June 10, 2011 Company Report Shinsegae (004170 KS) Retail Department stores experiencing a boom Mina Kim +822-768-4163 [email protected] Initiate coverage with Buy and TP of W386,000 following the company split Alison Jung We initiate our coverage on the post-split Shinsegae with a Buy call and a target +822-768-4173 price of W386,000 (Shinsegae was split into Shinsegae (department store [email protected] operations) and Emart (discount store operations) on May 1, 2011). Using a sum-of- the-parts methodology, we derived the value of ShinsegaeÊs operations (W305,170/sh) by applying a P/E of 15x to our 2011F EPS. We arrived at the companyÊs equity-stakes value (W80,665/sh) by adding the value of Samsung Life Insurance shares (W48,650/sh; based on the June 9th closing price of W92,700) to the value of its Shinsegae International shares (W32,000/sh; based on a fair P/E of 10x). As of now, Shinsegae has no plan to sell its Samsung Life Insurance shares. Buy (Relisting) In the near term, Shinsegae seems preferable to Emart Target Price (12M, W) 386,000 Share Price (06/09/11, W) 270,000 Following the company split, we believe that Shinsegae shares are preferable to Expected Return (%) 43.0 Emart shares, as ShinsegaeÊs department store operations are projected to stay EPS Growth (11F, %) -28.7 brisk in light of favorable economic indicators, consumer spending patterns, and the Market EPS Growth (11F, %) 24.9 companyÊs growth strategies. P/E (11F, x) 13.3 Market P/E (11F, x) 10.5 1) Economic indicators and consumption patterns appear favorable to the KOSPI 2,071.42 department store business. Shinsegae achieved same-store sales growth of 10% Market Cap (Wbn) 2,658 YoY in 1Q11. This growth rate is projected to stay at around 10% in 2H11. 2) Shares Outstanding (mn) 10 Shinsegae plans to fuel its top-line growth by expanding the floor sizes of its existing Avg Trading Volume (60D, '000) 65 stores and opening new stores. 3) Shinsegae is likely to advance into new business Avg Trading Value (60D, Wbn) 17 areas (in addition to its department store operations) in order to secure new growth Dividend Yield (11F, %) 0.9 Free Float (%) 61.2 engines. The company is aiming to enhance its online shopping mall operations 52-Week Low 241,500 (Shinsegae Mall) in response to consumersÊ growing pursuit of convenience, as well 52-Week High 628,000 establish detailed plans for fashion specialty stores and premium food offerings. Beta (12M, Daily Rate of Return) 0.6 Price Return Volatility (12M Daily,%,SD) 1.7 Long-term momentum to stem from the success of new businesses Foreign Ownership (%) 12.9 Although Shinsegae appears attractive in the short term, we believe that its long- Major Shareholder(s): Aberdeen Asset Mngt Asia et al (38.79%) term momentum will come from the success of its new businesses. Currently, the M.H. Lee et al. (27.13%) companyÊs department store business is being driven by favorable market factors, OppenheimerFunds, Inc.(OFI) (23.15%) such as solid consumer spending and higher asset value. However, it should be Price Performance noted that it is usually difficult for department store companies to swiftly adapt to (%) 1M 6M 12M changes in the market environment and consumer whims. Given that Shinsegae has Absolute 0.0 -6.4 8.7 no plans to expand abroad, the company should look for opportunities in the Relative 3.2 -10.6 -17.1 domestic market. Share price § Earnings & Valuation Metrics 140 KOSPI OP EV/ Sales OP NP EPS EBITDA FCF ROE P/E P/B FY Margin EBITDA 120 (Wbn) (Wbn) (Wbn) (W) (Wbn) (Wbn) (%) (x) (x) (%) (x) 100 12/09 10,002 919 9.2 568 15,059 1,226 121 13.7 17.8 2.3 11.4 80 12/10 11,025 994 9.0 1,077 28,548 1,331 -66 18.4 10.8 1.6 11.1 12/11F 1,653 263 15.9 200 20,345 327 328 4.3 13.3 1.3 34.6 60 12/12F 1,788 273 15.3 207 20,982 347 286 9.4 12.9 1.1 33.0 40 12/13F 1,918 280 14.6 211 21,446 363 313 8.8 12.6 1.1 31.7 6/10 10/10 2/11 6/11 Source: Company data, Daewoo Securities Research estimates Please read carefully important disclosures at the end of this report. June 10, 2011 Shinsegae 1. Initiate coverage with Buy and TP of W386,000 following the company split Split into Shinsegae and On May 1st, Shinsegae was split into Shinsegae (department store division) and Emart Emart (discount store division). The company believes that this move will enable the divisions to make efficiency improvements and to better execute their strategies. Department stores will focus on premium positioning, while discount stores will continue to implement a low cost/low price strategy. Shinsegae (004170 KS; a surviving entity) and Emart (139480 KS; a new entity) are scheduled to be listed on the Korea Exchange on June 10th. Table 1. ShinsegaeÊs split details Original company New company Company Shinsegae Emart Main business Department store Discount store Split ratio (%) 26.1 73.9 Listing after company split Change listing Relisting Chosun Hotel, Shinsegae Food, Shinsegae I&C, Shinsegae International, Shinsegae Chelsea, Gwangju Subsidiaries Shinsegae E&C, Starbucks Korea, Shinsegae L&B, Emart Shinsegae, Shinsegae Uijeongbu China subsidiaries (10) Total shareholder's equity (before split) 7,400 Total shareholder's equity (after split) 1,909 5,492 # of shares (before split, mn shares) 37.7 # of shares (after split, mn shares) 9.8 27.9 Share price (before split, 4/28/11, W) 270,000 Share price (after split, W) 270,000 270,000 Market cap (before split, 4/28/11) 10,185 Market cap (after split) 2,658 7,526 Relisting/change listing date Jun. 10, 2011 Price range (%) 50~200% Min 50% (W) 135,000 Max 200% (W) 540,000 Source: Company data, Daewoo Securities Research Figure 1. Corporate structure before split Figure 2. Corporate structure after split Chosun 45.0% 98.8% Chosun Hotel Lee, Myung Hee Hotel Bakery & Affiliates 1.1% Lee, Myung Hee & Affiliates 25.0% ShinsegaeShinsegae Food Food 52.1% Shinsegae (031440 KS) Chelsea (031440 KS) 27.1 1.1% 27.1% 10.3% 6.8% 10.4% 27.1% 30.9% % 98.8% 10.4% 63.6% 25.0% 32.4% ShinsegaeShinsegae E&C E&C ShinsegaeShinsegae I&C I&C GwangjuGwangju Shinsegae Shinsegae ShinsegaeShinsegae Shinsegae Chosun Hotel E-MartE-Mart (034300(034300 KS)KS) (035510(035510 KS)KS) (037710(037710 KS)KS) (004170(004170 KS)KS) International Shinsegae E&C 32.4% Shinsegae 65.1% Shinsegae E&C Shinsegae Shinsegae (034300 KS) (004170 KS) (034300 KS) (004170 KS) International 29.0% 25.0% 10.3% 31.6% 45.0% Shinsegae 98.1% 27.6% 25.0% Shinsegae 25.0% Chosun Hotel Bakery Uijeong- bu 100% Shanghai Branch I Chelsea Shinsegae L&B 29.0% Station Co. Shinsegae I&C 82.5% Shinsegae I&C Tianjin Branch (035510(035510 KS)KS) 6.6% 45.0% Shinsegae Chelsea Busan 19.9% 45.0% Shinsegae Uijeong-bu 27.6% 100% Station Co. Shanghai Branch II 50.0% 52.1% 50.0% 27.6% 100% 25.0% Starbucks Coffee Shinsegae Food Shinsegae Uijeong-bu 100% Korea Shinsegae Food Starbucks Coffee Korea Shinsegae L&B Wuxi Branch (031440 KS) Station Co. 10.4% (031440 KS) 19.9% GwangjuGwangju Shinsegae Shinsegae (037710 KS) (037710 KS) 100% 52.1% Beijing Branch 83.3% 100% 98.8% 100% 100% 100% Tianjin Branch Shanghai Branch II Shanghai Branch I Wuxi Branch Beijing Branch Kunshan Branch 100% 100% Shangzhou Branch Ningbo Branch 100% 100% 100% 100% 100% 100% 100% Taizhou Branch Hangzhou Branch Kunshan Branch Shangzhou Branch Ningbo Branch Taizhou Branch Hangzhou Branch Source: Company data, Daewoo Securities Research Source: Company data, Daewoo Securities Research Daewoo Securities Research 2 June 10, 2011 Shinsegae Buy rating with target We initiate our coverage on the post-split Shinsegae with a Buy call and a target price of price of W386,000 W386,000 (Shinsegae was split into Shinsegae (department store operations) and Emart (discount store operations) on May 1, 2011). Using a sum-of-the-parts methodology, we derived the value of ShinsegaeÊs operations (W305,170/sh) by applying a P/E of 15x to our 2011F EPS. We arrived at the companyÊs equity-stakes value (W80,665/sh) by adding the value of Samsung Life Insurance shares (W48,650/sh; based on the June 9th closing price of W92,700) to the value of its Shinsegae International shares (W32,000/sh; based on a fair P/E of 10x). As of now, Shinsegae has no plan to sell its Samsung Life Insurance shares. We recommend a Buy rating on Shinsegae based on the following investment points: 1) Economic indicators and consumption patterns appear favorable to the department store business. Domestic consumption is projected to gradually grow at 3.3% YoY in 3Q11 and 3.5% YoY in 4Q11. The domestic department store segment showed stagnant growth from 2003 to 2007; however, thanks to 1) solid consumption by high-end consumers, 2) the trading-up pattern by mid-to-high end consumers, and 3) greater emphasis on quality than quantity, the division is projected to record a CAGR of 10.6% from 2008 to 2011. Shinsegae achieved same-store sales growth of 10% YoY in 1Q11. This growth rate is projected to remain at around 10% in 2H11.