November 13, 2012 KOREA Morning Company News & Analysis Major Indices Close Chg Chg (%) Nongshim (Buy/TP: W320,000) Raise TP KOSPI 1,900.87 -3.54 -0.19 Likely to overcome all negatives KOSPI 200 248.18 -0.51 -0.21 KOSDAQ 521.43 1.53 0.29 Sector News & Analysis Turnover ('000 shares, Wbn) Shipbuilding (Neutral) Volume Value KOSPI 468,990 3,735 The law of the jungle KOSPI 200 64,914 2,526 KOSDAQ 408,919 1,883 Economy & Strategy Update Market Cap (Wbn) Fixed Income Weekly Value Uncertainty over policies should underpin bonds KOSPI 1,098,079 KOSDAQ 114,402 KOSPI Turnover (Wbn) Buy Sell Net Foreign 705 860 -154 Institutional 847 744 102 Retail 2,162 2,125 37 KOSDAQ Turnover (Wbn) Buy Sell Net Foreign 74 63 11 Institutional 136 102 33 Retail 1,670 1,712 -42 Program Buy / Sell (Wbn) Buy Sell Net KOSPI 555 499 56 KOSDAQ 15 13 2 Advances & Declines Advances Declines Unchanged KOSPI 391 436 68 KOSDAQ 452 475 65 KOSPI Top 5 Most Active Stocks by Value (Wbn) Price (W) Chg (W) Value Samsung Electronics 1,345,000 4,000 184 KODEX LEVERAGE 11,365 -15 168 WOORIDUL SCIENCES 3,170 55 159 Hyundai Motor 216,500 2,500 155 NCsoft 170,500 -8,000 122 KOSDAQ Top 5 Most Active Stocks by Value (Wbn) Price (W) Chg (W) Value Com2us 69,800 5,000 38 Sung Kwang Bend 24,650 -1,950 31 Mobilians 14,100 -550 31 Flexcom 17,750 1,100 29 Danal 12,650 -1,200 26 Note: As of November 13, 2012 This document is a summary of a report prepared by Daewoo Securities Co., Ltd. („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. 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. 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. Company November 13, 2012 Food & Beverage Nongshim (004370 KS) Daewoo Securities Co., Ltd. Woon-mok Baek Likely to overcome all negatives +822-768-4158 [email protected] Raise TP to W320,000; Maintain Buy call This year, Nongshim has been plagued with three negatives: price-fixing fines, legal disputes over the distribution rights of Samdasoo (bottled water), and food safety issues. As a result, the company’s shares have fared poorly relative to its peers, despite the potential for a 3Q earnings improvement, and an expansion in ramen market share. We expect the company’s shares to find momentum in 2013 from a normalization of its ramen market share, potential price hikes, expectations for new Buy (Maintain) products in Korea and China, and new business expansion. We maintain our Buy call Target Price (12M, W) 320,000 and raise our target price to W320,000 (from W290,000). We derived our target Share Price (11/12/12, W) 255,000 price by applying a target P/E of 15x (up from 13.5x; on reflection of the recent rise Expected Return (%) 25.5 in the food and beverage industry’s average P/E) to the average of 2013 and 2014 EPS Growth (12F, %) TTR Market EPS Growth (12F, %) 9.0 EPS estimates. P/E (12F, x) - Market P/E (12F, x) 10.2 3Q review: Exceeded the consensus KOSPI 1,900.87 Nongshim’s 3Q operating results exceeded the market consensus, with revenues of Market Cap (Wbn) 1,551 W500.7bn (up 3.9% YoY), an operating profit of W34.7bn (up 25.4% YoY), and a net Shares Outstanding (mn) 6 profit of W31.2bn (up 60.1% YoY). Ramen revenues expanded 10.3% YoY. And Avg Trading Volume (60D, '000) 38 Avg Trading Value (60D, Wbn) 10 revenues related to cup-ramen products jumped 16.2% YoY, boosted by an increase Dividend Yield (12F, %) 1.6 in single-person households. The company’s ramen market share continued to pick Free Float (%) 49.6 up QoQ, reaching 67.4% in 3Q (from 63.7%). The company’s ramen market share 52-Week Low (W) 203,000 had plunged from 68.1% in 3Q11 to 62.7% in 4Q11 and 62.2% in 1Q12. Beverage 52-Week High (W) 296,000 revenues deteriorated 9.6% YoY due to a supply disruption of Samdasoo. Overseas Beta (12M, Daily Rate of Return) 0.27 revenues grew 18.6% YoY thanks to robust revenues in China (up 24.8% YoY) and Price Return Volatility (12M Daily, %, SD) 2.6 the US (up 20.9% YoY). Foreign Ownership (%) 27.1 Major Shareholder(s) Growth in operating profit and net profit was largely attributable to a reduction in Nongshim Holdings et al. (45.49%) fixed costs (resulting from ramen sales volume growth) and an increase in F/X- NPS (6.12%) related gains caused by won appreciation. Price Performance Noteworthy items for 2013: Ramen market share; Introduction of Baeksansoo (%) 1M 6M 12M Absolute -10.5 4.9 16.7 We anticipate Nongshim’s market share to expand to 70% in 2013, driven by the Relative -8.9 5.8 14.7 revival of red-soup ramen products, a re-launch of Shin Ramyun Black, launches of Key Business premium products priced at above W1,000 (e.g., Jinjja Jinjja, Gochu Bibimmyun, Nongshim is the top ramen and confectionery company in Korea. Shin Ramyun Black), and the renewals of some products. Although some sales of the company’s products could contract due to food safety issues, we believe sales should recover in three~six months. In addition, given that Samyang Foods and Paldo raised their ramen prices in August, we believe that Nongshim could also raise its ramen prices next year. Share price FY Revenues OP OP Margin NP EPS EBITDA FCF ROE P/E P/B EV/EBITDA 140 KOSPI (Wbn) (Wbn) (%) (Wbn) (Won) (Wbn) (Wbn) (%) (X) (X) (X) 130 12/10 1,895 155 8.2 138 22,696 201 104 10.4 9.0 0.8 4.2 120 110 12/11 1,971 110 5.6 86 14,167 162 43 5.9 16.4 0.9 6.3 100 12/12F 1,997 110 5.5 -6 -939 165 1 -0.4 - 1.1 7.0 90 12/13F 1,967 117 6.0 119 19,574 180 79 7.9 13.0 1.0 6.1 80 12/14F 2,136 135 6.3 143 23,482 197 115 8.9 10.9 0.9 5.1 11/11 3/12 7/12 11/12 Notes: All figures are based on non-consolidated K-IFRS Sources: Company data, KDB Daewoo Securities Research estimates This document is a summary of a report prepared by Daewoo Securities Co., Ltd. (“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. 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. 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. Company November 13, 2012 Given that the company’s contract regarding its Samdasoo distribution rights expires in mid-December, Nongshim plans to introduce its Chinese bottled water brand Baeksansoo in Korea around December. Nongshim’s Chinese subsidiary built a factory for Baeksansoo in the Jilin Province in 2010, the capacity of which is equivalent to 50% of the Samdasoo capacity. We project the discontinuation of Nongshim’s Samdasoo business will lead to a W190bn decline in revenues (9% of overall revenues) and a W12bn drop in operating profit (11% of overall operating profit) in 2013 for Nongshim. However, it should be noted that Nongshim has distribution networks for its bottled water business. We advise investors to keep tabs on whether the Baeksansoo brand can smoothly penetrate the domestic market. Table 1. Nongshim 3Q earnings vs. forecasts (Wbn, %) 3Q12 Change 3Q11 2Q12 Actual KDB Daewoo Consensus YoY QoQ Revenues 482.0 469.2 500.7 497.9 495.1 3.9 6.7 Operating profit 27.7 18.7 34.7 30.0 29.2 25.4 85.2 Pretax profit 25.6 22.1 41.4 37.8 33.9 61.5 87.0 Net profit 19.5 16.7 31.2 29.1 26.7 60.1 86.7 OP margin 5.7 4.0 6.9 6.0 5.9 - - NP margin 4.0 3.6 6.2 5.8 5.4 - - Sources: Company data, KDB Daewoo Securities Research Table 2.