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Amorepacific (090430 KS/Buy) 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 China 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 Hong Kong Overseas revenue CAGR of 34%; 800 Singapore China revenueCAGR of 40% Taiwan 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, Laneige, 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 Japan and Korea Other, 24% (%) 60 Japan South Korea Hong Kong, 42% 40 France, 1% Vietnam, 1% Chinesetravelers' 20 Singapore, 2% outbound destinations in 2013 Malaysia, 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 KDB Daewoo Securities Research 2 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 Shanghai (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. KDB Daewoo Securities Research 3 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 KDB Daewoo Securities Research 4 October 16, 2014 Amorepacific 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
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