Shinsegae International (031430 KS) Cosmetics Drive Earnings Higher

Shinsegae International (031430 KS) Cosmetics drive earnings higher

Textiles/Apparel 2Q18 review Results Comment For 2Q18, Shinsegae International announced revenue of W283.4bn (+18.3% YoY) and August 9, 2018 operating profit of W14.3bn (+222.1% YoY). This brings 1H18 cumulative operating profit to W26.1bn, above the 2017 full-year figure (W25.4bn). We believe the results once again underscore the strong performance of the cosmetics business and its positive impact on overall margins. Detailed results by business division will be available when consolidated earnings are released on August 14th. (Maintain) Buy Cosmetics: We estimate that the cosmetics business recorded revenue of W54bn and Target Price(12M, W) 260,000 operating profit of W11.9bn (83% of overall operating profit), with OP margin of over 22%. This represents remarkable growth, considering that 2Q is typically the slowest Share Price (08/08/18, W) 172,500 quarter. One-offs: We believe that subsidiaries were affected by some one-off expenses: 1) We Expected Return 51% estimate that Tomboy posted a roughly W900mn loss, due to inventory valuation losses (estimated at W1.5bn) related to the withdrawal of Tomkid in June; 2) we also believe Paul Poiret front-loaded expenses related to its 2019 spring/summer fashion OP (18F, Wbn) 62 show (estimated at W3.3bn). We expect losses to decline sharply in 3Q18, as revenue Consensus OP (18F, Wbn) 62 recognition begins. EPS Growth (18F, %) 89.4 2H18 preview Market EPS Growth (18F, %) 10.5 P/E (18F, x) 27.0 We see several tailwinds ahead in 2H18. Demand in the duty-free channel should grow, Market P/E (18F, x) 9.0 thanks to holiday effects, while volume growth should continue on the back of brand KOSPI 2,301.45 portfolio expansion and distribution channel additions.

Market Cap (Wbn) 1,232 Holidays: Inbound/outbound demand in the duty-free channel will likely be boosted Shares Outstanding (mn) 7 by: 1) Korea’s Chuseok holiday (China’s Mid-Autumn Festival) in late September; and 2) Free Float (%) 34.9 China’s Golden Week in early October. Foreign Ownership (%) 4.4 New brands: Upcoming new launches include: 1) the Yeonjak brand in October; 2) Beta (12M) 0.71 products from VIDIVICI (six new skincare items) in November; and 3) Jaju’s private-label 52-Week Low 56,100 cosmetics. 52-Week High 214,000 Platform expansion: We expect VIDIVICI’s additional rollout in downtown duty-free (%) 1M 6M 12M stores to support revenue growth. The brand opened at the Shinsegae DF Gangnam Absolute -12.9 107.8 148.6 store and the SM Duty Free Seoul store in July, and is set to open in three more Relative -14.0 117.4 158.6 locations in the coming months: Lotte Duty Free Jeju in August, Hyundai Duty Free Gangnam in November, and Top City Duty Free Sinchon Station in December. 370 Shinsegae International KOSPI 320 Maintain Buy and TP of W260,000 270 220 We reaffirm our Buy rating and SOTP-based target price of W260,000 on Shinsegae 170 International. We see: 1) fundamentals improving on the back of strong earnings 120 growth; and 2) potential multiple expansion driven by the cosmetics business. We 70 believe that Shinsegae International is more than just an apparel firm. With cosmetics 7.17 11.17 3.18 7.18 generating an OP margin above 20%, we think the company offers an attractive investment opportunity as a cosmetics play. Mirae Asset Daewoo Co., Ltd.

[ Textiles/Apparel] FY (Dec.) 12/15 12/16 12/17 12/18F 12/19F 12/20F Revenue (Wbn) 1,005 1,021 1,103 1,273 1,405 1,490 Nu-ri Ha +822-3774-1653 OP (Wbn) 20 27 25 62 100 124 [email protected] OP Margin (%) 2.0 2.6 2.3 4.9 7.1 8.3

NP (Wbn) 21 17 24 46 74 93 EPS (W) 2,958 2,432 3,371 6,384 10,336 12,967 ROE (%) 4.6 3.7 5.0 8.9 13.0 14.4

P/E (x) 34.7 27.2 22.0 27.0 16.7 13.3 P/B (x) 1.6 1.0 1.1 2.3 2.1 1.8 Dividend Yield (%) 0.6 0.9 0.8 0.3 0.3 0.3 Note: All figures are based on consolidated K-IFRS; NP refers to net profit attributable to controlling interests Source: Company data, Mirae Asset Daewoo Research estimates

Analysts who prepared this report are registered as research analysts in Korea but not in any other jurisdiction, including the U.S. PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES & DISCLAIMERS IN APPENDIX 1 AT THE END OF REPORT.

August 9, 2018 Shinsegae International

Fact check about Shinsegae International’s cosmetics business outlook

1) Intensifying competition in the duty-free market is positive for Shinsegae International

Recently, investment sentiment on duty-free operators has largely weakened on concerns over intensifying competition. However, Lotte Group is planning the IPO of Lotte Duty Free, and Shinsegae DF is weighed down by a higher cost burden resulting from the opening of additional stores in Gangnam and Terminal 1 of Incheon International Airport. Thus, we do not expect to see a game of chicken in the industry sparked by companies’ market share expansion efforts, like commission hikes. Even if competition becomes more intense, Shinsegae International - as a content provider - should be able to boost sales volume on the back of platform operators’ expansion of discounts. Any increase in commissions or discounts leads to a higher cost burden solely for duty-free companies, not product providers.

2) For VIDIVICI, monthly average revenue is more important than monthly revenue

The monthly revenue trend of VIDIVICI is gaining attention. However, given that consumer goods tend to display strong seasonality, the trend of monthly average revenue by quarter, rather than the trend of monthly revenue, should provide a more meaningful insight into the company’s operating performances. VIDIVICI’s monthly average revenue came in at W6.7bn in 2Q, and is anticipated to have exceeded W10bn in 2Q.

3) Low revenue contribution form Shinsegae DF

Approximately 80% of VIDIVICI’s revenue is generated from duty-free stores. However, revenue from Shinsegae DF store (one in Myeongdong) accounts for less than 20% of duty- free revenue and just 10-15% of the total revenue of the brand. The revenue contribution from Shinsegae DF could increase further, due to the brand’s additional opening at the Shinsegae DF Gangnam store in July. However, the extent of the increase should be limited, as the brand is scheduled to open in three more non-Shinsegae duty-free shops in 2H.

Table 1. VIDIVICI’s duty-free presence Brand # of locations Stores Current: Lotte Duty Free Sogong, Lotte Duty Free World Tower, Hotel Shilla Seoul, Hotel Shilla Jeju, Shilla I'PARK Duty Free, Galleria Duty Free 63, Shinsegae Department Store (Myeongdong), Doota Duty Free, Dongwha Duty Free Currently 9 July: Shinsegae DF Gangnam, SM Duty Free Seoul VIDIVICI (14 by end-2018) August: Lotte Duty Free Jeju November: HDC Shilla Duty Free in Gangnam November: Top City Duty Free in Sinchon Source: Shinsegae International, media reports, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 2 August 9, 2018 Shinsegae International

Earnings trend and outlook

Table 2. Shinsegae International’s 2Q18P earnings (Wbn, %, %p) 2Q18P Growth 2Q17 1Q18 Preliminary Mirae Asset Daewoo Consensus YoY QoQ Revenue 239 304 283 284 279 18.4 -6.9 Operating profit 4 12 14 16 11 222.9 20.8 OP margin 1.8 3.9 5.0 5.6 3.8 3.2 1.2 Note: Detailed results will be announced on August 14th. Source: WISEfn, Mirae Asset Daewoo Research

Table 3. Shinsegae International’s earnings trend and outlook (Wbn, %) 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18P 3Q18F 4Q18F 2017 2018F 2019F Revenue 272.1 239.5 268.8 322.2 304.4 283.4 311.2 373.6 1,102.4 1,273.5 1,404.7 Foreign brands 93.8 88.9 90.3 107.7 91.2 87.9 90.5 108.5 380.6 379.1 382.9 Domestic brands 87.9 59.6 85.1 91.3 89.1 62.6 85.4 91.5 323.9 326.8 336.6 Cosmetics 11.3 14.5 15.8 21.4 39.9 54.0 55.0 69.3 63.0 219.0 329.0 Lifestyle 43.4 48.1 50.2 51.5 45.1 49.2 51.0 52.5 193.1 199.2 207.1 Tomboy 37.3 28.7 27.9 50.6 39.6 30.0 29.0 53.1 144.5 150.1 146.9 Operating profit 4.4 4.4 0.9 15.7 11.8 14.3 14.2 22.1 25.4 62.4 99.9 OP margin 1.6 1.9 0.3 4.9 3.9 5.0 4.6 5.9 2.3 4.9 7.1 Foreign brands 1.6 1.2 0.2 3.1 2.6 2.7 0.4 3.0 6.0 8.8 10.3 Domestic brands 0.5 -0.4 -0.6 4.1 2.1 0.1 0.0 1.8 3.6 3.5 12.6 Cosmetics 0.3 0.6 2.0 2.9 7.2 11.9 12.3 14.3 5.7 46.1 64.8 Lifestyle 2.0 4.7 3.4 3.6 1.3 4.2 2.9 3.6 13.7 12.0 13.2 Tomboy 1.5 0.6 -1.6 4.8 2.0 -0.9 0.0 4.2 5.2 5.6 7.9 Paul Poiret -1.2 -1.8 -2.0 -2.3 -3.1 -3.3 -1.0 -3.2 -7.3 -11.0 -6.0 YoY Revenue 9.6 1.5 9.8 10.2 11.9 18.4 15.8 16.3 8.0 15.5 10.3 Operating profit 25.4 -41.1 59.6 1.7 169.1 222.2 1457.0 40.9 -5.9 145.2 60.0 Note: Differences in the sum of revenue and operating profit of each business and total are attributable to Paul Poiret and consolidation adjustments; 2017F cosmetics earnings are based on our estimates Source: Shinsegae International, Mirae Asset Daewoo Research

Table 4. Shinsegae International: SOTP valuation (Wbn, x, W, 1,000 shares, %)) 12M NOPLAT 12M Target P/E Fair value Notes Operating value (A) 1,664 (A1)+(A2)+(A3)

Fashion (A1) 212

Foreign brands Global fashion + Moncler + Paul Poiret 7 14.0 99 40% discount to global peer average P/E In-house brands Domestic fashion + Tomboy 8 14.0 113 30% discount to global peer average P/E Cosmetics (A2) 1,243

VIDIVICI + imported cosmetics + Sales/production 41 30.0 1,243 Domestic peer average P/E Shinsegae Intercos Korea Lifestyle (A3) 209

Household goods JAJU 10 20.0 209 20% discount to Japanese peer average P/E Value of equity stakes (B) 166

Management consulting fee & equity- Shinsegae Simon 14 12.0 166 Domestic peer average P/E method gains Fair market cap (C) 1,830 (A)+(B)

No. of shares (D) 7,140 Fair share price (W) 256,264 260,000 (C)/(D), rounded up

Upside (%) 51 Note: We applied a 20% discount to the multiples of the fashion and lifestyle businesses, reflecting their weak brand power compared with global peers, but did not apply a discount to those of the cosmetics business, as the business is in the early stages of rapid earnings growth and expects to enjoy continuous sales expansion and benefits from vertical integration. For Shinsegae Simon, we applied our estimated average P/E of domestic retailers Source: Bloomberg, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 3 August 9, 2018 Shinsegae International

Shinsegae International (031430 KS/Buy/TP: W260,000)

Comprehensive Income Statement (Summarized) Statement of Financial Condition (Summarized) (Wbn) 12/17 12/18F 12/19F 12/20F (Wbn) 12/17 12/18F 12/19F 12/20F Revenue 1,103 1,273 1,405 1,490 Current Assets 368 420 487 538 Cost of Sales 528 567 597 619 Cash and Cash Equivalents 3 7 20 58 Gross Profit 575 706 808 871 AR & Other Receivables 134 143 171 193 SG&A Expenses 549 644 708 748 Inventories 218 254 280 270 Operating Profit (Adj) 25 62 100 124 Other Current Assets 13 16 16 17 Operating Profit 25 62 100 124 Non-Current Assets 583 572 556 540 Non-Operating Profit 7 -6 -1 0 Investments in Associates 88 102 113 120 Net Financial Income -8 -7 -6 -4 Property, Plant and Equipment 332 306 281 260 Net Gain from Inv in Associates 9 11 14 16 Intangible Assets 46 41 36 33 Pretax Profit 32 56 99 124 Total Assets 951 991 1,044 1,079 Income Tax 8 10 25 31 Current Liabilities 304 265 252 244 Profit from Continuing Operations 24 46 74 93 AP & Other Payables 64 74 82 85 Profit from Discontinued Operations 0 0 0 0 Short-Term Financial Liabilities 211 158 134 119 Net Profit 24 46 74 93 Other Current Liabilities 29 33 36 40 Controlling Interests 24 46 74 93 Non-Current Liabilities 151 193 188 144 Non-Controlling Interests 0 0 0 0 Long-Term Financial Liabilities 147 188 183 138 Total Comprehensive Profit 22 45 74 93 Other Non-Current Liabilities 4 5 5 6 Controlling Interests 22 45 74 92 Total Liabilities 455 458 441 387 Non-Controlling Interests 0 0 1 1 Controlling Interests 494 531 601 688 EBITDA 63 97 130 149 Capital Stock 36 36 36 36 FCF (Free Cash Flow) -22 37 61 112 Capital Surplus 121 121 121 121 EBITDA Margin (%) 5.7 7.6 9.3 10.0 Retained Earnings 337 374 444 532 Operating Profit Margin (%) 2.3 4.9 7.1 8.3 Non-Controlling Interests 2 2 2 3 Net Profit Margin (%) 2.2 3.6 5.3 6.2 Stockholders' Equity 496 533 603 691

Cash Flows (Summarized) Forecasts/Valuations (Summarized) (Wbn) 12/17 12/18F 12/19F 12/20F 12/17 12/18F 12/19F 12/20F Cash Flows from Op Activities 10 42 61 112 P/E (x) 22.0 27.0 16.7 13.3 Net Profit 24 46 74 93 P/CF (x) 6.0 13.0 9.1 8.0 Non-Cash Income and Expense 64 49 61 61 P/B (x) 1.1 2.3 2.1 1.8 Depreciation 32 29 25 22 EV/EBITDA (x) 14.0 16.1 11.7 9.5 Amortization 6 5 5 4 EPS (W) 3,371 6,384 10,336 12,967 Others 26 15 31 35 CFPS (W) 12,388 13,302 18,890 21,551 Chg in Working Capital -62 -39 -43 -6 BPS (W) 69,236 74,360 84,095 96,462 Chg in AR & Other Receivables -16 -2 -27 -20 DPS (W) 600 600 600 600 Chg in Inventories -3 -32 -26 10 Payout ratio (%) 17.7 9.4 5.8 4.6 Chg in AP & Other Payables -21 6 5 2 Dividend Yield (%) 0.8 0.3 0.3 0.3 Income Tax Paid -8 -7 -25 -31 Revenue Growth (%) 8.0 15.4 10.4 6.0 Cash Flows from Inv Activities -28 -13 -5 -3 EBITDA Growth (%) 3.3 54.0 34.0 14.6 Chg in PP&E -21 -5 0 0 Operating Profit Growth (%) -7.4 148.0 61.3 24.0 Chg in Intangible Assets 1 0 0 0 EPS Growth (%) 38.6 89.4 61.9 25.5 Chg in Financial Assets -3 -7 -5 -3 Accounts Receivable Turnover (x) 11.1 11.5 11.1 9.9 Others -5 -1 0 0 Inventory Turnover (x) 5.0 5.4 5.3 5.4 Cash Flows from Fin Activities 4 -12 -33 -64 Accounts Payable Turnover (x) 11.1 13.1 12.2 11.9 Chg in Financial Liabilities 0 -12 -29 -59 ROA (%) 2.5 4.7 7.3 8.8 Chg in Equity 0 0 0 0 ROE (%) 5.0 8.9 13.0 14.4 Dividends Paid -4 -4 -4 -4 ROIC (%) 3.0 8.0 11.5 14.3 Others 8 4 0 -1 Liability to Equity Ratio (%) 91.6 86.0 73.1 56.0 Increase (Decrease) in Cash -14 4 12 38 Current Ratio (%) 121.4 158.1 193.0 220.9 Beginning Balance 17 3 7 20 Net Debt to Equity Ratio (%) 70.1 62.0 47.8 27.5 Ending Balance 3 7 20 58 Interest Coverage Ratio (x) 2.9 8.2 13.9 19.8 Source: Company data, Mirae Asset Daewoo Research estimates

Mirae Asset Daewoo Research 4 August 9, 2018 Shinsegae International

APPENDIX 1

Important Disclosures & Disclaimers 2-Year Rating and Target Price History Company (Code) Date Rating Target Price (W) Shinsegae International Shinsegae International (031430) 06/27/2018 Buy 260,000 300,000 05/16/2018 Buy 200,000 250,000 04/30/2018 Buy 152,000 200,000 01/02/2017 No Coverage 150,000 11/30/2016 After 1yr 11/30/2015 Trading Buy 123,000 100,000 50,000

0 Aug 16 Aug 17 Aug 18

Stock Ratings Industry Ratings Buy : Relative performance of 20% or greater Overweight : Fundamentals are favorable or improving Trading Buy : Relative performance of 10% or greater, but with volatility Neutral : Fundamentals are steady without any material changes Hold : Relative performance of -10% and 10% Underweight : Fundamentals are unfavorable or worsening Sell : Relative performance of -10% Ratings and Target Price History (Share price (─), Target price (▬), Not covered (■), Buy (▲), Trading Buy (■), Hold (●), Sell (◆)) * Our investment rating is a guide to the relative return of the stock versus the market over the next 12 months. * Although it is not part of the official ratings at Mirae Asset Daewoo Co., Ltd., we may call a trading opportunity in case there is a technical or short-term material development. * The target price was determined by the research analyst through valuation methods discussed in this report, in part based on the analyst’s estimate of future earnings. * The achievement of the target price may be impeded by risks related to the subject securities and companies, as well as general market and economic conditions.

Equity Ratings Distribution & Investment Banking Services Buy Trading Buy Hold Sell Equity Ratings Distribution 73.40% 14.78% 11.82% 0.00% Investment Banking Services 77.42% 9.68% 12.90% 0.00% * Based on recommendations in the last 12-months (as of June 30, 2018)

Disclosures As of the publication date, Mirae Asset Daewoo Co., Ltd. and/or its affiliates do not have any special interest with the subject company and do not own 1% or more of the subject company's shares outstanding.

Analyst Certification The research analysts who prepared this report (the “Analysts”) are registered with the Korea Financial Investment Association and are subject to Korean securities regulations. They are neither registered as research analysts in any other jurisdiction nor subject to the laws or regulations thereof. Each Analyst responsible for the preparation of this report certifies that (i) all views expressed in this report accurately reflect the personal views of the Analyst about any and all of the issuers and securities named in this report and (ii) no part of the compensation of the Analyst was, is, or will be directly or indirectly related to the specific recommendations or views contained in this report. Mirae Asset Daewoo Co., Ltd. (“Mirae Asset Daewoo”) policy prohibits its Analysts and members of their households from owning securities of any company in the Analyst’s area of coverage, and the Analysts do not serve as an officer, director or advisory board member of the subject companies. Except as otherwise specified herein, the Analysts have not received any compensation or any other benefits from the subject companies in the past 12 months and have not been promised the same in connection with this report. Like all employees of Mirae Asset Daewoo, the Analysts receive compensation that is determined by overall firm profitability, which includes revenues from, among other business units, the institutional equities, investment banking, proprietary trading and private client division. At the time of publication of this report, the Analysts do not know or have reason to know of any actual, material conflict of interest of the Analyst or Mirae Asset Daewoo except as otherwise stated herein.

Disclaimers This report was prepared by Mirae Asset Daewoo, a broker-dealer registered in the Republic of Korea and a member of the Korea Exchange. Information and opinions contained herein have been compiled in good faith and from sources believed to be reliable, but such information has not been independently verified and Mirae Asset Daewoo makes no guarantee, representation or warranty, express or implied, as to the fairness, accuracy, completeness or correctness of the information and opinions contained herein or of any translation into English from the Korean language. In case of an English translation of a report prepared in the Korean language, the original Korean language report may have been made available to investors in advance of this report. The intended recipients of this report are sophisticated institutional investors who have substantial knowledge of the local business environment, its common practices, laws and accounting principles and no person whose receipt or use of this report would violate any laws or regulations or subject Mirae Asset Daewoo or any of its affiliates to registration or licensing requirements in any jurisdiction shall receive or make any use hereof. This report is for general information purposes only and it is not and shall not be construed as an offer or a solicitation of an offer to effect transactions in any securities or other financial instruments. The report does not constitute investment advice to any person and such person shall not be treated as a client of Mirae Asset Daewoo by virtue of receiving this report. This report does not take into account the particular investment objectives, financial

Mirae Asset Daewoo Research 5 August 9, 2018 Shinsegae International

situations, or needs of individual clients. The report is not to be relied upon in substitution for the exercise of independent judgment. Information and opinions contained herein are as of the date hereof and are subject to change without notice. The price and value of the investments referred to in this report and the income from them may depreciate or appreciate, and investors may incur losses on investments. Past performance is not a guide to future performance. Future returns are not guaranteed, and a loss of original capital may occur. Mirae Asset Daewoo, its affiliates and their directors, officers, employees and agents do not accept any liability for any loss arising out of the use hereof. Mirae Asset Daewoo may have issued other reports that are inconsistent with, and reach different conclusions from, the opinions presented in this report. The reports may reflect different assumptions, views and analytical methods of the analysts who prepared them. Mirae Asset Daewoo may make investment decisions that are inconsistent with the opinions and views expressed in this research report. Mirae Asset Daewoo, its affiliates and their directors, officers, employees and agents may have long or short positions in any of the subject securities at any time and may make a purchase or sale, or offer to make a purchase or sale, of any such securities or other financial instruments from time to time in the open market or otherwise, in each case either as principals or agents. Mirae Asset Daewoo and its affiliates may have had, or may be expecting to enter into, business relationships with the subject companies to provide investment banking, market-making or other financial services as are permitted under applicable laws and regulations. No part of this document may be copied or reproduced in any manner or form or redistributed or published, in whole or in part, without the prior written consent of Mirae Asset Daewoo.

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Mirae Asset Daewoo Research 6 August 9, 2018 Shinsegae International

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