated by government deregulations. Having 0 15% grown at an annual average of 27.9% over the last 3 years, AP’s duty-free sales are expected to grow further at the 21.3% CAGR until 2020. (Appendix 19)
Online/Homeshopping Duty-Free Overflowing Chinese Tourists Korea Cosmetics OPM (R) Due to the simplified visa issuance process and their increasing disposable income, Chinese inbound Source: Company data, team estimates visitors are expected grow at 19.6% until 2020. The Chinese visitors’ per capita spending is the highest compared to other origins, with a high consumption focus on cosmetics (Figure 23). The increase in Chinese Figure 23. Inbound Chinese Visitors & tourists will directly contribute to AP’s duty-free sales growth. Per Visitor Expenditure (thousand) (thousand KRW) Favorable Spending Environment 20,000 800 The Korean government is making remarkable efforts to encourage tourist spending by (1) simplifying tourists’ tax refunding processes and (2) granting permission for additional downtown duty-free shops in 15,000 600 Seoul. Credit companies are also contributing to foster a favorable spending environment by introducing incentive packages such as ‘KT Tourist Reward’ to maximize tourist expenditures. 10,000 400 Ecommerce 5,000 200 Korean ecommerce channel has expanded at an annual average of 18.6% for the last 5 years. The channel will continue to grow based on: (1) the high potential of mobile shopping market and (2) the increase in direct 0 0 2011 2012 2013 2014F2015F2016F2017F2018F2019F2020F online purchases by foreign customers. Consequently, AP’s ecommerce sales will demonstrate a solid growth of 14.1% annually until 2020. Inflow of Chinese Inbound Chinese Per Capita Cosmetics Consumption (R) Mobile shopping Source: Korea Tourism Organization, Statistics Korea, Local home-shopping enterprises are extending their business to mobile shopping in order to capture IMF, team estimates demand from the widespread smart-phone users. Newly developed mobile applications grant the users convenient access to the home-shopping channels with simple payment processes. Amid such changing paradigm, the mobile channel has grown at a 5-year CAGR of 277% and is expected to grow by 91% in 2014. Figure 24. AP’s OP Margin by Channel Direct Online Purchase Internet shopping sales are now opening up for foreigners with much easier access. The government has 25% eliminated burdensome systematic requirements upon online purchases of foreign customers, namely the Active-X control and compulsory Certificate Verifications. Private partnerships with foreign payment 20% 20% service providers such as Ali-pay will also make purchases easier. This will gradually attract foreign consumers who seek for more product variability at cheaper prices. (Appendix 15) 12% Margins Improvement The changing dynamics of AP’s distribution channels will make AP’s domestic business more profitable. 6.5% duty-free shops and online channels yield significantly higher returns with OPMs of 25% and 20%, respectively. (Figure 24) As their domestic sales contribution is predicted to grow from 31% in 2013 to 63% in 2020, the OPM for cosmetics division in Korea will be enhanced from 14.7% in 2013 to 18.3% by 2020. Department Specialty Online Door-to-door Duty Free Store Source: Company data 3. Strong Cash Position AP will remain attractive for the expected cash stock of KRW 703 bil in 2020. Increased operating cash flows are expected to exceed investment needs while AP’s debt-free structure minimizes financial cash outflows. Therefore, the growing profits will be accumulated almost intact in cash and cash equivalents with 16.5% Figure 25. Cash Flows & Cash Stock annual increase for the next seven years. (KRW bil) 1,500 Cashing in the Business 1,000 AP is expected to generate a net cash flow of KRW 127 billion in 2013 , and it will grow at 10.6% until 2020. This is attributable to the virtuous cash generating cycle of the company described below: 500 Operating Cash Flows 0 AP possesses strong competency in converting revenue streams into cash which show historical correlation of 0.95 R-square. We expect the 12.4% yearly revenue growth for AP with 16.5% increase in OCF per annum -500 by 2020. -1,000 Investing Cash Flows 2012 2013 2014F 2015F 2016F 2017F 2018F 2019F 2020F CAPEX investment is a must for AP’s aggressive expansion policy. The firm’s tangible assets will increase OCF ICF by 10.5% annually until 2020, which will require about 80% of OCF every year for the investment in tangible FCF Cash and cash equivalents assets. Financing Cash Flows Source: Company data, team estimates AP has, for the past decade, sustained management with no loans in non-consolidated basis and only has allowed borrowings for the working capital of subsidiaries abroad, which only amounts to 1% of total assets in 2014. Hence, most of the cash flow earned through operating activities will not be drained through repayment of debts. (Figure 25) Financial Flexibility The increasing cash stock enables AP to readily respond to any unexpected challenges or opportunities in the future. As the Korean government has decided to impose tax on a corporate’s retained earning, AP will likely to direct its cash out as either CAPEX or dividend. AP may choose to invest more than estimated to aggressively target other Asian markets. Otherwise, AP is most likely to increase divedend to satisfy shareholders rather than paying additional taxes.
6 Korea University Figure 26. Stock Movement and news flow 3,000,000 Expand ‘Sulwhasoo’, popular Aggressive expansion of First Quarter earning surprise, brand in China stores in the SEA region OPM increase by cost reduction 2,500,000 Rapid growth of Easing the risk of door to door channel 2,000,000 Chinese subsidiary through online and duty free shops
1,500,000
1,000,000 Reduced sales in door-to- Movements of Slowing growth rate door sales and increase in 500,000 redeeming stocks domestically marketing expenses 0 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14
AP KOSPI 200
Source: Bloomberg, company data
Table 3. Target Price Estimation Valuation We applied the Discounted Cash Flow Method (DCF) and Multiple Valuation Method (PER) to compute the Valuation DCF Multiple 1-year target price of KRW 3,000,000 with a 35.1% upside from the closing price of KRW 2,220,000 on Dec. 30th, Estimated Price KRW 3,300,000 KRW 2,700,000 2014. We averaged the prices gotten through each valuation methods in getting the target price (Table 3). Weights 50% 50% 1. Discounted Cash Flow Method Target Price KRW 3,000,000 Since there is a significant gap between the expected growth rates of domestic and overseas sales, it seems more suitable to break down the company into two components by countries. For both components, we have Source: Team estimates assumed a 2-stage growth model to estimate their FCFs and applied different constant growth rates to perpetuity (Table 4). For the domestic component, free cash flows are forecasted until 2020, after which the Table 4. DCF Model Stages constant growth rate of 1.0% is applied thereon. For the overseas component, we have forecasted FCFs for the Domestic Component 2-stage next 20 years until 2033 after which the constant growth rate of 1.0% is applied for the future cash flows.
Analytic stage 2014-2020 According to the DCF model, the domestic component value of the firm yields KRW 1,600,000 while the overseas component is valuated to be KRW 1,700,000. The sum of the components valuate the total firm as Perpetuity 2021- KRW 3,300,000 (Table 5) (Appendix 2). Overseas Component 2-stage Key Assumptions Analytic stage 2014-2033 Sales Growth Assumption Perpetuity 2034- The weight of overseas sales component is expected to make up 36% of the total sales (24% China, 10% Source: Team estimates HK/Taiwan/SEA) while the share of domestic sales drops to 64% in 2020 (from 83% in 2013) (Appendix 2).
Table 5. DCF: Value by Components CAPEX The expected CAPEX includes the firm’s construction plans; the plant expansion plans, both domestic and Domestic Component KRW 1,600,000 overseas, the office building construction plan (KRW 520 billion, July 2014 – July 2017) and store expansion. (1) Plant expansion was forecasted based on its high historical correlation with revenue growth. (2) Store Overseas Component KRW 1,700,000 expansion was forecasted with higher focus on the China expansion. (3) The planned construction of AP’s headquarters was reflected in the domestic CAPEX. Total Value KRW 3,300,000 Source: Team estimates Model Assumption The company has no debt under its non-consolidated balance sheet, but some of the subsidiaries have small Table 6. Duty Free Sales Drivers amounts of borrowings to raise funds for working capital. In applying the valuation method, it seems more
Annual Growth reasonable to use the FCFE method for evaluating the domestic component whereas FCFF method was Customer Segment Driving Factors (2013-2020F) adopted for the overseas component (Appendix 2). Per Capita GDP 8.0% Domestic Component Assumptions Chinese Korea-preference 9.4% Sales : AP's domestic sales is divided into two business segments, cosmetics and Mass & Sulloc. The Per tourist spending 5.3% cosmetics division was further subcategorized into 8 subcomponents per channel segments: specialty store, discount store, online, department store, duty-free, door-to-door, direct sales and others. Sales of the JPY/KRW Japanese (1.0%) Currency Rates subcomponents were forecasted by applying relevant statistical data and/or historical growth rates.
GDP-adjusted The most significant growths are from the duty-free and online channels, which are expected to account for Domestic 3.0% tourism growth trend 45% and 18% of domestic revenue by 2020, up from 17% and 14% in 2013 respectively. The growth stimulus of the duty-free channel is the increase of the Chinese tourists’ proportion within the channels contributed Historical Growing Other 2.0% trend by the increasing outbound tourists and GDP and their spending in the Duty-Free stores (Table 6). For the online channel, the biggest growth factor is the growth of the Chinese consumers’ direct online sales and * For proportion of spending on cosmetics and proportion spent on AP’s products, the historical figure of 33% and 14% was applied expansion of the channel to mobile home-shopping. As a combined result AP’s cosmetics sales is expected Source: IMF, Korea Tourist Organization, team estimates to grow at 9.6% CAGR until 2020 (Appendix 3). For the mass & Sulloc division, both divisions are forecasted separately with their growth factors based on Table 7. Domestic Discount Rate Computation their current market position and the growth consensus perceived by the market, as a result Mass and Domestic Component Sulloc division is expected to grow at 0.2% and 2.5% CAGR respectively until 2020. As a result, they will grow at a 1.3% combined until 2020. Risk-free Rate 2.73% Operating Profit : We have estimated the overall operating profit of the domestic component by applying Market Risk Premium 6.19% relevant OPM to each channel, depending on their expected sales. The overall domestic OPM is predicted to keep improving due to the increasing contribution of highly profitable segments. The overall domestic OPM Equity Beta 0.42 is expected to improve from 14.7% in 2013 to 18.3% in 2020 (Appendix 3). Cost of Equity 5.34% Tax : Korean government imposes 22% of corporate tax to firms that earn annual EBT of more than KRW Terminal Growth Rate 1.00% 23.98 billion. We applied the statutory tax rate of 22% to compute the NI of domestic component. Source: Team estimates, company data, KOFIA Cost of Equity : The cost of equity of 5.34% was calculated using the CAPM (Table 7) (Appendix 2). 7 Korea University Terminal Growth Rate : Based on the assumption that the relatively higher growth rate of cosmetics Table 8. China Sales Drivers industry will converge to the long-term economic growth in the long-run, the constant growth rate of 1.0% Annual Growth was applied to estimate the terminal value after 2020 (Appendix 2). Segment Driving Factors (2014-2020F) Overseas Component Assumptions Cosmetics Market Market 8.6% Growth Sales : Overseas sales are expected to maintain a high growth trend due to the rapid increase in sales in China and other Asia (HK, Taiwan and SEA). We forecasted the overseas sales per region: China, Developed # of counters 8.2% and Other Asia. The developed market region (accounting for US, France and Japan) is expected to grow at AP Sales per counter 4.6% CAGR until 2020, whereas Other Asia region (which accounts for most SEA countries) are expected to 12.7% (weighted average) grow at 19.2% CAGR until 2020. (Appendix 3). The China region was further divided into 5 segments per brand: Innisfree, Laneige, Mamonde, Sulwhasoo Source: Euromonitor, company data, team estimates and Etude. The growth stimulus of the brands were computed based on the number of stores and the sales per store while including the market growth with IMF’s GDP forecast. As a result, sales in China will grow Table 9. Overseas Discount Rate Computation at 26.3% CAGR until 2020. As a combined result the Overseas component is expected to grow at a 23.4% CAGR until 2020 (Table 8). Overseas Component Risk-free Rate 4.07% Operating Profit : The overseas component as a whole recorded an OPM turn-around in 1H14 for the first Equity Risk Premium 5.90% time in 3 years. We assumed that the OPM will improve in relation with the enhancing profitability of China until it reaches its sustainable OPM of 15% in 2020 (Appendix 3). Equity Beta 0.37 Cost of Equity 6.26% Tax Rate : We calculated the tax rate by using the weighted average method, taking into account the tax Pre-tax Cost of Debt 1.56% rates of all relevant countries, to determine the appropriate weights as a percentage of operating profits (Appendix 3). Marginal Tax rate 25% Cost of Debt after tax 1.2% WACC : The WACC of 6.24% was calculated by using the weight-averaging the cost of capital method. The calculated cost of equity and cost of debt was applied (Table 9) (Appendix 2). Market cap as % of total 99.6% Debt as % of total 0.4% Terminal Growth Rate : The FCF from overseas is expected to increase at a 23% CAGR until 2033, after WACC post tax 6.24% which the terminal growth rate of 1.0% is applied, since we believe that relatively high growth rate of China will eventually converge to the long-term economic growth rate (Appendix 2). Terminal Growth Rate 1.00% Source: Team estimates, company data, KOFIA 2. Price Multiples Apart from the DCF method, the team has also analyzed price relatives of the comparable firms to compute the fair value of AP.
Figure 27. PER Band Historical P/E Analyzing AP’s historical P/E from Jan, 2010, it can be seen that AP’s multiple maintained a steady volatility (KRW) with a 22.0X low and 30.0X high. AP’s stock price has rapidly grown since January 2014 resulting in their 3,500,000 overshooting of the historical P/E range. (Figure 27). However it is biased to directly perceive overshooting of 3,000,000 the P/E as an direct indicator of AP being overpriced. This is because of the high EPS growth of 24% forecasted 2,500,000 for the next 3 years until 2016, compared to its historical CAGR of 9.6% over the last 5 years. The price 2,000,000 overshooting occurred as a result of early incorporation of AP’s future EPS growth potentials, which suggest 1,500,000 that it may be invalid to utilize AP’s historical P/E for the analysis of AP’s forward value. 1,000,000 500,000 Bloomberg Consensus Estimate 2015 EPS Growth Rate 0 Company Country Trailing P/E PEG 2009-12 2011-12 2013-12 2015-12 Forward P/E (2013-2016F) AP Korea 34.46 26.33 24% 1.47 수정주가AP 33.6X 29.8X 26.0X Average 25.89 22.93 11% 3.42 22.2X 18.4X LG H&H Korea 28.80 23.87 11% 2.69 Source: Fn Dataguide Shiseido Japan 23.20 25.43 5% 5.09 L'Oreal France 25.83 23.12 4% 6.13 Figure 28. EPS Growth Rate Forecast Estee Lauder USA 25.56 22.02 12% 2.07 Shanghai Jahwa China 26.05 20.19 23% 1.11 30% * Trailing P/E based on EPS from 4Q, 2013 to 3Q, 2014 Source: Bloomberg 25% * Data adjusted in accordance with AP’s fiscal year basis 20% Peer selection 15% Peer selection is based on the closest global competitors that directly compete with and have direct impact on AP’s market position: (1) multinational manufacturers such as L’Oreal, Estee Lauder and Shiseido, who 10% position at the top 10 sellers’ list in China’s cosmetics market, and (2) Shanghai Jahwa, a fast-growing local 5% producer, (3) LG H&H, a Korean company that entered China market with similar K-Beauty image. 0% PEG Growth Rate Forecast by Company AP LG H&H L'Oreal P&G Estee Shiseido -5% Lauder Although a high relative Price to Earnings (P/E) ratio may be interpreted as the limited upside for a stock, the current P/E ratio of AP is justified by the remarkably higher estimated future EPS growth. AP is currently 10-13 13-16F traded at a trailing P/E of 35, which is the highest among the peers. Nonetheless, with the highest EPS growth Source: Bloomberg rate of 24%, we consider AP as a growth stock. AP is showing a low PEG ratio of 1.47, which is less than a half of the peer average 3.3; this justifies the current P/E ratio. Figure 29. P/E Valuation Multiple Valuation: Peer P/E 2015 Forward EPS (KRW) 74,648 The increase in AP’s stock price since January 2014 resulted in their relatively higher P/E ratio compared to 2015 Forward P/E (X) 29.7 peers; however, it is also true that AP’s EPS growth is expected to be much faster than its peers (Figure 28). To incorporate such rapid growth trend for AP into valuation, we studied EPS growth trends of the peers and Benchmark P/E (X) 36.1 their P/E ratios at the corresponding periods. We extracted periodic average P/E ratios of the peers when they LG H&H 31.3 retained EPS growths around 20%, which is AP’s current growth level. As a result, we arrived at the benchmark P/E of 36.1, which will be maintained until the end of 2016 (Figure 29). Shiseido 35.0 L'Oreal 38.8 Conclusion By combining the two aforementioned valuation methods to account for the firm’s intrinsic value and the Estee Lauder 34.4 market sentiment, as well as incorporating the growth potential, the fair price for AP is estimated to be KRW Shanghai Jahwa 41.2 3,000,000. Target Price (KRW) 2,700,000 Source: Bloomberg, team estimates 8 Korea University Financial Analysis Earnings : Figure 30. Cumulative Sales Revenue AP will enjoy an EPS increase from KRW 63,448 to KRW 152,534 between 2014 and 2020 due to both sales (KRW bil) increase and improving profit margin. 8,000 7,000 Sales 6,000 AP's sales revenue is expected to increase at 12.4% GAGR. This is attributable to the growth in China, duty- 5,000 Etc. free channel, online channel and other Asia (Figure 30).
4,000 Online (1) In China, the revenue is forecasted to rise at 26.3% GAGR (2014-2020) with increasing brand awareness and subsequent store expansion. 3,000 Duty-Free (2) Duty-free and online sales will show 18.9% CAGR (2014-2020). 2,000 China 1,000 Asia (exp. China, (3) AP is actively seeking other Asia markets including Hong Kong, Taiwan, Singapore and Indonesia. 0 Japan) Excluding China, AP will enjoy sales increase at 19.2% CAGR (2014-2020) in Asia. However, its contribution to profit will be small because it will take a long time to achieve sufficient economy of scale in scattered operation bases. Source: Team estimates, company data Profitability Table 10. Profitability Ratios AP’s overall operating profit margin (OPM) is expected to be improved from 13.7% in 2014 to 16.4% in 2020 thanks to the change of domestic channels and operational leverage in China. (Table 10) 2010 2012 2014F 2016F 2020F (1) Domestic Division: Channel Trend Shift Domestic 17.6% 15.4% 15.4% 16.9% 18.3% OPM Door-to-door, duty-free and online are the most lucrative channels of AP in Korea with OPM of 20%, 25% Overseas and 20% respectively. 3.3% -2.2% 7.2% 9.3% 13.0% OPM AP’s domestic OPM fell from 17.6% to 14.7% (2010-2013) along with the decline in door-to-door sales, a Overall 16.0% 12.7% 13.7% 15.0% 16.4% channel that used to be the largest and the most profitable before 2013. OPM OPM recovered to 15.4% due to the increasing contribution of duty-free and online channel with above 20% ROA 11.6% 8.9% 9.8% 10.5% 10.7% OPM. Sales through the two channels will increase at 21% CAGR to minimize the expected reduction in ROE 15.4% 11.5% 12.8% 13.7% 13.8% door-to-door channel (-2% annually); consequently, domestic OPM of AP is estimated to be 18.3% in 2020. (2) Overseas Cosmetics Division: Operational leverage ROIC 15.9% 13.7% 14.9% 14.6% 15.9% Whereas other multinationals commonly take short cuts through M&As and local partnerships, AP has Source: Team estimates, company data endured a large sum of investment cash outflows to enter China with direct ownership and control. The company has gradually enhanced its brand awareness by the consistent marketing and strict quality control. Recently, such efforts has just begun to be paid off with the increasing operational leverage. AP’s enlarged production scale heightens profitability, stemming from the decreasing fixed overhead cost allocation; its Figure 31. Operating Cash Flow and CAPEX OPM from China reached 9.1% in 2014, and is expected to reach around 15% by 2020, resulting in 13% (KRW bil) overall overseas OPM. 1,200 AP retains its debt-free financial structure with minimal interest expense. That is why there is no other 1,000 substantial expense to be subtracted after operating profit besides corporate tax. As a result of (1) and (2), AP’s ROE is estimated to rise from 12.8% to 13.8% between 2014 and 2020. (Table 10) 800
600 CAPEX
400 In accordance with its expansion plan, AP directs retained earnings to CAPEX. Its historical CAPEX/OCF ratio has been around 80%, and we expect the ratio will be maintained at 80% on average. (Figure 31) The main 200 usage for CAPEX includes (1) plants expansion in and out of Korea, (2) aggressive store expansion focused on 0 China, (3) ongoing headquarter construction plan (2014 - 2017).
Financial Flexibility OCF CAPEX AP retains a very stable financial structure with an almost zero interest bearing debt outstanding which grants Source: Team estimates, company data the firm a great financial flexibility for the future years. The company has maintained non-leveraged operation policy while guaranteeing the debts of subsidiaries abroad with a small portion of 3% for the use of safekeeping sufficient working capital. AP’s conservative leverage position is also apparent in its interest Table 11. Dividend Per Share and Payout Ratio coverage ratio of -36x in 2012 and -43x in 2013. AP’s extra capacity for debt positions can be a good source for financing future growth opportunities. 2010 2012 2014F 2016F 2020F
DPS 6,500 6,500 7,000 7,500 9,500 Dividends
Payout Historically, AP has been inactive in paying out dividends, just like other Korean companies. The company 13.2% 16.7% 12.1% 10.1% 7.4% Ratio has raised dividends only when the previous net income growth was positive; the payout ratio has declined because of smaller dividend increase compared to cash accumulation. If AP maintains the previous policy, we Source: Team estimates, company data expect that AP will increase dividends up to approximately KRW 9,500 by 2020, 46% increase from KRW 6,500 in 2013, which will lower the payout ratio to 7.2% from 16.8% in 2013. (Table 11) However, along with the Figure 32. Change in Marketing Strategy recent development of taxation on retained earnings as well as rapidly growing cash stocks of the company (KRW bil) will ultimately put pressure on the management to consider a major change in dividend policy. 600 16.0% Marketing Efficiency 500 12.0% AP’s marketing strategies from 2009 have utilized traditional marketing tools, such as mass-media and 400 magazine ads, which was rather inefficient in terms of profitability since it has soared the marketing cost ratio by 3.6%pts. within 4 years (2009-2012). The operating profit from China business had grown less than 5% a 300 8.0% year while the corresponding revenue increased more than 30% a year. 200 4.0% Since 2012, AP has changed its strategy to focus more on the online advertisement, considering the increasing 100 internet penetration ratio. Due to the improved efficiency of the marketing, the company was able to cut the 0 0.0% marketing cost ratio by 3.1%pts. within two years (2013-2014); AP raised its China operating profit by 70% a 2010 2011 2012 2013 2014F2015F2016F2017F year from KRW 14 bil to 40 bil in 2014. The marketing cost ratio of the firm will continue to show a downward trend until it reaches around 10% as AP more efficiently control the marketing costs. (Figure 32) Marketing Expense % of Marketing Expense (R) Source: Team estimates, company data 9 Korea University Figure 33. Operating Profit Breakdown Other Financial Changes (KRW bil) (1) Increase in Overseas Contribution to AP’s Operating Profit 1,400 The overseas operating profit is forecasted to reach around 30% in 2020 in accordance with the increasing 1,200 contribution of the China and other oversea segment to AP’s sales. (Figure 33) 1,000 (2) Increase in the Contribution of Chinese Customers to AP’s Performance 800 The key driver for AP’s growth is mostly coming from Chinese customers. As of 2014, revenues from the Chinese (considering duty-free and China sales only) is about KRW 900 bil, which accounts for 25% of total 600 sales. As AP focuses its operation more on China, the sales contribution of Chinese is forecasted to be widen 400 to 48% in 2020. (Figure 34) 200
0 2012 2013 2014F 2015F 2016F 2017F 2018F 2019F 2020F Individual Risk -200 korea china HK/Taiwan/SEA Others Market Risk Source: Team estimates, company data Market Risk | China Slowdown (MR1) Even though Cosmetics Industry is less affected by the economic conditions, the robust growth of Chinese Figure 34. Revenue from Chinese Customers economy is still a primary assumption for the promising future earnings forecast of AP. Nonetheless, there (KRW bil) are many skepticisms on the sustainability of China’s growth, warning for the possible slowdown of the 4,000 70% giant economy. The economy grew only 8% in 2013, which is a significant drop from 12% growth in 2007. 3,500 60% Reflecting such concerns, our recommendation changes to HOLD and SELL with an accelerated slowdown 3,000 50% by 2.0%pts and 9.6%pts respectively from our assumption of 9.9% for the expected China market growth. 2,500 40% 2,000 Market Risk | Korea-bound Tourists (MR2) 30% 1,500 The Korea-bound Chinese tourists accounts for about 90% of AP’s Cosmetics sales through duty-free 1,000 20% channels in 2020. the continuous increase in the number of Chinese tourists is a significant assumption for 500 10% the growth of AP’s duty-free channels. The inbound visits may be affected by various factors such as the 0 0% exports of Korean cultural contents (movies, TV dramas and music), the changing costs of travel including the KRW depreciation and tax-refund policies, and so forth; events which are difficult to quantify. Reflecting such concerns, our recommendation changes to HOLD and SELL with a slowed growth by 11.3%pts and
China Sales Duty-free sales by Chinese 20.2%pts respectively from our assumption of 17% for the expected Korea-bound tourist growth rates. % of total sales (R) % of total OP (R) Market Risk | Currency Risk (MR3) Source: Team estimates, company data With the Overseas component contributing around 20% of AP’s Cosmetics sales in 2013 and 40% by 2020, Figure 35. Risk Matrix the currency exchange rate between Korean Won and other relevant currencies is becoming a crucial factor for the translation of profits to AP’s income statement. Although we assume that the currency rates will remain stable for our estimates, the recommendation changes to HOLD and SELL with an appreciation of MR2
HIGH 8% and 35% of KRW compared with CHY and USD (Figure 36).
MR1 Regulatory Risk Regulatory Risk| Taxation on Reserve (RR1)
MR3 Attempting to quicken the money circulation held by companies, the Korean government is considering Impact
MEDIUM additional taxation on retained earnings starting from 2015. According to the plan, 60~80% (still undecided) of OR2 a company’s net income will be imposed with 10% tax, after the deduction of investment, wage increase and dividend payouts. Although the taxation does affect the target price, a BUY recommendation is maintained regardless of whether 60% or 80% will be taxed with a 27.5% and 24.7% upsides, respectively. OR1 RR1 RR2 LOW Regulatory Risk| China’s Profit Outbound Restriction (RR2) LOW MEDIUM HIGH With the increasing China sales, which currently accounts for around 11% and is expected to reach around Probability 24% of AP’s overall sales by 2020, it is important for AP to understand China’s regulations. According to Source: Company data Figure 36. Currency Volatility Chinese regulations regarding repatriation of profits and dividends, the company must keep at least 10% of 1,250 195 its profits in reserve fund account. However, this account is capped when the amount of reserves reaches 190 50% of the registered capital of the company, and does not indicate additional taxation nor spending of the 1,200 185 company. This regulation does not impact AP’s target price, nor its translation of sales. 1,150 180 Operational Risk 1,100 175 170 Operational Risk| Europe and Japan Subsidiaries’ Loss (OR1) 1,050 165 AP’s European and Japanese subsidiaries are continuously making operating losses in their respective 1,000 160 markets (France, since 2012 and Japan, since 2012). Japanese subsidiary has shown poor performance with 155 the increase in consumption tax and low price competitiveness due to the depreciated Japanes Yen. 950 150 However, the Japanese subsidiary’s operating loss is on a recovering trend; furthermore, European 900 145 subsidiary is also forecasted to turn around with the expected recovery of the European economy. With its Dec-10 Dec-11 Dec-12 Dec-13 small contribution of 4.6% in AP’s sales (as of 2014), our BUY recommendation is maintained even with a
USD/KRW (L) CNY/KRW (R) 100% drop in sales in respective regions. Source: Fn Dataguide Operational Risk| Door-to-door Channel Reduction (OR2) With the door-to-door channel showing a reverse growth in 2013, AP accordingly laid off their on-visit Figure 37. Door-to-door Salesperson personnel from 37,800 in 2012 to 35,400 in 2013 (Figure 37). On-Visit sales had traditionally been the focal (persons) point of AP’s sales, and contributed 40.2% of the company’s sales in 2009, but its concentration continued to 39,000 decrease and only accounted for 21.4% of AP’s sales in 2013. Nevertheless, considering that AP has responded promptly to the industrial channel shifts towards the new distribution channels with much faster 36,000 growth such as ecommerce and duty-free shops, AP is better off with exceeding benefits from preoccupying the new channels. The recommendation changes to HOLD with an accelerated sales slowdown of 28%pts from our current assumption of 2.6% YoY decrease. 33,000
30,000
27,000 2006 2008 2010 2012 2014F 2016F 2018F 2020F Source: Company data, team estimates
10 Korea University Appendix Contents
1. Financial Analysis A 1 2. Valuation A 8 3. Future Estimation A16 4. Stock Price Trend A25 5. Industry – World A26 6. Industry – China A30 7. Industry – Korea A47 8. Industry – US, France A54 9. Industry – Southeast Asia A56 10. Industry MC&S A57 11. Macro Economy – China A59 12. Macro Economy – Korea A66 13. Korean Wave A68 14. AP China Online Sales A75 15. Company Structure A78 16. Brand Portfolio A86 17. Social Responsibility A91 18. Competitive Analysis A92 19. Regulations A97 20. Risk Matrix A99 21. Key Management A103 Korea University APPENDIX 1. Financial Analysis
A-1 Korea University APPENDIX 1. Financial Analysis
2012 2013 2014F 2015F 2016F 2017F 2018F 2019F 2020F
Sales Revenue 2,849 3,100 3,675 4,122 4,677 5,265 5,905 6,615 7,426
Cost of goods sold 847 912 1,038 1,143 1,280 1,426 1,591 1,772 1,975
Gross profit 2,002 2,189 2,637 2,979 3,397 3,839 4,315 4,843 5,452
Selling and administrative expenses 1,637 1,819 2,132 2,385 2,698 3,028 3,386 3,782 4,233
Labor cost 341 375 427 468 522 577 636 699 770
Depreciation expense 54 68 68 95 96 109 112 127 140
Research and development 62 64 75 85 96 108 121 136 152
Advertising expense 399 389 402 437 477 526 591 662 743
Distribution commission 369 434 578 660 768 888 1,019 1,166 1,323
Freight expense 57 65 74 83 94 106 119 133 150
Taxes and dues 27 33 43 48 55 61 69 77 87
Commission expense 201 218 253 278 308 339 372 407 446
Other 126 173 211 231 281 312 347 375 424
Operating profit 365 370 505 595 699 811 929 1,061 1,219
Non-operating income 27 35 29 29 29 29 29 29 29
Finance income 12 11 12 12 12 12 12 12 12
Other non-operating gains 15 24 17 17 17 17 17 17 17
Non-operating expense 31 42 34 34 34 34 34 34 34
Finance costs 2 3 2 2 1 1 1 1 1
Other non-operating losses 29 39 32 32 33 33 33 33 33
Profit before income tax 362 364 500 590 694 806 924 1,056 1,214
Income tax expenses 92 96 129 153 181 212 243 280 323
Net income 269 267 371 436 513 594 680 777 891
Source : Company data, team estimates
A-2 Korea University APPENDIX 1. Financial Analysis
Changes in assets and liabilities from operation -126 -18 -45 -42 -38 -68 -85 -92 -80
Others 31 54 -31 -32 -32 -32 -31 -31 -31 Cash flows from investing activities -254 -349 -406 -535 -611 -572 -551 -611 -722
Decrease (Increase) in property, plant and equipment -223 -307 -331 -471 -536 -482 -445 -511 -603
Decrease (Increase) in intangible assets -17 -18 -21 -14 -16 -18 -21 -23 -27
Decrease (Increase) in ownership of affiliates 0 0 6 0 0 0 0 0 0
Decrease (Increase) in long-term financial assets 3 -2 -2 -3 -9 -6 -14 -8 -13
Decrease (Increase) in other non-current assets -30 -24 -2 -15 -10 -20 -24 -14 -20
Decrease (Increase) in short-term financial assets 12 2 -35 -18 -32 -36 -39 -39 -46
Decrease (Increase) in other current assets 0 0 -22 -15 -9 -11 -9 -16 -14
Decrease (Increase) in ownership of subsidiaries 0 0 0 0 0 0 0 0 0
Dividends received from associates 1 0 0 0 0 0 0 0 0 Cash flows from financing activities -35 49 -91 -47 -82 -54 -50 -66 -64
Increase (decrease) in long-term financial liabilities 0 71 -4 -35 0 0 -5 0 0
Increase (decrease) in short-term financial liabilities 8 19 -46 37 -30 0 12 -5 0
Stock issuance of non-controlling interest 2 4 3 0 0 0 0 0 0
Dividends paid to equity holders of the Company -45 -45 -45 -48 -51 -55 -58 -61 -64
Changes in cash and cash equivalents from currency -3 -4 -4 -4 -4 -4 -4 -4 -4 translation
Net increase(decrease) in cash and cash equivalents -17 123 -83 -70 -98 41 164 205 255
(Cash and cash equivalents at the beginning of year) 188 171 294 211 142 44 84 248 453
Cash and cash equivalents at the end of year 171 294 211 142 44 84 248 453 708 Source : Company data, team estimates
A-3 Korea University APPENDIX 1. Financial Analysis
2012 2013 2014F 2015F 2016F 2017F 2018F 2019F 2020F Total Assets 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Current Assets 26.6% 28.4% 26.3% 23.6% 20.9% 21.2% 23.3% 25.2% 26.8% Cash and cash equivalents 5.6% 8.6% 5.6% 3.3% 0.9% 1.5% 3.9% 6.2% 8.5%
Short-term financial assets 4.7% 4.1% 4.6% 4.5% 4.6% 4.7% 4.7% 4.7% 4.6% Accounts receivable 6.3% 6.6% 6.3% 6.1% 6.0% 5.9% 5.8% 5.8% 5.5% Inventories 8.8% 8.3% 8.5% 8.2% 7.9% 7.7% 7.4% 7.1% 6.8% Other current assets 1.1% 0.8% 1.3% 1.5% 1.5% 1.5% 1.4% 1.5% 1.5% Non-Current Assets 73.4% 71.6% 73.7% 76.4% 79.1% 78.8% 76.7% 74.8% 73.2% Property, plant and equipments 58.4% 56.9% 60.0% 63.8% 67.2% 67.5% 66.0% 64.8% 63.7%
Investment Properties 6.7% 5.9% 5.3% 4.6% 4.0% 3.5% 3.0% 2.6% 2.3% Intangible assets 4.0% 3.9% 4.1% 3.9% 3.8% 3.6% 3.5% 3.4% 3.3% Long-term financial assets 1.1% 1.2% 1.2% 1.1% 1.1% 1.1% 1.2% 1.1% 1.2% Deferred tax assets 1.1% 1.1% 1.1% 0.8% 0.8% 0.7% 0.7% 0.6% 0.6% Other non-current assets 2.1% 2.5% 2.2% 2.3% 2.2% 2.3% 2.4% 2.3% 2.2% Liabilities 22.5% 24.5% 23.4% 23.8% 22.8% 22.9% 22.6% 22.3% 22.5% Current Liabilities 13.8% 16.0% 14.8% 15.9% 15.1% 14.9% 14.9% 14.7% 14.6% Accounts payable 8.3% 8.8% 8.7% 8.6% 8.6% 8.6% 8.5% 8.4% 8.5% Short-term financial liabilities 0.7% 2.4% 1.0% 1.7% 0.9% 0.8% 0.9% 0.7% 0.6%
Other current liabilities 4.7% 4.8% 5.1% 5.6% 5.6% 5.6% 5.6% 5.6% 5.6% Non-Current Liabilities 8.8% 8.6% 8.7% 7.9% 7.7% 8.0% 7.7% 7.7% 7.9% Long-term financial liabilities 1.8% 2.3% 1.9% 0.9% 0.8% 0.7% 0.5% 0.5% 0.4%
Retirement benefit obligations 1.6% 1.3% 1.5% 1.6% 1.6% 2.0% 1.9% 1.9% 2.2%
Deferred tax liabilities 4.9% 4.6% 4.8% 4.8% 4.8% 4.8% 4.8% 4.8% 4.8%
Other non-current liabilities 0.4% 0.3% 0.4% 0.5% 0.5% 0.5% 0.5% 0.5% 0.5% Equity 77.5% 75.5% 76.7% 76.5% 76.9% 77.1% 77.2% 77.3% 77.3% Equity attributable to owners of the Parent 77.1% 75.1% 76.2% 76.1% 76.5% 76.8% 76.9% 77.1% 77.1% Capital stock 1.1% 1.0% 0.9% 0.8% 0.7% 0.6% 0.5% 0.5% 0.4% Additional paid-in-capital 23.8% 21.2% 19.1% 16.8% 14.8% 13.0% 11.3% 9.9% 8.6%
Acumulated other comprehensive income -0.4% -0.4% -0.3% -0.3% -0.3% -0.2% -0.2% -0.2% -0.2%
Other components of equity -0.1% -0.1% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Retained earnings 52.6% 53.4% 56.6% 58.9% 61.4% 63.5% 65.3% 66.9% 68.3% Non-controlling interest 0.3% 0.4% 0.5% 0.4% 0.4% 0.3% 0.3% 0.2% 0.2% Liabilities and Equity 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Source : Company data, team estimates
A-4 Korea University APPENDIX 1. Financial Analysis
2012 2013 2014F 2015F 2016F 2017F 2018F 2019F 2020F Sales Revenue 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold 29.7% 29.4% 28.2% 27.7% 27.4% 27.1% 26.9% 26.8% 26.6%
Gross profit 70.3% 70.6% 71.8% 72.3% 72.6% 72.9% 73.1% 73.2% 73.4%
Selling and administrative expenses 57.4% 58.7% 58.0% 57.8% 57.7% 57.5% 57.3% 57.2% 57.0%
Labor cost 12.0% 12.1% 11.6% 11.4% 11.2% 11.0% 10.8% 10.6% 10.4%
Depreciation expense 1.9% 2.2% 1.8% 2.3% 2.1% 2.1% 1.9% 1.9% 1.9%
Research and development 2.2% 2.1% 2.1% 2.1% 2.1% 2.1% 2.1% 2.1% 2.1%
Advertising expense 14.0% 12.5% 10.9% 10.6% 10.2% 10.0% 10.0% 10.0% 10.0%
Distribution commission 13.0% 14.0% 15.7% 16.0% 16.4% 16.9% 17.3% 17.6% 17.8%
Freight expense 2.0% 2.1% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0%
Taxes and dues 1.0% 1.1% 1.2% 1.2% 1.2% 1.2% 1.2% 1.2% 1.2%
Commission expense 7.1% 7.0% 6.9% 6.7% 6.6% 6.4% 6.3% 6.1% 6.0%
Other 4.4% 5.6% 5.7% 5.6% 6.0% 5.9% 5.9% 5.7% 5.7%
Operating profit 12.8% 11.9% 13.7% 14.4% 15.0% 15.4% 15.7% 16.0% 16.4%
Non-operating income 1.0% 1.1% 0.8% 0.7% 0.6% 0.6% 0.5% 0.4% 0.4%
Finance income 0.4% 0.4% 0.3% 0.3% 0.3% 0.2% 0.2% 0.2% 0.2%
Other non-operating gains 0.5% 0.8% 0.5% 0.4% 0.4% 0.3% 0.3% 0.3% 0.2%
Non-operating expense 1.1% 1.3% 0.9% 0.8% 0.7% 0.6% 0.6% 0.5% 0.5%
Finance costs 0.1% 0.1% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
Other non-operating losses 1.0% 1.3% 0.9% 0.8% 0.7% 0.6% 0.6% 0.5% 0.4%
Profit before income tax 12.7% 11.7% 13.6% 14.3% 14.8% 15.3% 15.6% 16.0% 16.3%
Income tax expenses 3.2% 3.1% 3.5% 3.7% 3.9% 4.0% 4.1% 4.2% 4.3%
Net income 9.4% 8.6% 10.1% 10.6% 11.0% 11.3% 11.5% 11.7% 12.0% Source : Company data, team estimates
A-5 Korea University APPENDIX 1. Financial Analysis - Sales Breakdown
2012 2013 2014F 2015F 2016F 2017F 2018F 2019F 2020F Korea 9% 6% 14% 8% 10% 9% 8% 8% 8% Korea-Cosmetics 9% 5% 18% 10% 12% 10% 9% 8% 9% Specialty store 9% 13% 13% 5% 7% 6% 5% 4% 3% Discount store -2% -4% -2% 3% 0% 0% 0% 0% 0% Online/Homeshopping 25% 32% 21% 15% 16% 15% 14% 13% 12% Department store 11% 1% 3% 2% 2% 2% 2% 2% 2% Travel Retail 24% 31% 71% 35% 28% 20% 17% 14% 14% Door to Door 1% -13% -9% 0% -2% -3% -3% -3% -3% Direct Sale -2% -19% -10% -3% -3% -3% -3% 0% 0% Others 12% -1% 4% 2% 2% 2% 2% 0% 0% Mass Cosmetics & Sulloc 9% 7% 0% 1% 3% 2% 2% 1% 1% Mass Cosmetics 8% 8% -2% 0% 2% 2% 1% 1% 0% Sulloc 18% 7% 3% 3% 3% 2% 2% 2% 2% Overseas-Cosmetics 35% 22% 40% 26% 24% 23% 23% 22% 22% China 37% 29% 31% 29% 27% 26% 26% 25% 25% France -15% 6% 0% 0% 0% 0% 0% 0% 0% USA 15% 31% 44% 30% 25% 20% 15% 10% 5% Japan 2% -5% 3% 0% -1% 1% 0% 0% Other Asia (Hong Kong, Taiwan, SEA) -37% 163% 230% 17% 19% 20% 21% 20% 18% Sales adjustment for overseas sales -100% 39800% 161% 0% 0% 0% 0% 0% 0% Total 12% 8% 19% 12% 13% 13% 12% 12% 12% Source : Company data, team estimates
A-7 Korea University APPENDIX 2. Valuation - DCF Analysis A. Domestic Component (KRW bil) 2014F 2015F 2016F 2017F 2018F 2019F 2020F TV Net Income 352 404 460 514 567 621 681 Depreciation and Amortization 99 118 116 128 143 156 170 Changes in Net Working Capital 2 -18 -23 -22 -22 -22 -24 CAPEX -243 -396 -449 -375 -312 -343 -389 FCFE 209 108 104 244 375 411 437 10,167 Discount factor 1.00 0.95 0.90 0.86 0.81 0.77 0.73 0.73 PV of FCF 209 102 93 209 305 317 320 7,440
Price Target Computation Operation value (KRW bil) 8,995 Add: Net Cash (KRW bn) 389 Intrinsic Value (KRW bil) 8,142 Shares Outstanding (bn) 0.0058 Value Per Share (KRW) 1,605,224 One-year Price Target (KRW/Share) 1,600,207
* The reason for one-year price target is lower than the current value per share : the high CAPEX forecast for 2015
B. Overseas Component (KRW bil) 2014F 2015F 2016F 2017F 2023F 2028F 2033F TV EBIT 54 77 109 152 693 1653 3012 0 Tax -11 -17 -26 -37 -163 -388 -707 0 Depreciation and Amortization 25 36 39 49 157 292 447 0 Changes in Net Working Capital -23 4 7 4 7 7 7 0 CAPEX -109 -89 -103 -124 -453 -1001 -1729 0 FCFF -63 10 28 44 241 563 1030 19,855 Discount factor 1.00 0.94 0.89 0.83 0.58 0.43 0.32 0.32 PV of FCF -63 10 24 37 140 241 326 6,287
Price Target Computation
Operation value (KRW bil) 9,348
Less: net debt (KRW bil) 34
Intrinsic Value (KRW bil) 9,313
Shares Outstanding (bil) 0.0058
Value Per Share (KRW) 1,593,177
One-year Price Target (KRW/Share) 1,700,079
A-8 Korea University APPENDIX 2. Valuation - DCF Assumptions - Domestic A. Domestic Component - WACC and terminal growth rate
Variable Value Explanation Risk-free Rate 2.73% 10-year Korean Government Bond Market Risk Premium 6.19% KOSPI return (Mar, 2003 - Dec, 2014) Equity Beta 0.42 Regression of AP shares against KOSPI (2006-2014) Cost of Equity 5.34% Team computations Terminal Growth Rate 1.00% The projected long-term ecomic growth rate of OECD countries
Risk-free Rate 10-year Korean Government bond Market Risk Premium The benchmark return was based on the historical return of Korea Composite Stock Price Index (KOSPI) from Mar 2003 to present (Dec, 2014). We have tried to find a linear trend of KOSPI to use it as a benchmark return in long-term perspective. Historical KOPSI return apparently indicates a fluctuating growth trend. But it becomes more clear if some abnormal outlier-periods are excluded. There have been several bubbles and shocks with tremendous impacts on Korean stock market, specifically in early 90s, 1997 Asian financial crisis and 2008 global financial crisis. With the adjustment, it shows a clear upturn trend; especially from 2003 (after Korean economy recovered from the IT bubble shock) its R-square value was calculated as 90.9%. Therefore, we applied the 10-year historical return from 2003 as the benchmark return for the valuation.
1,500 1,500
1,000 1,000
500 500
0 0 Oct-80 Oct-85 Oct-90 Oct-95 Oct-00 Oct-05 Oct-10 Mar-03 Mar-05 Mar-07 Mar-09 Mar-11 Mar-13 -500 Source : KRX, team estimates Beta AP's historical beta has fluctuated in accordance with major economic events. During the year of global financial crisis, the beta fell below 0.4 and kept falling as AP reported earning shocks until the late 2013 when it was recovered up to 0.4 an earning surprise. So we have excluded abnormal events to obtain the beta of 0.42 based on the average beta from Feb 2007, the point when the IPO premium w as worn out after spinning off from the parent company of Amore Pacific Group.
Variable Value Explanation Risk-free Rate 4.07% 20-Year Chinese Government Bond (Dec, 2014) Market Risk Premium 5.90% "Equity Risk Premiums" by Aswath Damodaran, 2014 Equity Beta 0.37 Pure-play method using Beta of Shanghai Jahwa Cost of Equity 6.26% Team computations Pre-tax Cost of Debt 1.56% Team computations Marginal Tax rate 24% Weighted average of corporate tax rates of different countries Cost of Debt after tax 1.2% Team computations Market cap as % of total 99.6% Partial market value of AP divided by the expected overseas sales portion Debt as % of total 0.4% Percentage of the borrowings WACC post tax 6.24% Team computations Terminal Growth Rate 1.00% An adjusted long-term economic growth rate
Pre-tax Cost of Debt The cost of debt was calculated by the weighted average of the interest rate of interest-bearing debts AP is currently holding. Debt Interest Rates Weight Short-term Borrowings 1.41% 25% Current portion of long-term Borrowings 1.73% 29% Long-term Borrowings 1.53% 46% Source : Company data, team estimates Marginal Tax Rate The tax rate of overseas component was calculated by weight-averaging different tax rates of different countries. And it was adjusted by the future sales weight. Since we expect China and other Asia will eventually take most of overseas sales portion, the statutory tax rates of China and other asia were considered.
Tax Rate Sales weight (%) in 2020E China 25.0% 65% France 33.3% 3% USA 35.0% 3% HK/Taiwan 16.8% 8% HK 16.5% Taiwan 17.0% Japan 38.0% 2% SEA 23.4% 19% SG 17.0% Indonesia 25.0% Thailand 20.0% Philippines 30.0% Vietnam 25.0% Overall Overseas Tax rate (2020E) 24.8% Source : Company data, team estimates
Capital Structure The capital structure is based on the partial market value of AP and its borrowings. To get the overseas portion of its market value, we applied the expected portion of overseas sales to the current market capitalization at the closing price of Dec 30th, 2014.
Terminal Growth Rate To determine the terminal growth rate to be applied for both components of Amore Pacific, we have adopted an adjusted long-term GDP growth rate for advanced economise based on credible sources of information provided by OECD and PwC. Through an in-depth analysis on cosmetics industry, we have concluded that the terminal growth rate of cosmetics market will ultimately be converged to the long-term economic growth rate. Also, we have selected the long-term economic growth rate of advanced countries instead of the world average based on the assumption that China will become a part of developed countries after our detailed forecast ends in 2033. According to OECD and PwC, relatively advanced economies are projected to grow at a rate of 2% or less after 2050-60 (2050 for PwC estimation, 2060 for OECD). We have assumed that the terminal growth rate should reflect a longer term in order to estimate the perpetual value; with a conservative approach, we have decided to apply 1% as the perpetual growth rate for each component of Amore Pacific. •Note that the terminal growth rate is applied on a different timeline: Korea after 2020, Overseas after 2033 Sources : PwC, World in 2050 – The BRICs and beyond: prospects, challenges and opportunities, Jan. 2013 OECE, Looking to 2060: A Global Vision of Long-term Growth, Nov. 2012
A-10 Korea University APPENDIX 2. Valuation - Sensitivity Analysis A. Domestic Component
Perpetual Growth Rate 0.50% 0.60% 0.70% 0.80% 0.90% 1.00% 1.10% 1.20% 1.30% 1.40% 1.50%
4.8% 1,629,400 1,663,004 1,698,230 1,735,200 1,774,046 1,814,914 1,857,967 1,903,385 1,951,368 2,002,140 2,055,950
4.9% 1,591,539 1,623,507 1,656,982 1,692,075 1,728,904 1,767,601 1,808,314 1,851,203 1,896,448 1,944,249 1,994,827
5.0% 1,555,350 1,585,794 1,617,641 1,650,989 1,685,948 1,722,637 1,761,188 1,801,746 1,844,472 1,889,545 1,937,163
5.1% 1,520,727 1,549,748 1,580,077 1,611,802 1,645,024 1,679,850 1,716,399 1,754,804 1,795,208 1,837,771 1,882,673
5.2% 1,487,570 1,515,261 1,544,173 1,574,386 1,605,991 1,639,087 1,673,780 1,710,191 1,748,450 1,788,700 1,831,103
5.3% 1,455,788 1,482,235 1,509,822 1,538,623 1,568,722 1,600,207 1,633,177 1,667,740 1,704,012 1,742,126 1,782,224
5.4% 1,425,298 1,450,578 1,476,925 1,504,407 1,533,100 1,563,084 1,594,450 1,627,296 1,661,727 1,697,862 1,735,831 Discount Discount Rate 5.5% 1,396,022 1,420,208 1,445,393 1,471,640 1,499,018 1,527,602 1,557,473 1,588,720 1,621,441 1,655,742 1,691,741
5.6% 1,367,891 1,391,048 1,415,142 1,440,231 1,466,379 1,493,654 1,522,130 1,551,888 1,583,017 1,615,614 1,649,786
5.7% 1,340,838 1,363,027 1,386,096 1,410,099 1,435,094 1,461,143 1,488,315 1,516,683 1,546,329 1,577,341 1,609,815
5.8% 1,314,803 1,336,080 1,358,186 1,381,168 1,405,081 1,429,981 1,455,932 1,483,001 1,511,262 1,540,796 1,571,691
Source: Team estimates
B. Overseas Component
Perpetual Growth Rate 0.5% 0.6% 0.7% 0.8% 0.9% 1.0% 1.1% 1.2% 1.3% 1.4% 1.5%
4.8% 1,829,360 1,854,698 1,881,042 1,908,452 1,936,996 1,966,744 1,997,774 2,030,171 2,064,028 2,099,445 2,136,534
4.9% 1,778,660 1,802,660 1,827,594 1,853,518 1,880,492 1,908,580 1,937,853 1,968,389 2,000,270 2,033,587 2,068,440
5.0% 1,730,022 1,752,771 1,776,389 1,800,926 1,826,437 1,852,981 1,880,622 1,909,430 1,939,479 1,970,852 2,003,639
5.1% 1,683,331 1,704,910 1,727,298 1,750,540 1,774,687 1,799,792 1,825,914 1,853,115 1,881,464 1,911,035 1,941,909
5.2% 1,638,482 1,658,965 1,680,202 1,702,233 1,725,106 1,748,869 1,773,575 1,799,281 1,826,050 1,853,948 1,883,049
5.3% 1,595,376 1,614,831 1,634,989 1,655,888 1,677,570 1,700,079 1,723,465 1,747,778 1,773,077 1,799,420 1,826,875
5.4% 1,553,920 1,572,411 1,591,557 1,611,395 1,631,963 1,653,301 1,675,453 1,698,467 1,722,395 1,747,292 1,773,218 Discount Discount Rate 5.5% 1,514,028 1,531,613 1,549,811 1,568,654 1,588,178 1,608,419 1,629,419 1,651,220 1,673,870 1,697,418 1,721,920
5.6% 1,475,622 1,492,355 1,509,662 1,527,571 1,546,116 1,565,330 1,585,251 1,605,918 1,627,374 1,649,665 1,672,841
5.7% 1,438,625 1,454,557 1,471,025 1,488,058 1,505,684 1,523,936 1,542,846 1,562,452 1,582,792 1,603,908 1,625,846
5.8% 1,402,968 1,418,145 1,433,826 1,450,034 1,466,797 1,484,145 1,502,108 1,520,719 1,540,015 1,560,033 1,580,816 Source: Team estimates
A-11 Korea University APPENDIX 2. Valuation – CAPEX Assumptions (1) PPE/CAPEX Forecast We forecasted PPE differently for domestic and overseas components. In forecasting the domestic PPE, we considered (1) the expected demand from in and out of Korea by applying the adjusted sales growth rate, (2) ongoing headquarter construction plan through dividing the budget throughout the construction period. In forecasting the overseas PPE, we broke it down into China and the sum of the rest. we considered (1) the estimated store expansion for China part, (2) the sales growth rate in other countries for the rest part. CAPEX was estimated based the forecasted PPE.
PPE (KRW bil) 2010 2011 2012 2013 2014F 2015F 2016F 2017F 2018F 2019F 2020F Korea 1,557 1,604 1,702 1,771 2,008 2,397 2,839 3,205 3,507 3,839 4,216 - Store and Plant Expansion 1,921 2,137 2,405 2,685 2,987 3,319 3,696 (Total Sales YoY) 8%* 12% 13% 13% 12% 12% 12% - Headquarter Construction 87 260 433 520 520 520 520 Overseas 46 52 65 165 259 340 435 550 693 872 1,098 - China 26 30 38 139 212 287 374 480 612 779 992 (Store Expansion in China) 53% 36% 30% 28% 27% 27% 27% - Other Countries 20 21 26 26 47 53 61 70 81 93 106 (Sales in Other countries YoY) 78% 13% 14% 15% 16% 15% 14% Total 1,603 1,655 1,767 1,936 2,267 2,738 3,274 3,755 4,200 4,711 5,314 *Adjusted by reducing the effect of the acquisition of Hong Kong subsidiary
Forecasted CAPEX for PPE 2010 2011 2012 2013 2014F 2015F 2016F 2017F 2018F 2019F 2020F Korea 286 294 193 188 237 389 441 367 302 332 376 Overseas 9 13 30 119 94 82 94 115 143 179 226
(2) Intangibles / CAPEX In estimating intangible asset, we applied the historical growth rate for each components. And we divided the estimated amount into Korea and overseas component by applying the adjusted average of historical proportion. Forecasted Intangibles 2010 2011 2012 2013 2014F 2015F 2016F 2017F 2018F 2019F 2020F Goodwill 7 35 36 36 45 45 45 45 45 45 45 Industrial property right 7 11 10 13 17 20 24 28 33 39 46 Software 19 23 23 28 31 36 41 48 55 64 73 Other intangibles 16 47 52 55 61 67 74 81 89 98 108 Total 49 115 121 133 154 168 184 201 222 245 272
Intangibles Allocation 2010 2011 2012 2013 2014F 2015F 2016F 2017F 2018F 2019F 2020F Korea 44 53 58 68 75 81 89 98 108 119 132 Overseas 4 62 63 64 79 86 94 104 114 126 140 91% 46% 48% 52% 49% 49% 49% 49% 49% 49% 49% Total 49 115 121 133 154 168 184 201 222 245 272
Forecasted CAPEX for Intangibles 2010 2011 2012 2013 2014F 2015F 2016F 2017F 2018F 2019F 2020F Korea 5 17 17 18 6 7 8 9 10 11 13 Overseas -1 16 1 0 15 7 8 9 11 12 14 4 33 17 18 21 14 16 18 21 23 27
(3) Total CAPEX 2010 2011 2012 2013 2014F 2015F 2016F 2017F 2018F 2019F 2020F Korea 291 311 210 205 243 396 449 375 312 343 389 Overseas 8 29 30 119 109 89 103 124 153 191 240 4 33 17 18 352 485 552 500 465 534 629 Source : Company data, team estimates
A-12 Korea University APPENDIX 2. Valuation – Historical P/E Analysis Historical P/E Analysis Analyzing AP’s historical P/E from Jan, 2010, it can be seen that AP’s multiple maintained a steady volatility with a 22.0X low and 30.0X high. AP’s stock price has rapidly grown since January 2014 resulting in their overshooting of the historical P/E range. However it is biased to directly perceive overshooting of the P/E as an direct indicator of AP being overpriced. This is because of the high EPS growth of 24% forecasted for the next 3 years until 2016, compared to its historical CAGR of 9.6% over the last 5 years.
3,500,000
3,000,000
2,500,000
2,000,000
1,500,000
1,000,000
500,000
0 2009-12 2010-12 2011-12 2012-12 2013-12 2014-12 2015-12 2016-12
수정주가AP 33.6X 29.8X 26.0X 22.2X 18.4X Source: Fn Dataguide
APPENDIX 2. Valuation – Relative P/E Analysis Relative P/E Analysis Analyzing AP’s current trailing and forward P/E with LG H&H, Shiseido, L’Oreal, Estee Lauder and Shanghai Jahwa, it can be seen that AP has the highest P/E with 34.46 X and 26.33 X respectively. This suggests that AP may be overpriced, but it is significant to note that EPS Growth Rate of AP is the highest among the peers, which suggests that the overshooting shown in the historical P/E may not indicate the overpricing of AP.
Consensus Estimate 2015 EPS Growth Rate Company Country Trailing P/E PEG Forward P/E (2013-2016F) AP Korea 34.46 29.5 24% 1.47
Average 25.73 22.02 11% 2.69
LG H&H Korea 28.80 23.87 11% 2.69
Shiseido Japan 23.20 25.43 5% 5.09
L'Oreal France 25.83 23.12 4% 6.13
Estee Lauder USA 25.56 22.02 12% 2.07
Shanghai Jahwa China 26.05 20.19 23% 1.11
Source: Bloomberg
A-13 Korea University APPENDIX 2. Valuation – Growth-adjusted relative P/E Analysis Relative P/E Analysis The following graphs are the historical P/E ratios of AP’s peers while experiencing high EPS growths similar to the growth rate expected by AP. L'Oreal Shiseido 80.00 200% 80.00 100% 80% 60.00 150% 60.00 60% 40.00 40.00 100% 40% 20.00 20.00 50% 20% 0.00 0% 0.00 0% 1988 1991 1994 1997 2000 2003 2006 2009 2012
PER (X) (L) EPS Growth Rate(%) (R) PER (X) (L) EPS Growth Rate(%) (R)
LG H&H Shanghai Jawha 50.00 150% 70.00 200% 60.00 40.00 100% 50.00 150% 30.00 40.00 50% 100% 20.00 30.00 0% 20.00 50% 10.00 10.00 0.00 -50% 0.00 0% 2001 2003 2005 2007 2009 2011 2013 1997 1999 2001 2003 2005 2007 2009 2011 2013
PER (X) (L) EPS Growth Rate(%) (R) PER (X) (L) EPS Growth Rate(%) (R)
Estee Lauder 60.00 140% Forward EPS (2015) 74,684 50.00 120% Benchmark P/E 36.1X 40.00 100% LG H&H 31.3X 80% Shiseido 35.0X 30.00 60% L'Oreal 38.8X 20.00 40% Estee Lauder 34.4X 10.00 20% Shanghai Jahwa 41.2X 0.00 0% 1997 1999 2001 2003 2005 2007 2009 2011 2013 Target Price 2,700,000
PER (X) (L) EPS Growth Rate(%) (R) Source : Bloomberg, team estimates
Applying the P/E ratios of the peers experiencing the similar growth expected by AP, we computed the target price of AP by utilizing the 2015 forward EPS of KRW 74,684 to the Benchmark P/E of 36.1 X, which was computed as the arithmetic average of the P/E of the peers. The P/E of each peer was computed by using the average of the P/E ratio during the highlighted time period, where each peer experienced the similar growth expected of AP.
A-14 Korea University APPENDIX 2. Valuation – PEG Analysis PEG Analysis PEG analysis incorporates the growth potentials of different companies into their P/E ratio, and is therefore an appropriate measure to check validity of the target price of AP. In terms of the current PEG ratio, AP holds the 2nd lowest PEG ratio which suggests the potential underpricing of the company. Consensus Estimate 2015 EPS Growth Rate Company Country Trailing P/E PEG Forward P/E (2013 – 2015F) AP Korea 35.30 26.97 24% 1.47 Average 25.61 22.65 11% 3.32 LG H&H Korea 29.49 24.44 11% 2.75 Shiseido Japan 23.20 25.43 5% 5.09 L'Oreal France 23.72 21.22 4% 5.63 Estee Lauder USA 24.35 20.98 12% 1.97 Shanghai Jahwa China 27.31 21.16 23% 1.16
Source : Bloomberg, team estimates
The PEG analysis was conducted based on the following criteria
Main Criteria for Selecting Peers
1 Product Mix ; Heavy weight on Cosmetics, Especially on Skin-care Products
2 Relatively High Market Share in China Market
3 Companies with Solid Brand Image
Figures used for AP’s Target Price Estimation 2015 EPS KRW 75,000 Adjusted Average EPS Growth Rate (2013-2020F) 22.3%
Value Key Criteria for Target PEG High 1.96 1) More than 10% of average annual EPS growth rate 1) More than 10% of average annual EPS growth rate Low 1.57 2) Top 10 M/S in Chinese skin-care industry
It can be seen that the target price of AP, which is KRW 3,000,000 from the average of the DCF Valuation and relative P/E valuation, lies within the high and the low range of the PEG ratio. This suggests that the target price is valid.
Target Price Range Assessed by Target PEG Ratio
Low Target Price High 1.57 1.79 1.96 `
18.3% 35.1% 46.7% KRW 2,000,000 KRW 2,626,000 KRW 3,000,000 KRW 3,278,000 KRW 4,000,000
A-15 Korea University APPENDIX 3. Financial Statement Forecast – Income Statement (Sales Forecast, Korea)
GDP per capita($) 6,959 7,572 8,211 8,859 9,556 10,290 11,071 11,901
Total Outbound Tour 98,190,000 110,841,492 124,510,106 138,849,397 154,811,032 172,184,825 191,275,231 212,234,948 ists (person) Korea-bound Tourist 4,326,869 6,000,000 7,993,103 9,956,261 11,676,414 13,411,289 15,369,764 17,577,179 s (person) Per capita Spending ( Chinese 1,431 1,593 1,736 1,857 1,950 2,009 2,029 2,049 $) Per capita Spending 48,229 77,415 84,382 90,289 94,804 97,648 98,624 99,610 on Cosmetics ($) Per capita Spending 48,229 77,415 84,382 90,289 94,804 97,648 98,624 99,610 on AP's Products ($)
Duty-Free Sales 209 464 674 899 1,107 1,310 1,516 1,751
KRW/JPY 1123 1,010 960 950 950 950 950 950 Japanese Sales 139 35 33 33 33 33 33 33
Korean 0 66 67 69 72 74 76 78
Other 0 31 31 32 32 33 34 34
Total sales 348 596 806 1,033 1,244 1,449 1,658 1,896
YoY 71.2% 35.4% 28.1% 20.4% 16.5% 14.4% 14.4%
Aritaum Shops 1,275 1,283 1,289 1,293 1,296 1,300 1,304 1,311
Sales / Shop (1 mil.) 295 322 346 369 390 409 424 434 Specialty Total sales 376 423 446 477 506 531 553 569
YoY 12.5% 5.5% 7.0% 6.0% 5.0% 4.0% 3.0%
Discount Total sales 165 166 166 167 167 167 167 167
Stores YoY 0.9% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1%
Korean Ecommerce Market 29,946 31,263 34,800 37,453 40,309 43,382 46,690 50,250
Online Total sales 294 351 408 472 541 616 696 782
YoY 19.6% 16.1% 15.7% 14.6% 13.7% 13.0% 12.4%
Door-to- Sales Personnel (person) 35,400 36,200 35,400 34,866 34,185 33,518 32,864 32,222
door Sales / salesman (KRW mil) 15.9 14.6 14.5 14.4 14.3 14.2 14.1 14.0
Total sales 562 528 513 502 489 476 464 451
YoY -6.1% -2.9% -2.2% -2.6% -2.6% -2.6% -2.6%
Depart- Total sales 294 302 309 314 320 326 331 337
ment YoY 3.0% 2.2% 1.8% 1.8% 1.8% 1.8% 1.8%
Total Sales in Korea 2,088 2,400 2,696 3,013 3,313 3,611 3,915 4,250
Sales Growth in Korea(YoY) 14.9% 12.3% 11.7% 10.0% 9.0% 8.4% 8.5%
Source: IMF, KTO, Euromonitor, Bloomberg, company data, team estimates Travel-retail The main drivers that affect sales through duty-free shops are the number of inbound foreign tourists and their average consumption on cosmetics. Compounded with the government’s promotion on traveling abroad, the increase in national income will result in a larger number of overall Chinese travelers; an increasing portion of those travelers will be directed to visit Korea for its geographical proximity and the Korean Wave effect. Per tourist spending is also expected to grow along with the increase in household disposable of Chinese population. Consequently, the sales are broken down into origins of consumers (from China, Japan, Korea, and others) and estimated by multiplying the expected number of inbound tourists by the per capita consumption; travel-retail sales are expected grow at 71.2%, 35.4%, 28.1%, 20.4%, 16.5%, 14.4%, 14.4%, respectively between 2014 and 2020. A-16 Korea University APPENDIX 3. Financial Statement Forecast – Income Statement (Sales Forecast, Korea)
Specialty Shops Two most important factors for sales through specialty shops are the number of managed specialty shops and per store sales. Both the number of stores and per store sales are forecasted based on the historical data. Specialty shop sales are forecasted by multiplying the expected number of stores and the estimated per store sales, which results in the sales growth at rates of 12.5%, 5.5%, 7.0%, 6.0%, 5.0%, 4.0%, 3.0%, respectively from 2014 to 2020.
Discount Stores The major variable used to estimate the sales of discount store channel is the growth rate in the number of stores. However, the discount store sales is showing almost no growth according to the historical data. Therefore, we believe that sales through the discount store channel in general will be maintained, growing (0.9% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1%) YoY respectively.
Online The main driver that affect online sales is the growth in the E-commerce market. Due to the expansion of the mobile shopping malls and the increase of the direct purchasers, the E-commerce market is projected to grow at the CAGR of 8% until 2020. Using the linear regression between the E-commerce industry and AP’s online sales, we estimated that the online sales will grow at annual rates of 19.6%, 16.1%, 15.7%, 14.6%, 13.7%, 13.0%, 12.4%, respectively from 2014 to 2020.
Door-to-Door The key factors that affect door-to-door sales are the number of the on-visit salespersons and their average sales. With the industrial transition of major sales channels to travel-retail and online, door-to-door sales are currently shrinking in size, AP is expected to gradually reduce the number of sales-persons. Door-to-door sales is estimated by multiplying the expected number of salespersons by forecasted per salesperson sales; the sales revenues will decline at annual rates of -6.1%, -2.9%, -2.2%, -2.6%, -2.6%, - 2.6%, -2.6%, respectively until 2020.
Department Stores Department stores sales are largely affected by the growth in the number of stores. As there is no convincing data to prove higher growth of the channel in the foreseeable future, we have estimated the growth at the CAGR of 2% until 2020.
Sulloc Sulloc has also recorded a high growth until 2013 but its growth rate is slowing down in 2014. High growth rates were caused by the effects of early stages of the new business and its revenue increment was relatively small if considering the absolute figures. As Sulloc settles in the new channel that it recently started, we assume its growth rate will be slowed down to 3% unless AP decides to launch a new brand line or enter into new channels.
A-17 Korea University APPENDIX 3. Financial Statement Forecast – Income Statement (Sales Forecast, China)
2013 2014F 2015F 2016F 2017F 2018F 2019F 2020F # of counters 3609 3841 4065 4281 4489 4691 4885 5073 Per counter sales 0.04 0.05 0.05 0.06 0.06 0.07 0.07 0.08 Mamonde Total sales 153 178 207 237 270 305 343 383 YoY 17% 16% 15% 14% 13% 12% 12% # of counters 463 517 572 626 681 735 789 844 Per counter sales 0.33 0.36 0.40 0.43 0.47 0.51 0.55 0.59 Laneige Total sales 153 187 227 270 319 373 432 497 YoY 23% 21% 19% 18% 17% 16% 15% # of counters 30 42 56 73 93 117 146 180 Per counter sales 0.34 0.37 0.41 0.45 0.48 0.52 0.57 0.61 Sulwhasoo Total sales 10.2 16 23 33 45 61 83 109 YoY 52% 40% 33% 28% 25% 22% 20% # of counters 47 106 179 269 381 518 689 899 Per counter sales 0.50 0.55 0.57 0.60 0.63 0.67 0.70 0.74 Innisfree Total sales 23.7 59 103 162 241 346 484 665 YoY 148% 85% 64% 54% 47% 43% 40% # of counters 1 12 36 66 103 148 204 273 Per counter sales 0.33 0.37 0.40 0.43 0.47 0.50 0.54 Etude Total sales 4 13 26 45 69 103 148 YoY 119% 64% 45% 35% 29% 25% Total Sales in China 339 444 572 729 920 1,155 1,445 1,802 Sales Growth in China (YoY) 29.2% 31.0% 28.9% 27.4% 26.3% 25.5% 25.1% 24.7%
Source: Company data, team estimates The Number of Counters – Laneige, Sulwhasoo, Etude ; Mamonde The number of counters for each brand is estimated based on the past trends of expansion. For Laneige, Sulwhasoo and Etude, which have shown quite fluctuating annual growths of opening new stores, the historical average number of new counters is applied to forecast the numbers of the total counters. Laneige is expected to launch 54 new stores every year until 2020. Sulwhasoo is expected to launch an average of 21 stores a year, while Etude us projected to launch additional yearly average of 39 stores until 2020. For Mamonde, it was clearly observed that the rate of expansion had been slowing down over the years. The average annual growth rate of the past 4 years (-3.4%) was utilized to estimate the number of Mamonde’s new counters is estimated to gradually decline. The Number of Counters – Innisfree As AP ascertains its resolution to aggressively spread Innisfree in China, we referred to the initial expansion trajectory of Innisfree in Korea from 2005 to 2013 (CAGR of 23.6%). Based on the observation of Innisfree’s growth for 2 years since its entry to China, we judged that Innisfree is currently in similar circumstances of moving into the full-scale growth phase. Therefore, the number of Innisfree’s new stores is estimated to increase at an impressive rate of 23.6% annually, reaching 899 stores in China by 2020. Per Counter Sales The remarkable growth of Chinese cosmetics market is mainly due to: 1) an increasing number of consumers, 2) the rise in per capita expenditure. We interpreted that these two factors are also most critical determinants for the growth of per counter sales. Hence, forecasted market growth rates (See next paragraph) are applied to estimate the increase in per counter sales for all 5 brands operating in China. As a result, per counter sales will grow at the CAGR of 8.6% from 2014 to 2020. Forecasted Market Growth Rates In order to find a suitable index for predicting market growth rate for cosmetics market in China, 6-year-data of three relevant macro indices were cross-analyzed: the real GDP growth rates, disposable income growth rates, and retail sales growth rates. Although none of the three shows significant similarity to the past market growth trend, the average of the three demonstrates noteworthy correspondence. Based on the World Bank’s estimation of the three macro indices, the market growth rate for 2014F (9.9%) is calculated by the simple average of them. Then, the market growth rates for the following years are estimated under the key assumption that the growth rate of Chinese cosmetics market will gradually converge with the current growth rate of Korean market (4.7%) by 2030 since that is when the income level of 1st-tier cities of China roughly equals that of Korea as of 2014. The growth rates for Chinese beauty market are as follow: 9.9%, 9.4%, 9.0%, 8.6%, 8.2%, 7.8%, 7.5% from 2014 to 2020.
A-18 Korea University APPENDIX 3. Financial Statement Forecast – Income Statement (Sales Forecast, China)
25%
20%
15%
10%
5%
0% 2007 2008 2009 2010 2011 2012 2013
Real GDP g Disposable Income g Retail Sales Growth Market g
20%
15%
10%
5%
0% 2007 2008 2009 2010 2011 2012 2013
Market g Avg. Source: World Bank
A-19 Korea University APPENDIX 3. Financial Statement Forecast – Income Statement
Cost of Goods Sold To estimate the cost of goods sold(COGS) for the next 7 years, we have adopted a consistent correlation between the following two variables: 1) historical gross profit margin (GPM) for the company and 2) the sales weight of travel-retail channel sales. An increase in the share of sales through travel-retail will lead to a higher GPM because of highly concentrated sales of the high-end products within duty-free shops, leaving the company with such a high profit margin. ‘
30% y = 4.1229x - 2.7905 25% R² = 0.9714 20%
Retail Retail % 15% -
10% Travel 5% 0% 69% 70% 70% 71% 71% 72% 72% 73% 73% 74% 74% 75% GPM
Selling and Administrative Expenses Labor Cost Labor cost is estimated on the basis of the significantly high correlation between the labor cost and the sales weight of door-to-door sales. We have forecasted the labor-cost-to-sales ratio will decline as the sales share of door-to-door channel will gradually come down from 12.1% in 2013 to 10.4% in 2020.
20%
15%
y = 7.0131x - 0.672 door %
- 10% R² = 0.9897
to -
Door 5%
0% 10% 10% 11% 11% 11% 11% 11% 12% 12% 12% 12% Labor Cost Advertising Expense As Amore Pacific (AP) has renovated its marketing strategies in China towards more cost-efficient ways of advertisements especially via online, the weight of advertising expenses is expected to decrease to 10% of sales by 2020. We have assumed the company will be able to sustain the sales-to-advertisement-expense rate at 10% afterwards. Distribution Commission The percentage of distribution commission in total sales has been increasing since 2009 as the sales weight of door-to-door channel is on a steady decline. Distribution commission of door-to-door sales is the very low compared to different channels such as department stores or travel-retail where rents or other complicated processes are involved. Thus, the percentage of distribution commission is estimated based on the changes in sales weight of all channels combined except the door-to-door.
door 90%
- to - 85% 80%
75% except door except
70% Percentage of Sales revenue ofrevenue Sales Percentage 10% 11% 12% 13% 14% 15% 16% 17% 18% 19%
Sales weight of door-to-door Source : Company data, team estimate
A-20 Korea University APPENDIX 3. Financial Statement Forecast – Income Statement
Overall Operating Profit Margin Cosmetics – Korea The increasing weight of the highly lucrative travel-retail sales will lead to the gradual upgrading of the overall operating profit margin of the company (from 16.6% in 2014 to 19.4% in 2020).
100% 3% 2% 2% 2% 2% 1% 1% 1% 1% 12% 11% 90% 17% 15% 13% 21% 19% 27% 80% 33%
70% 40% 42% 45% 17% 25% 30% 34% 38% 60% 13% 50% 14% 15% 13% 11% 40% 10% 10% 9% 8% 8% 14% 30% 11% 15% 15% 16% 16% 17% 18% 18% 8% 20% 9% 7% 6% 6% 5% 5% 4% 4% 10% 17% 18% 18% 17% 16% 15% 15% 14% 13% 0% 2012 2013 2014E 2015E 2016E 2017E 2018E 2019E 2020E
Specialty store Discount store Online/Homeshopping Department store Travel Retail Door to Door Direct Sale / Others
Channel OPM 20.0% 19.4% Specialty store 12% 19.0% 19.1% 18.8% Discount store 6% 18.5% Online / Homeshopping 20% 18.0% 18.1% 17.6% Department store 7% 17.0% 16.9% Travel Retail 25% 16.6% Door to Door 20% 16.0% 16.2% Direct Sales / Others 11% 15.0% 2012 2013 2014E 2015E 2016E 2017E 2018E 2019E 2020E
Source : Company data, Team estimate Cosmetics – Overseas China Amore Pacific’s operation in China will show an encouraging upturn of OPM, forecasted to reach 15% in 2020. This is estimated by 1) using historical OPM of each channel and its sales weight in Korea and then adjusting those to the expected sales weight of each channel in China to calculated the overall OPM, and 2) additional adjustments are made on the estimated OPM for extra costs involved for operating overseas. The 15% OPM signifies the normalized profitability of AP’s business in China after the operation leverage is realized. France / Japan AP’s operation in France and Japans is currently on a series of structural reforms due to the persisting operational losses. It is expected that business components in France and Japan will generate net profit after three years of restructuring is completed. USA The operation in the U.S. is expected to have 7% of operating profit margin, the first turn-around since entering the market in 2004. We have assumed the current level of profit margin will be sustained till 2020. Other Asia Due to the acquisition of AP’s affiliate company in Hong Kong, the operation in other Asia has turned around with the 9% OPM. As subsequent turn-arounds are expected in the rest of the countries within the region, the profit margin will further increase; yet, such trend is not likely to come in the foreseeable future.
A-21 Korea University APPENDIX 3. Financial Statement Forecast – Income Statement
13.0% 15.0% 12.1% 10.5% 11.3% 12.0% 9.3% 8.1% 9.0% 7.2% 6.0% 3.0% 0.0% -3.0% -2.2% -1.1% 2012 2013 2014F 2015F 2016F 2017F 2018F 2019F 2020F
Effective Tax Rate The effective tax rate will be changed according to the increasing portion of sales made overseas. Therefore, the effective tax rate is calculated according to: 1) the historical changes in tax rates for the company along with changes in the overseas operating profit weight, 2) the historical adjustment portion between statutory tax rates and effective tax rates.
Country Tax Rate 2012 2013 2014F 2015F 2016F 2017F 2018F 2019F 2020F Korea 22.0% Korea 103% 102% 89% 87% 84% 81% 78% 75% 72% China 25.0% Overseas-Cosmetics -3% -2% 11% 13% 16% 19% 22% 25% 28% France 33.3% China 4% 3% 8% 10% 12% 14% 16% 19% 22% USA 35.0% France -4% -2% -2% -1% -1% 0% 0% 0% 0% USA -1.2% -0.6% 0.4% 0.5% 0.6% 0.6% 0.6% 0.6% 0.6% HK/Taiwan 16.8% Japan -0.9% -1.1% -0.6% -0.5% -0.2% 0.0% 0.1% 0.0% 0.0% HK 16.5% HK/Taiwan -1% -1% 4% 4% 4% 5% 5% 5% 6% Taiwan 17.0% SEA 0% 0% 0% 0% 0% 0% 0% 0% 0%
Japan 38.0%
Source : Incyclopedia Source : Company data, Team estimate
A-22 Korea University APPENDIX 3. Financial Statement Forecast – Balance Sheet / Cash Flow Statement
Working Capital While estimating the working capital, specifically accounts receivable, inventories and accounts payable, we forecasted the turnover ratios of each item first and applied them to the expected sales revenue and cost of goods sold. (KRW bil) 2011 2012 2013 2014F 2015F 2016F 2017F 2018F 2019F 2020F Accounts Receivable 166 190 223 237 263 292 327 369 419 461 A/R Turnover 16.1 16.5 15.5 15.5 15.7 16.0 16.1 16.0 15.8 16.1 Inventories 226 267 283 322 350 388 427 470 518 564 Inventories Turnover 3.4 3.2 3.2 3.2 3.3 3.3 3.3 3.4 3.4 3.5 Accounts Payable 259 251 298 330 369 420 476 540 612 705 A/P Turnover 3.0 3.4 3.1 3.1 3.1 3.0 3.0 2.9 2.9 2.8
(KRW bil) 2011 2012 2013 2014F 2015F 2016F 2017F 2018F 2019F 2020F Sales 2,555 2,849 3,100 3,675 4,122 4,677 5,265 5,905 6,615 7,426 COGS 775 847 912 1,038 1,143 1,280 1,426 1,591 1,772 1,975
Property, Plant and Equipment AP’s construction plans; Plant expansion plan(expected capacity of KRW 2 trillion in 2020) in China and office building construction plan(KRW 520 billion, July 2014 – July 2017). After the announced plans we assumed its percentage against total assets will remain the same (62%), while growing in line with the sales growth. (KRW bil) 2011 2012 2013 2014F 2015F 2016F 2017F 2018F 2019F 2020F Property, plant and equipment 1,655 1,767 1,936 2,267 2,738 3,274 3,755 4,200 4,711 5,314 Land 799 860 907 920 1,040 1,178 1,277 1,344 1,413 1,488 Construction in Progress 89 85 170 286 534 662 563 630 707 797 Building and equipment 437 454 453 567 643 818 1,239 1,470 1,743 2,072 Machinery 146 158 174 203 246 327 376 420 471 531 Other PPE 185 209 232 292 274 287 300 336 377 425 Percentage of total assets (%) 59% 58% 57% 60% 64% 67% 68% 66% 65% 64%
(KRW bil) 2011 2012 2013 2014F 2015F 2016F 2017F 2018F 2019F 2020F Property, plant and equipment 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% Land 48% 49% 47% 43% 38% 36% 34% 32% 30% 28% Construction in Progress 5% 5% 9% 13% 20% 21% 15% 15% 15% 15% Building and equipment 26% 26% 23% 25% 24% 25% 33% 35% 37% 39% Machinery 9% 9% 9% 9% 9% 10% 10% 10% 10% 10% Other PPE 11% 12% 12% 10% 9% 8% 8% 8% 8% 8%
Borrowings Forecast of borrowings was based on the borrowings AP is currently holding. Since all of them are constituted of foreign subsidiaries, we have estimated the forecast based on gross sales. We have assumed that liabilities will decrease considering the constant increase in cashflow AP is accumulating and also their repayment plans. Also, we have calculated the interest expense by multiplying the liabilities by interest rate.
Overseas Sales (KRW bil) 2011 2012 2013 2014F 2015F 2016F 2017F 2018F 2019F 2020F USA 16 18 24 34 44 55 66 76 83 87 France 100 86 90 90 90 89 89 88 88 87 Japan 0 47 48 46 47 47 47 47 47 47 Other Asia 47 30 79 260 306 365 440 530 634 746 Total 327 443 540 754 954 1,180 1,457 1,792 2,192 2,665 Source : Company data, Team estimate
A-23 Korea University
Borrowings (KRW bil) 2011 2012 2013 2014F 2015F 2016F 2017F 2018F 2019F 2020F Interest Rate Short-term Borrowing France 4 6 19 19 19 22 22 29 29 29 1.29 Sales / Borrowing 24 14 5 5 5 4 4 3 3 3 0 France 7 7 7 8 10 12 12 12 12 12 1.29 Sales / Borrowing 6 4 11 11 11 8 7 7 7 7 0 Hong Kong 0 1 1 1 0 0 0 0 0 0 3.4 Japan 4 5 6 5 6 6 6 6 6 6 1.15 Sales / Borrowing 0 9 8 8 8 8 8 8 8 8 0 Japan 0 3 2 2 3 3 3 3 3 3 2.83 Sales / Borrowing 0 16 20 20 18 18 18 18 18 18 0 France 0 0 4 0 0 0 0 0 0 0 1.79 USA 0 0 0 0 0 0 0 0 0 0 2.31 Current Portion of Long-term Debt USA 0 0 42 0 35 0 0 5 0 0 1.73 Long-term Borrowing USA 46 43 69 65 30 30 30 25 25 25 1.53 Total Borrowings 61 65 151 102 103 73 73 80 75 75 Dividend Referring to past dividends, they have increased their DPS by KRW 500 almost every two years. However, the dividends increase ratio is relatively smaller than the NI increase, which is constantly reducing the payout ratio. This is due to the management’s passive attitude towards giving out cash dividends. (Thousand) Shares 2011 2012 2013 2014F 2015F 2016F 2017F 2018F 2019F 2020F Common Stock 5,846 5,846 5,846 5,846 5,846 5,846 5,846 5,846 5,846 5,846 Preferred Stock 1,056 1,056 1,056 1,056 1,056 1,056 1,056 1,056 1,056 1,056 (KRW) Dividend per share 2011 2012 2013 2014F 2015F 2016F 2017F 2018F 2019F 2020F Dividend for common shares 6,000 6,500 6,500 6,500 7,000 7,500 8,000 8,500 9,000 9,500 Dividend for preferred shares 4550 5050 5,050 5,050 5,550 6,050 6,550 6,550 6,550 7,050 (KRW bil) Total dividend 2011 2012 2013 2014F 2015F 2016F 2017F 2018F 2019F 2020F Total dividend for common shares 35 38 38 38 41 44 47 50 53 56 Total dividend for preferred shares 6 7 7 7 7 7 8 8 8 8 Total 41 45 45 45 48 51 55 58 61 64
2011 2012 2013 2014F 2015F 2016F 2017F 2018F 2019F 2020F Payout ratio 12.7% 16.7% 16.8% 12.1% 11.1% 10.0% 9.2% 8.5% 7.9% 7.2%
(KRW bil) 2011 2012 2013 2014F 2015F 2016F 2017F 2018F 2019F 2020F R/E 1,377 1,592 1,815 2,141 2,529 2,991 3,531 4,153 4,869 5,696 Dividend 41 45 45 45 48 51 55 58 61 64 NI 327 269 267 371 436 513 594 680 777 891 Depreciation Depreciation expense was estimated by multiplying each items of PPE and average of historical depreciation percentage. We have applied 55 to 60 percent based on past data of income statements to the distribution of SG&A. Depreciation % of PPE items Land 0% Construction in Progress 0% Building and equipment 4% Machinery 11% Other PPE 36%
Allocation to COGS, SG&A (KRW bil) 2011 2012 2013 2014F 2015F 2016F 2017F 2018F 2019F 2020F Total depreciation (CF) 82 102 124 124 154 155 176 205 233 265 Depreciation attributable to COGS 39 48 56 56 58 59 67 93 105 125 Depreciation attributable to SG&A 42 54 68 68 95 96 109 112 127 140
A-24 Korea University APPENDIX 4. AP Stock Price Analysis against KOSPI 200
3,000,000
Aggressive expansion of First Quarter earning surprise, Expand ‘Sulwhasoo’, stores in the SEA region OPM increase by cost reduction 2,500,000 popular brand in China
Easing the risk of door to door channel 2,000,000 Rapid growth of Chinese subsidiary through online and duty free shops
1,500,000
1,000,000
Reduced sales in door- Movements of to-door sales and Slowing growth redeeming 500,000 increase in marketing rate domestically stocks expenses
0 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14
AP KOSPI 200 Source : Bloomberg, company data, team estimates
U/D Period Analysis Increase in size through the successful launching of the specialty store 'Aritaum' 2010 Feb Sales increase of higher-value added brands (Sulwhasoo, Amore Pacific) leading to higher profit margins Turnaround expected in the Chinese market in 2011, High growth potential 2010 Oct Foreign subsidiaries have succeeded in turnaround in the third quarter, Mainly attributable to the Chineses and French subsidiaries
Higher growth potential of China, Investors concern of stronger regulations by the Chinese government have been solved through th 2011 Jan e acquisition of the right to export 'Sulwahsoo' to China and door-to-door sales
Amore Pacific has ambitious plans to expand the 'Sulwahsoo' brand of being one of the global top ten brands by 2015,'Sulwhasoo' is 2011 Jun very popular brand in China It was announced that Amore pacific will expand in size in the Asian cosmetics market including China Pressure of rising stock price, Decrease in sales of door-to-door sales and other factors showing indications of a slowing growth rate domestically 2011 Nov Domestic cosmetics division recording a 8.8% growth rate and a 14% operating profits that has decreased by 1.4%p, The profitable d oor-to-door sales with higher margins has experienced a slowdown after September, ending with a 2.8% growth rate, Additional cost incurred from the relocation of new production plants
The recovery of profits from the door-to-door channel and the stable improvement of profits from the domestic cosmetics division t hrough the growth of major distribution channels such as the duty-free shops, speciallity stores, online and etc. 2012 Mar The increase of sales of duty-free shops due to Chinese tourists, the rapid growth of the Chinese subsidiary and other related factors to increased consumption continues to make Amore Pacific attractive in the medium to long run future.
AmoreG, the holding company of Amore Pacific, was included in the emerging market index of Morgan Stanley Capital International, 2012 which has played in the favor of Amore Pacific. This event has lead to purchase of stocks by institutions. August The increase of sales of the second and fourth quarter, stronger brand power has resulted in an increase of 38% of gross sales. Also, aggressive expansion of stores in the East South Asian region has contributed to the increase of size of foreign subsidiaries. Disappointing results of the fourth quarter in 2012 has caused a decrease in stock price. 2013 Feb Reduced sales in door-to-door sales and increase in marketing expenses. They have eased the risk of door-to-door channel through online and duty-free shops 2014 Jan The expectation of high growth of China and higher contribution to profits.
First quarter results showing an earning surprise. The increase of duty-free shops (140% increase compared to same period in the pr 2014 May evious year), home shopping and online also showing a 30% growth compared to the same period last year, increase in advertising e xpense has resulted in improved profits. They have successfully linked the increase of size to improved earnings. 2014 Sep Movements of redeeming stocks has decreased stock price.
A-25 Korea University APPENDIX 5. World Cosmetics Market
The United States has the biggest market share followed by Japan, China, Brazil, Germany, France and others. A noteworthy feature is that the emerging markets including China and Brazil are expanding market share while traditionally strong countries are losing their market shares. In addition, the growth rate of emerging market is much higher than that of traditional market on average.
(USD mil) (%) 100% 120,000 7.0 6.7 90% US 6.0 80% JPN 100,000 CHN 70% 4.8 5.0 4.7 BRA 80,000 60% DEU 4.0 50% FRA 60,000 40% UK 3.0 ITA 2.5 30% 40,000 RUS 2.0 20% KOR 20,000 1.0 10% Other
0% 0 0.0 2008 2009 2010 2011 2012 2013 Europe Asia-Pacific North/Latin Middle America East/Africa 2012 CAGR('08~'12)
Source: Datamonitor
North/Latin North/Latin America 28.10% America 28.90% Europe 39.40% Europe 37.20%
Asia/Pacific, Asia/Pacific, 30.10% 31.20%
Source: Datamonitor
A-26 Korea University APPENDIX 5. World Cosmetics Market
Even though traditionally strong countries such as United States, Japan, Germany and France still show high market share, the growth rate of BRICs (China, Brazil, India, Russia) surpasses the world average growth rate. Since it is expected that these emerging countries will keep growing, the power will shift from traditional cou ntries to emerging countries. Especially China shows both the third largest market size and high growth rate. China is forecasted to be the second largest cosmetics market in the world in 2016.
2002 Rank 2007 Rank 2012 Rank 2016 Rank 1 United States 1 United States 1 United States 1 United States 2 Japan 2 Japan 2 Japan 2 China 3 Germany 3 Germany 3 China 3 Japan 4 France 4 China 4 Brazil 4 Brazil 5 China 5 France 5 Germany 5 Germany 6 Italy 6 Brazil 6 France 6 France 7 United Kingdom 7 Italy 7 United Kingdom 7 United Kingdom 8 Brazil 8 United Kingdom 8 Italy 8 Italy 9 Spain 9 Spain 9 Russia 9 India 10 Korea 10 Russia 10 Spain 10 Russia 11 Canada 11 Korea 11 Korea 11 Korea 12 Russia 12 Canada 12 India 12 Spain 13 Mexico 13 Mexico 13 Mexico 13 Mexico 14 Australia 14 Australia 14 Canada 14 Venezuela 15 Taiwan 15 India 15 Australia 15 Canada 16 Netherlands 16 Taiwan 16 Argentina 16 Argentina 17 Switzerland 17 Netherlands 17 Poland 17 Australia 18 Poland 18 Poland 18 Taiwan 18 Poland 19 India 19 Switzerland 19 Netherlands 19 Taiwan 20 Belgium 20 South Africa 20 Venezuela 20 Netherlands
12%
10% CHN BRA Bubble size represents the market size as of 2013. 8%
6%
KOR UK 4% DEU JPN
2% ITA US FRA
0% -10 40 90 140 190 240 290 340 390 440 Per Capita Spending (mil USD) Source: Datamonitor, team estimates
A-27 Korea University APPENDIX 5. World Cosmetics Market
Top 100 Beauty Companies
In total, 2013 revenues of beauty companies amounted to 204.61 billion dollars and increased compared with previous years. Loreal, the biggest French beauty company, alone generated nearly 15% among the total sales of top 100 cosmetics manufacturers, widening the gap with lower-ranked companies. Unilever and Procter & Gamble produced 10% each. Three Korean and two Chinese cosmetics companies are included in the world Top 100: AMORE PACIFIC ranked 15th; LG Household & Health Care 26th; adn Able C&C 56th Shanghia Jahwa United Co., a Chinese local cosmetics company ranked 43rd
Rank Company Country Revenue M/S Growth rate 1 L’ORÉAL France 30.52 14.9 5.7 2 UNILEVER UK, Netherlands 21.33 EST. 10.4 3.0 3 PROCTER & GAMBLE US 20.50 EST. 10.0 2.1 4 THE ESTÉE LAUDER COS. US 10.39 EST. 5.1 4.1 5 SHISEIDO CO. Japan 7.77 EST. 3.8 -7.3 6 AVON PRODUCTS US 7.10 3.5 -7.1 7 BEIERSDORF Germany 6.44 EST. 3.1 -4.3 8 JOHNSON & JOHNSON US 6.00 EST. 2.9 -2.6 9 CHANEL France 5.84 2.9 -0.5 10 KAO CORP. Japan 5.83 2.8 9.4 11 LVMH MOËT HENNESSY LOUIS VUITTON France 4.94 2.4 6.2 12 COTY US 4.54 2.2 -1.1 13 HENKEL Germany 4.44 EST. 2.2 2.8 14 L BRANDS US 3.90 EST. 1.9 8.3 15 MARY KAY US 3.40 EST. 1.7 2.7 ⋮
17 AMORE PACIFIC GROUP Korea 3.32 1.6 9.6 ⋮
26 LG HOUSEHOLD & HEALTH CARE Korea 1.76 0.9 15.0 ⋮
56 ABLE C&C Korea 0.40 0.2 -2.9 Total(100) 204.61 100.0 1.9
* For this list, “beauty” includes fragrance, makeup, skin care, body care, sun care, hair care, deodorant, plus cellulite and shaving products. It does not take into account bar soaps, razors, toothpastes, food and diet foods, medicines, vitamins or detergents.
Source : Women's Wear Daily, WWD Beauty Report, 2013
A-28 Korea University APPENDIX 5. World Cosmetics Market
Market Trend by Category Skincare category has the largest market with its market share of 31%. Haircare market is the second largest in size, maintaining its market share of 20.3%.
Others 3%
Fragrances 13%
Skincare, 31%
Make-up 15%
Personal hygiene 17% Haircare, 20%
Source: Datamonitor
A-29 Korea University APPENDIX 6. China Cosmetics Industry
Others 9%
China 12%
Europe&US 49%
Korea&Japan 30%
Make-up 16% 8% 14% Personal Hygiene 12% 11% 10% CAGR('08-'12) : 8.8%
8%
Skin Care 6% Hair Care 57% 22% 4%
2%
0% Skincare Haircare Make-up Personal Male Fragrances Baby hygiene Toiletries Personal Care '08~'12 '13~'16
Source: Datamonitor
A-30 Korea University APPENDIX 6. China Cosmetics Industry
Skin Care Market
Skin care market grew with an average growth rate (CAGR) of 12% per annum from 2008 to 2012. The market size is forecasted to further increase by 8.9% of CAGR from 2013 to 2018.
Source : Euromonitor
(CNY mil)
Category 2013 2014 2015 2016 2017 2018 (‘13~’18)CAGR Body Care 3,723.5 3,833.0 3,973.9 4,143.6 4,345.2 4,587.7 4.3% - Firming / Anti-Cellulite Body Care 1,135.5 1,191.6 1,261.6 1,344.4 1,441.4 1,556.2 6.5% - General Care Purpose Body 2,588.0 2,641.4 2,712.2 2,799.1 2,903.8 3,031.4 3.2% Facial Care 124,612.5 133,795.1 144,876.8 158,087.8 173,709.1 192,059.1 9.0% - Acne Treatments 601.4 621.6 644.8 670.8 699.9 732.4 4.0% - Face Masks 11,274.0 12,444.3 13,765.8 15,254.5 16,942.8 18,851.1 10.8% - Facial Cleansers 13,356.1 13,886.3 14,487.7 15,163.8 15,930.7 16,787.8 4.7% - Facial Moisturisers 56,880.3 60,095.2 64,077.9 68,934.2 74,719.0 81,559.8 7.5% - Lip Care 1,481.1 1,536.9 1,612.6 1,710.6 1,829.9 1,977.9 6.0% - Anti-Agers 31,333.6 34,594.5 38,593.0 43,402.9 49,175.8 56,035.3 12.3% - Toners 9,686.0 10,616.2 11,695.0 12,950.9 14,411.0 16,114.8 10.7% Hand Care 3,070.8 3,303.1 3,567.3 3,865.2 4,201.2 4,581.6 8.3% - Premium Hand Care 319.0 354.0 394.6 441.7 496.8 561.1 12.0% - Mass Hand Care 2,751.8 2,949.1 3,172.7 3,423.4 3,704.4 4,020.5 7.9% Skin Care (Total) 131,406.8 140,931.2 152,418.0 166,096.6 182,255.5 201,228.3 8.9%
Source : Euromonitor
A-31 Korea University APPENDIX 6. China Cosmetics Industry
China Skin Care + Color Cosmetics Market Share Recalculated
2009 2010 2011 2012 2013 1 L’Oréal China 12.8% 13.5% 13.7% 14.0% 14.2% 2 Shiseido China Co Ltd 6.3% 6.6% 6.6% 6.1% 5.6% 3 Procter & Gamble (Guangzhou) Ltd 6.7% 6.4% 6.1% 5.9% 5.6% 4 Hangzhou Mary Kay Cosmetics Co 4.0% 4.3% 4.3% 4.5% 4.8% 5 Estée Lauder (Shanghai) Commercial Co Ltd 2.1% 2.4% 2.8% 3.2% 3.4% 6 Amway (China) Co Ltd 3.9% 3.8% 3.6% 3.3% 3.1% 7 Jala (Group) Co Ltd 1.8% 2.0% 2.3% 2.5% 2.7% 8 Nu Skin (China) Daily Use & Health Products Co Ltd 0.3% 0.3% 0.5% 0.7% 2.3% 9 Shanghai Jahwa United Co Ltd 1.4% 1.6% 1.8% 2.2% 2.3% 10 AmorePacific Cosmetics (Shanghai) Co Ltd 1.0% 1.2% 1.3% 1.7% 2.1% 11 Nivea (Shanghai) Co Ltd 2.0% 2.0% 1.9% 1.8% 1.9% 12 Shanghai Inoherb Cosmetics Co Ltd 0.6% 1.0% 1.6% 1.9% 1.9% 13 Proya Cosmetics Co Ltd 0.6% 0.8% 1.2% 1.7% 1.8% 14 Guangdong Marubi Biotechnology Co Ltd 0.7% 1.0% 1.1% 1.4% 1.5% 15 Jiangsu Longliqi Group Co Ltd 1.8% 1.7% 1.5% 1.4% 1.3% 16 Magic Holdings International Ltd 0.4% 0.8% 1.0% 1.1% 1.3% 17 Christian Dior (China) Fragrances & Cosmetics Co Ltd 1.0% 1.1% 1.1% 1.0% 1.0% 18 Unilever China Ltd 1.2% 1.1% 1.0% 1.0% 1.0% Others 51.5% 48.5% 46.6% 44.5% 42.2% Source : Euromonitor
A-32 Korea University APPENDIX 6. China Cosmetics Industry
AMORE PACIFIC is ranked 12th with 2.1% of its share in the skin care market in China. Loreal China shows 11.4% of market share, far outstripping its competitors.
Rank Company 2009 2010 2011 2012 2013
1 L’Oréal China 9.9% 10.6% 10.9% 11.2% 11.4% 2 Procter & Gamble (Guangzhou) Ltd 7.5% 7.2% 6.8% 6.6% 6.2% 3 Shiseido China Co Ltd 6.45% 6.7% 6.7% 6.2% 5.7% 4 Hangzhou Mary Kay Cosmetics Co 4.2% 4.5% 4.5% 4.7% 5.0% 5 Estée Lauder (Shanghai) Commercial Co Ltd 2.0% 2.3% 2.7% 3.1% 3.3% 6 Amway (China) Co Ltd 4.2% 4.0% 3.8% 3.5% 3.3% 7 Jala (Group) Co Ltd 1.9% 2.1% 2.4% 2.6% 2.9% 8 Shanghai Jahwa United Co Ltd 1.5% 1.8% 2.0% 2.5% 2.6% 9 Nu Skin (China) Daily Use & Health Products Co Ltd 0.2% 0.2% 0.4% 0.7% 2.4% 10 Shanghai Inoherb Cosmetics Co Ltd 0.7% 1.1% 1.8% 2.2% 2.2% 11 Nivea (Shanghai) Co Ltd 2.3% 2.3% 2.2% 2.1% 2.2% 12 AMORE PACIFIC Cosmetics (Shanghai) Co Ltd 1.0% 1.3% 1.4% 1.8% 2.1% 13 Proya Cosmetics Co Ltd 0.6% 0.9% 1.3% 1.9% 2.0% 14 Guangdong Marubi Biotechnology Co Ltd 0.8% 1.1% 1.3% 1.5% 1.7% 15 Jiangsu Longliqi Group Co Ltd 2.1% 1.9% 1.7% 1.6% 1.5% 16 Magic Holdings International Ltd 0.5% 0.9% 1.2% 1.3% 1.5% 17 Unilever China Ltd 1.4% 1.3% 1.2% 1.2% 1.1% 18 Johnson & Johnson China Ltd 1.0% 1.0% 1.0% 1.0% 0.9% 19 Eau Thermale Avène Co Ltd 0.8% 0.8% 0.9% 0.9% 0.9% 20 Mentholatum (Zhongshan) Pharmaceutials Co Ltd, The 0.6% 0.6% 0.7% 0.8% 0.9% 21 Christian Dior (China) Fragrances & Cosmetics Co Ltd 0.8% 0.9% 0.9% 0.8% 0.8% 22 Shanghai Pehchaolin Daily Chemical Co Ltd 0.0% 0.1% 0.2% 0.4% 0.8% 23 Shanghai DHC Business Co Ltd 0.6% 0.7% 0.8% 0.8% 0.7% 24 Fancl Corp 0.8% 0.8% 0.9% 0.8% 0.7% 25 Dabao Cosmetics Co 0.9% 0.7% 0.6% 0.6% 0.6% 26 Nanjing Jianong Chemical Co Ltd 0.8% 0.7% 0.7% 0.7% 0.6% 27 Guangzhou Uniasia Cosmetics Science Technology Co Ltd 0.3% 0.4% 0.5% 0.6% 0.6% 28 Danzi Group 0.1% 0.2% 0.3% 0.4% 0.5% 29 Kosé Cosmetics Co Ltd (China) 0.7% 0.6% 0.6% 0.5% 0.5% 30 Infinitus (China) Co Ltd 0.6% 0.6% 0.5% 0.5% 0.5% Others 44.8% 41.6% 39.0% 36.6% 34.0% Total 100.0% 100.0% 100.0% 100.0% 100.0% Source : Euromonitor
A-33 Korea University APPENDIX 6. China Cosmetics Industry
If we consider more in detail, table shows ranking by each brand. Mamonde is ranked 17th while Laneige is ranked 25th with 1.1% and 0.7% market share, respectively.
Rank Brand Company 2010 2011 2012 2013 1 Olay Procter & Gamble (Guangzhou) Ltd 6.9% 6.3% 5.9% 5.4% 2 L’Oréal Paris L’Oréal China 4.9% 5.0% 5.2% 5.3% 3 Mary Kay Hangzhou Mary Kay Cosmetics Co 4.5% 4.5% 4.7% 5.0% 4 Aupres Shiseido China Co Ltd 3.4% 3.4% 3.3% 3.1% 5 Artistry Amway (China) Co Ltd 3.5% 3.4% 3.1% 2.9% 6 Estée Lauder Estée Lauder (Shanghai) Commercial Co Ltd 1.6% 2.0% 2.2% 2.2% 7 Inoherb Shanghai Inoherb Cosmetics Co Ltd 1.1% 1.8% 2.2% 2.2% 8 Lancôme L’Oréal China 1.7% 2.0% 2.1% 2.2% 9 Chcedo Jala (Group) Co Ltd 1.6% 1.7% 1.9% 2.1% 10 Herborist Shanghai Jahwa United Co Ltd 1.1% 1.3% 1.7% 1.9% 11 Proya Proya Cosmetics Co Ltd 0.8% 1.2% 1.8% 1.8% 12 Marubi Guangdong Marubi Biotechnology Co Ltd 1.1% 1.3% 1.5% 1.7% 13 Longliqi Jiangsu Longliqi Group Co Ltd 1.9% 1.7% 1.6% 1.5% 14 MG Magic Holdings International Ltd 0.9% 1.2% 1.3% 1.5% 15 Nu Skin Nu Skin (China) Daily Use & Health Products Co Ltd 0.2% 0.3% 0.4% 1.3% 16 Nu Skin Age Lock Nu Skin (China) Daily Use & Health Products Co Ltd 0.1% 0.2% 0.3% 1.2% 17 Mamonde AMORE PACIFIC Cosmetics (Shanghai) Co Ltd 0.8% 0.9% 1.1% 1.1% 18 Pond’s Unilever China Ltd 1.2% 1.1% 1.1% 1.1% 19 L’Oréal Men Expert L’Oréal China 0.7% 0.7% 0.9% 1.0% 20 Shiseido Shiseido China Co Ltd 1.2% 1.2% 1.1% 1.0% 21 Avène Eau Thermale Avène Co Ltd 0.8% 0.9% 0.9% 0.9%
22 Dior Christian Dior (China) Fragrances & Cosmetics Co Ltd 0.9% 0.9% 0.8% 0.8%
23 Nivea Visage Nivea (Shanghai) Co Ltd 0.9% 0.8% 0.8% 0.8% 24 Vichy L’Oréal China 1.0% 0.9% 0.8% 0.8% 25 Laneíge AMORE PACIFIC Cosmetics (Shanghai) Co Ltd 0.5% 0.6% 0.6% 0.7% 26 Neutrogena Johnson & Johnson China Ltd 0.7% 0.7% 0.7% 0.7% 27 Fancl Fancl Corp 0.8% 0.9% 0.8% 0.7% 28 DHC Shanghai DHC Business Co Ltd 0.7% 0.8% 0.8% 0.7% 29 Nivea for Men Nivea (Shanghai) Co Ltd 0.6% 0.6% 0.6% 0.7% 30 Pechoin Shanghai Pehchaolin Daily Chemical Co Ltd 0.1% 0.1% 0.3% 0.6% Others 53.7% 51.9% 49.6% 47.0% Total 100.0% 100.0% 100.0% 100.0%
Source: Euromonitor
A-34 Korea University APPENDIX 6. China Cosmetics Industry
In 2013, China imported skin care products the most from France followed by Japan, U.S., and Korea. The proportion of other countries is small compared with the leading countries.
Canada Others 2% 4% Germany 2%
UK 5%
Korea France 12% 38%
US 14%
Japan 23%
Source : General Administration of Customs of the People's Republic of China
A-35 Korea University APPENDIX 6. China Cosmetics Industry
Color Cosmetics Market
Color cosmetics market increased with an average growth rate (CAGR) of 8.9% per annum from 2008 to 2012. It is forecasted to grow at the 7.1% CAGR from 2013 to 2018.
Category 2008 2009 2010 2011 2012 2013 (‘08~’13)CAGR Facial Make-Up 5,302.9 5,747.3 6,408.4 7,344.0 8,158.4 8,936.3 11.0% - Foundation/Concealer 3,537.6 3,843.1 4,285.1 4,908.0 5,446.2 5,956.3 11.0% - Powder 884.4 954.1 1,057.7 1,201.5 1,320.6 1,424.9 10.0% - Other Facial Make-Up 482.7 520.9 575.0 653.8 720.4 777.6 10.0% - Blusher/Bronzer/Highlighter 398.2 429.2 490.5 580.8 671.1 777.5 14.3% Lip Products 5,225.9 5,410.8 5,759.6 6,309.0 6,678.2 6,931.0 5.8% - Lipstick 4,511.3 4,668.7 4,972.2 5,449.3 5,770.6 5,992.7 5.8% - Lip Gloss 438.6 458.9 490.5 538.7 571.7 592.3 6.2% - Lip Liner/Pencil 276.0 283.3 296.8 321.0 335.9 345.9 4.6% - Other Lip Products ------Eye Make-Up 1,466.7 1,573.0 1,779.4 2,074.3 2,333.3 2,576.2 11.9% - Mascara 611.4 661.7 768.2 917.4 1,052.9 1,182.3 14.1% - Eye Shadow 476.4 512.5 574.1 663.6 741.9 812.2 11.3% - Other Eye Make-Up 242.7 254.5 277.7 310.4 335.2 360.0 8.2% - Eye Liner/Pencil 136.2 144.3 159.5 182.9 203.2 221.7 10.2% Nail Products 342.9 353.9 372.8 403.6 422.8 437.8 5.0% - Nail Polish 305.4 315.0 331.1 357.6 373.7 385.4 4.8% - Polish Remover 33.5 34.6 37.1 41.0 43.8 46.7 6.9% - Other Nail Products 2.5 2.6 2.8 3.1 3.4 3.6 7.0% - Nail Treatments/Strengthener 1.5 1.6 1.7 1.9 2.0 2.1 6.8% Color Cosmetics (Total) 12,338.4 13,085.0 14,320.2 16,130.9 17,592.6 18,881.3 8.9% Source : Euromonitor
A-36 Korea University APPENDIX 6. China Cosmetics Industry
Category 2013 2014 2015 2016 2017 2018 (‘13~’18)CAGR Facial Make-Up 8,936.3 9,607.9 10,404.4 11,329.8 12,405.4 13,652.0 8.8% - Foundation/Concealer 5,956.3 6,398.7 6,928.7 7,547.7 8,268.2 9,103.7 8.9% - Powder 1,424.9 1,505.4 1,599.2 1,705.1 1,827.8 1,968.2 6.7% - Other Facial Make-Up 777.5 881.1 1,002.5 1,144.0 1,309.4 1,503.0 14.1% - Blusher/Bronzer/Highlighter 777.6 822.6 874.0 933.0 1,000.0 1,077.0 6.7% Lip Products 6,931.0 7,070.1 7,314.6 7,632.7 8,005.0 8,436.0 4.0% - Lipstick 5,992.7 6,114.6 6,327.1 6,605.8 6,932.1 7,310.8 4.1% - Lip Gloss 592.3 605.8 628.9 657.3 690.2 727.5 4.2% - Lip Liner/Pencil 345.9 349.7 358.6 369.6 382.7 397.8 2.8% - Other Lip Products ------Eye Make-Up 2,576.2 2,787.4 3,031.1 3,310.5 3,630.2 3,996.1 9.2% - Mascara 1,182.3 1,301.4 1,438.8 1,596.0 1,776.3 1,983.2 10.9% - Eye Shadow 812.2 870.1 935.6 1,010.2 1,094.7 1,190.7 8.0% - Other Eye Make-Up 360.0 379.0 401.6 428.2 459.6 496.1 6.6% - Eye Liner/Pencil 221.7 236.9 255.0 276.0 299.6 326.1 8.0% Nail Products 437.8 445.2 457.2 472.4 490.5 511.7 3.2% - Nail Polish 385.4 390.6 399.9 411.9 426.4 443.3 2.8% - Polish Remover 46.7 48.7 51.1 53.9 57.1 60.9 5.5% - Other Nail Products 3.6 3.7 3.9 4.1 4.4 4.7 5.7% - Nail Treatments/Strengthener 2.1 2.2 2.3 2.5 2.6 2.8 5.4% Color Cosmetics (Total) 18,881.3 19,910.6 21,207.2 22,745.4 24,531.1 26,595.8 7.1% Source : Euromonitor
A-37 Korea University APPENDIX 6. China Cosmetics Industry
Similar to skin care market, AMORE PACIFIC is ranked 11th with 1.9% market share. Loreal China shows a do minant market share of 33.9% as of 2013.
Rank Company 2009 2010 2011 2012 2013 1 L’Oréal China 31.9% 32.7% 32.9% 33.5% 33.9% 2 Carlsan Group Hongkong Co Ltd 2.0% 2.9% 3.5% 4.3% 5.3% 3 Shiseido China Co Ltd 5.3% 5.6% 5.6% 5.1% 4.8% 4 Estée Lauder (Shanghai) Commercial Co Ltd 2.4% 3.1% 3.6% 3.8% 4.0% 5 Hangzhou Mary Kay Cosmetics Co 2.9% 2.9% 2.8% 3.0% 3.2% 6 LVMH Moët Hennessy Louis Vuitton SA 1.5% 2.0% 2.2% 2.3% 2.9% 7 Christian Dior (China) Fragrances & Cosmetics Co Ltd 2.3% 2.4% 2.5% 2.5% 2.7% 8 Chanel SA 1.5% 1.8% 2.1% 2.2% 2.4% 9 Shanghai Feiyang Cosmetics Co Ltd 0.0% 0.4% 0.9% 1.5% 2.1% 10 Amway (China) Co Ltd 2.3% 2.3% 2.2% 2.0% 2.0% 11 AMORE PACIFIC Cosmetics (Shanghai) Co Ltd 0.8% 0.8% 0.8% 0.9% 1.9% 12 Jala (Group) Co Ltd 1.2% 1.4% 1.5% 1.6% 1.6% 13 Nu Skin (China) Daily-Use & Health Products Co Ltd 0.6% 0.7% 0.8% 0.9% 1.4% 14 Procter & Gamble (Guangzhou) Ltd 1.3% 1.3% 1.2% 1.1% 1.1% 15 Shanghai Kanebo Cosmetics Co Ltd 1.1% 1.1% 1.1% 1.1% 1.1% 16 Shanghai DHC Business Co Ltd 0.6% 0.7% 0.9% 0.9% 0.8% 17 Guangzhous Uniasia Cosmetics Science Technology Co Ltd 0.1% 0.2% 0.4% 0.5% 0.5% 18 Proya Cosmetics Co Ltd 0.3% 0.3% 0.4% 0.5% 0.4% 19 Anna Sui Beauty 0.4% 0.4% 0.4% 0.4% 0.4% 20 Revlon (China) Co Ltd 2.0% 1.8% 1.7% 0.9% 0.4% 21 Kosé Cosmetics Co Ltd (China) 0.5% 0.5% 0.4% 0.4% 0.3% 22 Danzi Group 0.1% 0.1% 0.2% 0.2% 0.3% 23 CRE Esprit Ltd 0.3% 0.3% 0.3% 0.3% 0.3% 24 Avon (China) Co Ltd 2.7% 1.6% 0.8% 0.4% 0.2% 25 La Prairie SA, Laboratoires 0.2% 0.2% 0.2% 0.2% 0.2% 26 Sisley China Co Ltd 0.1% 0.1% 0.1% 0.3% 0.2% 27 Guangdong Marubi Biotechnology Co Ltd - - 0.4% 0.2% 28 Pro-Health (China) Co Ltd - 0.1% 0.1% 0.2% 0.2% 29 LG Household & Health Care Ltd - - 0.1% 0.1% 30 Oriflame Cosmetics (China) Co Ltd 0.1% 0.1% 0.1% 0.1% 0.1% 31 Shanghai Jahwa United Co Ltd 0.4% 0.4% 0.4% 0.1% - Others 35.1% 31.9% 29.9% 28.7% 25.4% Total 100.0% 100.0% 100.0% 100.0% 100.0%
Source : Euromonitor
A-38 Korea University APPENDIX 6. China Cosmetics Industry
If we consider more in detail, table shows the ranking by brand. Laneige is ranked 11th with 1.7% market share.
Rank Brand Company 2010 2011 2012 2013 1 Maybelline New York L’Oréal China 20.3% 20.0% 20.5% 20.8% 2 L’Oréal Paris L’Oréal China 9.8% 10.1% 10.0% 10.0% 3 Carslan Carlsan Group Hongkong Co Ltd 2.9% 3.5% 4.3% 5.3% 4 Mary Kay Hangzhou Mary Kay Cosmetics Co 2.9% 2.8% 3.0% 3.2% Christian Dior (China) Fragrances & Cosmetics 5 Dior 2.4% 2.5% 2.5% 2.7% Co Ltd
6 Aupres Shiseido China Co Ltd 2.9% 2.8% 2.6% 2.5% 7 Chanel Chanel SA 1.8% 2.1% 2.2% 2.4% 8 Estée Lauder Estée Lauder (Shanghai) Commercial Co Ltd 1.5% 1.9% 2.0% 2.1% 9 Marie Dalgar Shanghai Feiyang Cosmetics Co Ltd 0.4% 0.9% 1.5% 2.1% 10 Artistry Amway (China) Co Ltd 2.3% 2.2% 2.0% 2.0% 11 Laneíge AMORE PACIFIC Cosmetics (Shanghai) Co Ltd 0.8% 0.8% 0.8% 1.7% 12 Benefit LVMH Moët Hennessy Louis Vuitton SA 0.7% 0.8% 0.9% 1.4% Nu Skin (China) Daily-Use & Health Products Co 13 Nu Skin 0.7% 0.8% 0.9% 1.4% Ltd
14 Lancôme L’Oréal China 0.9% 1.0% 1.2% 1.3% 15 Chcedo Jala (Group) Co Ltd 1.1% 1.2% 1.3% 1.3% 16 Yue-sai L’Oréal China 1.1% 1.0% 1.1% 1.1% 17 Max Factor Procter & Gamble (Guangzhou) Ltd 1.1% 1.0% 1.0% 1.0% 18 Bobbi Brown Estée Lauder (Shanghai) Commercial Co Ltd 0.8% 0.8% 0.8% 0.9% 19 Mac Estée Lauder (Shanghai) Commercial Co Ltd 0.7% 0.8% 0.8% 0.8% 20 Guerlain LVMH Moët Hennessy Louis Vuitton SA 0.7% 0.8% 0.8% 0.8% 21 DHC Shanghai DHC Business Co Ltd 0.7% 0.9% 0.9% 0.8% 22 Make Up For Ever LVMH Moët Hennessy Louis Vuitton SA 0.5% 0.6% 0.6% 0.7% 23 Za Shiseido China Co Ltd 0.6% 0.6% 0.6% 0.5% 24 Cle de Peau Shiseido China Co Ltd 0.5% 0.6% 0.5% 0.5% 25 Shu Uemura L’Oréal China 0.4% 0.4% 0.4% 0.4% 26 Shiseido Shiseido China Co Ltd 0.5% 0.5% 0.5% 0.4% 27 Lunasol Shanghai Kanebo Cosmetics Co Ltd 0.5% 0.4% 0.4% 0.4% 28 Anna Sui Anna Sui Beauty 0.4% 0.4% 0.4% 0.4% Guangzhou Uniasia Cosmetics Science 29 Meifubao 0.2% 0.3% 0.3% 0.4% Technology Co Ltd
30 Revlon Revlon (China) Co Ltd 1.8% 1.7% 0.9% 0.4% Others 38.3% 35.7% 33.9% 30.4% Total 100.0% 100.0% 100.0% 100.0%
Source : Euromonitor
A-39 Korea University APPENDIX 6. China Cosmetics Industry
Even though the premium cosmetics market has gained more significance over the years, mass products are still the majority of color cosmetics.
79.1% 77.2% 75.4% 74.5% 74.5% 74.1%
20.9% 22.8% 24.6% 25.5% 25.5% 25.9%
2008 2009 2010 2011 2012 2013
Premium Mass
Source : Euromonitor
A-40 Korea University APPENDIX 6. China Cosmetics Industry
China Cosmetics Distribution Channels
China cosmetics distribution structure changed a lot for the last 10 years. The most noteworthy fact is that the online sales grew nearly 10 folds from 2008 to 2012. The weight of online sales is rising quickly whereas the proportion of department store sales among all channels has been substantially declined.
Considering small or medium sized cities, it is difficult to make an inroad directly into 2nd and 3rd tier cities. In this case, utilization of the online channels is the best way to secure the growing number of consumers. With the popularity of cosmetics in online market, B2C online cosmetics shopping malls such as Lefeng, Jumei, and Tiantian have been developed. Taobao, the largest online shopping mall in China, proves an increasing trend of cosmetics sales from 5% in 2008 to 25% in 2012. Especially, Korean cosmetics are rapidly gaining poluarity among online shoppers.
(100 million yuan) 1400 120%
1200 100% 1000 80% 800 60% 600 40% 400
200 20%
0 0% 2008 2009 2010 2011 2012 2013 2014e 2015e Sales growth rate Source: CECRC
100% Hypermarkets 90%
80% Department Stores
70% Internet Retailing 60% Direct Selling 50% Beauty Specialist Retailers 40%
30% Supermarkets
20% Parapharmacies/Drugstores 10% Independent Small Grocers 0% 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Others
Source: Euromonitor
A-41 Korea University APPENDIX 6. China Cosmetics Industry
China E-commerce
The total E-commerce transaction within China during 2013 reached CNY 10 trillion with an increase of XX.X% from the previous year. In addition, B2C E-commerce sales is forecasted to grow by 63.8% in 2014 which is significantly higher than in other cou ntries. Over 55% of China's Internet users have made a mobile payment in Q4 2012 while only 19% of internet users in th e US have done so. Taobao accounts for 76.1% of mobile shopping market in China.
(CNY tri) 25 35% Australia 5.7%
30% Japan 7.1% 20 Korea 7.4% 25% US 11.8% 15 20% UK 12.2%
15% Canada 14.0% 10 Russia 17.1% 10% Brazil 5 19.1% 5% India 31.5%
0 0% China 63.8% 2010 2011 2012 2013 2014e 2015e 2016e 2017e
Total transactions Growth Rate Source: iResearch Source: eMarketer
Australia 17% Others 17.3% Tencent US 19% 1.5% JD 5.2% Japan 22%
India 26% Taobao 76.0% South Korea 37%
China 55%
Source: eMarketer Source: iResearch
A-42 Korea University APPENDIX 6. China Cosmetics Industry
Chinese Internet Commerce Market Status As of 2013, the B2C transaction of CNY 666.1 bil accounts for 36.2% of the total Internet shopping market in China, havin g increased from 30.5% in 2012. The reasons behind the B2C market becoming a major growth engine for online commer ce industry are the following: 1) the C2C market has reached its maturity state and 2) a number of famous brands and gl obal manufacturers have entered the B2C market. The growing competition within the B2C channel has created opportu nities for development while providing satisfactory credibility to meet the consumer needs, which resulted in the increas ing trend of customer preference for B2C services. Currently, the B2C market in China is dominated by Tmall(46.5% M/S ) and JD(18.3% M/S), followed by numerous companies with relatively small market shares.
100% 90% 80% 50.6% 47.6% 70% 59.2% 54.3% 70.4% 64.9% 60% 74.7% 86.3% 50% 40% 30% 49.4% 52.4% 20% 40.8% 45.7% 29.6% 35.1% 10% 25.3% 13.7% 0% 2010 2011 2012 2013 2014F 2015F 2016F 2017F B2C C2C
Source: K&C Consulting, iResearch Analysis on the Online Shopping Users in China Among the users of online shopping in China, the portion of the age group of 24-36 has increased while that of the age gr oup 25-35 has declined. This contributes to more even distribution among different age groups. Overall, the age group of 19-35 is observed to be the major users accounting for 65.2% out of the total online shopping users.
35%
30%
25%
20%
15%
10%
5%
0% Under 18 19~24 25~30 31~35 36~40 Over 40
2012 2013 Source: iResearch
A-43 Korea University APPENDIX 6. China Cosmetics Industry
Consumption Trend
The majority of cosmetic consumers in China are '80 后, 90 后' (born after 1980~1990). They go on shopping more frequently than other age groups and try to consume in a reasonable way. Since they are already familiar with shopping online, it is only a matter of time these population grow up to have a tremendous impact on creating a new dynamics of distribution channels.
When obtaining information on cosmetics products, Chinese consumers heavily rely on the words of mouth; that is, the recommendation from acquaintances. This is mainly because the safety of a product is the most important concern for Chinese consumers. With the increasing usage of Internet, online reviews are also becoming a widely used measure of product reliability.
Once had been price and efficacy, the most influential consideration points upon purchasing cosmetics are now the brand and quality of products. Such change in consumer perception signifies that the Chinese beauty market is gradually transforming into an oligopoly structure, where only suppliers with strong brand power can thrive.
Under 18 11.8% Others 0.8%
Radio 10.6% 18~24 36.5%
Visual Advertising 22.4%
25~30 26.3% Outdoor Advertising 26.8%
31~35 12.3% TV 55.4%
36~40 6.9% Internet 62.7%
Recommendation 68.8% over 40 6.4%
Source: 网络数据资料中心:, 前瞻资讯, Yipai, K&C Consulting
Package 17%
Volume 31%
Ingredient 31%
Fragrance 39%
Reputation 48%
Efficacy 68%
Price 72%
Quality 78%
Brand 85%
A-44 Korea University APPENDIX 6. China Cosmetics Industry
Policy
Korea-China FTA Negotiations between Korea and China on a bilateral free trade agreement appear likely to be settled as the representatives of the two countries have agreed to set the end of 2014 as the deadline for the deal. Cosmetics industry is expected to be a beneficiary in this agreement because high tariffs are imposed on cosmetics imports. When the current tariffs of 6.5-10% on cosmetics are eliminated as a result of the FTA agreement, Korean cosmetics will gain substantial price competitiveness in Chinese market.
Abolition of Consumption Tax China ministry of finance will confirm the abolition of consumption tax on cosmetics this year. Its scope is limited to mass cosmetics, and thus premium cosmetics will be excluded. It is expected that the maximum of 30% tax on color cosmetics and 8% tax on skincare products will be exemted. If consumption tax cut applies to imported cosmetics brands, AP’s brands of Laneige, Innisfree, and Etude are expected to benefit from it.
Announcement of 'Directory of used cosmetic ingredients' China Food and Drug Administration(CFDA) allowed additional 140 ingredients after it announced 8641 allowed ingredients in March, 2014.
Raise the Ceiling for Ultraviolet Index The State Food and Drug Administration is currently working on lifting the limit of 30+ for sun screen products up to 50+, the same level as in Korea.
Simplify the Submission of Required Materials Chinese government has announced to streamline the paper works for acquiring sales permit down to 20%~30% of existing level.
Revise the Regulation in relation to Animal Testing CFDA has announced to abolish the requirement for animal testing.
A-45 Korea University APPENDIX 6. China Cosmetics Industry
Skincare-Most often purchased % Skincare-Main brand considered % 100% 100% 14% 12% 90% 90% 21% 24% 26% 28% 23% 80% 33% 80% 70% 70% 60% 60% 50% 50% 86% 88% 40% 40% 79% 76% 74% 72% 77% 30% 67% 30% 20% 20% 10% 10% 0% 0% Total Tier1 Tier2 Tier3 Total Tier1 Tier2 Tier3
Foreign Local Foreign Local
Color-Most often purchased % Color-Main brand considered %
100% 3% 2% 3% 5% 100% 3% 2% 5% 5% 90% 90% 80% 80% 70% 70% 60% 60% 50% 97% 98% 97% 95% 50% 97% 98% 95% 95% 40% 40% 30% 30% 20% 20% 10% 10% 0% 0% Total Tier1 Tier2 Tier3 Total Tier1 Tier2 Tier3
Foreign Local Foreign Local
Source : Morgan Stanley Research
A-46 Korea University APPENDIX 7. Korea Cosmetics Industry
Others 1%
Make up 7% Personal Others Hygiene AMORE PACIFIC 37.4% 8% 31.6%
Haircare 15% Skincare 69% LG Healthcare 14.2%
L'oreal 4.0%
The Face Shop 4.0% Able C&C Estee Lauder 4.3% 4.5% Source: FSS Source: KCA
100% Direct Selling 90% Beauty Specialist Retailers 80% Department Stores 70% Hypermarkets 60%
50% Internet Retailing
40% Supermarkets
30% Homeshopping 20% Parapharmacies/Drugstores 10% Others 0% 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Source: Euromonitor
A-47 Korea University APPENDIX 7. Korea Cosmetics Industry
Source: KCIA
Specialty 14.7% 41.4% 17.2% 28.7% 23.1% 13.6% 24.9% 3.3% 8.4% 0.0% Brand Shop 0.0% 0.1% 9.1% 7.8% 5.3% 3.5% 6.0% 2.5% 22.4% 0.0% Door-to-door 0.3% 0.1% 2.4% 0.1% 5.8% 2.1% 14.4% 0.1% 25.1% 0.0% Multi-Step 0.0% 0.0% 2.5% 0.4% 2.7% 11.8% 1.6% 0.0% 0.2% 32.1% Department 0.2% 3.3% 1.2% 8.4% 0.4% 19.2% 5.6% 77.4% 7.2% 59.1% Home-shopping 0.9% 0.0% 1.6% 0.4% 8.4% 4.3% 9.9% 0.0% 5.1% 0.1% Discount 0.0% 0.0% 1.0% 0.5% 3.5% 9.8% 6.8% 1.5% 17.9% 0.9% Duty-Free 0.0% 0.0% 0.8% 3.0% 4.1% 0.6% 3.9% 0.9% 8.8% 1.9% Online 37.6% 10.2% 33.3% 20.5% 23.4% 15.9% 12.1% 9.7% 3.4% 5.7% Pharmaceuticals 19.7% 27.7% 15.5% 6.1% 9.6% 3.2% 8.2% 4.5% 0.0% 0.0% Hair Salon 9.1% 0.0% 3.6% 2.5% 5.0% 9.0% 0.5% 0.2% 1.4% 0.1% Other 17.4% 17.1% 11.8% 21.5% 8.6% 6.9% 6.1% 0.0% 0.3% 0.0% Source : Ministry of Health & Welfare
A-48 Korea University APPENDIX 7. Korea Cosmetics Industry
Skincare 68,331 71,020 74,095 77,076 80,160 4.1% Facial care 44,895 46,757 48,899 51,015 53,172 4.3% Body care 11,246 11,555 11,889 12,214 12,564 2.8% Suncare 6,842 7,169 7,557 7,902 8,271 4.9% Hand care 3,933 4,077 4,237 4,389 4,551 3.7% Make-up remover 1,416 1,462 1,512 1,557 1,603 3.1% Haircare 46,074 47,466 48,878 50,609 52,431 3.3% Shampoo 17,408 17,962 18,554 19,292 20,057 3.6% Hair colorants 10,169 10,595 10,981 11,451 11,960 4.1% Conditioner 8,732 9,060 9,421 9,849 10,283 4.2% Styling agents 8,077 8,125 8,175 8,242 8,328 0.8% Perms & relaxers 1,688 1,723 1,747 1,774 1,803 1.7% Personal hygiene 37,950 39,469 41,179 43,008 44,997 4.4% Deodorants 13,546 14,130 14,858 15,655 16,479 5.0% Soap 13,906 14,455 15,020 15,628 16,340 4.1% Bath & shower products 10,498 10,884 11,300 11,725 12,177 3.8% Make-up 33,670 34,894 36,333 38,017 39,683 4.2% Face make-up 12,049 12,396 12,846 13,290 13,710 3.3% Eye make-up 9,480 9,897 10,342 10,787 11,199 4.3% Lip make-up 8,550 8,773 9,063 9,419 9,770 3.4% Nail make-up 3,591 3,827 4,081 4,521 5,004 8.6% Fragrances 28,758 29,656 30,631 31,879 33,275 3.7% Female fragrances 18,385 18,951 19,608 20,401 21,330 3.8% Male fragrances 8,919 9,251 9,565 9,984 10,402 3.9% Unisex fragrances 1,454 1,454 1,459 1,494 1,542 1.5% Male Toiletries 4,322 4,465 4,615 4,769 4,919 3.3% Male Shaving Preparations 2,442 2,536 2,628 2,730 2,831 3.8% Male Shaving Aftercare 1,880 1,929 1,987 2,039 2,088 2.7% Feminine Care 694 731 772 813 849 5.2% Baby Personal Care 1,817 1,869 1,926 1,987 2,050 3.1% Total 221,617 229,570 238,428 248,157 258,364 3.9%
Source: Datamonitor
A-49 Korea University APPENDIX 7. Korea Cosmetics Industry Exports Viewing the Top 8 exporting countries, it can be observed that Korea is exporting Cosmetics to both developed and emerging economy, but also that besides USA, the export market is predominantly focused on nearby Asian Markets. It is positive to see that the Cosmetics Market in general are showing high CAGR
Country 2008 2009 2010 2011 2012 2013 CAGR
China 105,648 121,471 327,050 204,321 215,922 300,693 23.3%
Hong Kong 34,160 45,713 62,063 97,131 143,051 215,716 44.6%
Japan 67,796 78,315 87,802 127,515 169,692 151,106 17.4%
USA 35,391 41,708 50,902 65,213 77,777 106,251 24.6%
Taiwan 33,376 34,698 52,597 66,906 61,334 93,896 23.0%
Thailand 6,544 13,597 45,045 61,089 70,848 79,646 64.8%
Singapore 17,310 16,430 23,963 31,887 40,468 41,172 18.9%
Malaysia 10,294 12,544 31,650 30,897 35,136 39,573 30.9%
Vietnam 10,912 13,534 28,370 20,847 26,172 38,191 28.5%
Russia Federation 4,737 4,527 6,923 8,791 18,344 23,631 37.9%
Total 313,600 371,800 525,800 721,500 1,067,002 1,283,414 32.6%
Country 2008 2009 2010 2011 2012 2013 CAGR
China 40,550 46,077 50,344 58,704 80,863 127,511 25.8%
Hong Kong 23,280 29,450 33,419 52,013 74,029 106,561 35.6%
Japan 21,106 18,999 26,541 38,135 62,896 61,634 23.9%
Taiwan 17,033 18,925 28,783 41,235 34,804 48,888 23.5%
Thailand 4,480 8,726 28,573 36,044 37,784 41,917 56.4%
USA 13,810 19,476 17,874 19,577 27,837 27,845 15.1%
Malaysia 6,051 5,294 13,461 15,687 16,885 18,683 25.3%
Singapore 9,620 6,036 8,580 9,937 12,864 18,541 14.0%
Vietnam 4,068 5,298 10,001 7,927 9,517 10,859 21.7%
Australia 3,259 3,178 4,700 4,977 7,548 9,453 23.7%
Total 162,153 179,989 245,686 315,383 394,281 513,287 25.9%
Source: Foundation of Korea Cosmetic Industry Institute
A-50 Korea University APPENDIX 7. Korea Cosmetics Industry
HongKong 1,910 3,348 11,491 17,352 21,708 30,740 74.3%
Japan 3,033 8,563 9,009 12,231 21,448 18,556 43.7%
China 7,447 6,789 7,590 9,793 9,520 15,096 15.2%
USA 2,674 2,446 3,300 6,012 6,897 13,497 38.2%
Taiwan 6,494 6,196 7,199 6,806 5,900 10,042 9.1%
Thailand 914 838 4,471 5,753 6,143 7,648 52.9%
Malaysia 369 724 2,415 3,063 3,720 5,477 71.5%
Singapore 483 924 1,680 3,194 4,811 3,399 47.7%
Vietnam 1,321 1,376 7,837 2,550 2,898 2,940 17.4%
Iran 1,096 2,985 4,236 3,636 3,283 2,335 16.3%
Total 27,752 36,847 63,661 75,723 99,111 121,094 34.3%
Source: Foundation of Korea Cosmetic Industry Institute
E-Commerce E-Commerce’s growth is being boosted by its relatively new Mobile channel
2009 2010 2011 2012 2013 2014F YoY
Mobile 0 300 600 1700 3970 7600 -
Internet 22030 27240 32480 37205 41160 46270 16.9% TV Homeshopping 4700 5680 6530 7920 8730 9680 16.7%
Catalog 730 770 770 820 890 980 5.1%
Total 27460 33990 40380 47645 54750 64530 18.8%
Source: Korea Online Shopping Association
A-51 Korea University APPENDIX 7. Korea Cosmetics Industry
Duty-Free Market
2009 2010 2011 2012 2013 YoY (1k USD) 14,417 21,675 24,168 23,678 23,429 Korean 12.9% 15,927 17,497 24,459 32,401 38,976 Foreigner 25.1% 30,344 39,172 48,627 56,079 62,405 Total 19.8%
Source: Korea Duty-Free Association
Duty-Free Expansion History AP is making rapid expansion into the global Duty-Free stores, mainly focused in Asia.
Country Time of Expansion Brands Singapore Feb 2008 Sulwhasoo, Laneige Hong Kong Aug 2009 Sulwhasoo, Laneige China Jul 2010 Sulwhasoo, Laneige, Etude, Innisfree Thailand Sep 2011 Sulwhasoo, Laneige Philippines Feb 2012 Sulwhasoo, Laneige Macao Jun 2012 Sulwhasoo, Laneige Taiwan Mar 2014 Sulwhasoo, Laneige Japan Mar 2014 Sulwhasoo, Laneige Malaysia Jul 2014 Sulwhasoo, Laneige Hawaii (US) 2015E -
Source: Company data
A-52 Korea University APPENDIX 7. Korea Cosmetics Industry
Source: Kantar World-panel
A-53 Korea University APPENDIX 8. Developed Cosmetics Industry - US
US Cosmetics Market
The largest cosmetics market is the U.S. with its market size of USD 35.3 billion as of 2013. The U.S. market grew by 2.6% in 2013, demonstrating slower growth compared to the world average of 3.7%; therefore, its world market share is on a decline. Within the U.S., skin care market accounts for the largest portion of 25%, followed by haircare(19%), color make-up(18%) and personal hygiene(18%). The fastest growing sector within the U.S. market is feminine care with an annual average growth rate of 6.2%; other three categories of skincare, make-up and personal hygiene show moderate growths of 2-3% while the market for make-up products is expected to accelerate its growth at 4.1% in the foreseeable future.
(mil USD) 36000 18%
16% 35000 14%
34000 12%
10% 33000 8%
32000 6%
4% 31000 2%
30000 0% 2008 2009 2010 2011 2012 2013
Market Size YoY Market Share
6% Others 4% 5% Skincare Fragrances 25% 4% 17% 3%
CAGR('08-'12) : 1.6% 2% Personal Hygiene 1% 18% Haircare 0% 19% -1% Make-up 18% -2% '08-'12 '13-'16
Source: Datamonitor
A-54 Korea University APPENDIX 8. Developed Cosmetics Industry - France
France Cosmetics Market
The cosmetics market size of France reached USD 14.3 billion in 2013, increased by 1.95% from the previous year. France has the 6th largest beauty market in the globe, yet its share of the world market has been falling since 2008. Within France, the market for skincare products accounts for the largest portion of 35.1%. An interesting aspect of cosmetics market in France is perhaps the fragrance market ranked as the 2nd largest with its share of 20.8%. The annual average growth rates of skincare and fragrance are observed to be 2.3% and 1.8% for the last 4 years, respectively. These two markets are forecasted to grow at similar rates of 2.2% and 1.7% for the next 3 years.
(mil USD)
14500 8%
7% 14000 6% 13500 5%
13000 4%
3% 12500 2% 12000 1%
11500 0% 2008 2009 2010 2011 2012 2013
Market Size YoY Market Share
Others 6% 4% Haircare 5% 13% 4% Skincare 35% 3% Make-up CAGR('08-'12) : 1.6% 13% 2% 1%
0%
Personal -1% Hygiene 14% Fragrances -2% 21% '08-'12 '13-'16
Source: Datamonitor
A-55 Korea University APPENDIX 9. Rising Cosmetics Industry - Southeast Asia Market
AMORE PACIFIC (AP) currently operates in 7 countries within South East Asia (SEA) region: Indonesia, Thailand, Malaysia, Singapore, the Philippines, Vietnam, and Brunei. Positive Prospects of SEA Cosmetics market in Southeast Asia (SEA) will be the next growth engine for AP after China. Singapore, the Philippines and Thailand have moderately advanced cosmetics market with sizes of USD 840 mil., 1737 mil, and 1605 mil., respectively. Beauty market of SEA is predicted to grow at an annual average rate of 7.5% by 2030, outperforming world’s average of 4.7%.
GDP per Capita (USD) 60000
SGP 50000
40000 JPN
30000
KOR 20000
MYS 10000 CHN IDN THA Cosmetics Spending per Capita PHL 0 VNM 0 50 100 150 200 250 (USD) Source: IMF, Datamonitor Required Localization It is essential for a foreign enterprise to localize its business in order to thrive in SEA market because the countries in the region have diverse religions, languages and income levels. At a glance, it might seem easy for a Korean cosmetics company to go into SEA market by taking advantage of the Korean Wave, yet it takes a lot of efforts to tailor product lines and customize marketing strategy for each country due to the vast differences among the countries.
R&D as to Attain Brand Power AMORE PACIFIC locates the Center of Innovation in order to carry out R&D for products that are best suitable for Asian population. For the recent 7 years, AP has studied over 1,200 women from different regions in Asia to find out that most Asian women are troubled with dried skin while they desire for white facial tone, which is significantly different from Western consumers. Consequently, AP has concentrated on developing products with superior moisturizing and whitening effects, which led to an exponential growth of sales in the SEA region. AP shows a distinct strategy for each country in the SEA region. Because the Philippines and Malaysia are the markets where coloring cosmetics are preferred, AP connects its brand image with vivid coloring ability.
Innisfree in SEA With much emphasis on its identity of ‘Naturalism’, Innisfree entered Singapore in 2013. As it has drawn positive reactions from Chinese customers for its differentiated way of displaying and offering solutions to various concerns about skin, Innisfree is projected to be successful down on the road of its expansion in SEA region. In fact, the first Innisfree store that opened at Orchard road in Singapore in November 2013 sold KRW 470 million within just one month.
A-56 Korea University APPENDIX 10. MC&S Industry - Mass Cosmetics
AP’s MC History The Mass Cosmetics (MC) Business, which make up about 13% of AP’s sales focuses on Hair-care, Body-care where they have managed to maintain a firm market status. The company’s MC business is mostly composed of hair-care and oral products under brands ‘Mise-en-scene (Hair-care)’, ‘Happy Bath (Bathing)’, ‘Ryo (Hair-care’, and ‘Median (toothpaste)’. The herb shampoo ‘Ryo’, which was launched in 2008 grew rapidly into a hit-product with over KRW 100 bn. in sales, helping MC business to grow 18.4% CAGR from 2008 to 2012. The growth slowed down in 2013, very much like the domestic cosmetics business, but is still growing strong.
Source: Company data
MC Market MC are necessity products in detergents, hair-care (Shampoo, Rinse), body-care (Body-wash, Body Lotion), Oral (toothpaste, toothbrush), cleanser and other product groups. In terms of Product Life Cycle, MC is in a maturing stage, which mean growth potential is not high, but because consumer preference is changing fast it leads to a high burden to release new products. The domestic MC market size is around KRW 7 tn. as of 2013 and is maintaining a 3~4% annual growth, but the decrease in purchasing power of consumers due to slowing economic recovery and intense competition is overheating the market. The activation of the premium market following the well-being and functional product fever, the pioneering and differentiation of the niche market exploiting the diversification of consumer needs is vitalizing the market.
MC Competition The scale of revenue is about one third of the market leader LG Healthcare, and even though the level of product diversification is low, core products are securing firm market control within their criterion. After the MC Market growth had started to slow down after 2012, the company is managing to maintain their high growth via launching of new brands and online marketing, but the flooding competitors and the fast change in consumer preference is causing intense competition.
22.60%
22.40%
22.20%
22.00%
21.80%
21.60%
21.40% 2011 2012 2013
Source: Company data
A-57 Korea University APPENDIX 10. MC&S Industry - Sulloc
AP’s Sulloc History Suh, Sung-Hwan, the founder of AP, disappointed by the vanishing tea market, felt a sense of duty to reestablish Korea’s tea culture. After announcing the ‘tea business’ in 1979, he began his full-scale progress by nominating Jeju Island, the place with the ideal tea cultivation conditions, as the tea plantation field. 1979 through mid-1980s was the time when O’Sulloc brand and its business had been established. Beginning with the opening of Do-sun garden, Seo-Kwang and Han-nam gardens followed to fulfill AP’s 3.3 m2 organic garden in Jeju.
The tea business, which produces and sells teas, is maintaining its firm control of the market with its strong brand image in ‘Sulloc Tea’ and owns over 50% of the market share. The affiliate company, ‘Jangwon, Co.’ rents and produces green tea in the largest tea farm in Korea, operating its economies of scale and maintaining cost advantage. Also, the positive market response to the dessert specialty store ‘O’Sulloc Tea House’ which sells green tea based teas, Cakes, Ice Creams, etc. is expected to improve the brand image and increase sales. It has to be noted that the first quarter of 2014 had a small decrease in sales due to the expansion of the Sulloc business as a premium business which followed a cut in mass business.
(KRW 100mil) 800 700 600 500 400 300 200 100 0 2009 2010 2011 2012 2013 1Q13 1Q14 Source: Company data
Sulloc’s Competency O’Sulloc is currently operating 13 tea houses and 41 department store tea-shops all over Korea. Last year O’Sulloc was able to manage 34% growth from 2012. According to associates there has been a 72% increase in new customers, among which 70% were in their 20s and 30s. This trend shows that tea is clearing itself of the obsolete image and is increasing its awareness as a refined culture within the younger generation.
The associates further reveals that Sulloc is creating a tasty and stylish way of enjoying tea with it pure-tea based ‘blending tea’. Bypassing the standard of simply mixing water and tea, the emotions of time, space and recollections are being blended to appeal to the customers with its attractive taste, scent and trendy design. The associate believes that “as consumers preference becomes diversified, various blending teas may be the center of the new trend”.
A-58 Korea University APPENDIX 11. Macro Economy - China
GDP growth for 3Q 2014 has shown a recovery trend with the score of 7.3%, exceeding prior consensus; however, the annual GDP growth is expected to underperform with a rate of 7.3-7.4% compared to the general consensus of 7.5%. Retail sales growth is maintained its downturn with a slight decrease while the growth in Consumer's Price Index has marked its annual record-low of 1%. Moreover, the fixed asset investment rate recorded 15.8%. The manufacturing PMI announced by HSBC, which suggests economic expansion if over 50 and recession under 50, had been marking under 50 until May 2014, but inclined to 51.7 in July 2014 to signal the green light for manufacturing economy. Nonetheless, it has come down again to 49.6 in December, forming doubts on the upturn trend of the economy.
0
2009-03-01 2009-07-01 2009-11-01 2010-03-01 2010-07-01 2010-11-01 2011-03-01 2011-07-01 2011-11-01 2012-03-01 2012-07-01 2012-11-01 2013-03-01 2013-07-01 2013-11-01 2014-03-01 2014-07-01
(YoY%) (YoY%) 20 7 18 6 16 14 5 12 4 10 3 8 6 2 4 1 2
0 0
2011-01-01 2011-04-01 2011-07-01 2011-10-01 2012-01-01 2012-04-01 2012-07-01 2012-10-01 2013-01-01 2013-04-01 2013-07-01 2013-10-01 2014-01-01 2014-04-01 2014-07-01 2014-10-01
2011-02-01 2011-05-01 2011-08-01 2011-11-01 2012-02-01 2012-05-01 2012-08-01 2012-11-01 2013-02-01 2013-05-01 2013-08-01 2013-11-01 2014-02-01 2014-05-01 2014-08-01 2014-11-01
(YoY%) (YoY%) 30 53 52 25 51 20 50 15 49 48 10 47 5 46
0 45
2011-02-01 2011-05-01 2011-08-01 2011-11-01 2012-02-01 2012-05-01 2012-08-01 2012-11-01 2013-02-01 2013-05-01 2013-08-01 2013-11-01 2014-02-01 2014-05-01 2014-08-01 2014-11-01 2012-01-01 2012-03-01 2012-05-01 2012-07-01 2012-09-01 2012-11-01 2013-01-01 2013-03-01 2013-05-01 2013-07-01 2013-09-01 2013-11-01 2014-01-01 2014-03-01 2014-05-01 2014-07-01 2014-09-01 2014-11-01
Source: Informax, Bloomberg
A-59 Korea University APPENDIX 11. Macro Economy - China
CNY/KRW Exchange Rate
Status of CNY Exchange Rate Fluctuation - 1H 2014 Depreciation of CNY relative to KRW ∙ CNY/KRW exchange rate marked its record-high 6.1710 on June 3rd, announced by the People's Bank of China; CNY value was the lowest in 2014. ∙ The People's Bank of China raised the regulatory fluctuation range limit for CNY value from ±1% to ±2% on March 17th, which accelerated the upturn of CNY/KRW rate. - After June 3rd, CNY/KRW exchange rate fluctuated up and down, forming a box pattern to record 6.1425 on September 10th.
6.2
6.18 6.1710 (6/3)
6.16 0.46%
6.14 + 1.28% pt.
6.12 + 0.81% pt.
6.1
6.0930 (1/14) 6.08
Source: The People's Bank of China Cause of CNY/KRW Exchange Rate Increase - Warning on the hot-money speculators - Encouraging CNY depreciation in order to stimulate exports - Reduced attractiveness of CNY due to the Tapering by the U.S. and the slowing down of Chinese economy
The Recent Box Pattern of CNY/KRW Exchange Rate - CNY/KRW exchange rate is switched to a downturn due to a higher GDP growth than expected for 2Q 2014 - But there is growing uncertainty on the economic recovery due to the poor real economic indicators for 3Q 2014.
Outlook of CNY/KRW Exchange Rate - Despite the recovery in exports, the short-term exchange rate of CNY/KRW will fluctuate in a box pattern with high volatility due to the poor real economic indicators - In the long run, the appreciation stance of CNY is valid, but it is not appropriate to expect an unilateral downturn of it. - Major investment banks estimate CNY 6.13 per USD with a slight increase from 6.0969 at the end of 2013.
Trade Impact on Korea - Appreciation of KRW compared to CNY may lead to the increased competitiveness of Chinese local producers, yet the magnitude of currency value fluctuation will be rather limited in scope; thus, export to the world except China will be hardly influenced by the changes in exchange rates. - Appreciation of KRW will have a negative impact on the competitiveness of Korean products, possibly resulting in reduced export to China.
A-60 Korea University APPENDIX 11. Macro Economy - China
Date of Forecast Q4 14 Q1 15 Q2 15 Q3 15 2015 Median 6.12 6.10 6.08 6.02 6.00 Mean 6.13 6.10 6.08 6.05 6.01 Max 6.29 6.31 6.33 6.20 6.22 Min 5.98 5.90 5.92 5.97 5.75 Forward Exchange 6.16 6.17 6.19 6.21 6.23 Barclays 08/29/14 6.23 6.19 6.17 - - Cinkciarz.pl 08/29/14 6.15 6.15 6.10 - - Commerzbank 08/29/14 6.10 6.05 6.00 - 5.95 Scotiabank 08/29/14 6.10 6.06 6.01 5.97 5.92 Swissquote Bank 08/29/14 6.12 6.10 6.08 - - Prestige Economics LLC 08/27/14 6.05 6.05 6.00 6.00 5.95 Royal Bank of Scotland 08/27/14 5.98 5.95 5.92 - 5.86 Morgan Stanley 08/26/14 6.14 6.12 6.13 5.81 6.09 ABN Amro Bank N.V. 08/25/14 6.10 6.15 6.15 - 6.20 Banco Bilbao Vizcaya Argentaria 08/25/14 6.10 6.06 6.03 - 5.95 Commonwealth Bank of Australia 08/25/14 6.10 6.05 6.00 - 5.75 Norddeutsche Landesbank 08/25/14 6.11 6.06 6.03 - 5.96 Mouvement Desjardins 08/22/14 6.10 6.10 6.05 - 6.00 Rabobank 08/22/14 6.29 6.31 6.33 - 6.38 Wells Fargo 08/19/14 6.12 6.10 6.08 - 6.04 Citigroup 08/18/14 6.09 6.06 6.04 6.03 6.02 Credit Suisse Group 08/18/14 6.13 6.12 6.11 - - Skandinaviska Enskilda Banken 08/14/14 6.00 5.90 6.00 - - Emirates NBD 08/13/14 6.20 6.20 6.20 - - Nomura Bank International 08/12/14 6.05 6.05 6.04 - 6.02 Societe Generale 08/12/14 6.18 6.20 6.22 - - RBC Capital Markets 08/11/14 6.20 6.20 6.20 6.20 6.20 JPMorgan Chase 08/08/14 6.15 6.15 6.15 - - Standard Chartered 08/08/14 6.09 6.00 5.95 - 5.85 Westpac Banking 08/08/14 6.08 6.05 6.00 - 5.93 BMO Capital Markets 08/07/14 6.15 6.12 6.09 - 6.03 HSBC Holdings 08/07/14 6.14 6.12 6.11 - 6.10 Ausbil Investment Management Limited 08/04/14 6.15 6.10 6.10 - 6.00 Oversea-Chinese Banking Corp 08/04/14 6.14 6.12 6.11 - - Silicon Valley Bank 08/01/14 6.20 6.15 6.12 - 6.10 Bank of Tokyo-Mitsubishi UFJ 07/31/14 6.06 6.00 5.93 - - Nordea Bank 07/31/14 6.10 6.06 6.02 - 5.95 ING Financial Markets 07/28/14 6.22 6.22 6.22 - 6.22 Macquarie Bank 07/28/14 6.12 - - - - TD Securities 07/28/14 6.15 6.00 6.00 - 6.00
Source: Bloomberg A-61 Korea University APPENDIX 11. Macro Economy - China
Additional base rate markdown . On top of consumption growth in 2nd – 3rd tier cities, the recently lowered interest rate in Ch ina will have a positive impact on the further increase in retail consumption. . Increased liquidity helps vitalize the domestic economy.
China Lending Rate China Deposit Interest Rate
6.8 3.6 6.6 3.4 6.4 3.2 6.2 3 6 2.8 5.8 2.75 5.6 2.6 5.6 5.4 2.4 5.2 2.2 5 2 2010-01-04 2011-01-04 2012-01-04 2013-01-04 2014-01-04 2010-01-01 2011-01-01 2012-01-01 2013-01-01 2014-01-01
Source : The People’s Bank of China
A-62 Korea University APPENDIX 11. Macro Economy - China 2nd & 3rd tier cities(1) GDP . Following 1st tier cities, per capita GDP from 2nd tier cities has exceeded USD 10,000, a critical point from which the portion of middle class population grows. * Per capita GDP exceeded USD 10,000 in 2010 for 1st-tier, 2013 for 2nd-tier cities . Per capita GDP for the entire China is expected to reach USD 10,000 in 2017, driven by the income growth in 2nd to 3rd-tier cities. . Considering urbanization policies and growth trend is expanding towards 2nd to 3rd-tier cities, consumption increase in China is only a matter of time. China Per capita GDP (USD) 18,000 15,517 16,000
14,000
12,000 11,186
10,000
8,000 6,799
6,000
4,000
2,000
- 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014F 2015F 2016F 2017F 2018F 2019F 2020F Source : Global Insight
2nd & 3rd tier cities(2) Income
Urban Households Weights by Income levels Urban Private Consumption Weight by Income levels
100% 3 100% 9 11 90% 90% 14 25 80% 80% 20 High Income 70% 70% 54 60% High Income 60% Upper Middle Income 50% Upper Middle Income 50% 56 40% Lower Middle 40% Lower Middle Income Income 30% 30% Low Income Low Income 20% 20% 10% 10% 0% 0% 2012 2022 2012 2022 Source : Mckinsey & Company
*The number of urban households is forecasted to increase from 256 million in 2012 to 357 million in 2022. Private consumption in urban areas will increase from CHY 10 trillion in 2012 to CHY 26.8 trillion in 2022.
A-63 Korea University APPENDIX 11. Macro Economy - China 2nd & 3rd tier cities(3) Middle class . Areas with concentrated middle class are spreading from the East coast and 1st- tier cities to the Mid-West land and 2nd to 3rd-tier cities.
Middle Class Portion by Regions Middle Class Portion by Tier-classes
100% 100% 3 8 90% 90% 15 80% 80% 31 70% 61 70% 60% 87 60% 43 50% 50% 40% 40% 45 4th tier 30% 30% Coastal 3rd tier 20% 39 area 20% 2nd tier 10% 13 10% 1st tier 0% 0% 2002 2022 2002 2022 Source : Mckinsey & Company
KOREA-CHINA FTA / Consumption Tax
FTA . Its focus is on the trade increase rather than actual enhancement in price-competitiveness Longer-term observation needed . For Amore Pacific, it can go around tariff-barriers if necessary while tariff has actually only little impact on pricing (fixed cost is high). . Simplification of custom clearance makes it easier to enter Chinese market . Skincare 6.5% Color cosmetics 10%
Abolition of Consumption Tax . China ministry of finance will confirm the abolition of consumption tax on cosmetics this year. . limited to mass cosmetics . maximum of 30% tax on color cosmetics and 8% tax on skincare products
A-64 Korea University APPENDIX 11. Macro Economy - China
Simplification of procedure
KFDA-CFDA . The two governments of Korea and China are negotiating on the rules and procedures related to cosmetics business. . As the traded volume of cosmetics products between the two nations is increasing every year, they had rounds of meetings. Resulted in the increased mutual trust
Sanitation Clearance Time
Non-specialized Cosmetics Specialized Cosmetics
Preparation 1~2 months 1~2 months
Inspection 3 months 5 months
CFDA Evaluation 2 months 5 months
Permission Stand-by 1 month 1 month
Total 7 months 11 months
Source : cosinkorea
Pricing . There is a gap between product prices in China and in Korea . Price gap is based on the differences in: 1) Taxes 2) Distribution margins 3) Fixed Costs . Economy of scale Enables price competition
Innisfree – The green tea seed serum (80ml)
Country Channel Price Price($)
Official Online Shop KRW 22,000 USD 19.8 Korea Shilla Duty-free USD 16 USD 16
China Official Online Shop CNY 210 USD 34.3
(KRW 1,000 = USD 0.9 / CNY 1 = USD 0.15)
A-65 Korea University APPENDIX 12. Macro Economy - Korea
The Bank of Korea (BoK) has made a downward revision on the GDP growth forecast for the year 2014 from 3.8% to 3.5%. It has also downgraded the forecast for 2015 from 4.0% to 3.9%. BoK has announced that insufficient consumption growth along with the poor CAPEX increase have caused the economic recovery falling short of expectation. Export contribution will be less than the contribution of domestic consumption due to the relative slowdown of exports. Furthermore, BoK lowered the standard interest rate again from 2.25% to 2% in October 2014, following a downgrade in August. Consumer's price increase suggests no significant inflation burden as it has been maintained at around 1% and dropped to 0.8%. Retail sales are recovering slowly since the catastrophic accident of Sewol-ho in April, yet not sufficient to have a meaningful impact on the overall economy. Capital investment index, an useful forecasting indicator, rose by 13% points in November. Korean manufacturing PMI recorded 49.9 in December.
(YoY%) 8
6
4
2
0
-2
2009-03-01 2009-07-01 2009-11-01 2010-03-01 2010-07-01 2010-11-01 2011-03-01 2011-07-01 2011-11-01 2012-03-01 2012-07-01 2012-11-01 2013-03-01 2013-07-01 2013-11-01 2014-03-01 2014-07-01 -4
(YoY%) (YoY%) 5 4.5 10 4 3.5 8 3 6 2.5 2 4 1.5 1 2 0.5 0 0
-2
2011-01-01 2011-04-01 2011-07-01 2011-10-01 2012-01-01 2012-04-01 2012-07-01 2012-10-01 2013-01-01 2013-04-01 2013-07-01 2013-10-01 2014-01-01 2014-04-01 2014-07-01 2014-10-01
2011-04-01 2011-07-01 2011-10-01 2012-01-01 2012-04-01 2012-07-01 2012-10-01 2013-01-01 2013-04-01 2013-07-01 2013-10-01 2014-01-01 2014-04-01 2014-07-01 2014-10-01 -4 2011-01-01
(YoY%) (YoY%) 15 54
10 52
5 50
0 48
-5 46
2011-04-01 2011-07-01 2011-10-01 2012-01-01 2012-04-01 2012-07-01 2012-10-01 2013-01-01 2013-04-01 2013-07-01 2013-10-01 2014-01-01 2014-04-01 2014-07-01 2014-10-01 -10 2011-01-01 44
-15 42
-20
2012-01-31 2012-03-31 2012-05-31 2012-07-31 2012-09-30 2012-11-30 2013-01-31 2013-03-31 2013-05-31 2013-07-31 2013-09-30 2013-11-30 2014-01-31 2014-03-31 2014-05-31 2014-07-31 2014-09-30 2014-11-30
A-66 Korea University APPENDIX 12. Macro Economy - Korea
Trade Balance of Cosmetics Korea's trade balance of cosmetics products will record a surplus for the first time. As of August 2014, Korea has accumu lated the trade surplus of USD 147 mil since January. This is mainly due to the increase in exports to China, the largest im porter of cosmetics made in Korea. The magnitude of trade surplus is expected to further grow after 1) the abolition of co nsumption tax on cosmetics goods and 2) settlement of the Korea-China Free Trade Agreement.
(mil USD) 1400
1200 1000 800
600 400
200 0 2010 2011 2012 2013 2014 (Jan-Aug) -200
-400 -600
Exports Imports Trade Balance
50%
40%
30%
20%
10%
0% '11~'12 '12~'13 '13~'14 -10%
-20% China Hongkong Japan US Taiwan
''13~'14 = 13(Jan-Aug) + 14(Jan-Aug) Contribution Rate(%) = (Country Cosmetics Export Variation)/(Total Cosmetics Exports Variation)
Source: KITA
A-67 Korea University APPENDIX 13. Korean Wave
Taobao Sales Index From the observation on sales index of Taobao, two exceptional peaks with almost 10 folds increase in the index during Oct.-Nov. 2012 and Nov. 2013. This is largely attributed to the growing popularity of Korean TV dramas of 'Missing You' and 'The Innocent Man' broadcasted during the period of the first peak and 'The Heirs' for the second peak.
Laneige Laneige
Innisfree Innisfree
Mamonde Mamonde
Source: Taobao
A-68 Korea University APPENDIX 13. Korean Wave
Taobao Area Distribution With its 20 years of market penetration in China, Mamonde shows somewhat different geographical distribution of its sales from other brands of Laneige and Innisfree; Mamonde is observed to generate substantial demands from 2nd-to-3rd tier cities.
Laneige Laneige (2011-07-01 ~ 2014-10-05) (2013-11-01 ~ 2014-10-05)
Innisfree Innisfree (2011-07-01 ~ 2014-10-05) (2013-11-01 ~ 2014-10-05)
Mamonde Mamonde (2011-07-01 ~ 2014-10-05) (2013-11-01 ~ 2014-10-05)
Source: Taobao A-69 Korea University APPENDIX 13. Korean Wave
Laneige Laneige
Innisfree Innisfree
Mamonde Mamonde
Source: Taobao
A-70 Korea University APPENDIX 13. Korean Wave
GIRLS' GENERATION
Victoria (f(x))
Kim Su Hyun
LUHAN (EXO)
Source: Baidu
A-71 Korea University APPENDIX 13. Korean Wave
Where are you going, Dad (China ver.)
Running Man
Source: Baidu
'Where are you going, Dad' and 'Running Men' are being broadcasted in Chinese versions. Zhejiang Satellite TV is waitin g for the response from the public after starting to broadcast the Chinese version of a TV show called 'Running Men.'
A-72 Korea University APPENDIX 13. Korean Wave
My Lovely Girl
Man from the Star
Source: Baidu A-73 Korea University APPENDIX 13. Korean Wave
Chinese entrepreneurs have started to advertise their brands through Product Placement (PPL) in Korean TV dramas; especially, the online shopping malls are making their moves. Taobao, the largest E-commerce service provider with 80% market share, showed its presence in popular Korean dramas of 'Three Days,' and 'Doctor Stranger.' Online shopping malls of JD and Jumei advertised through PPL in 'You Are Surrounded.' The increasing frequency of PPL of Chinese firms on Korean cultural contents signals that the competition has begun.
- Doctor Stranger
- Three Days
'An Influence of the Korean Wave on the Purchasing Intention of the Korean Cosmetics in China’
According to 'An Influence of the Korean Wave on the Purchasing Intention of the Korean Cosmetics in China’ written by Jong- Sup Kim and Hong-Mei Li, Korean TV dramas have significant influence on consumption of Korean cosmetics, whereas K-POP impacts on consumers’ perception on the quality of Korean cosmetics products.
Following is the summary of this study. (Samples are 576 Chinese undergraduate and graduate students (463 women, 113 men).) First, 63.8% of female students and 42.7% of male students have used Korean cosmetics and are highly interested in Korean cosmetics. Second, Korean cosmetic proportion out of total cosmetic spending was very high. Third, the test result was proven to be fit through validity analysis . In conclusion, Korean TV dramas and K-POP have a mediating role between perception on Korean Wave and quality or buying attitude on Korean cosmetics.
A-74 Korea University APPENDIX 14. China Online Sales
Skincare
Sulwhasoo
Facial Mask pack
Lotion (Moisturizer)
Source: Taobao
A-75 Korea University APPENDIX 14. China Online Sales
Set
Sulwhasoo
Cleanser
Toner
Facial Cream
Source: Taobao
A-76 Korea University APPENDIX 14. China Online Sales
Other Bodycare
Make-up
Source: Taobao
A-77 Korea University APPENDIX 15. Company-China
Capacity
Source: Company data
A-78 Korea University APPENDIX 15. Company-Korea
Duty-free: AP’s Competitive Power
Source: Company data, Unit: # of shop Source: Company data, Unit: # of shop
Source: Company data, Unit: KRW 100 mil
A-79 Korea University APPENDIX 15. Company-Korea
Online: Direct online purchase
Source : China Online Trading Reseach Institute
Source : China Online Trading Research Institute
Source : Infodesk Source : G-Market
A-80 Korea University APPENDIX 15. AP Ownership Structure
Insider NPS Board Members Public Float (49.37%) (7.07%) (0.0025%) (43.55%)
AMORE PACIFIC
Suh Family
(66.47%)
AMORE PACIFIC Group
(71.75%) (25.83%)
Insider NPS Board Members Public Float (49.37%) (7.07%) (0.0025%) (43.55%)
AMORE PACIFIC
Source: Company data
A-81 Korea University APPENDIX 15. AP Ownership Structure
AMORE PACIFIC Group
35% AMORE PACIFIC
90% AMORE PACIFIC 70% Global Operations Pte Ltd.
AMORE PACIFIC Vietnam JSC
100% AMORE PACIFIC 100% Global Operations Ltd. (HK)
AMORE PACIFIC Europe S.A.S
AMORE PACIFIC Trading Co., Ltd.
Annick Goutal S.A.S
AMORE PACIFIC US, Inc.
AMORE PACIFIC Japan Co., Ltd.
AMORE PACIFIC Taiwan Co., Ltd.
AMORE PACIFIC Singapore PTE. Ltd.
AMORE PACIFIC Malaysia SDN. BHD
AMORE PACIFIC (Thailand) Limited
PT Laneige Indonesia Pacific
Innisfree Cosmetics India
100% AMORE PACIFIC Cosmetics (Shanghai) Co. Ltd.
100% AMORE PACIFIC (Shanghai) R & I Center Co. Ltd.
81% Etude
82% Innisfree
100% Amos Professional
65% PacificPharma
100% Pacificglas
100% Jangwon
99% PacificPackage Source: Company data A-82 Korea University APPENDIX 15. AP Ownership Structure - Affiliate Introduction
70% AMORE PACIFIC AMORE PACIFIC (Shanghai) R & I Center Co. Ltd. Global Operations Pte Ltd. AMORE PACIFIC Vietnam JSC
100% 100%
100%
100% 90% AMORE PACIFIC Europe S.A.S
AMORE PACIFIC Trading Co., Ltd. AMORE PACIFIC AMORE PACIFIC Cosmetics (Shanghai) Co. Ltd. Global Operations Ltd. (HK) Annick Goutal S.A.S
AMORE PACIFIC US, Inc.
AMORE PACIFIC Japan Co., Ltd.
AMORE PACIFIC Taiwan Co., Ltd.
AMORE PACIFIC Singapore PTE. Ltd.
AMORE PACIFIC Malaysia SDN. BHD
AMORE PACIFIC (Thailand) Limited
PT Laneige Indonesia Pacific
Innisfree Cosmetics India
Source: Company data
A-83 Korea University APPENDIX 15. AP Ownership Structure –Corporate Governance
Management Style
Source: Company data
A-84 Korea University APPENDIX 15. AP Ownership Structure –Corporate Governance
CEO Succession
Source: Company data
A-85 Korea University APPENDIX 16. AP’s Brand - Portfolio
Cosmetics Sulwhasoo Builds an unrivaled reputation with cosmetics products that embody ancient Oriental skin care therapies and modern clinical Science HERA Creates its own modern aesthetic with a trend-Setting sense and continuous research on skin primera Green communication with the customers through the development of sustainable products IOPE Promises effective solutions to a variety of skin problems with the science of skin rejuvenation LANEIGE The Science of water and light is greatly loved by young Asian women HANYUL Delliver wisdom and beauty of Oriental Medicine based on herbal medicine ingredients locally grown in Korea Mamonde Contains naturally derived ingredients that supply moisture to the skin to give a smooth, natural look VB program Includes a wide variety of conveninent menu options to suit the beautiful & healthy lifestyles Lolita Lempika A globally-popular men's fragrance for its romantic fragrances and artistic container design
MC & S Mise-en-scene Makes a trend with fashionable hair that gives you the confidence of a supermodel on the catwalk Ryoe Carefully selected herbal ingredients not only help prevent hair loss but also provide hair with a healthy sheen Happy Bath Leads the mass-consumption market with reliable products bassed on natural, organically-grown ingredients HANBANG BIO Premium Korean herbal medicinal body care brand from AMORE PACIFIC's skin science research and the traditional beauty methods Median Provides professional oral care based on customized solutions for teeth Song-yeom Improves each individual's natural ability to heal and maintains oral health with natural herbal vitality Sulloc Recognized as Korea's leading green tea brand, using clean tea cultivated on Hallasan
Source: Company data
A-86 Korea University APPENDIX 16. AP’s Brand - Portfolio
500 Estee Lauder AMORE PACIFIC
450 SK-II Prestige 400
Sulwhasoo 350 Shiseido O HUI LIRIKOS YSL Whoo 300 Helena -Rubinstein Darphin Su:m
HERA 250 Bobby Brown HANYUL
Lancome Revital LACVERT Masstige 200 IOPE Glorgio Armani Benefique ISA KNOX
150 Shu Uemrua
Lolita Lempika 100 Biotherm Origins Elixir LANEIGE Prescriptives primera Aveda 50 Kiehl's Maquillage Olay eSpoir The Face shop Clinique Innisfree Mass Smashbox Aqua Label L'Oreal Paris Aruide 0 MAC Majolica CoverGirl Maybelline Mamonde Intergate L'Oreal Estee Lauder Shiseido P&G AMORE PACIFIC LG HC
Source: Company data, team estimates
AMORE PACIFIC Brand Target Segment Target Age Price(Low)(KRW) Price(High)(KRW) AMORE PACIFIC Prestige 20~30 36000 480000 Sulwhasoo Prestige mid 30~ 30000 400000 LIRIKOS Prestige 20~30 35000 400000 HERA Prestige late 20~30 12000 250000 HANYUL Masstige mid 20~40 28000 250000 IOPE Masstige 30~40 18000 160000 Lolita Lempika Masstige 10~30 50000 95000 LANEIGE Mass 10~30 8000 65000 Mamonde Mass 20~40 6000 30000 Innisfree Mass 10~early 20 3000 42000 Atuide Mass 10~early 20 2500 31000 primera Mass 20~30 15000 45000 eSpoir Mass 20~30 8000 48000 Source: Company data
A-87 Korea University APPENDIX 16. AP’s Brand - Expansion
Europe 1997 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Lolita Lempicka France
North America 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 US Laneige Canada Mamonde Sulwhasoo US Innisfree Etude
China 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Laneige China Mamonde China Sulwhasoo China Innisfree China Etude China
Others 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Hong Kong Singapore New Zealand Vietnam Taiwan Laneige Malaysia Thailand Brunei Philippines Japan Indonesia Mamonde Hong Kong Taiwan Singapore Sulwhasoo Thailand Malaysia Vietnam Indonesia Hong Kong Innisfree India Singapore Thailand Indonesia Malaysia Vietnam Myanmar Etude Taiwan Philippines Japan Brunei Singapore Hong Kong Lolita Lempicka Source: Company data
A-88 Korea University APPENDIX 16. AP’s Brand - Expansion Innisfree
A-89 Korea University APPENDIX 16. AP’s Brand - Expansion Etude
Source: Company data, team estimates
Sulwhasoo
Source: Company data, team estimates
A-90 Korea University APPENDIX 17. Corporate Social Responsibility
AMORE PACIFIC(AP) conducts employees’ sharing activities through which the employees experience and disseminate the value of sharing and exert a positive influence on the society. In 2013, about 3,500 employees took part in the social contribution programs while donating manufactured personal care, makeup and green tea products to over 1,000 facilities. AMORE PACIFIC Foundation The AMORE PACIFIC Foundation supports comprehensive researches integrating science, arts, everyday life and academics based on the keywords of ‘Beauty of Asia’ and ‘Women and Culture.’ It publishes ‘Women and Culture’ and conducts a refinement lecture program called, ‘Mi (Beauty)’ through which the outcomes of its activities are presented. AP is also contributing to the discovery of researchers by promoting an outstanding research environment. Moreover, it is supporting 16 research projects including the long-term projects such as the ‘Study of Historical Records on Korean Women’s Lifestyle,’ ‘Study of Literature on Tea,’ and Korea’s first ‘Primate Research Project.’ AMORE PACIFIC Welfare Foundation The AMORE PACIFIC Welfare Foundation promotes the welfare of women in the low-income class; in 2013, it implemented a project to improve the quality of public facilities for the less well-off women. Moreover, in order to promote cultural diversity, it supports the cultural contents development project of 19 communities with high a ratio of foreign population. ‘Makeup your life’ Campaign ‘Makeup your life’ campaign, in its 7th year, gives back to the patients, who have undergone abrupt changes in appearance such as skin damage and hair loss during the process of treating cancer, by passing on the styling know-hows such as make-up, skin care and hair- choreography. Through these special interactions, AP hopes to aid the patients to recover from the emotional sufferings, and to maintain a positive attitude. AP’s beauty counselors and instructors participate in the campaign with their roles of ‘Beauty Missionaries’. Until 2013, around 2000 counselors have participated as volunteers, passing on know-hows to over 8000 female patients. This campaign is held in local hospitals of major cities. All female patients within 2 years of cancer-related surgery may participate in this program, through which they not only learn know-hows, but also receive different bags, books, brochures and make-up products. In 2011, AP decided to expand its ‘Makeup your life’ campaign overseas to China. This campaign has been held in major institutions and hospitals including the Fudan University Hospital in Shanghai. AP is currently increasing the frequency and the beneficiaries of the campaign. ‘Pink Ribbon Campaign’ Pink Ribbon Campaign is a campaign that aims to enhance people’s awareness of breast health. AP established Korea Breast Cancer Foundation (KBCF), which is Korea’s first NGO that focuses on breast cancer in 2000, through which they are expanding the Pink Ribbon Campaign. This campaign involves various activities under the theme of breast health, to inform the value of healthy lifestyle and to promote public interest. In 2001 AP started the ‘Pink Ribbon Marathon of Love’ to provide useful information and to emphasize the importance of early screening. AP has so far donated 2.6 bn. KRW to KBCF and financially supported both patients and researchers. Heemang Store ‘Heemang Store’ is AP’s unique campaign which focuses on supporting start-ups of single-mother families by aiding them to open sustainable businesses of restaurants, hair salons, private taxi, cafeteria, car wash, natural soaps and etc. As of 2013, over 200 Heemang Stores have opened. Heemang Store operates through the usage of ‘the Beautiful World Fund’, which was established with the donation of Sung-hwan, Suh, the founder of AMORE PACIFIC Group. Single-parent families with low incomes receive AP’s support without collaterals nor guarantees. This enables many single parents to ensure economic stability, improvement of child relationship, and bettering of individual capability. Greencycle Greencycle Campaign is AP’s representative pro-environment campaign. This campaign lays its basis on the ‘retrieval of empty container event’ promoted by Innisfree in 2009. After receiving warm welcome from its customers, this campaign was expanded to all AP shops within Korea including Aritaum, hypermarkets, department stores and Etude house. Through the campaign, each store offers 500 AMORE PACIFIC membership points (300 points for Etude) for returning an empty container. As its result AP has retrieved 431 tons of empty containers, saving 456 tons of CO2. M-Garden Campaign Through the M-Garden Campaign hosted by Mamonde, AP aims to provide emotional support to the marginalized classes with flowers. Together with the Shanghai Jiu-qian Volunteer Center, an NGO located in Shanghai, AP provides art education to the children of migrant workers and creates a mini flower garden for them. The Beautiful Dream Campaign The Beautiful Dream Campaign involves giving lectures to female college students in China as part of the effort to instill hope among the young adults, who are disheartened by the growing youth unemployment rate.
A-91 Korea University APPENDIX 18. Competitive Analysis - DuPont
Tax Interest Asset OPM Leverage Burden Burden Turnover ROE NI/EBT EBT/EBIT EBIT/Sales Sales/Asset Asset/Equity 2006 69% 100% 10% 67% 148% 7% 2007 72% 105% 16% 109% 140% 19% 2008 67% 103% 15% 109% 138% 15% 2009 75% 97% 16% 111% 135% 17% 2010 79% 100% 16% 92% 133% 15% 2011 76% 115% 15% 91% 132% 15% 2012 74% 99% 13% 94% 129% 11% 2013 74% 98% 12% 91% 132% 10% 2014F 74% 99% 14% 97% 130% 13% 2015F 74% 99% 14% 96% 131% 13% 2016F 74% 99% 15% 96% 130% 14% 2017F 74% 99% 15% 95% 130% 14% 2018F 74% 99% 16% 93% 130% 14% 2019F 74% 100% 16% 91% 129% 14% 2020F 73% 100% 16% 89% 129% 14%
Tax Interest Asset OPM Leverage LG H&H Burden Burden Turnover ROE NI/EBT EBT/EBIT EBIT/Sales Sales/Asset Asset/Equity 2010 72% 92% 12% 145% 230% 27% 2011 71% 101% 10% 146% 223% 24% 2012 71% 96% 11% 141% 217% 24% 2013 75% 96% 11% 126% 233% 24% Tax Interest Asset OPM Leverage L'Oreal Burden Burden Turnover ROE NI/EBT EBT/EBIT EBIT/Sales Sales/Asset Asset/Equity 2010 71% 103% 16% 81% 162% 15% 2011 70% 105% 16% 75% 152% 14% 2012 74% 105% 16% 76% 141% 14% 2013 74% 104% 17% 73% 138% 13% Tax Interest Asset OPM Leverage P&G Burden Burden Turnover ROE NI/EBT EBT/EBIT EBIT/Sales Sales/Asset Asset/Equity 2010 79% 97% 19% 59% 203% 17% 2011 86% 86% 18% 62% 207% 17% 2012 77% 94% 19% 59% 203% 16% 2013 78% 93% 19% 58% 206% 17% Tax Interest Asset OPM Leverage Shiseido Burden Burden Turnover ROE NI/EBT EBT/EBIT EBIT/Sales Sales/Asset Asset/Equity 2010 45% 65% 7% 91% 230% 4% 2011 37% 100% 6% 95% 237% 5% 2012 228% -25% 4% 95% 236% -5% 2013 52% 102% 7% 95% 223% 7% Tax Interest Asset Estee OPM Leverage Burden Burden Turnover ROE Lauder NI/EBT EBT/EBIT EBIT/Sales Sales/Asset Asset/Equity 2010 68% 87% 13% 140% 237% 26% 2011 68% 90% 14% 147% 240% 31% 2012 69% 95% 15% 142% 216% 31% 2013 68% 97% 17% 139% 203% 31% Source: Bloomberg
A-92 Korea University APPENDIX 18. Competitive Analysis - OCF & Liquidity Analysis
P&G Shiseido Estee Lauder
18,000.0 R² = 0.319 90.0 1,800.0 16,000.0 80.0 R² = 0.2543 1,600.0 14,000.0 70.0 1,400.0 R² = 0.8911 12,000.0 60.0 1,200.0 10,000.0 50.0 1,000.0 8,000.0 40.0 800.0 6,000.0 30.0 600.0 4,000.0 20.0 400.0 2,000.0 10.0 200.0 0.0 0.0 0.0 76,000.078,000.080,000.082,000.084,000.086,000.0 600.0 650.0 700.0 750.0 800.0 0.0 5,000.0 10,000.0 15,000.0
2007 2008 2009 2010 2011 2012 2013 CCC 25 35 20 10 11 18 22 Receivable Turnover Period 29 27 27 24 22 21 22 Inventory Turnover Period 103 113 113 96 102 106 110 Trade Payable Turnover Period 107 106 120 110 113 110 110 Cash and Cash Equivalent 114161.4 154387.5 219782.2 159142.0 187708.1 170707.3 294011.5 Interest Coverage 133 109 124 166 194 172 139 Current Ratio 2.18 2.08 2.25 1.96 1.77 1.93 1.78 Quick Ratio 1.57 1.40 1.68 1.41 1.24 1.29 1.26
Estee Amore LG Care L'Oreal P&G Shiseido Lauder CCC 22.17 39.68 -17.05 12.84 138.17 160.98 Receivable Turnover Period 21.96 11.08 51.50 28.33 60.84 42.44 Inventory Turnover Period 110.12 61.46 116.28 59.30 168.29 203.62 Trade Payable Turnover Period 109.91 32.86 184.83 74.79 90.97 85.09 Cash and Cash Equivalent(USD mil) 275.70 134.40 3,332.80 8,558.00 1,021.20 1,629.10 Interest Coverage 138.81 13.29 133.01 5.05 28.76 35.92 Current Ratio 1.78 0.99 1.42 0.94 1.61 2.35 Quick Ratio 1.26 0.61 1.09 0.74 1.25 1.72
Source: Bloomberg
A-93 Korea University APPENDIX 18. Competitive Analysis – 5 Forces Model
Threat of New Entrants 5 4 3 LEGEND Threat of 2 Bargaining Substitutes 1 Power of… 0 No threat to the business 0 1 Insignificant threat to the business 2 Low threat to the business 3 Moderate threat to the business Bargaining Competition in 4 Significant threat to the business Power of Buyers the Industry 5 High threat to the business
KOR CHN
Threat of New Entrants - Domestic| Low threat to the business Considering the oligopolistic market structure that focuses on AMOREPACIFIC & LG Healthcare, together with the decreasing trend of Imported Cosmetics within the domestic market, new entrants pose little threat to AP. Threat of New Entrants - China| Moderate threat to the business The Chinese cosmetics market is currently at a growth stage, and although there are many factors leaving room for new entrants, it is undergoing restructuring focusing on leading companies. As China’s regulations ease, the threat of new entrants will increase. However, considering the characteristic of the cosmetics market which requires brand recognition and marketing costs, new entrants threatening AP’s ‘Asian Beauty’ is unlikely.
Bargaining Power of Suppliers| Insignificant threat to the business AP has a stable supply of raw materials through many affiliates within the group. Amore's raw material cost volatility is low, and its rate of cost to sales is showing a decreasing trend. Also, with the operation of China's Shanghai plant, China's OEM concentration has been diversified. Therefore, leading to a low bargaining power of suppliers.
Competitive Rivalry within the industry - Domestic| Insignificant threat to the business AP's M/S is the largest within the domestic market. Even with the transition of channels and intensifying competition per channel, AP is managing to maintain its leading M/S. For example, one brand shops channel, where Innisfree entered the market as a second-mover. Even as a second mover, Innisfree managed to reach second place in the market. Competitive Rivalry within the industry - China| Moderate threat to the business As for the Chinese Market, the competition is intensifying between global companies such as Loreal, P&G and China's local companies. Its is positive that AP's M/S is also showing a growing trend. Also, an Asian company, Shiseido, which operates in the similar niche market, is losing competence with the fear of Japanese radiation and anti-Japanese sentiments. This creates increased growth potential for Amore, which can further grow with the utilization of Korean Wave and trendy products.
Bargaining Power of Customers - Domestic| Insignificant threat to the business AP is maintaining its oligopoly within the domestic market, providing variety of products to a variety of customers through multiple brands. Even as the market competition intensifies, AP’s brand recognition enables its market power. Bargaining Power of Customers - China| Insignificant threat to the business China’s consumers are growing increasingly fond of Korean cosmetics products. With the help of the Korean Wave and trendy ‘Asian-Beauty’ products, AP’s market share is growing fast.
Threat of Substitute Products| Insignificant threat to the business Medical Procedures, Plastic Surgeries may be a substitute. However, compared to cosmetics, which is a consumption good, cost burden is higher, demand is lower, and higher entry barriers exist.
A-94 Korea University APPENDIX 18. Competitive Analysis - SWOT
Strength - Domestic High M/S: AP is the no. 1 cosmetics company in Korea. This enables them to maintain their market control and achieve economies of scale Vertical structuring: AP applies vertical structuring. With backward integration and creating synergy effect with its affiliates, AP can reduce costs and operate more efficiently Owner Leadership: The strong CEO leadership and company control allows his pioneering of the cosmetics industry and makes the decision-making process more efficient Steady R&D: With focus on R&D, AP is able to develop innovative hit-products on a regular basis Strength - China Shanghai Plant: Completion of the China Shanghai Plant secures steady supply channel Financial capability: The solid financial position of the holding company that operates at no-debt, allows for raising of investment capital overseas R&D Center: With a R&D Center stationed in Shanghai, it allows for successful localization
Weakness - Domestic Door-to-door: AP is showing opposing reaction to the reducing door-to-door market. Whereas AP is reducing salespeople, LG HealthCare is increasing them. Which may further decrease AP’s door-to-door sales Weakness - China Inefficient advertisement: AP is inefficiently marketing their products by utilizing leaflets, a marketing channel that is ineffective and costly. Mismanaged marketing skills are leading to unrealized profits Decline in profitability: Due to aggressive overseas investment, AP is likely to be less profitable in the short term until the investment is realized
Opportunity - Domestic Brand recognition: Korea's no.1 Cosmetics company Online market: Growth travel-retail shops Duty-Free shop: The duty-free shop market is growing with expansion into foreign airports. It is also being boosted by the increase in both inbound and outbound tourists China: Sales of duty-free shops are boosted by the increasing tourists who choose to visit China. Together with high inclination to purchase cosmetics products, AP’s sales may have much more growth potential. Opportunity - China Korean Wave: The value of Korean Wave and the popularity of Korean celebrities and their commercials allow marketing of AP with increased recognition and popularity 2,3 tier cities: Global competitors are showing low market share in 2,3 tier cities where much growth potential lies. This enables AP to exploit the markets in the 2,3 tier cities Chinese market: Chinese cosmetics market is growing at a great speed with the economic development and increased wealth. Their market growth far exceeds other developed markets where cosmetics market has matured Shiseido: Radiation in Japan is negatively impacting the image of Shiseido
Threat - Domestic Door-to-door channel: The transition of channels within the Korean cosmetics market means a reverse growth of the door-to-door channel. This provides a threat because door-to-door used to be the biggest profit generating segment of domestic sales Threat - China Local Companies: The local companies are making rapid growths in China. With the intensifying competition, AP has to compete with other ‘Asian’ companies in the cosmetics market
A-95 Korea University APPENDIX 18. Competitive Analysis - VRIO
Is it Is it Is it hard Is the firm organized Result Valuable? Rare? to imitate? around it?
NO Competitive Disadvantage
YES NO Competitive Equality
Short term Competitive YES YES NO Advantage
Unused Competitive YES YES YES NO Advantage
Long-term Competitive YES YES YES YES Advantage
A-96 Korea University APPENDIX 19. Recent Revision of Regulations
In general, the government’s regulatory standards that limit AP’s have been easing.
*If 1st Visit to OECD country: Validity 1yr, Length of Stay 30days If 2nd Visit to OECD country: Validity 3yr, Length of Stay 30days Source: Immigration Office
Article Notes Subject - Chinese Group tourists who seek to visit partial tour-available regions within 120hrs on condition of Jeju Island Visit Conditions - In case of Jeju group transit passengers, the transit participating Travel Agency and the primary Chinese Travel Agency (China Embassy Group Visa Application Agency) must host the visit, and must own domestic air ticket / passage ticket within the next 120hrs Transit available Airports - 6 Airports including Incheon, Kimhae, Chungju, Yangyang, Muan, Daegu Modifications - 15th Sep, 2014 Daegu International Airport was added as a transit available airport Visit time was increased from 72hrs to 120hrs
Source: Immigration Office
A-97 Korea University APPENDIX 19. Recent Revision of Regulations
Before Modification After Modification Modification Year 1) Doctors, Lawyers, Accountants and other professions - - that require a national authorized qualification 2) College (includes community college) Instructor or higher - - level faculty and elementary / middle / high school teachers 3) Famous artisans, celebrities and athletes acknowledged - - by the Chief 4) One who has visited Korea as a group guide, without - People who have 2 or more inbound visits as a group 2012 committing crime such as illegal alien activities travel guide within the last year as of the application date (* Indicates only the guide affiliated to the travel agency that specializes in guiding only, and not one who is affiliated to the Group travel designated Agency)
5) Person with a history of visiting Korea or other OECD - People who have 2 or more visit records within 1 year, 2012 countries without committing crime such as illegal alien and one who has received invitation from a special activities institution (Casino Association, Travel Agency, etc.) as (Non-Visa Visit to Jeju and Group Tourisms are not best customer included in the calculation) - People with permanent residency within the OECE countries or who has visited over 2 OECD countries (excluding Korea) within the last 2 years - People who have visited Korea over 4 times within the last 2 years, or who has visited Korea over 5 times overall 6) Person with a history of visiting Korea via Medical Newly Added 2012 Treatment without committing crime such as illegal alien activities 7) Person who has proven his personal wealth of real Newly Added 2012 estate, financial asset, or company worth over 5 mil. yuan 8) Chinese government or public enterprise employee Newly Added 2012
9) Executive of companies with over 1 mil USD (1bn. KRW) Newly Added 2012 investment 10) Executives and staff of periodic airlines or passenger - - ships 11) Customers with premium card levels among commonly - - used credit cards 12) People who earn over 5,000 yuan a month (60,000 - - yuan annual) 13) Person aged 55 or above who receive pension after - People aged over 60, who receive pension after 2012 retirement retirement 14) Student or graduate of ‘211 Project’ Universities - Graduate of ‘211 Project’ Universities 2013 112 Government listed excelling universities 112 Government listed excelling universities 15) Person who works as a Chief or have served for over 6 - - months in China’s top 500 company announced by China Company Alliance
16) Purchaser of Korea-based condominium membership Newly Added 2013 (over 30 mil. KRW) 17) Spouse, minor, parent, spouse’s parent of a valid short- Newly Added 2013 term visiting visa owner 18) Beijing, Shanghai based civilians → Economical Newly Added 2013 Passport 19) Person who serves as a Managerial level or higher, or Newly Added 2013 one who has worked for over 2 years as a regular employee in a private company which trades over 30,000 USD annually
Source: Immigration Office, Ministry of Justice
A-98 Korea University APPENDIX 20. Risk Matrix
Korea-bound Tourists
HIGH (MR2)
China Slowdown (MR1)
Currency Risk
(MR3)
Impact MEDIUM
Door-to-door Channels (OR2)
Subsidiaries’ Taxation on China’s Profit Loss Reserve Restriction
LOW (OR1) (RR1) (RR2)
LOW MEDIUM HIGH Probability
A-99 Korea University
APPENDIX 20. Risk Matrix – Brand Risk Although AP is doing well and are expected to continue to do well in the future, their brands do not have equal weightings of importance, and thus the question could be, “what is the sensitivity” of each brand. To answer the question, the risks were analyzed per brand.
Stress Test Matrix Etude Sales Decrease 20% 10% 0% -10% -20% Upside Potential 46.76% 41.35% 35.14% 29.93% 25.64% Target 3,258,000 3,138,000 3,000,000 2,884,000 2,789,000 Laneige Innisfree Price Amore Pacific
Mamonde Sulwhasoo
ETUDE
Stress Test Matrix Sales 20% 10% 0% -10% -20% Decrease Upside Etude 28.1% 30.0% 26.2% 24.3% 22.4% Potential Target 2,943,000 2,987,000 2,900,000 2,856,000 2,813,000 Price
Laneige Innisfree Amore Pacific Stress Test Less than expected Etude Sales -100% Base 22% 26% Mamonde Sulwhasoo Still BUY BUY KRW 2,813,000 KRW 2,900,000
A-100 Korea University
APPENDIX 20. Risk Matrix – Brand Risk Innisfree
Stress Test Matrix Sales 20% 10% 0% -10% -20% Decrease Upside Etude 50.3% 37.8% 26.2% 15.6% 5.9% Potential Target 3,454,000 3,166,000 2,900,000 2,655,000 2,432,000 Price
Laneige Innisfree Amore Pacific Stress Test Less than expected Innisfree Sales -20% Base 6% 26% Mamonde Sulwhasoo HOLD BUY KRW 2,432,000 KRW 2,900,000
Sulwhasoo
Stress Test Matrix Sales 20% 10% 0% -10% -20% Decrease Upside Etude 32.1% 28.9% 26.2% 23.8% 21.9% Potential Target 3,035,000 2,962,000 2,900,000 2,846,000 2,800,000 Price
Laneige Innisfree Amore Pacific Stress Test Less than expected Sulwhasoo Sales -20% Base 22% 26% Mamonde Sulwhasoo Still BUY BUY KRW 2,800,000 KRW 2,900,000
A-101 Korea University
APPENDIX 20. Risk Matrix – Brand Risk Mamonde
Stress Test Matrix Sales 20% 10% 0% -10% -20% Decrease Upside Etude 35.7% 31.4% 26.2% 21.7% 19.4% Potential Target 3,119,000 3,019,000 2,900,000 2,797,000 2,745,000 Price
Laneige Innisfree Amore Pacific Stress Test
Less than expected-20% Mamonde SalesBase 19% 26% Mamonde Sulwhasoo Still BUY BUY KRW 2,745,000 KRW 2,900,000
Laneige
Stress Test Matrix Sales 20% 10% 0% -10% -20% Decrease Upside Etude 41.0% 33.0% 26.2% 20.4% 15.6% Potential Target 3,239,000 3,056,000 2,900,000 2,768,000 2,656,000 Price
Laneige Innisfree Amore Pacific Stress Test Less than expected Laneige Sales -20% Base 16% 26% Mamonde Sulwhasoo Still BUY BUY KRW 2,432,000 KRW 2,900,000
A-102 Korea University APPENDIX 21. AP Key Management Personnel
Board of Directors
Director Position Held Since Responsibility / Work Experience
• Yonsei University Business Graduate School • Cornell University Business Graduate School Suh, Kyung-bae President Mar 23, 2012 • Pacific Co. Head of Planning & Coordination Department • Pacific Co. President • AMORE PACIFIC President • Korea University Industrial Engineering, BS • Korea University Business Graduate School (completed) Shim, Sang-bae Chairman Mar 23, 2012 • Pacific Co. Project Support Executive Director • AMORE PACIFIC Product Flow Deputy-Chairman • AMORE PACIFIC Chairman • Kookmin University Business School • Pacific Co. Finance & Economics Department Executive Director Bae, Dong-hyun Deputy-Chairman Mar 23, 2012 • AMORE PACIFIC Planning Finance & Economics Department, Vice-President • AMORE PACIFIC Deputy-Chairman • Seoul National University Business School, BA, Masters • University of Pennsylvania Wharton School, Ph.D • Seoul National University Business School Assistant Dean Song, Jae-yong Outside Director Mar 23, 2013 • Columbia University Business Graduate School Professor • Yonsei University Business School Professor • KASBA/ KSOSM Vice-Chairman • Seoul National University Business (Graduate) School Professor • Seoul National University Business School, BA, Masters • KAIST Management Science, Masters • KAIST Management Policy, Ph.D Lee, Eon-oh Outside Director Mar 23, 2013 • KDI Researcher • NIS Intelligence Manager • SERI Public Policy Department Executive Director • BDI Director • Seoul National University Civil Engineering, BS • Illinois University Environmental Engineering Masters, Ph.D • P&G Asia-Pacific Environmental General Manager / Namkung, Eun Outside Director Mar 23, 2013 R&D Deputy- Director • ME Head of Water Treatment Advancement Office • Myungji University Energy & Environment Engineering Professor • Seoul National University Business School, BA • UCLA Business School Ph.D • Case Western Reserve University Business School, Assistant Professor Kim, Seong-su Outside Director Mar 21, 2014 • KMICS Chairman • KHRM, KLERA Director • Seoul National University Business School Professor
Source: Company data
A-103 Korea University APPENDIX 21. AP Key Management Personnel
Director Position Held Since Responsibility / Work Experience • Sungkyungkwan University Sociology School, BA • Sungkyungkwan University Business School Masters • AMORE PACIFIC Innovation Operation Division, in charge Ryu, Jae-chun Deputy Chairman Nov 06, 1981 • AMORE PACIFIC HR General Managing Director • China Office, Deputy Chairman • AMORE PACIFIC New Business BU Deputy Chairman • AMORE PACIFIC Luxury BU Deputy Chairman • Kyungpook University Food Engineering School, BS • Espoir CEO Managing Director Lee, Min-jeon Deputy Chairman Dec 22, 1984 • Etude CEO Managing Director • AMORE PACIFIC Marketing Department Deputy Chairman • AMORE PACIFIC Premium BU Deputy Chairman • NSEAD MBA, BA Chae, Yang-sun Deputy Chairman Feb 10, 2014 • AMORE PACIFIC Marketing Strategy Unit Deputy Chairman • Dongkuk University, BA Kang, Byung-do Executive Director Dec 22, 1983 • AMORE PACIFIC SCM Unit Head • Dongkuk University Industrial Management School, BS Lee, Suk-woo Managing Director Mar 30,1983 • AMORE PACIFIC International Japan Office, in Charge • AMORE PACIFIC Japan Corporation Managing Director • Kyungki University Accounting School, BA Kim, Seong-su Managing Director Jan 01, 1988 • AMORE PACIFIC China RHQ Managing Director • Seoul National University Industrialization School, BS • Ajou University Industrialization School Masters Han, Sang-hoon Executive Director Jan 01, 1988 • AMORE PACIFIC Customer Management Team Leader • AMORE PACIFIC Research Management Division Head • Chosun University Mechanical Engineering School, BS • AMORE PACIFIC Mass Beauty Operating Plant Manager Kim, Jae-sung Managing Director Jan 01, 1988 • AMORE PACIFIC Mass Cosmetics Operating Plant Manager • AMORE PACIFIC Beauty Operations SCM Head • AMORE PACIFIC Production Division Managing Director • Chungbuk University Accounting School, BA Kim, Yoon-hwan Managing Director Jul 01, 1988 • AMORE PACIFIC Procurement Support Division Managing Director • Chungbuk University Business School, BA • Pacific Co. MB&S Seoul Operating Division Head Kim, Chan-hwei Executive Director Jul 01, 1988 • AMORE PACIFIC MC&S Distribution Operating Division Head • AMORE PACIFIC Mass BU Executive Director • Woosuk University Newspaper Broadcasting (Media) School, BA Park, Sun-yong Managing Director Jan 01, 1989 • AMORE PACIFIC O'Sulloc Division Managing Director • Gyeongsang University Agrichemical School, BS Jeon, Ho-soo Managing Director Jan 01, 1989 • AMORE PACIFIC Aritaum Division Managing Director
Kim, Yong-nam Managing Director Apr 19, 1989 • AMORE PACIFIC Lirikos Division Managing Director
• Ajou University Industrial Engineering School, BS Baik, Joo-sang Managing Director Nov 01, 1990 • AMORE PACIFIC Mass Cosmetics Production Division Managing Director • University of Seoul Industrial Chemistry School, BS Kim, Sung-ho Managing Director Mar 01, 1991 • AMORE PACIFIC Logistics Division Managing Director • Mokwon University Physics School, BA Lim, Won-kil Managing Director Jul 01, 1991 • AMORE PACIFIC Development & Purchase Division Managing Director • Kwandong University Environmental Engineering School, BS Roh, Sang-chul Managing Director Jan 01, 1992 • AMORE PACIFIC Department Store Division Managing Director • Yonsei University, BA Baik, Suk-yoon Managing Director Mar 01, 1992 • AMORE PACIFIC Happy Bath & Median Division Managing Director Source: Company data A-104 Korea University APPENDIX 21. AP Key Management Personnel
Director Position Held Since Responsibility / Work Experience • Hankuk University of Foreign Studies Revised Romanization School, BA Kim, Young-soo Managing Director Sep 16, 1992 • AMORE PACIFIC International India Office in charge • AMORE PACIFIC ASEAN RHQ Managing Director • Inha University, BA Kim, Dae-ho Managing Director Dec 08, 1992 • AMORE PACIFIC HR Division Managing Director • Seowon University Geographic Education School, BA Jeon, Jin-soo Managing Director Dec 08, 1992 • AMORE PACIFIC Sulwhasoo Division Managing Director • Chungnam National University Industrial Chemistry School, BS • AMORE PACIFIC MassBeauty CM Team Leader Lim, Hye-young Managing Director Dec 08, 1992 • AMORE PACIFIC MC&S CM Department Head • AMORE PACIFIC Ryo & Mijangsen Division Managing Director • Konkuk University Law School, BA Shim, Jae-wan Managing Director Jul 22, 1993 • AMORE PACIFIC New Growth BU Managing Director • Hongik University, BA Choi, Myung-jong Managing Director Jan 01,1994 • AMORE PACIFIC Door-to-Door Busan Division Managing Director • Kyungpook University Agricultural Economics School, BA Lee, Woo-dong Managing Director Jan 01,1994 • AMORE PACIFIC Advertisement Division Managing Director • AMORE PACIFIC Door-to-Door Seoul Division Managing Director • Dankook University Japanese Language & Literature School, BA Kwon, Keom-joo Managing Director Jan 01,1994 • AMORE PACIFIC Laneige Division Managing Director • Busan University of Foreign Studies Business School, BA Han, Jae-shin Managing Director Apr 13, 1994 • AMORE PACIFIC Logistics Division Managing Director • Sungkyungkwan University Industrial Chemistry School, BS Choi, Young-jin Managing Director Jul 26, 1994 • AMORE PACIFIC Make-Up Research Division Managing Director • Kwangwoon University Industrial Chemistry School, BS Kim, Jin-ho Managing Director Jul 26, 1994 • AMORE PACIFIC IOPE&Han-yul Division Managing Director • Inha University, BA Lee, Jon-hwan Managing Director Jan 01, 1995 • AMORE PACIFIC Dermatology Research Division Managing Director • Chungnam National University Food Engineering, BS Sung, Joong-yong Managing Director Jan 01, 1995 • AMORE PACIFIC GIANT TF Managing Director • Seoul National University Industrial Chemistry School, BS Kang, Byung-yong Managing Director Jan 01, 1995 • AMORE PACIFIC Skin-care Research Division Managing Director • Chosun University Economics School, BA Roh, Min-soo Managing Director Jan 01, 1996 • AMORE PACIFIC Door-to-Door Gwang-ju Division Managing Director • Seoul National University Pharmaceutics School, BS Park, Young-ho Managing Director Mar 01, 1996 • AMORE PACIFIC Medical Beauty Research Division Managing Director • Sungkyungkwan University, BA Choi, Suk Managing Director Sep 04, 1996 • AMORE PACIFIC SCM Support Division Managing Director • Soongsil University, BA Gong, Moon-kun Managing Director Jan 01, 1997 • AMORE PACIFIC Door-to-Door Daegu Division Managing Director • Kangnam University, BA Lee, Young-woon Managing Director Sep 01, 1997 • AMORE PACIFIC Agent Division Managing Director • Korea University, BA Na, Jeong-kyun Managing Director May 01, 1998 • AMORE PACIFIC Travel Retail Division Managing Director • Chungang University Advertising Creation School, BA Jung, Hye-jin Managing Director Jan 01, 1999 • AMORE PACIFIC HERA Division Managing Director • Dongkuk University, BA Kim, Nam-yong Managing Director Nov 01, 1993 • AMORE PACIFIC MART Division Managing Director • Konkuk University, BA Lee, Sang-joon Managing Director Oct 01, 1999 • AMORE PACIFIC Beauty Food Research Division Managing Director • Seoul National University, BA Lee, Tae-ryong Managing Director Nov 01, 1999 • AMORE PACIFIC Bio-Science Research Division Managing Director Source: Company data A-105 Korea University APPENDIX 21. AP Key Management Personnel
Director Position Held Since Responsibility / Work Experience Managing • Chungnam National University Law School, BA Kang, Kwang-hee May 04, 1996 Director • AMORE PACIFIC Office Construction Division Managing Director Managing • Dankook University Administrative School, BA Kwon, Oh-keun Jul 01, 1996 Director • AMORE PACIFIC Door-to-Door Dae-jeon Division Managing Director Managing • Yonsei University Business School, BA Lee, Sang-mok Jul 01, 2003 Director • AMORE PACIFIC Finance & Economy Division Managing Director • Kyungpook University Electronic Engineering School, BS • KAIST Computation Engineering Masters Managing Kim, Jin-woo Apr 10, 2007 • IBM GBS Head Director • Microsoft KOREA Managing Director • AMORE PACIFIC Information TechnologyDivision Managing Director • Sookmyung Women's University French Language & Literature School, Managing BA Lee, Eun-im Feb 15, 2010 Director • Hansung University Beautician School Masters • AMORE PACIFIC Make-Up Division Managing Director Managing • Hongik University Graduate School Art History School, BA Jeon, Sung-chang Jul 01, 2012 Director • AMORE PACIFIC Art Museum Managing Director Managing • ENSAD Furniture Design School, BA Oh, Jun-sik Jan 01, 2013 Director • AMORE PACIFIC Brand & Design Lab Managing Director
Director Position Held Since Adjunct Responsibilities / Position • AMORE PACIFIC Group / President Suh, Kyung-bae President Mar 23, 2012 • Etude / Director • Innisfree / Director
Han, Sang-hoon Executive Director Jan 01, 1988 • Pacific Pharmaceutics / Director
Kim, Chan-hwei Executive Director Jul 01, 1988 • Amos Professional / Director
Kang, Byung-do Executive Director Dec 22, 1983 • Cos-vision / Director
Source: Company data
A-106
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