Nongshim (004370) Simmering with Expectations! Ae Ran Park Analyst Food & Beverage February 13, 2019 82-2-6114-2939 [email protected] Keep BUY and raise target price to We maintain our BUY rating on Nongshim and raise the target price 4.7% to KRW335,000 KRW335,000, which was derived by applying a PER of 13.5x (10% discount applied to the F&B industry’s average PER of 15.0x) to a 12M-forward EPS of KRW17,046 and reflecting net cash holdings of KRW616.4bn. The target price represents an implied PER of 19.7x and PBR of 1.0x and corresponds to the low-end of the stock’s historical valuation band. Although the share price recently rallied in anticipation of earnings improvements, Nongshim still offers ample upside potential. If we remove the 10% discount in light of Nongshim’s ramyeon market share recovery and expansion in overseas markets, its per-share value could reach KRW360,000. Enterprise value expected to recover, Nongshim’s dominant standing in the domestic ramyeon market has been damaged by driven by earnings improvements at launches of various new products and deep discounts at rivals over the past three years. home and abroad; Threat from rivals However, 1) such downside factors have already been factored into Nongshim’s appears to have tapered off enterprise value, 2) new product launches by rivals pose less of a threat compared to the past and 3) consumers no longer choose ramyeon products only because of their cheap price. Against this backdrop, 4) Nongshim’s market share has been increasing starting in 2H18 through product renewals by adding new flavors to mainstay products and changing the types of product packages (bowl noodle ⇔ pack noodle), while growth is continuing in the US and China. This implies the potential of Nongshim’s enterprise value recovering ahead. 2019 OP to grow 27.1%; OP to top Nongshim’s earnings are forecast to recover from the 2018 slump and improve in 2019. KRW100.0bn mark for first time since The company is forecast to turn in OR of KRW2.35tr (+5.6% YoY) and OP of 2015 KRW111.3bn (+27.1% YoY; OPM 4.7%) in 2019. Buy maintain Trading Data Share price performance Free float 49.6% (%) 1M 3M 6M 12M Target Price (raised) KRW335,000 Avg T/O Val (3M, KRWbn) 5.3 Absolute -1.9 18.1 -4.8 -6.3 Upside/Downside 20.7% Foreign ownership 19.8% Relative -7.6 11.1 -2.8 2.0 Current price (Feb 13) KRW277,500 Major shareholders Chun-Ho Shin and 4 others 45.5% Consensus Target Price KRW326,154 Market cap USD1.5bn NPS 10.6% Relative performance (LHS) Forecast earnings & valuation Stock price (RHS) FY-end 2017A 2018E 2019E 2020E % KRW 30 400,000 OR (KRWbn) 2,208 2,229 2,354 2,453 OP (KRWbn) 96 88 111 120 20 360,000 NP to parent (KRWbn) 91 82 103 110 10 320,000 EPS (KRW) 14,905 13,439 16,900 18,112 0 280,000 EPS Growth (%) -54.5 -9.8 25.8 7.2 -10 PER (x) 23.8 18.9 16.4 15.3 -20 240,000 EV/EBITDA (x) 9.4 5.9 5.6 5.1 -30 200,000 PBR (x) 1.2 0.8 0.9 0.8 18.2 18.5 18.8 18.11 19.2 ROE (%) 5.0 4.4 5.3 5.5 Div. Yield (%) 1.1 1.6 1.4 1.4 Source: Nongshim, KB Securities estimates Nongshim(004370) KB RESEARCH Earnings will grow as 1) the domestic ramyeon business’ earnings improve on the renewal of mainstay products, receding new product effects at competitors and cost cuts and 2) the US and Chinese subsidiaries sustain growth by expanding distribution channels. The Chinese subsidiary’s 2018 profit margins have recovered to levels registered in 2016, before China implemented an unofficial ban on Korean products in retaliation against the Korean government’s decision to deploy Terminal High- Altitude Area Defense (THAAD) anti-missile systems, which China considers as a threat. After suffering from channel expansion and rising production costs ensuing production line expansions in late 2017, the US subsidiary is also expected to see profit margins improve on price hikes and easing cost burdens. Nongshim will also benefit from the effects of a snack price hike in Nov 2018 (5.4% increase based on ASP) and reduced losses enabled by the fast growth of Baeksansu (bottled water). 2 Nongshim(004370) KB RESEARCH Investment opinion and risks Base-case Scenario: Catalysts 1) Earnings improvement following eased competition in domestic ramyeon market 2) Earnings improve at overseas subsidiaries Bull-case Scenario KRW430,000 (Target PER 25.0x) that were impacted by cost increases Bull-case Scenario: Upside risks Base-case Scenario (Target Price) KRW335,000 (Target PER 19.7x) 1) Meaningful recovery of ramyeon market share Current Price KRW277,500 2) Increased earnings contributions by overseas subsidiaries Bear-case Scenario KRW260,000 (F&B avg. PER 15.0x) Bear-case Scenario: Downside risks 1) Continued weakness in ramyeon market share 2) Slower-than-expected improvement in earnings at overseas subsidiaries Revised earnings estimates Valuation and target price (KRWbn, %) Previous Revised Change calculation 2018E 2019E 2018E 2019E 2018E 2019E 1) Valuation method: OR 2,227 2,338 2,229 2,354 0.1 0.7 Reflected PER valuation and net cash OP 87 110 88 111 1.2 1.5 holdings NP to parent 81 102 82 103 1.0 1.2 Source: KB Securities estimates 2) Target price calculation: Reflected 12M Fwd EPS X PER of 13.5x and Difference vs. Consensus per-share value of KRW616.4bn in net cash (KRWbn, %) KB est. Consensus Difference holding Target PER reflects 10% discount to F&B 2018E 2019E 2018E 2019E 2018E 2019E industry avg. OR 2,229 2,354 2,233 2,350 -0.2 0.2 OP 88 111 88 106 -0.1 5.4 3) Target price range: NP to parent 82 103 83 98 -1.6 4.8 KRW430,000 ~ KRW260,000 Source: Fnguide, KB Securities estimates 4) Target price valuation: 12M Fwd PER of 19.7x, PBR of 1.0x OR composition (2019E, %) Earnings sensitivity analysis (%) EPS change 18.2% 2018E 2019E 1% rise in FX rate -0.2 -0.2 1%p rise in interest +4.4 +3.5 rate Ramyeon Snack 16.9% Beverage/Other 64.9% Source: KB Securities estimates Peer group comparison (USDmn, KRWbn, X, %) Market PER PBR ROA ROE Dividend Yield Cap 2018E 2019E 2018E 2019E 2018E 2019E 2018E 2019E 2018E 2019E Ajinomoto 8,153 22.2 15.5 1.4 1.3 8.9 8.0 6.8 8.9 1.9 2.1 Nissin 7,199 26.2 29.7 2.3 2.2 14.0 13.6 8.6 8.0 1.5 1.6 Tingyi 7,860 21.3 20.1 2.7 2.6 7.2 7.2 12.9 12.7 2.6 2.8 Ottogi 2,823 16.8 19.2 2.2 2.1 13.5 12.3 13.7 11.3 0.9 1.0 Source: Bloomberg, KB Securities 3 Nongshim(004370) KB RESEARCH I. Focus Charts Target price calculation: SOTP valuation - Keep BUY on Nongshim and raise target price to KRW335,000 - Target price derived by applying 13.5x PER to 12M-forward (KRW, x, KRW100mn, %) Content Note Per-share operating value 230,127 ① EPS of KRW17,046 and reflecting net cash holdings of EPS 17,046 12M forward basis 2017 14,905 KRW616.4bn 2018E 13,439 2019E 16,900 - 10% discount applied to F&B industry’s average PER of 15.0x 2020E 18,112 Applied 10% discount to F&B sector avg. considering weakened in order to reflect Nongshim’s weakened standing in ramyeon PER 13.5 standing in ramyeon market F&B 15.0 market Past avg. 19.5 2013~2017 avg. Net DER per share -101,339.6 ② - Nongshim’s standing as No. 1 domestic ramyeon market player Net debt -6,164.1 12M fwd basis 2017 -4,835.3 undermined 2018E -5,485.2 2019E -6,086.9 - But such concerns already priced in; Impact of rival products 2020E -6,727.5 Calculated price 331,467 ③ = ① - ② weakened as well Target price 335,000 Raised 4.7% compared to existing target price Current price 277,500 Feb 13 basis - Target price as high as KRW360,000 when valuation discount is Upside 20.7 Buy removed considering Nongshim’s recovering ramyeon market Source: Quantiwise, Nongshim, KB Securities estimates share and overseas growth momentum Nongshim's annual earnings trend and estimates - Nongshim’s 2018 earnings disappointing, but seem to have bottomed out KRW100mn % - OR of KRW2.35tr (+5.6% YoY) and OP of KRW111.3bn (+27.1% OR (L) OP (R) 25,000 6 YoY, OPM 4.7%) expected in 2019 - OP to surpass KRW100.0bn for first time since 2015 5 23,000 - 1) Domestic ramyeon business’ earnings to improve on 4 renewal of mainstay products, receding new product effects at 21,000 competitors and cost cuts; 2) US and Chinese subsidiaries to 3 19,000 sustain growth via distribution channel expansions 2 17,000 1 15,000 0 13 14 15 16 17 18E 19E Source: Company data, KB Securities estimates OP contribution growth by major region - Enterprise value expected to recover, backed by improving ramyeon earnings at home and abroad in 2019 - 1) Domestic: Earnings improvements should be led by % 2018E 2019E 150 renewals of mainstay products and reduced marketing cost burden as well as weakening threat from rivals 100 - 2) US: Earnings were hurt by rising production costs and other 50 expenses caused by expanding retail channels; Profitability 0 improvement possible in 2019, buoyed by strong growth of US -50 market (market share up to 15%) and price markup effects -100 - 3) China: Earnings pickup materialized in 2018 amid easing ramifications of THAAD battery deployment and price markup -150 effects in Aug 2017; Sound earnings expected to continue in -200 2019 thanks to expansion into western inland regions of China Korea China US Japan Australia and strengthening online channel.