Ottogi (007310 KS ) Steady earnings to continue Food & beverage 2Q18 preview: Ramen and frozen food drive strength Earnings Preview For 2Q18, we expect Ottogi to post a 7.0% YoY increase in revenue and an 18.4% gain in operating profit. We believe revenue growth was robust, driven by the continu ation July 19, 2018 of strong growth (7-9%) in noodles (ramen, vermicelli, etc.), frozen food (dumplings, pizza, rice, HMR, etc.), and seafood (canned tuna, etc.). Following some softness in 1Q18, we estimate revenue from sauces (curry, “three-minute” series), condiments (ketchup, mayonnaise, etc.), rice (cooked rice, pre-washed rice, etc.) , and oil (sesame oil, edible oil, etc.) also rose around 3-5% in 2Q18. (Maintain) Buy Particularly worth noting is the growth of ramen, which we attribute to: 1) increased sales of new products; 2) strong sales of existing products (Jin Ramen); and 3) a rise in Target Price (12M, W) ▲ 1,050,000 actual selling prices owing to reduced discounts. We estimate Ottogi’s ramen market share reached a record 26.5% in 2Q18. We believe operating profit growth was Share Price (07/19/18, W) 820,000 supported by: 1) strong revenue growth; 2) stabilizing raw material prices; and 3) price hikes in major products (canned tuna, cooked rice, and soybean oil for restaurants). Expected Return 28% Three reasons why earnings are likely to remain steady 1) Ottogi’s new products and product extensions have been well received by the OP (18F, Wbn) 169 market. Targeting the cold bibim noodle market, the company released new products like Real Jjolmyeon and Chuncheon Makguksu, which we think could bring in monthly Consensus OP (18F, Wbn) 164 sales of around W10bn during the summer, given the positive reception so far . Sales of EPS Growth (18F, %) 4.7 frozen food (cup rice, rice bowls, dumplings, etc.) and frozen pizza ( round/square Market EPS Growth (18F, %) 10.4 pizzas, pizza cups, etc.) are continuing to grow, while Jin Jjambbong extensions, such as stir-fried and oyster-flavored versions, are also doing well. P/E (18F, x) 20.5 Market P/E (18F, x) 9.0 2) We expect raw material prices to stabilize. Ottogi annually purchases around KOSPI 2,282.29 W750bn worth of raw materials, 60% of which are imported (soybeans, raw sugar, palm oil, tuna, etc.) and 40% of which are sourced domestically ( eggs, corn syrup, Market Cap (Wbn) 2,821 ethanol, etc.). After rising in 2017, both international and domestic prices of the Shares Outstanding (mn) 3 company’s key raw materials are likely to stabilize lower in 2H18-1H19. In particular, Free Float (%) 35.6 international prices are falling materially amid concerns of a US-China trade war. Foreign Ownership (%) 17.1 Further, Ottogi is continuing its efforts to enhance its raw material processing efficiency and sourcing capabilities (bulk purchasing and centralized purchasing). Beta (12M) 0.56 52-Week Low 684,000 3) We see potential for price hikes. Unlike its competitors (which hiked prices in late 2016 52-Week High 890,000 and early 2017), Ottogi has not raised its ramen prices, as sales and market share have been rising on the back of price competitiveness (Jin Ramen) and new releases (higher- (%) 1M 6M 12M priced items like Jin Jjambbong and Jjolmyeon). The company is currently raising its actual Absolute -2.1 5.3 10.5 selling price by reducing discounts. We think Ottogi could increase ramen prices later this Relative 0.3 16.2 17.7 year, as it already has raised prices for some of its processed food products (16 items). 120 Ottogi KOSPI Maintain Buy and raise TP to W1,050,000 110 We believe Ottogi’s strong sales and product development capabilities make it well- positioned to capitalize on the growing HMR market and thus deliver steady growth. In 100 order to preempt related-party transaction risks, the company has announced that it will overhaul its ownership structure by merging with affiliates Sangmi Foods Holdings 90 (food manufacturer; revenue of W59.5bn and net profit of W4.5bn), and Poonglim P&P 80 Holdings (packaging firm; revenue of W32.8bn and net profit of W3.5bn) (to be close d 7.17 11.17 3.18 7.18 on September 27 th ). Over the long term, we think there is also a chance of Ottogi Ramen eventually becoming a consolidated subsidiary. We maintain our Buy rating on Ottogi and raise our target price to W1,050,000 (from W1,000,000). Mirae Asset Daewoo Co., Ltd. [ F&B/Tobacco ] FY (Dec.) 12/15 12/16 12/17 12/18F 12/19F 12/20F Revenue (Wbn) 1,883 2,011 2,126 2,268 2,379 2,484 Woon -mok Baek +822 -3774 -1679 OP (Wbn) 133 143 146 169 184 198 [email protected] OP margin (%) 7.1 7.1 6.9 7.5 7.7 8.0 Susie Hong NP (Wbn) 104 138 131 137 150 164 +822 -3774 -1853 EPS (W) 30,365 39,977 38,161 39,964 43,595 47,689 [email protected] ROE (%) 11.9 13.9 12.3 11.9 11.7 11.6 P/E (x) 40.3 16.6 21.1 20.5 18.8 17.2 P/B (x) 4.4 2.2 2.4 2.2 2.0 1.8 Dividend yield (%) 0.4 1.0 0.9 0.9 1.0 1.0 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 July 19, 2018 Ottogi Table 1. 2Q18 preview (Wbn, %) 2Q18F Growth 2Q17 1Q18 Mirae Asset Daewoo Consensus YoY QoQ Revenue 513.4 577.3 549.4 552.0 7.0 -4.8 Operating profit 41.5 38.5 49.1 47.4 18.4 27.5 Pretax profit 45.8 41.6 54.9 52.2 19.9 31.9 Net profit 35.7 30.3 41.3 39.4 15.7 36.1 OP margin 8.1 6.7 8.9 8.6 - - Net margin 7.0 5.3 7.5 7.1 - - Source: WISEfn, company data, Mirae Asset Daewoo Research estimates Table 2. Quarterly and annual earnings (Wbn, %) 17 18F 17 18F 19F 1Q 2Q 3Q 4Q 1Q 2QF 3QF 4QF Annual Annual Annual Revenue 532 513 564 517 577 549 600 541 2,126 2,268 2,379 Operating profit 30 42 44 30 39 49 52 29 146 169 184 Pretax profit 41 46 63 30 42 55 57 31 180 184 202 Net profit 32 36 47 16 30 41 42 23 131 137 150 OP margin 5.6 8.1 7.9 5.8 6.7 8.9 8.7 5.3 6.9 7.4 7.7 Net margin 6.1 7.0 8.3 3.2 5.3 7.5 7.1 4.3 6.2 6.1 6.3 Revenue growth 3.1 5.2 9.3 5.3 8.5 7.0 6.4 4.8 5.7 6.7 4.9 OP growth -15.7 2.6 -2.1 42.7 28.5 18.4 18.0 -4.4 2.5 15.6 9.0 Pretax profit growth -18.7 2.1 30.6 -23.6 1.0 19.9 -10.0 3.1 -1.7 2.3 9.4 Net profit growth -33.8 38.8 31.2 -39.6 -6.4 15.7 -9.4 42.9 -4.5 4.7 9.1 Source: Company data, Mirae Asset Daewoo Research estimates Table 3. 2018-19 earnings forecast revisions (Wbn, %) Previous Revised % chg. Notes 18F 19F 18F 19F 18F 19F Revenue 2,245 2,347 2,268 2,379 1.0 1.4 Frozen food sales growth Operating profit 161 174 169 184 4.9 5.8 New ramen product sales growth Pretax profit 179 195 184 202 3.2 3.3 Net profit 133 145 137 150 3.2 3.3 OP margin 7.2 7.4 7.4 7.7 - - Net margin 5.9 6.2 6.1 6.3 - - Source: Company data, Mirae Asset Daewoo Research estimates Figure 1. OP margin comparison of major processed food Figure 2. Share price performance of major processed food companies companies (since Jan. 2017) (%) (1/17=100) 8 18F 19F 160 Dongwon F&B CJCJ Daesang Lotte Foods Pulmuone Ottogi 6 130 Ottogi 4 100 2 0 70 Ottogi Dongwon F&B Daesang Lotte Foods CJCJ 1/17 5/17 9/17 1/18 5/18 9/18 Source : WISEfn , Mirae Asset Daewoo Research Source : Thomson Reuters, Mirae Asset Daewoo Research Mirae Asset Daewoo Research 2 July 19, 2018 Ottogi Figure 3. International and domestic prices of Ottogi’s key Figure 4. Domestic prices of Ottogi’s key raw materials raw materials (Cents/lb, US$/bushel) (US$/tonne) (US$/tonne) (2010=100) 40 Raw sugar (L) 1600 2500 Tuna price (L) 200 Soybeans (L) Eggs (R) Corn syrup (R) Palm oil (R) 2000 160 30 1200 1500 120 20 800 1000 80 10 400 500 40 0 0 0 0 09 11 13 15 17 00 02 04 06 08 10 12 14 16 18 Source : Thomson Reuters, Mirae Asset Daewoo Research Source : Company data , KOSIS , Mirae Asset Daewoo Research Figure 5. Domestic ramen CPI trend Figure 6. Ottogi’s ramen market share (by volume) (2015=100) (%) (%) 120 Ramen CPI (L) YoY (R) 10 27 Ottogi's ramen market share 8 110 24 6 4 100 21 2 0 90 18 -2 80 -4 15 08 10 12 14 16 18 14 15 16 17 18 Source : KOSIS , Mirae Asset Daewoo Research Source: Company data, Mirae Asset Daewoo Research Figure 7.