Ae Ran Park Analyst / Food & Beverage FIRST TO THE MARKET January 30, 2019 82-2-6114-2939 [email protected] CJ Freshway (051500) Sale of CJ Foodville to Have Limited Impact Even if it Happens Possibility of CJ Group selling off CJ Foodville being raised in market — CJ Group reportedly plans to sell CJ Foodville, according to media reports (Korea Economic Daily). — CJ Foodville operates a wide range of food franchises, including bakeries (Tous les Jours), salad bars (VIPS), Korean food buffets (Season's Table), and coffee shops (A Twosome Place). — CJ Foodville registered 2017 OR of KRW1.43tr (+2.6% YoY) and OP of -KRW3.8bn (loss continued YoY, OPM -0.3%). In 2018, a drop in consumer spending at restaurants and increased labor costs should have weighed on earnings. — Focusing on profitability improvements, CJ Foodville has shut down money-losing operations since 2018. As a result, the number of VIPS stores was cut from 74 to 60 and the number of Season's Table stores from 40 to 29. CJ Freshway in charge of food materials distribution at CJ Group — CJ Freshway is in charge of food material distribution within CJ Group and the business is divided into the wholesale of fresh vegetables and other ingredients. — The food material distribution business achieved OR of KRW480.7bn in 2017, which roughly breaks down into KRW260bn at CJ Foodville and KRW120bn at CJ Cheiljedang. — CJ Foodville’s OR has been declining amid deteriorating restaurant industry conditions, but OR at CJ Cheiljedang has been increasing thanks to growing demand for convenience foods and expanding market share. Unlikely to sell CJ Foodville; Impact on CJ Freshway to be limited even assuming possible sale — CJ Foodville said that rumors of its sale are groundless. We believe any impact on CJ Freshway should be limited even assuming the sale of the subsidiary. — We believe CJ Freshway will be largely unaffected because 1) it has a competitive edge evident in its position as the leader of the foodstuff distribution market, 2) revenues from CJ Cheiljedang are growing at a rapid pace thanks to robust convenience food sales and 3) CJ Freshway will secure additional growth momentum in 2019 by increasing the number of products supplied to CJ Cheiljedang. On the other hand, CJ Foodville stands to lose if it is ejected from the group, because it is difficult to find a supplier that has a well-established distribution network and is capable of supplying a wide range of products at competitive prices. www.kbsec.com Growth momentum of food catering service business and brisk earnings shine amid adverse business conditions — CJ Freshway is forecast to turn in OR of KRW699.7bn (+14.2% YoY) and OP of KRW12.5bn (+19.0% YoY; OPM of 1.8%) in 4Q18. The estimated earnings are in line with market consensus, which was recently revised up. The anticipated earnings improvement is attributable to 1) an increase in the number of business days (due to Chuseok holidays coming earlier than in 2017), 2) receipt of new food catering service orders and meal price hikes and 3) the foodstuff distribution wing’s continuing strategic focus on profit margins (for details, read our 4Q18 earnings preview report from Jan 16, 2019). — Despite the increasing labor cost burden caused by the minimum wage hike, CJ Freshway will extend its earnings run, posting OR of KRW2.93tr (+4.3% YoY) and OP of KRW49.9bn (+9.4% YoY; OPM of 1.7%) in 2019. — Investors are advised to focus on the outstanding earnings and structural growth factors shining amidst adverse business conditions 2 Disclosures KB Securities has not provided in advance the material contained in this report to any All KB Securities Research is available via the following electronic databases: institutional investor or third party. 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