August 22, 2018 Korea Morning Focus Company News & Analysis Major Indices Close Chg Chg (%) Shinsegae International (031430/Buy/TP: W260,000) KOSPI 2,270.06 22.18 0.99 Power of platform KOSPI 200 291.93 3.32 1.15 KOSDAQ 787.15 17.37 2.26 Turnover ('000 shares, Wbn) Volume Value KOSPI 290,503 5,093 KOSPI 200 78,660 3,894 KOSDAQ 504,193 3,420 Market Cap (Wbn) Value KOSPI 1,518,199 KOSDAQ 262,063 KOSPI Turnover (Wbn) Buy Sell Net Foreign 1,506 1,400 106 Institutional 1,232 1,249 -17 Retail 2,282 2,433 -151 KOSDAQ Turnover (Wbn) Buy Sell Net Foreign 404 292 111 Institutional 304 167 137 Retail 2,718 2,953 -235 Program Buy / Sell (Wbn) Buy Sell Net KOSPI 1,280 1,225 54 KOSDAQ 250 121 129 Advances & Declines Advances Declines Unchanged KOSPI 523 293 82 KOSDAQ 891 249 102 KOSPI Top 5 Most Active Stocks by Value (Wbn) Price (W) Chg (W) Value Hynix 78,400 3,700 429 Samsung Electronics 44,800 950 422 KODEX KOSDAQ150 15,620 990 247 LEVERAGE SEMCO 143,500 10,000 176 Celltrion 268,500 7,500 167 KOSDAQ Top 5 Most Active Stocks by Value (Wbn) Price (W) Chg (W) Value SillaJen 62,900 2,400 105 ECOMAISTER 13,600 1,450 94 Keayeast 3,335 -40 92 ViroMed 217,200 16,200 83 Daea TI 9,170 50 81 Note: As of August 21, 2018 Mirae Asset Daewoo Research This document is a summary of a report prepared by Mirae Asset Daewoo Co., Ltd. (“Mirae Asset Daewoo”) and published on our website. Please review the compliance notices contained in the original report. Information and opinions contained herein have been compiled in good faith from sources deemed to be reliable. However, the information has not been independently verified. Mirae Asset Daewoo makes no guarantee, representation or warranty, express or implied, as to the fairness, accuracy or completeness of the information and opinions contained in this document. Mirae Asset Daewoo accepts no responsibility or liability whatsoever for any loss arising from the use of this document or its contents or otherwise arising in connection therewith. Information and opinions contained herein are subject to change without notice. This document is for informational purposes only. It is not and should not be construed as an offer or solicitation of an offer to purchase or sell any securities or other financial instruments. This document may not be reproduced, further distributed or published in whole or in part for any purpose. Shinsegae International (031430 KS) Power of platform Textiles/Apparel Surge in VIDIVICI’s search frequency on Baidu The search frequency of VIDIVICI, Shinsegae International’s in-house cosmetics brand, Company Update is surging on Baidu, China’s largest search engine. In our view, such a trend is August 22, 2018 attributable to Shinsegae’s marketing efforts ahead of the opening of the Shinsegae DF Gangnam store in July, including the posting of VIDIVICI products on its official page on Weibo (China’s biggest social media network). Shinsegae DF’s online store is also running the banner ad for VIDIVICI’s new product (Hydra Ice Gel Ultra Soothing Mask; launched in June) on its main page. (Maintain) Buy Platform is the key to success Shinsegae International has an upper hand over competitors, as it can leverage the Target Price (12M, W) 260,000 expansive retail network of subsidiaries (Shinsegae, etc.). The well-established distribution network should help the company to: 1) further expand its sales channel; Share Price (08/21/18, W) 182,500 2) improve consumer access (by securing more favorable store locations, or maximizing the impact of marketing activities); and 3) have greater bargaining power in negotiations over distribution rights for foreign brands. Consumer needs are Expected Return 42% increasingly becoming segmented, while intensifying market competition has led to product diversification and quality improvement. Accordingly, platform competitiveness has become critical for the success of retailers. OP (18F, Wbn) 63 What’s next? Consensus OP (18F, Wbn) 63 Shinsegae International is likely to continue its quantitative growth through the EPS Growth (18F, %) 88.0 expansion in both its brand portfolio and sales channels, and qualitative growth via Market EPS Growth (18F, %) 9.1 premium product releases and cost savings. P/E (18F, x) 28.8 Quantitative growth: The company plans to launch Yeonjak, a premium cosmetics Market P/E (18F, x) 8.9 brand (mainly based on plant extracts), in October and add two foreign cosmetics KOSPI 2,270.06 brands to its lineup by year-end. It is also looking to release VIDIVICI skincare products and Jaju’s private-label cosmetics in December. Furthermore, the company plans to Market Cap (Wbn) 1,303 expand its duty-free channels, with VIDIVICI expected to be launched in two additional duty-free stores by year-end. Shares Outstanding (mn) 7 Free Float (%) 34.9 Qualitative growth: Yesterday, Shinsegae International disclosed that it will invest Foreign Ownership (%) 4.5 W6bn in new shares of its subsidiary Intercos Korea (Intercos S.p.A. will also invest W6bn; equity stake after the investment will remain at 50%). We view the move as part Beta (12M) 0.50 of preparations for production capacity expansions due to new product launches and 52-Week Low 56,100 believe the funds will be used for operations, including purchasing of raw materials. 52-Week High 214,000 Intercos Korea will produce all VIDIVICI products going forward and is also likely to (%) 1M 6M 12M handle the production of Shinsegae International’s new brands. By increasing the production of in-house brands through its subsidiary, Shinsegae International should Absolute 1.7 121.2 178.6 be able to strengthen its vertical integration and cut costs. We also expect qualitative Relative 2.5 136.8 189.1 growth to be supported by the addition of premium products. New VIDIVICI products will have an ASP of around W100,000 (versus W67,000 for existing products), while the 370 Shinsegae International KOSPI prices of Yeonjak brand products are expected to be set at relatively high levels. 320 270 Maintain Buy and TP of W260,000 220 We reaffirm our Buy rating and SOTP-based target price of W260,000 on Shinsegae 170 International. We see: 1) fundamentals improving on the back of strong earnings 120 growth; and 2) potential expansion of multiples, driven by the cosmetics business. We 70 believe that Shinsegae International deserves a valuation premium, as the company is 8.17 12.17 4.18 8.18 the only domestic consumer goods maker that is seeking vertical integration. Mirae Asset Daewoo Co., Ltd. [ Textiles/Apparel] FY (Dec.) 12/15 12/16 12/17 12/18F 12/19F 12/20F Revenue (Wbn) 1,005 1,021 1,103 1,273 1,405 1,490 Nu-ri Ha +822-3774-1653 OP (Wbn) 20 27 25 63 100 128 [email protected] OP margin (%) 2.0 2.6 2.3 4.9 7.1 8.6 NP (Wbn) 21 17 24 45 75 97 EPS (W) 2,958 2,432 3,371 6,335 10,479 13,563 ROE (%) 4.6 3.7 5.0 8.8 13.2 15.0 P/E (x) 34.7 27.2 22.0 28.8 17.4 13.5 P/B (x) 1.6 1.0 1.1 2.5 2.2 1.9 Dividend yield (%) 0.6 0.9 0.8 0.3 0.3 0.3 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. August 22, 2018 Shinsegae International Figure 1. Baidu search trend: VIDIVICI searches are surging (Daily search traffic) 8,000 VIDIVICI Sulwhasoo Whoo 6,000 4,000 2,000 0 18.1 18.2 18.3 18.4 18.5 18.6 18.7 18.8 Note: As of August 20th Source: Baidu, Mirae Asset Daewoo Research Figure 2. Expansion of marketing for VIDIVICI on Shinsegae DF’s online platform Shinsegae DF’s official Weibo page Shinsegae DF’s online store Promotions for new VIDIVICI items (VIDIVICI Hydra Ice Gel Ultra Cool Soothing Mask) Source: Weibo, Shinsegae, Mirae Asset Daewoo Research Figure 3. Duty-free presence of Shinsegae International’s cosmetic brands (No. of DF stores) 15 15 Shilla: Jangchung-dong, Yongsan (HDC), Jeju Lotte: Sogong-dong, Lotte World Tower, Jeju 12 Shingsegae: Myeongdong, Gangnam Others: Galleria Duty Free 63, Doota Duty Free, Dongwha Duty Free, SM Duty Free (Seoul) 10 6 5 4 3 1 0 Diptyque VIDIVICI Santa Maria Novella La Perva Byredo Hourglass Note: As of August 20th;; VIDIVICI is set to open in two more locations in the coming months: Hyundai Duty Free Gangnam in November and Top City Duty Free Sinchon Station in December, totaling 14 locations by the end of the year; SMN refers to Santa Maria Novella Source: Company data, media outlets, Mirae Asset Daewoo Research Mirae Asset Daewoo Research 2 August 22, 2018 Shinsegae International Table 1. Shinsegae International’s earnings trend and outlook (Wbn, %) 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18F 4Q18F 2017 2018F 2019F Revenue 272.1 239.5 268.8 322.2 304.4 283.4 311.2 373.6 1,102.4 1,273.5 1,404.7 Foreign brands 93.8 88.9 90.3 107.7 91.2 88.9 90.5 108.5 380.6 379.1 382.9 Domestic brands 87.9 59.6 85.1 91.3 89.1 60.8 85.4 91.5 323.9 326.8 336.6 Cosmetics 11.3 14.5 15.8 21.4 39.9 54.8 55.0 69.3 63.0 219.0 329.0 Lifestyle 43.4 48.1 50.2 51.5 45.1 50.6 51.0 52.5 193.1 199.2 207.1 Tomboy 37.3 28.7 27.9 50.6 39.6 28.4 29.0 53.1 144.5 150.1 146.9 Operating profit 4.4 4.4 0.9 15.7 11.8 14.3 14.2 23.1 25.4 63.4 99.9 OP margin 1.6 1.9 0.3 4.9 3.9 5.0 4.6 6.2 2.3 5.0 7.1 Foreign brands 1.6 1.2 0.2 3.1 2.6 2.9 0.4 3.0 6.0 8.8 10.3 Domestic brands 0.5 -0.4 -0.6 4.1 2.1 -0.4 0.0 1.8 3.6 3.5 5.0 Cosmetics 0.3 0.6 2.0 2.9 7.2 12.3 12.3 14.3 5.7 46.1 72.4