Ottogi (007310 KS ) Share price to eventually reflect strong sales capabilities Food & beverage Steady earnings outlook for 2017 For 2017, we expect Ottogi to report a 3.2% YoY increase in revenue and 6.1% YoY Company Update rise in operating profit (OP margin: 7.3%). We expect steady earnings growth to be March 17, 2017 driven by: 1) an increase in ramen market share; 2) brisk sales of new products in the frozen food and home meal replacement (HMR) segments; 3) likely price increases for key products; and 4) tight cost management (e.g., more efficient processing, enhanced sourcing, and improved manufacturing). (Maintain) Buy Three investment points Target Price (12M, W) 880,000 1) Ramen market share gains: Ottogi’s ramen mar ket share rose from 18.3% in 2014 to 20.5% in 2015 and 23.2% in 2016, thanks to a two-pronged strategy of Share Price (03/17/17, W) 700,000 focusing on price competitiveness in the low-end segment (e.g., Jin Ramen) and enhancing flavors in the premium segment (Jin Jjambbong). Unlike Nongsh im, Expected Return 26% Ottogi has yet to raise ramen prices. Accordingly, in 2017, we expect Ottogi to increase its market share to 26% (based on product weight). We believe that Ottogi will continue its marketing push until it achieves a market share of 30%. Given that OP (17F, Wbn) 151 low pricing alone is not sufficient to secure a bigger piece of the pie, we expect the Consensus OP (17F, Wbn) 151 company to expand its product lineup going forward. EPS Growth (17F, %) -8.7 2) Likely price hikes for key products: We believe that price increases are justifiable Market EPS Growth (17F, %) 17.8 for cooking oil, canned tuna, ram en, and mayonnaise. In the cooking oil segment, P/E (17F, x) 19.2 Ottogi has already raised B2B prices by 6-7%, reflecting higher soybean prices. In Market P/E (17F, x) 9.9 the canned tuna market, Dongwon F&B, the market leader, raised prices by an KOSPI 2,164.58 average of 5.1% in February—and we expect Ottogi (market share: 12.5%) to follow Market Cap (Wbn) 2,408 suit in 1H17. In the ramen segment, Ottogi’s focus on market share gains makes hikes unlikely in the near term; however, we believe that it is only a matter of time Shares Outstanding (mn) 3 before prices are raised. Meanwhile, considering the increa se in egg prices, we Free Float (%) 35.4 believe that the company will be able to raise mayonnaise prices. Foreign Ownership (%) 17.1 Beta (12M) 0.51 3) Expected increase in HMR revenue: Ottogi (market share: 55%) has released four 52-Week Low 615,000 kinds of frozen pizza, driving the expansion of the domestic frozen pizza market 52-Week High 1,019,000 (W5bn in 2015 W40bn in 2017F). The company has also emerged as the second- largest player (market share: 20%) in the frozen rice-product market (W32bn in (%) 1M 6M 12M 2015 W50bn in 2016 W70bn in 2017F) by releasing 11 variants, including fried Absolute -5.4 2.5 -31.3 rice and rice with toppings/stew. Relative -9.1 -5.3 -36.9 Given the strong growth potential of the ready-to-eat rice market, we project that 130 Ottogi KOSPI Ottogi (market share: 33%; no. 2 player) will try to enhance its product lineup by 110 launching new products, such as cup rice and lunch boxes. We expect Ottogi to 90 establish strong presences in the HMR and ready-to-eat rice markets, thanks to favorable externalities (e.g., rapid growth of convenience stores, rise of single- 70 person households), as well as its competitive products and sales capabilities. 50 3.16 7.16 11.16 3.17 FY (Dec.) 12/14 12/15 12/16 12/17F 12/18F 12/19F Mirae Asset Daewoo Co., Ltd. Revenue (Wbn) 1,782 1,883 2,011 2,076 2,156 2,232 [F&B/Tobacco ] OP (Wbn) 116 133 143 151 160 170 OP margin (%) 6.5 7.1 7.1 7.3 7.4 7.6 Woon -mok Baek NP (Wbn) 94 104 138 126 137 144 +822 -3774 -1679 [email protected] EPS (W) 27,258 30,365 39,977 36,507 39,764 41,764 ROE (%) 12.1 11.9 13.9 11.5 11.3 10.8 Susie Hong P/E (x) 17.8 40.3 16.6 19.2 17.6 16.8 +822 -3774 -1853 P/B (x) 2.0 4.4 2.2 2.1 1.9 1.7 [email protected] Dividend yield (%) 0.8 0.4 1.0 1.0 1.0 1.0 Notes: 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 t he U.S. PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES & DISCLAIMERS IN APPENDIX 1 AT THE END OF REPORT. March 17, 2017 Ottogi Maintain Buy and TP of W880,000 We expect Ottogi to continue to display steady earnings growth, driven by well-performing new products, likely price increases, and strong sales capabilities. Given the company’s long- term growth potential, OP margin, and ROE, we think the company deserves an over-30% premium to the F&B sector’s average 2017-2018F P/E multiple (17-18x). We think the current price level offers a good entry point. Table 1. 1Q17 preview (Wbn,%) 1Q17F Growth 1Q16 4Q16 Mirae Asset Daewoo Consensus YoY QoQ Revenue 515.6 490.5 527.0 518.1 2.2 7.4 Operating profit 35.6 21.2 37.1 38.5 4.2 75.1 Pretax profit 50.7 39.6 43.9 43.9 -13.5 10.7 Net profit 49.0 27.2 32.7 33.3 -33.2 20.2 OP margin 6.9 4.3 7.0 7.4 - - Net margin 9.5 5.5 6.2 6.4 - - Note: W25bn in one-off gains (refund of penalties) in 1Q16, Source: Company data, Mirae Asset Daewoo Research Table 2. Quarterly and annual earnings (Wbn, %) 16 17F 15 16 17F 1Q 2Q 3Q 4Q 1QF 2QF 3QF 4QF Annual Annual Annual Revenue 516 488 516 491 527 505 539 505 1,883 2,011 2,076 Operating profit 36 40 45 21 37 42 48 24 133 143 151 Pretax profit 51 45 48 40 44 46 51 28 143 183 168 Net profit 49 26 36 27 33 34 38 21 104 138 126 OP margin 6.9 8.3 8.8 4.3 7.0 8.4 8.9 4.8 7.1 7.1 7.3 Net margin 9.5 5.3 6.9 5.5 6.2 6.8 7.0 4.2 5.5 6.8 6.1 Revenue growth 11.0 7.1 2.6 6.8 2.2 3.4 4.4 2.9 5.7 6.8 3.2 OP growth -8.5 9.0 15.1 17.3 4.2 4.2 5.9 13.6 15.1 6.8 6.1 Pretax profit growth 17.3 9.9 7.7 181.6 -13.5 2.0 5.1 -29.1 14.2 28.4 -8.2 Net profit growth 49.0 -14.6 8.8 210.2 -33.2 32.7 6.0 -23.0 11.4 31.7 -8.7 Notes: Around W40bn of one-off gains in 2016 (W25bn in 1Q; W15bn in 4Q) Source: Company data, Mirae Asset Daewoo Research Table 3. 2017-18 earnings forecast revisions (Wbn, %) Previous Revised % chg. Notes 17F 18F 17F 18F 17F 18F Revenue 2,073 2,154 2,076 2,156 0.1 0.1 Operating profit 151 159 151 160 0.1 0.9 Pretax profit 167 182 168 184 1.1 1.2 Net profit 122 132 126 137 2.6 3.6 OP margin 7.3 7.4 7.3 7.4 - - Net margin 5.9 6.1 6.1 6.3 - - Source: Company data, Mirae Asset Daewoo Research Mirae Asset Daewoo Research 2 March 17, 2017 Ottogi Figure 1. OP margin comparison of major processed-food companies Figure 2. PER comparison of major processed-food companies (%) (%) 25 8 16 17F 16 17F 7 20 6 5 15 4 10 3 2 5 1 0 0 Ottogi Daesang Dongwon Lotte Foods CJCJ Pulmuone Ottogi Pulmuone Dongwon F&B Daesang Lotte Foods CJCJ F&B Source: Company data, Wisefn, Mirae Asset Daewoo Research Source: Company data, Wisefn, Mirae Asset Daewoo Research Figure 3. Ramen shipment growth Figure 4. Ottogi’s ramen market share (based on product weight) ('000 tonne) Ramen shipments (L) (%) (%) 50 YoY (R) 20 30 Market share (based on weight) 45 10 25 40 0 20 35 -10 15 30 -20 10 10 11 12 13 14 15 16 17 13.12 14.6 14.12 15.6 15.12 16.6 16.12 Source: KOSIS, Mirae Asset Daewoo Research Source: Ottogi, Mirae Asset Daewoo Research Figure 6. Ottogi ’s curry and ready -to -eat rice market share Figure 5. Retort product shipment growth (based on product weight ) ('000 tonne) (%) (%) (%) 12 Retort food shipments (L) 80 90 Curry (L) 40 YoY (R) RTE rice (R) 60 10 87 35 40 8 84 30 20 6 81 25 0 4 78 20 -20 2 -40 75 15 10 11 12 13 14 15 16 17 13.12 14.6 14.12 15.6 15.12 16.6 16.12 Source: KOSIS, Mirae Asset Daewoo Research Source: Ottogi, Mirae Asset Daewoo Research Mirae Asset Daewoo Research 3 March 17, 2017 Ottogi Figure 8.