April 6, 2018 Korea Morning Focus Company News & Analysis Major Indices Close Chg Chg (%) Hite Jinro (000080/Trading Buy/TP: W27,000) Lower TP KOSPI 2,437.52 29.46 1.22 Leaning on imported beer and FiLite KOSPI 200 313.04 4.50 1.46 KOSDAQ 868.93 6.42 0.74 Studio Dragon (253450/Buy/TP: W110,000) On the right trajectory Turnover ('000 shares, Wbn) Volume Value KOSPI 574,657 7,171 KOSPI 200 93,027 4,516 KOSDAQ 837,102 5,852 Market Cap (Wbn) Value KOSPI 1,622,984 KOSDAQ 280,015 KOSPI Turnover (Wbn) Buy Sell Net Foreign 1,491 1,419 72 Institutional 1,414 1,218 196 Retail 4,238 4,502 -263 KOSDAQ Turnover (Wbn) Buy Sell Net Foreign 524 523 1 Institutional 285 271 15 Retail 5,036 5,027 9 Program Buy / Sell (Wbn) Buy Sell Net KOSPI 1,262 1,144 118 KOSDAQ 277 236 40 Advances & Declines Advances Declines Unchanged KOSPI 473 326 89 KOSDAQ 745 417 70 KOSPI Top 5 Most Active Stocks by Value (Wbn) Price (W) Chg (W) Value Samsung Electronics 2,437,000 91,000 642 Celltrion 295,000 1,000 529 Hyundai Merchant 5,150 665 367 Marine Pharmicell 17,700 1,200 354 KODEX LEVERAGE 16,300 475 316 KOSDAQ Top 5 Most Active Stocks by Value (Wbn) Price (W) Chg (W) Value Diostech 22,400 3,850 379 Celltrion 90,800 8,700 248 Celltrion Healthcare 101,200 200 178 HLB 84,400 4,500 129 SillaJen 106,200 -900 127 Note: As of April 05, 2018 Mirae Asset Daewoo Research This document is a summary of a report prepared by Mirae Asset Daewoo Co., Ltd. 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This document may not be reproduced, further distributed or published in whole or in part for any purpose. Hite Jinro (000080 KS) Leaning on imported beer and FiLite Food & Beverage 1Q18 preview: Likely to turn to profit Earnings Preview For 1Q18, we expect Hite Jinro to report a 1.2% YoY rise in revenue. For soju (54.4% of overall revenue), we believe revenue remained stagnant, affected by cold weather. For April 5, 2018 beer (39.2% of revenue), we believe regular beer sales declined, also due to cold weather, but revenue likely rose slightly thanks to stronger sales of low-malt beer (FiLite) and imported beer (Kronenbourg, etc.). At the operating level, we estimate the company swung to operating profit of W25.1bn. (In 1Q17, the company recorded an (Maintain) Trading Buy operating loss due to W56bn in restructuring charges.) Overcoming shrinking regular beer sales with imported beer and FiLite Target Price (12M, W) ▼ 27,000 Hite Jinro is seeking to overcome the shrinking regular beer market with imported beer and FiLite. In our view, strong sales of imported beer and FiLite will likely keep Share Price (04/05/18, W) 22,300 Hite Jinro’s market share from falling further from 32-33%. Expected Return 21% In 2017, the imported beer market grew 44.5%, accounting for 16% of the overall market (in terms of sales volume). Sales of Hite Jinro’s imported beers (Kirin, Kronenbourg, Singha, Somersby, XXXX Gold, etc.) increased from W47bn in 2016 to W85bn in 2017 and are forecast to climb to over W100bn in 2018. While the brewery OP (18F, Wbn) 138 business as a whole is losing money, the company is generating 7-8% margin on its Consensus OP (18F, Wbn) 155 imported beer. EPS Growth (18F, %) 370.5 Because imported beers are more expensive than regular beers, growth may be Market EPS Growth (18F, %) 16.0 limited in the restaurant/bar segment, but we see potential for growth in the P/E (18F, x) 26.6 household segment (70-80% of imported beer is consumed at home), given the Market P/E (18F, x) 9.2 increasing number of single-person households and diversifying consumer tastes. KOSPI 2,437.52 Sales of FiLite, Korea’s first low-malt beer (10% malt content) that launched in 1H17, totaled around W80bn (5mn boxes) in 2017. In 2018, we forecast FiLite sales to reach Market Cap (Wbn) 1,564 W110bn (8mn boxes), representing 14.6% of the company’s overall beer sales. Shares Outstanding (mn) 71 Free Float (%) 43.6 We believe FiLite will grow into a major beer category (regular, premium, low-malt, Foreign Ownership (%) 18.5 and third beer), given its price appeal (ex-factory price, including taxes, is W717, 40% Beta (12M) 0.24 cheaper than regular beer) and the recent “small but certain happiness” trend among 52-Week Low 19,900 consumers. In Japan, low-malt beers and third beers (no malt), which are more affordable than regular beers, began to grow in popularity during the mid-1990s. 52-Week High 27,150 Today, low-malt/third beers account for 55% of the Japanese market, while (%) 1M 6M 12M regular/premium beers make up the rest. Absolute 6.2 -15.2 9.6 Current share prices offer trading opportunities Relative 3.5 -16.7 -2.9 From a long-term perspective, Hite Jinro’s brewery business faces a number of 140 Hite Jinro KOSPI headwinds, such as dwindling demand for regular beer, Lotte Chilsung’s capacity 130 ramp-ups, and the growing popularity of craft beer. However, we believe current share 120 prices offer trading opportunities and thus maintain our Trading Buy rating, given 110 that: 1) the soju business is performing well, with market share of over 50%; 2) 100 imported beer and FiLite are helping the company overcome the weakness in regular 90 beers; and 3) the stock is trading at a P/B of only 1.2x. That said, we lower our target 80 price to W27,000 (from W29,000), reflecting our earnings revisions. 3.17 7.17 11.17 3.18 Mirae Asset Daewoo Co., Ltd. [ F&B/Tobacco] FY (Dec.) 12/15 12/16 12/17 12/18F 12/19F 12/20F Revenue (Wbn) 1,907 1,890 1,890 1,917 1,944 1,974 Woon-mok Baek +822-3774-1679 OP (Wbn) 134 124 87 138 142 145 [email protected] OP margin (%) 7.0 6.6 4.6 7.2 7.3 7.3 Susie Hong NP (Wbn) 53 38 13 60 62 64 +822-3774-1853 EPS (W) 747 538 178 837 870 895 [email protected] ROE (%) 4.0 2.9 1.0 4.9 5.1 5.2 P/E (x) 31.3 39.2 135.4 26.6 25.6 24.9 P/B (x) 1.2 1.1 1.3 1.2 1.2 1.2 Dividend yield (%) 4.3 4.3 3.3 3.6 3.6 3.6 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. April 5, 2018 Hite Jinro Table 1. 1Q18 preview (Wbn, %) 1Q18F Growth 1Q17 4Q17 Mirae Asset Consensus YoY QoQ Daewoo Revenue 413.4 456.9 418.3 428.2 1.2 -8.4 Operating profit -27.4 23.1 25.1 28.6 TTB 8.8 Pretax profit -27.4 0.8 15.2 18.3 TTB - Net profit -21.2 -10.5 9.9 12.0 TTB TTB OP margin -6.6 5.0 6.0 6.7 - - Net margin -5.1 -2.3 2.4 2.8 - - Source: Company data, Mirae Asset Daewoo Research estimates Table 2. Quarterly and annual earnings (Wbn, %) 17 18F 17 18F 19F 1Q 2Q 3Q 4Q 1QF 2QF 3QF 4QF Annual Annual Annual Revenue 413 491 528 457 418 502 516 481 1,890 1,917 1,944 Operating profit -27 35 57 23 25 34 49 31 87 138 142 Pretax profit -27 23 43 1 15 24 37 13 40 89 93 Net profit -21 14 31 -11 10 16 25 9 13 60 62 OP margin -6.6 7.1 10.7 5.0 6.0 6.7 9.5 6.4 4.6 7.2 7.3 Net margin -5.1 2.8 5.8 -2.3 2.4 3.1 4.9 1.8 0.7 3.1 3.2 Revenue growth 1.0 -1.8 7.9 -6.9 1.2 2.1 -2.3 5.2 0.0 1.4 1.4 OP growth TTR 26.7 103.9 -44.4 TTB -3.9 -13.7 33.9 -29.6 58.6 2.6 Pretax profit growth TTR 25.4 267.0 -96.0 TTB 5.6 -14.7 - -35.1 125.1 3.9 Net profit growth TTR 37.0 267.0 TTR TTB 13.3 -17.4 TTB -67.0 370.5 3.9 Source: Company data, Mirae Asset Daewoo Research estimates Table 3.