Amorepacific (090430 KS/Buy)

Mid/long-term strategy raises prospects of Cosmetics overseas growth ¢ During its 2014 Analyst Day, Amorepacific unveiled its mid/long-term roadmap, Event Summary focusing on the brand Innisfree October 16, 2014 ¢ By 2020, management expects Innisfree revenue and operating profit to reach W1.5tr and W200bn, respectively; Total number of stores in to rise to 800 ¢ Detailed strategies for core brands raise prospects of growth in Asia, including China Daewoo Securities CCo.,o., Ltd. ¢ Maintain Buy and target price of W2,900,000; Our top pick in cosmetics [Hotel/Leisure, Cosmetics, Fashion]

Regina Hahm Amorepacific announces mid/long-term strategy at 2014 Analyst Day +822-768-4172 [email protected] (1) Innisfree to emerge as a key driver of mid/long-term growth

Amorepacific hosted its 2014 Analyst Day on October 15 th , outlining a mid/long-term business

strategy focused on its brand Innisfree. Despite the domestic cosmetics market’s slowing growth trend overall, Innisfree has continuously gained market share on the back of its

superior strategy and higher product quality. Beginning this year, Innisfree has been

expanding its presence in Asia (including in China), positioning itself as a key driver of Amorepacific’s mid- to long-term growth.

(2) Management expects 57% of Innisfree’s revenue to come from abroad by 2020 Management aims to raise Innisfree’s revenue to W1.5tr by 2020, 57% of which it expects to come from outside Korea. Over the long term, the company will focus on maintaining solid growth domestically, while aggressively expanding in key overseas markets. Specifically, management plans to increase the number of directly operated Innisfree stores in China from 100 in 2014 to 350 in 2017 and 800 in 2020. Management expects Innisfree’s revenue from China to reach W680bn by 2020 (CAGR of 40%), accounting for 80% of the brand’s overall overseas revenue (W850bn).

Innisfree has already established a strong brand identity in the domestic market as an all- natural skincare brand made with ingredients from Jeju Island. More recently, the high growth of inbound travelers from China and other emerging markets has led to the brand gaining widespread recognition among foreign consumers. Amorepacific has been accelerating the brand’s overseas presence on the back of its strong marketing capability, one of its core strengths. We thus anticipate overseas growth to strengthen going forward.

Figure 111.1. InnisfreeInnisfree’’’’ss overseas revenue guidance

(Wbn) 1,000 China Overseas revenue CAGR of 34%; 800 China revenueCAGR of 40% Other 600

400

200

0 14F 17F 20F

Source: Company data

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

October 16, 2014 Amorepacific

Domestic business: Continued growth to be led by duty-free and digital channels

(1) Duty-free shops on track to become largest sales channel in 2014 Chinese consumers have contributed 74% of Amorepacific’s duty-free shop revenue in 2014, up from 40% in 2011, and the company’s China revenue has expanded at a CAGR of 85% during the period. Also worth noting is that the portion of Chinese tourists spending US$3,000 or more per travel has increased to 29% in 2012 from 10% in 2007, while the portion of those spending US$1,000 or less has decreased to 48% from 29%. This suggests that Korea is becoming an increasingly attractive destination among high-income tourists. Management believes Korea has a number of advantages as a tourist destination, including geographic accessibility, supportive visa regulations, and low travel expenses, and therefore sees strong room for growth in Chinese inbound tourists and the duty-free channel.

Management assumes about 11.9mn Chinese tourists will visit Korea in 2020, which is more conservative than our projection.

At present, Hong Kong and Macao are the most popular outbound destinations for Chinese travelers, collectively accounting for 62.3% and 61% of China’s outbound traffic in 2012 and 2013, respectively. The primary driver behind this has been the strict visa requirements of other regions.

In response to the recent surge in Chinese tourists, the Korean government has been relaxing visa rules to efficiently absorb demand. We believe Korea is well-positioned to siphon China’s rising outbound tourism demand away from Hong Kong and Macao. Over the long term, we see the number of Chinese tourists to Korea increasing to 17mn, similar to the current number of Chinese tourists to Macao. If so, Amorepacific’s duty-free shop sales are likely to far exceed management’s expectations.

At present, Amorepacific brands Sulwhasoo, , and Hera are the main growth drivers in the duty-free shop channel, but the company also plans to bolster its brands IOPE, Innisfree, and Etude, which have a weaker presence in the channel. This should enable Amorepacific to deliver differentiated growth within the duty-free shop channel.

Figure 222.2. Chinese travelerstravelers’’’’ key destinations Figure 333.3. CCChChhhineseinese inbound travel growth in and Korea

Other, 24% (%) 60 Japan Hong Kong, 42% 40 France, 1%

Vietnam, 1% Chinesetravelers' 20 Singapore, 2% outbound destinations in 2013 , 2% 0

Thailand, 5% -20

South Korea, 4% -40 Japan, 1% Macau, 19% 08 09 10 11 12 13

Source: Tourism organizations in respective countries, KDB Daewoo Securities Source: JTO, KTO, KDB Daewoo Securities Research Research

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October 16, 2014 Amorepacific

(2) Direct online store to gain ground Amorepacific plans to leverage the digital channel to deliver a complete brand experience. By integrating online and offline shopping, the company aims to increase brand exposure and allow consumers to experience its products wherever they may be.

Currently, Amorepacific’s direct online store accounts for only 5% of overall online sales, far lower than the percentages of department stores (44%) and concessions (50%). Global beauty brands’ direct online stores comprise 10% of their sales, implying there is ample room for growth in Amorepacific’s direct online channels.

The company plans to make its direct online store more accessible so that consumers in less- penetrated regions can directly purchase products online. Amorepacific expects its global online store to become one of its long-term growth drivers.

Other key issues

(1) Door-to-door strategy The company’s efforts to increase the competitiveness of its door-to-door channel began showing signs of paying off in 1H14. Inventory turnover has been reduced to 13 days from 25 last year, and the number of door-to-door-only products has increased from zero in 2012 to eight in 2014.

The key challenge over the longer term is the aging of the channel’s main consumers. Older customers constituted 50% of door-to-door sales in 2014, up from 41% in 2011. Amorepacific is looking for ways to turn this unavoidable problem into an opportunity for growth, such as by introducing more products exclusive to door-to-door sales, as well as by expanding its functional food lineup.

(2) Overhaul of the Etude brand Though most of Amorepacific’s brands continued healthy growth this year, Etude has been an exception, with sales falling 10% YoY. Amorepacific views this as a problem with Etude’s vague brand identity, as well as its lack of “hit” items. In response, the company plans to overhaul Etude’s brand concept, focus on developing items with international appeal, and strengthen the competitiveness of the brand’s stores.

The company will simultaneously seek growth overseas. Recently, it opened Etude flagship stores in (August) and Beijing (September), and is set to add another store in Singapore this month. For 2015, the focus will be on resuming Etude’s growth in China, Southeast Asia, and Japan.

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October 16, 2014 Amorepacific

Figure 444.4. InnisfreeInnisfree’’’’ss revenue contribution by region: OOOverseasOverseas contribution to surpass domestic contribution

(%) 100 Other China Korea

80

60

40

20

0 14F 17F 20F Source: Company data

Figure 555.5. Innisfree domestic revenue contribution by channelchannel

(%) 60 Duty-free shops Digital channel Marts Roadshops

45

30

15

0 14F 17F 20F Source: Company data

Figure 666.6. Revenue guidance for Innisfree Figure 777.7. Operating profit guidance for Innisfree

(Wbn) (Wbn) 1,600 Korea Overseas 240 Korea Overseas

1,200 180

800 120

400 60

0 0 14F 17F 20F 14F 17F 20F Source: Company data Source: Company data

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Figure 888.8. AmorepacificAmorepacific’’’’ss overseas revenue and growth forecast: 2020201420 141414----2020202017F17F CAGR ofofof 39.8%39.8%39.8%

(Wbn) (%, YoY) 2500 Overseas revenue (L) Growth (R) 50

2000 40

1500 30

1000 20

500 10

0 0 11 12 13 14F 15F 16F 17F

Source: Company data, KDB Daewoo Securities Research

Figure 999.9. AmorepacificAmorepacific’’’’ss overseas revenue by countrcountryyyy

100% Other Asia Japan 80% US France 60% China

40%

20%

0% 11 12 13 14F 15F 16F 17F

Source: Company data, KDB Daewoo Securities Research

Figure 101010.10 . Hotel Shilla and Amorepacific willwillwill continue to see strong dutyduty----freefree channel growth

(Wbn) (%) 6000 Hotel Shilla's duty-free revenue (L) 90 Amorepacific's duty-free revenue (L) 4800 Hotel Shilla's duty-free revenue growth (R) Amorepacific's duty-free revenue growth (R) 60 3600

2400 30

1200

0 0 10 11 12 13 14F 15F 16F 17F

Source: Company data, KDB Daewoo Securities Research

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October 16, 2014 Amorepacific

Figure 111111.11 . Etude and Innisfree revenue forecast

(Wbn) (%, YoY) 800 Etude (L) Innisfree (L) Etude's revenue growth (R) Innisfree's revenue growth (R) 80

60 600

40 400 20

200 0

0 -20 11 12 13 14F 15F 16F

Source: AmoreG, KDB Daewoo Securities Research

FY (FY (Dec( DecDecDec....)))) 12/1112/1112/11 12/1212/1212/12 12/1312/1312/13 12/14F 12/15F 12/16F Revenue (Wbn) 2,555 2,849 3,100 3,809 4,626 5,603 OP (Wbn) 373 365 370 570 681 865 OP margin (%) 14.6 12.8 11.9 15.0 14.7 15.4 NP (Wbn) 327 270 268 402 488 625 EPS (W) 47,384 39,183 38,828 58,240 70,710 90,563 ROE (%) 17.8 12.1 11.0 14.8 15.7 17.3 P/E (x) 22.2 31.0 25.8 39.8 32.8 25.6 P/B (x) 3.4 3.6 2.7 5.5 4.8 4.1 Notes: All figures are based on consolidated K-IFRS; NP refers to profit attributable to controlling interests Source: Company data, KDB Daewoo Securities Research estimates

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October 16, 2014 Amorepacific

APPENDIX 1

Important Disclosures & Disclaimers 222-2---YearYear Rating and Target Price History

Company (((Code)(Code)Code)Code) DateDateDate RatingRatingRating Target Price (W) Amorepacific Amorepacific(090430) 09/15/2014 Buy 2,900,000 4,000,000 No Coverage 02/07/2014 Buy 1,320,000 3,000,000 12/09/2013 Trading Buy 1,140,000 08/07/2013 Trading Buy 1,020,000 2,000,000 05/09/2013 Buy 1,200,000 1,000,000 11/08/2012 Buy 1,530,000

10/11/2012 Buy 1,480,000 0 Oct 12 Oct 13 Oct 14

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 Daewoo Securities, 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.

Disclosures As of the publication date, Daewoo Securities 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 and regulations thereof. Opinions expressed in this publication about the subject securities and companies accurately reflect the personal views of the Analysts primarily responsible for this report. Daewoo Securities Co., Ltd. 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. No part of the compensation of the Analysts was, is, or will be directly or indirectly related to the specific recommendations or views contained in this report but, like all employees of Daewoo Securities, the Analysts receive compensation that is impacted 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 Daewoo Securities Co., Ltd. except as otherwise stated herein.

Disclaimers This report is published by Daewoo Securities Co., Ltd. (“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 from sources believed to be reliable and in good faith, but such information has not been independently verified and 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. If this report is 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. Daewoo, its affiliates and their directors, officers, employees and agents do not accept any liability for any loss arising from the use hereof. This report is for general information purposes only and it is not and should not be construed as an offer or a solicitation of an offer to effect transactions in any securities or other financial instruments. 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 and regulations or subject Daewoo and its affiliates to registration or licensing requirements in any jurisdiction should receive or make any use hereof. Information and opinions contained herein are subject to change without notice and 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 Daewoo. 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. 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. The price and value of the investments referred to in this report and the income from them may go down as well as up, and investors may realize losses on any investments. Past performance is not a guide to future performance. Future returns are not guaranteed, and a loss of original capital may occur.

Distribution United Kingdom: This report is being distributed by Daewoo Securities (Europe) Ltd. in the United Kingdom only to (i) investment professionals falling within

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Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (the “Order”), and (ii) high net worth companies and other persons to whom it may lawfully be communicated, falling within Article 49(2)(A) to (E) of the Order (all such persons together being referred to as “Relevant Persons”). This report is directed only at Relevant Persons. Any person who is not a Relevant Person should not act or rely on this report or any of its contents. United States: This report is distributed in the U.S. by Daewoo Securities (America) Inc., a member of FINRA/SIPC, and is only intended for major institutional investors as defined in Rule 15a-6(b)(4) under the U.S. Securities Exchange Act of 1934. All U.S. persons that receive this document by their acceptance thereof represent and warrant that they are a major institutional investor and have not received this report under any express or implied understanding that they will direct commission income to Daewoo or its affiliates. Any U.S. recipient of this document wishing to effect a transaction in any securities discussed herein should contact and place orders with Daewoo Securities (America) Inc., which accepts responsibility for the contents of this report in the U.S. The securities described in this report may not have been registered under the U.S. Securities Act of 1933, as amended, and, in such case, may not be offered or sold in the U.S. or to U.S. persons absent registration or an applicable exemption from the registration requirements. Hong Kong: This document has been approved for distribution in Hong Kong by Daewoo Securities (Hong Kong) Ltd., which is regulated by the Hong Kong Securities and Futures Commission. The contents of this report have not been reviewed by any regulatory authority in Hong Kong. This report is for distribution only to professional investors within the meaning of Part I of Schedule 1 to the Securities and Futures Ordinance of Hong Kong (Cap. 571, Laws of Hong Kong) and any rules made thereunder and may not be redistributed in whole or in part in Hong Kong to any person. All Other Jurisdictions: Customers in all other countries who wish to effect a transaction in any securities referenced in this report should contact Daewoo or its affiliates only if distribution to or use by such customer of this report would not violate applicable laws and regulations and not subject Daewoo and its affiliates to any registration or licensing requirement within such jurisdiction.

KDB Daewoo Securities International Network

Daewoo Securities Co. Ltd. (Seoul) Daewoo Securities (Hong Kong) Ltd. Daewoo Securities (America) Inc. Head Office Two International Finance Centre 320 Park Avenue 34-3 Yeouido-dong, Yeongdeungpo-gu Suites 2005-2012 31st Floor

Seoul 150-716 8 Finance Street, Central New York, NY 10022 Korea Hong Kong, China United States Tel: 82-2-768-3026 Tel: 85-2-2845-6332 Tel: 1-212-407-1000 Daewoo Securities (Europe) Ltd. Daewoo Securities (Singapore) Pte. Ltd. Tokyo Branch 41st Floor, Tower 42 Six Battery Road #11-01 7th Floor, Yusen Building 25 Old Broad St. Singapore, 049909 2-3-2 Marunouchi, Chiyoda-ku London EC2N 1HQ Tokyo 100-0005 United Kingdom Japan Tel: 44-20-7982-8000 Tel: 65-6671-9845 Tel: 81-3- 3211-5511

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Chaoyang District, Beijing 100022 Pudong New Area, Shanghai 200120 Dist. 1, Ho Chi Minh City, China China Tel: 86-10-6567-9299 Tel: 86-21-5013-6392 Tel: 84-8-3910-6000 Daewoo Investment Advisory (Beijing) Co., Ltd. Daewoo Securities (Mongolia) LLC PT. Daewoo Securities Indonesia 2401B, 24th Floor, East Tower, Twin Towers #406, Blue Sky Tower, Peace Avenue 17 Equity Tower Building Lt.50 B-12 Jianguomenwai Avenue, 1 Khoroo, Sukhbaatar District Sudirman Central Business District Jl.

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