South Korea_Consumer Sector Research_2011dec

8/3/2019 South Korea_Consumer Sector Research_2011dec

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Consumer

Either expensive or cheap

Analyst: Gene Parktel 822) 768-7477e-mail [email protected]

I. Prepare for weakening consumption

II. Apparel industry: Lower growth expectation for 2012

III. F&B, Select undervalued stocks


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ConsumerI. Prepare for weakening consumption

Asset market contraction

Source: Woori I&S Research Center

Retail sector: No Middle Ground Expensive orcheap strategy recommended

Deepening consumption polarization at middle income households: To maintainhigh-end consumption, middle-income households buy more low-end products

Abundant wealth in absoluteterms& low consumption

propensity Consumptionto continue

Deteriorating businessenvironment

High consumptionpropensity

Contractingconsumption

Spending on high-end goods to

continueHDS

Purchase morelow-end goodsE-Mart

High-

income

High-

income

Middle-income

Middle-income

Weakening wealtheffects

Slow wage growth+

In 2012, retail sectors relative earnings momentum to weaken amid

contracting consumption momentum

- Retail sectors relative earnings momentum and attractiveness to

weaken in 2012 due to sluggish consumption on slowing income

growth, delayed asset market recovery, and high-base effect

-However, stabilizing macro indicators (slowing inflation, stabilization ofbase rate, strong won, and employment growth) to create favorable

environment over mid- to long term

Consumption polarization deepens in middle-income households;

select stocks by focusing on either expensive or cheap products

-High-income households expected to keep spending thanks to boththeir abundant wealth (top 20% income-earners own 43% of total

household assets and 58% of property income) and low consumption

propensity (consumption propensity of 56%)

- Middle-income households (consumption propensity of 81%) likely to

realign their purchase priorities to continue buying high-end goods,

they will likely buy more lower-end daily household goods; low-endgoods buying to further increase for those in low-income bracket

(consumption propensity of 94~178%)

- In line with slowing consumption, we recommended selective approach,

focusing on either expensive or cheap products 1) Hyundai

Department Store (HDS): Strong leverage effects on solid high-income

customer base and streamlined cost structure; and 2) E-Mart:

Strengthened price competitiveness and improving margins on

diversification of business structure

Consumption pattern

Consumption pattern

Low-income

Low-income


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-In 2012, earnings momentum to remain sound in retail sector:

operating profit to rise 10.7% y-y (up 9.2% y-y in 2011)

- However, the sectors relative earnings momentum compared

to manufacturing sectors to weaken sharply may be

misinterpreted as weakening momentum of retail sector

-Retail sectors relative earnings momentum (operating profit)

correlates highly with sectors relative return

Source: Company report, Woori I&S Research Center estimates Source: Company report, Woori I&S Research Center estimates

Retail sectors relative earnings momentum (vsmanufacturing) to weaken

Retail sectors relative earnings momentum (operatingprofit) highly correlated with its relative performance

Retail sectors relative earnings momentum to gradually weaken

-200

-160

-120

-80

-40

0

40

80

'03 '04 '05 '06 '07 '08 '90 '10 '11E '12F

240

280

320

360

400

Retail sector's relative earnings momentum to the

manufacturing sector (LHS)

Retail sector's relative performance to the Kospi (RHS)

(%p)

-100

-60

-20

20

60

100

1Q03 3Q04 1Q06 3Q07 1Q09 3Q10 1Q12F

Retail's Change in OP - Kospi mfg's Change in OP

(%P)


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-In 2012, retail market growth to slow to 6.8% y-y based onaverage-case scenario (best-case 7.8%, worst-case 6.3%) vs8.7% in 2010 and 8.1% in 2011; growth expected to reboundfrom 3Q12 after hitting bottom in 2Q12 (6.2% y-y growth)

- (+) Rising employment, global monetary easing andstabilizing macro environment

- (-) Slowing wage growth and weakening wealth effects

-Rising sales growth at discount stores, supermarkets vsslowing growth at department stores, home shopping firms

- Discount stores: Double-digit sales growth (11.1%) to besustained on growing preference for low-end goods, effectivepricing strategy, and diversified store formats (includingwarehouse-type stores)

- Department stores: Sales growth to fall to single-digits (8.3%)

for first time in three years due to high-base effect andreduced buying of high-end goods on contracting consumersentiment

Note: Retail market growth based on retail sales excluding automobile and gasoline sales

Source: Statistics Korea, Woori I&S Research Center estimates

Note: Including new stores; home shopping based on total GMS of three listed home shopping

companies

Source: Statistics Korea, Woori I&S Research Center estimates

2012 retail market: Sound growth to continue, but slowery-y Sales growth by type (inc. new stores): y-y comparison

2012 retail market outlook: Slowing market growth appears inevitable

-3

0

3

6

9

12

15

'02 '03 '04 '05 '06 '07 '08 '09 '10 '11E '12F

(%) Base-case

Best-case

Worst-case

-20

-10

0

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20

30

'03 '04 '05 '06 '07 '08 '09 '10 '11E '12E

(% y-y) Department store

Discount store

Home shopping


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-Consumer sentiment index (CSI) began correction from 2H11due to global economic downturn and sluggish macro

indicators

- Weak sentiment to continue until 1H12 due to slowing

recovery of global economy and European fiscal crisis

-CSI outlook: CSI for household income of those in low-income bracket fell below neutral in 2010 followed by mid-

income bracket in 1H11; expectation for high-income bracket

to also slip below neutral

- CSI for household income to bottom in 1H12

Note: A reading below (above) 100 implies worse (better) economic situations compared to average

past economic conditions

Source: BOK, Statistics Korea, Woori I&S Research Center estimates

Source: BOK

Consumer sentiment to correct till end-1H12 Household income outlook CSI: Decline began with low-income bracket

Consumer sentiment to contract (or remain stalled) for time being

80

90

100

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130

'01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11

-20

-10

0

10

20

30

(% y-y)CSI (LHS)

Consumption spending forecast (LHS)

Retail market growth (RHS)

(Base line = 100)

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90

100

110

120

'08.7 '09.1 '09.7 '10.1 '10.7 '11.1 '11.7

Less than W1mn W1-2mnW2-3mn W3-4mnW4-5mn W5mn and above


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- Household income growth estimated at around 4% in 2012

(vs 5-5.8% over 2010~2011) due to global fiscal crisis

- In 2012, household income growth of W31tn and

consumption growth of W19tn to result in private

consumption growth of 2.9%

- The number of those employed rose 500,000 y-y in October

highest since 2004 (falling since peaking at 1.7mn newprivate sector employees in 3Q10); but, quality ofemployment still disappointing given manufacturingemployment falling since August

- Companies less willing to hire in 2012: Companies plan toincrease jobs 32.7% (2011)30.6% (2012); companiesexpected to downsize 11.2%12.4% (SERI, Aug 2011)

-Job growth leads to consumption growth; consumptiongrowth pa of up to W11tn from employment growth of500,000: private consumption growth (1.7% y-y expected)

Source: Statistics Korea, DataGuide pro, Woori I&S Research Center estimates Source: Statistics Korea, Woori I&S Research Center estimates

Household income and consumption expenditure: y-ygrowth slowing (-2)

Employment and retail market: Employment growth solid(+1)

Household purchasing power: (-2) Household income growth slowing vs (+1) solidemployment

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-10

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15

'98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 11

(% y-y)

-80

-40

0

40

80

(% y-y)

Household income growth (LHS)

Household consumption growth (LHS)

Relative return of the sector (RHS) -5

0

5

10

15

20

'01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11

-300

0

300

600

900

Employment growth (RHS)

Retail market growth (LHS)

(% y-y) ('000 persons y-y)


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- High-income bracket benefiting directly from wealth effects;

middle-income bracket benefits indirectly from wealth effects(via improvements in consumption sentiment)

- Household assets concentrated in high-income bracket: Top20% accounts for 43% of total household assets and 58% ofproperty income

- Consumption propensity: High-income bracket of 56% vsmid-income bracket of 81%, average of high- middle- low-income bracket of 77%,

- Stock market: Stagnant in 2011 following surge over

2009~2010; progress in resolving European fiscal crisis to

affect market in 2012

- Property market: Remained stagnant after bottoming in

3Q10; short-term recovery expected in 2012 stemming from

deregulation following a house supply shortage (including

jeonsei housing) in 2011

Source: DataGuide Pro, BOK Source: KB, BOK

Kospi and household consumption Housing transaction and jeonsei price index along withhousehold consumption in metropolitan areas

Wealth effects: Volatility in asset market to increase

-5

0

5

10

15

20

'01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11

(% y-y)

0

500

1,000

1,500

2,000

2,500

(P)

Household consumption growth (LHS)

Kospi (RHS)

-5

0

5

10

15

'01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11

-2

0

2

4

Household consumption growth (LHS)Metropolitan housing transaction index (RHS)Metropolitan jeonsei price index (RHS)

(% m-m)(% y-y)


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-In 2Q11, household debt surged to W876tn (up 9% y-y) vs2011 GDP of W1,218tn due to jeonsei price hike

-Real loan rate rose (6.6% in 3Q11 up 0.2%p YTD) due toregulations

- Base rate frozen at 3.25%; base rate cut expected in 2H12

- Base rate hike of 0.25% leads to W500bn change in

household finances expenses

Source: BOK, Statistics Korea, Woori I&S Research Center estimates Source: BOK, Credit Finance Association, Woori I&S Research Center

Household debt grew due to jeonsei hike in 2Q11 Household loan rate rose due to regulations

Household debt & base rate: Short-term burden expected due to growing debt andreal interest rate

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-10

0

10

20

30

40

'97 '99 '01 '03 '05 '07 '09 '11

-10

-5

0

5

10

15

20Household debt growth (LHS)

Retail market growth (RHS)

(% y-y) (% y-y)

0

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400

600

800

1,000

'01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11

(Wtn)

6

7

8

9

10

(%)Selling on credit (LHS)

Household loan (LHS)

Household loan rate (RHS)


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-CPI declined after peaking in August (5.3%)

- CPI downtrending to slow as import prices to continue

growing at double-digit pace

-Major countries likely to devalue their respective currencies inorder to kick-start their economies

- Stronger won more favorable to domestically-oriented shares

than to export-oriented retail shares likely to benefit;

European fiscal crisis is a wild card

Source: BOK, Woori I&S Research Center Source: BOK, DataGuide Pro

Inflation eases after peaking in 3Q11 Won to gradually strengthen against dollar

Inflation and forex rates to be positive for sector

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-5

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10

15

'01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11

-50

0

50

100

150

200

250

300

CPI (LHS)

Import price (LHS)

Sector index chg (RHS)

(% y-y) (% y-y)

800

900

1,000

1,100

1,200

1,300

1,400

1,500

'01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11

100

300

500

700

900

1,100Won/dollar (LHS)

Retail sector index (RHS)

(won)


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Source: DataGuide Pro, Woori I&S Research Center

Earnings forecasts and valuations (IFRS consolidated) P/E band: Re-rating likely

Top picks: 1. HDS (069960.KS); Target price of W225,000

(Wbn) 2010 2011E 2012F 2013F

Sales 2,107.5 4,221.8 4,994.3 5,421.1

Adj. operating pr ofit 217.5 429.0 533.6 575.9

Adj. operating margin (%) 10.3 10.2 10.7 10.6

Operating prof it 252.7 444.6 552.3 596.3

Net profi t 291.7 412.2 436.0 475.1

Net profit excl. minority int erests 291.7 380.8 402.8 438.8

EPS (won) 12,844 16,270 17,211 18,752

P/E (x) 10.9 10.1 9.6 8.8

P/B (x) 1.5 1.6 1.4 1.2

ROE (%) 15.1 16.4 15.0 14.2

Net Debt(-Cash) 77.8 296.4 371.5 314.7

- Target price equivalent to a 2012 P/E of 13.1x (vs historical

average of 9.7x and peak of 15.7x)

- Likely to reach upper P/E band on strengthening growth

potential thanks to new store openings

-Rapid earnings contribution from new stores; these earningsto be more significant than rivals

Note: 1. Adj. operating profit = GMS COGS SG&A expense

2. EPS, BPS, and ROE based on net profit and shareholders equity excluding minority interests

3. 2010 earnings based on K-GAAP non-consolidated, 2011 onwards: on K-IFRS consolidatedSource: Woori I&S Research Center estimates

Current pr ice (11/11, won) 164,500 Foreign ownership 43.8%

Market cap (Wbn) 3,848.7 Dividend y ield (2010) 0.43%

- Strong operating leverage thanks to efficient cost structure;

new stores breaking-even at rapid pace

- Daegu store realized operating profit in the month after

opening in 2011 (Ilsan store opened in 2010)

-Plans to open six more stores by 2016

- Anticipate listing of its core affiliate Hanmoo Shopping

0

50,000

100,000

150,000

200,000

250,000

'04.1 '05.1 '06.1 '07.1 '08.1 '09.1 '10.1 '11.1

(Won)Price 7.1x 8.0x

9.6x 11.4x 14.0x


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-HDS began opening stores again in 2010 (closed threestores over 2003~2009) - opened a store in Ilsan in 2010 and

one in Daegu in 2011; company plans to open six more

stores by 2016 (four by HDS and two by Hanmoo Shopping)

- The Daegu Store is expected to breakeven in 2011 contrary

to previous forecasts of operating loss of W6bn

-Hanmoo Shoppings operating profit should grow 19% y-y in2012, backed by normalization of the Ilsan Store and

expansion of its COEX Store

- We believe the company will go public in 2012; major

shareholders include HDS 46.3%, Hyundai Shopping 8.3%,

Chung Mong-geun 10.4%, and KITA 33.4%

Note: Currently operates total of 12 stores(including subsidiarys stores)

Source: HDS

Note: Hanmoosnew stores: Ilsan (2010) Cheongju (2012), Yangjae(2015)

Source: Business reports, Woori I&S Research Center estimates

HDS: Floor space to grow by more than 80% followingcompletion of new stores

Hanmoo Shopping holds key stores in COEX andMokdong

Top pick 1: HDS (069960.KS); Target price of W225,000

0

30

60

90

120

150

180

'07 '08 '09 '10 '11E '12F

OP

(Wbn)

4,5226,123

265

2,230

743

407

0

2,000

4,000

6,000

8,000

10,000

'10 '16

0

150

300

450

600

750

Sales from new store areas (LHS)Sales from expanded areas (LHS)

Sales from same-store areas (LHS)

Total areas (RHS)

('000sqm)(Wbn)


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Source: E-Mart, Woori I&S Research Center estimates

Earnings forecasts and valuations (IFRS consolidated) Same-store growth at E-Mart, backed by EDLP strategy

Top pick 2: E-Mart (139480.KS); Target price of W350,000

(Wbn) 2010 2011E 2012F 2013F

Sales 11,101.0 12,401.3 13,481.7 14,576.4

Adj. operating profit 791.2 867.0 963.3 1,072.4

Adj. OP margin (%) 7.1 7.0 7.1 7.4Operating profit 791.2 876.9 974.1 1,084.0

Net profi t 824.1 571.8 674.6 770.3

Net profit excl. minority interests 824.1 571.8 674.6 770.3

EPS (won) 29,563 20,512 24,201 27,634

P/E (x) - 12.9 10.9 9.6

P/B (x) - 1.2 1.1 1.0ROE (%) 15.3 10.1 10.7 11.0

Net Debt(-Cash) 2,814.2 1,240.6 933.0 502.2

- Improved its price competitiveness via EDLP in 2010, and

reinforced margins via efficient EDLP product mix in 2011

- Sales at the first Traders store (was formerly an E-Mart)

grew 100% y-y (vs the previous E-Mart), with operating

margin rising 3%p to 5%

Note: 1. Adj. operating profit = sales-COGS-SG&A expense

2. EPS, BPS, and ROE based on net profit and shareholders equity excluding minority interests

3. 2010 data estimates + inc gains on disposal of Samsung Life stake (3.35mn shrs, W368bn before tax)Source: Woori I&S Research Center estimates

Current price (11/11, won) 296,500 Foreign ownership 61.4%

Market cap (Wbn) 8,265.2 Dividend yield (2010) 0.0%

- Operating leverage is showing signs of strengthening in 2011

following launch of EDLP strategy; margins to rise thanks to

strong product competitiveness

- Plans to restructure E-Mart and diversify business via

expanding the number of warehouse stores it runs (5 in 2011,

4 more in 2012)

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0

2

4

6

'01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11E '12F

-15

-5

5

15

25

35E-Mart

Costco same stores (RHS)

(% y-y)(% y-y)


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(Unit: Wbn, %) 2011 % 2015 % 2020 %

GMS 12,400 23,000 60,000

E-Mart 11,300 91 14,950 65 30,000 50

Non-store 300 2 3,450 15 9,000 15

New type of store 301 2 3,450 15 12,000 20

Overseas 562 5 1,150 5 9,000 15

Operating profit 830 1,400 3,700

E-Mart 838 101 - - - -

Non-store -15 -2 - - - -

New type of store 9 1 - - - -

Overseas -2 0 - - - -

-Operating margin peaked at 8.1% in 2007 before falling backto 7.0% in 2011; we expect operating margin to bottom out in

2011 and rebound to 7.4% by 2013

- Margin improvements will likely be led by stronger product

competitiveness (EDLP product mix adjustments, increased

sourcing, and operation of processing/collection centers) and

transforming sluggish E-Mart stores to Traders stores

-In 2020, aims at GMS of W60tn and operating profit ofW3.7tn

- Seeks to diversify its business portfolio (eg, warehouse store,

supermarket, E-club), while reinforcing its buying power

- The company plans to maintain its overseas business over

the longer term; restructuring currently underway in China eg,disposal of some stores

Source: E-mart, Woori I&S Research Center estimates Source: E-mart

Adj. operating margin to bottom out in 2011 Longer-term vision: Multi-channel global player

Top pick 2: E-Mart (139480.KS); Target price of W350,000

0

3,000

6,000

9,000

12,000

15,000

'01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11E '12F '13F

(Wbn)

4

6

8

10GMS (LHS)

OP margin (RHS)

(%)


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-The retail sector index outperformed the Kospi by 5%p in2010 and 10%p in 2011 (till end-3Q11)

- Outperformance due to sharp income growth in 2010 and

2011, the stock market recovery, and concerns over exporter

shares (following the global credit crisis)

-Retail sector traded at a P/E of 12.6x over past decade; thesectors premium to Kospi ranged from -21 to 130% (avg

28%), closely correlating with industry conditions

- The premium reached almost 50% in 3Q11, but has pulled

back in 4Q11

Source: DataGuide Pro, Woori I&S Research Center Source: DataGuide Pro, Woori I&S Research Center

Retail sector outperformed Kospi over 1Q10~3Q11 In 3Q11, retails P/E premium to Kospi higher than its 10-yr average

[Reference] Retail sector outperformed Kospi through 3Q11; valuations appear tohave peaked out

50

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90

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130

150

'06.1 '06.7 '07.1 '07.7 '08.1 '08.7 '09.1 '09.7 '10.1 '10.7 '11.1 '11.7

60%

80%

100%

120%

Sector index (LHS)

Relative performance to Kospi (RHS)

(2006.1 =100) (%p)

-50

0

50

100

150

'00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11E

(%)Retail's P/E premium to Kospi

Post-2000 avg premium of 28%

2011 P/E premium of 23.1%


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Consumer





Analyst: Sarah Yoontel 822) 768-7573e-mail [email protected]


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ConsumerII. Apparel industry: Lower growth expectation for 2012

Recommend selective investing in 2012

Source: Woori I&S Research Center

Entry of overseasSPAs

High growth in 2011

Recommend selective investmentRecommend selective investment

Pressure on retailers tolower sales commission

Pick companies undervalued

vs growth potential

Apparel industry growth

to decline in 2012

Apparel industry growth

to decline in 2012

High-end brands

Lower growth expectations for 2012

- Korean apparel industry enjoyed unprecedented growth in

2011; growth slowdown expected in 2012

- Industry to post growth of 7.5% in 2012 vs 11% in 2011

- High-end brands to maintain solid growth, but growth seen

from 4Q10 to act as high-base effect

Selectively invest in high-end brands withundervaluation merit

-Recommend selective investment: Focus on apparel plays

that are less sensitive to economic cyclical events and that

possess valuation merit

- Recommend undervalued apparel plays that sell high-end

products targeting consumers in high-income bracket

Top picks: Youngone Corp, LG Fashion

- Youngone Corp (Buy; Target price: W36,000)

- LG Fashion (Buy; Target price: W60,000)

Lower rating on apparel industry to Neutral

LG

Fashion

5

10

15

20

0 5 10 15 20

(2012 P/E, x)

(2012 sales growth, %)Shinsegae

InternationalYoungone

Corp

Handsome


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High correlation between apparel market growthand private consumption growth

Apparel market growth exceeds private consumptiongrowth in 2011

- Apparel market and private consumption growth displayed strong

correlation of 0.7 since 2000

-In 2011, despite private consumption growth slowdown, apparelmarket posted growth of 11% (highest in past ten years)

- Strong growth attributed to: 1) higher growth of high-end (luxury)

market; 2) increasing entry of overseas brands; and 3) growth of SPA

(specialty store/retailer of private-label apparel) market

Anticipate slower growth in 1H12 and recovery in 2H12

- Domestic apparel industry growth to fall in 1H12 (to 6.5%), but recover

gradually in 2H12 (8.5%); apparel market to post growth of 7.5% in

2012 which is lower than in 2011

- Private consumption growth to recover to 3.5% in 2012 (vs 2.8% in

2011), but apparel market growth likely to soften on weakening

purchase demand in middle-income bracket as low growth in gross

national income (GNI) leads to polarization in consumption

Widening gap between apparel industry growth and private consumptiongrowth; growth to slow in 2012

Source: Statistics Korea, BOK, Woori I&S Research Center

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-5

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5

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15

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'02 '03 '04 '05 '06 '07 '08 '09 '10 '11E '12F

Apparel market growth

Private consumption

(%)


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Close correlation between CSI on apparel spending and market cap growth of listed apparel makers: CSI downtrending

-CSI on apparel spending recorded 98 in August, 100 in September, and 101 in October

- Index remained above 100 in 1Q11 (101) and 2Q11 (101), but fell to 99 in 3Q11; given possible fall in apparel market growth from

November, index likely to drop below 100 in 4Q11 and 2012

- In light of close correlation between index and market cap growth of listed apparel makers, apparel shares to soften further in 2012

Lower expectations for apparel when CSI on apparel spending falls

Note 1: Correlation coefficient=0.73, Note 2: CSI (Consumer Survey Index): plans on apparel spending for coming 6 months compared to for past 6 months

Source: DataGuide Pro, BOK, Woori I&S Research Center

-60

-30

0

30

60

90

120

150

1Q02 4Q02 3Q03 2Q04 1Q05 4Q05 3Q06 2Q07 1Q08 4Q08 3Q09 2Q10 1Q11

(%)

80

90

100

110

120

Market cap growth of listed apparel makers (LHS)

CSI on apparel spending (RHS)

II A l i d t L th t ti f 2012


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Note 1: y-y basis. Note 2: Based on same stores of three department stores

Source: MKE, Woori I&S Research Center

Note 1: y-y basis. Note 2: Based on same stores of three department stores

Source: MKE, Woori I&S Research Center

Monthly growth of apparel sales at department storesslows in 3Q11

Apparel sales growth at department stores: Luxuryapparel sales post strong growth

Apparel sales growth at department stores begins to slow

-Apparel sales at department stores grew only 7.6% y-y in3Q11, posting single-digit growth for first time in four quarters

- Apparel sales solid through October, but growth likely to slow

from November; thus, sales unlikely to increase more than

10% y-y in 4Q11

- Given base effect (growth in excess of 10% y-y from 1Q11),

sharp growth unlikely in 1H12

-From 4Q10, apparel sales growth at department stores rallied, ledby luxury apparel (up more than 20% y-y through May 2011)

- Since June, however, luxury apparel sales have stabilized, rising

at 10%-level

- Womens casual wear and kids sports wear also posting sharp

growth of around 10%

-Sales of mens wear and womens suits have declined sharply

-10

0

10

20

30

'05.1 '06.1 '07.1 '08.1 '09.1 '10.1 '11.1

(%)

-10

0

10

20

30

Women's suit Womens'

casual wear

Men's suit Kids/sports

wear

Luxury

apparel

(%)

'11.6

'11.7'11.8

'11.9

CII A l i d t L th t ti f 2012


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Source: FKI Source: Statistics Korea

BSI on apparel falls below 100 CSI drops below 100

Conservative approach advised for 2012 given lower BSI and CSI

-BSI on apparel has remained below 100 since Jun 2011(95.7 in October)

- BSI estimate came to 95.7 in November, falling below 100 for

first time since Feb 2011

- Apparel makers expect growth to slow y-y in 2012

-CSI dropped below 100 from Aug 2011

- Index has been falling for more than two years, after peaking

at 117 in Oct 2009

- Unlikely to rebound to 100 near term; thus, we advice

conservative stance for 2012

0

40

80

120

160

'05.1 '06.1 '07.1 '08.1 '09.1 '10.1 '11.1

(P) BSI (actual)

BSI (forecast)

60

80

100

120

'06.1 '07.5 '08.9 '10.1 '11.5

(P)

Consumer sentiment index

Cons merII Apparel industry: Lower growth expectation for 2012


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Rapidly-growing global SPA brands eat into Korean low- to mid-end apparel market

Source: Company disclosure, press report, Woori I&S Research Center

Global SPA brands sales in Korea H&Ms expansion to further expand global SPA brandmarket in Korea

- Global SPA brand H&M, which opened its first store in Korea in Feb

2010, opened its sixth store in Apgujeong at end-Sep 2011; strong

expansion expected going forward- Global SPA brand market grew sharply in Korea upon entry of Uniqlo

in 2006, Zara in 2008, and Mango in 2009, eating into female casual

brand market

- Combined sales of top-three (foreign) SPA brands in Korea came to

W400bn in 2010, up 20-fold over past four years; 50% or higher y-y

sales growth expected in 2011, with sales rising to W600bn (3% ofKorean apparel market)

- SPA brands not only produce their own clothing, they also sell it

exclusively

Explosive global SPA brand market expansion to hurt

Korean low- to mid-end clothing brands

- Global SPA brands have eaten into Koreas low- to mid-end apparel

market; in particular, as global SPA brands receive preferential

treatment from distribution channels (lower commissions), it looks

inevitable that low- to mid-end domestic clothing brands will suffer

contracting sales and margins

20 3473

123

226

34

80

134

37

0

50

100

150

200

250

300

350

400

450

'06 '07 '08 '09 '10

(Wbn)

H&M

ZARA

Uniqlo

66%113%

69%

84%133%

67%

ConsumerII Apparel industry: Lower growth expectation for 2012


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Despite efforts to lower sales commission paid to department stores, apparelmakers remain weak

Source: Korea Federation of Small and Medium businesses (300 companies having stores

in Hyundai, Lotte, and Shinsegae department stores)

Sales commission at big-three departmentstores: Highest for apparel

TypeAvg commission

rate

Sales commission

rate range

Leather/accessories 34.1% 22.5~39 %

Mens suits 33.5 % 27~38 %

Outdoor 33.3 % 29~36 %

Womens suits 33.1 % 19~37.5 %

Casual 32.7 % 27~37.5 %

Kids apparel 32.0 % 25~37 %

Shoes 31.2 % 25~33 %

Tableware 31.2 % 27~36 %

Cosmetics31.0 %

25~34 %

Miscellaneous goods 30.6 % 22~38 %

Big-three department stores agreed to lower salescommission

- Big-three department stores agreed to lower sales commissions for

small vendors by 3~7% (applied retroactively from Oct 2011)

-However, apparel companies already pay average sales commissionsof 33% or higher to top-three department stores, highest among

various product vendors

- Despite sales commission reduction agreement, apparel companies

will likely remain weak in power game with major retailers

- In addition to sales commission, other expenses (including promotion

expenses and renovation expenses) could be imposed on small

vendors; actual sales commission reduction unlikely

Domestic apparel makers vs foreign brands: 40% vs 10%

- While domestic apparel companies have to pay very high sales

commissions (up to 40%), foreign designers and SPA brands

estimated to pay commissions of only 10~20%



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LG Fashion

Shinsegae

International

Youngone Corp

Handsome

5

10

15

20

0 5 10 15 20

(2012 P/E, x)

(2012 sales growth, %)

-Amid weakening expectations for apparel industry growth, selective investment strategy recommended for 20121) Stable earnings expected for high-end apparel makers less sensitive to economic cycle

2) Of them, we recommend undervalued companies

1) Youngone Corp produces high-end sports/casual wear such as The North Face and Jack Wolfskin; undervalued at 2012 P/E of 7.7x

2) LG Fashion has rising portion of high-end womens apparel brands such as Max Mara and Jill Stuart; undervalued at 2012 P/E of

9.6x despite lofty growth

Source: Homepage, Google

Choose high-end goods makers Undervalued stocks with high sales growth potential

Top picks: Youngone Corp, LG Fashion (based on selective investment strategy)

Source: Woori I&S Research Center estimates



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Source: Youngone Corp, Woori I&S Research Center estimates

Earnings forecasts and valuations (IFRS consolidated) Order trend (US$)

Top picks 1: Youngone Corp (111770.KS); Target price of W36,000

-Export up 32% in 2011 on growing orders from existing clientsand securing of new clients; rapid growth to continue in 2012

(up 15% to US$900mn)

- New clients including Coach to drive future growth

Note: 1. Adj. operating profit = Sales -COGS-SG&A expense

2. EPS, BPS, and ROE based on net profit and shareholders' equity excluding minority interests


-Amid rising labor costs in China, cost competitiveness ofBangladesh draws attention

- Rapid growth expected in 2012 on new clients including

Coach, Arcteryx, and Engelbert Strauss

(Wbn) 2010 2011E 2012F 2013F

Sales 816.6 941.2 1,078.8 1,186.6

Adj operating profit 105.5 171.9 198.3 218.9

Adj OP margin (%) 12.9 18.3 18.4 18.4

Operating profi t 101.4 171.9 198.3 218.9

Net prof it 74.3 127.6 151.3 168.4

Net profi t excl. minority interests 72.8 125.0 148.3 165.1

EPS (won) 1,785 3,064 3,634 4,044

P/E (x) 15.7 9.2 7.7 6.9

P/B (x) 2.5 2.0 1.6 1.4

ROE (%) 16.9 24.2 23.3 21.3

Net debt (-cash) -122 -132 -120 -274

Current price (11/11) 28,100 Foreign ownership 36.1%


0

50

100

150

200

250

300

'06 '07 '08 '09 '10 '11E '12F

(US$mn)

-40

-20

0

20

40

60

80

100

Export of finished products (LHS)

Growth (y-y)

(% y-y)

US$430mn US$490mn US$520mn US$560mn US$590mn US$780mn US$900mn



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Source: EIU, Bangladesh Bureau of Statistics, Woori I&S Research Center

Earnings of overseas buyers Chinas labor cost posts fast growth

Apparel production demand increases in Bangladesh

(Wbn) 4Q10 1Q11 2Q11 3Q11E

Lululemon athletica 52.8 35.1 39.5 33.9

Sales (US$mn) 245.4 186.8 212.3 235.3

Fiscal quarter ends 2011.01 2011.04 2011.07 2011.10

Coach 18.7 14.5 8.5 15.2

Sales (US$mn) 1,264.5 950.7 1,031.7 1,050.4


Nike Inc 7.3 13.6 17.5 15.8

Sales (US$mn) 5,079.0 5,766.0 6,081.0 5,606.5


VF Corp 11.0 11.9 15.4 16.1Sales (US$mn) 2,126.2 1,958.8 1,840.1 2,591.1


Polo Ralph Lauren 24.4 6.7 22.2 20.2

Sales (US$mn) 1,548.0 1,426.9 1,409.2 1,840.9


Timberland 26.7 10.1 27.3 19.6

Sales (US$mn) 491.1 349.0 240.1 517.0


-

Labor costs in Bangladesh up less than 3% over five years vs16% hike in China

- As Youngone Corp produces 65% of its products in

Bangladesh, it boasts competitive labor costs-> increase in

orders

Note1. The North Face acquired by FVF Corp in 2001

2. LululemonAthleticaproduces yoga and dance wear and running gear

Source: Bloomberg, Woori I&S Research Center

-15

0

15

30

'00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11E

Bangladesh

China

Vietnam

(%)



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Co su epp y g p

Source: LG Fashion, Woori I&S Research Center estimate s

Earnings forecasts and valuations (IFRS consolidated) Female brands drive overall sales growth

Top picks 2: LG Fashion(093050.KS); Target price of W60,000

- Direct import of brands such as Max Mara, Neil Barrett, and

Burton in 2011 to contribute to sales in 2012

- Growth to continue in 2012 on sustained growth of high-end

brands such as Lafuma and Jill Stuart

Note: 1. Adj. operating profit = Sales -COGS-SG&A expense

2. EPS, BPS, and ROE based on net profit and shareholders' equity excluding minority interests


- Rapid growth to continue in 2012 with sales of W1,572.4bn

(up 15% y-y) and operating profit of W176.9bn (up 15% y-y)

- Expectation beating top-line growth to continue in 2012

- Leader in apparel industry with attractive valuation

(Wbn) 2010 2011E 2012F 2013F

Sales 1,121.2 1,368.3 1,572.4 1,729.7

Adj operating profit 120.5 154.5 176.9 196.7

Adj OP margin (%) 10.7 11.3 11.3 11.4

Operating profi t 122.9 154.5 176.9 196.7

Net prof it 92.2 118.7 141.1 158.7

Net profi t excl. minority interests 92.2 118.7 141.1 158.7

EPS (won) 3,155 4,059 4,825 5,427

P/E (x) 14.7 11.5 9.6 8.6

P/B (x) 2.1 1.8 1.6 1.4

ROE (%) 15.4 17.2 17.7 17.2Net Debt(-Cash) -70 -115 -192 -291

Current price (11/11) 46,500 Foreign ownership 20.3%


0

2,000

4,000

6,000

8,000

10,000

12,000

'06 '07 '08 '09 '10

Men's suit Casual

Sports/outdoor Accessories

Women's apparel

(Wbn)

11%9%

12%18%

21%Portion of women's


29/43

Consumer





Analyst: Judy Kim

tel 822) [email protected]

ConsumerIII. F&B, Select undervalued stocks


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292

Source: DataGuide, Woori I&S Research Center estimates

Food and beverage sectors valuationsexpensive, but there are cheap stocks

Food and beverage sectors valuations expensive...select undervalued stocks

Food and beverage sectors premiums expensive but

- The food and beverage (F&B) sector has risen 17% YTD in 2011,

outperforming the market by 26%p; sector has 31% premium to the

market higher than historic average

-We attribute the growth to 1) profit growth from price hikes; and 2)investor preference for defensive stocks eg, food and beverage amid

growing concern over current economic uncertainties

- Price hike to be difficult in 2012 due to elections; thus, profit growth

to slow; solid performance of sector across the board hard to expect

There are undervalued shares

- While some F&B shares are demanding sector trading at an

average 2011 P/E of 12x we suggest focusing on companies

whose valuations are beneath that of the F&B average and on firms

that possess high growth potential

-As such, we recommend CJCJ, Hyundai Green Food, Binggrae, and

Lotte Samkang

Selective approach toward undervalue shares recommended

Food/bev

valuations

expensive-Absolute return17%Relative return 26%p

P/E premium31%

Earnings growth

to slowShare price less

attractive compared toother sectors

20112012High-base

effect 2011

Elections in2012; price hiketo be difficult

Orion

HiteJinro

Nongshim

KT&G

Binggrae

CJCJ

Ottogi

Lotte Samkang

MuhakCrownConfec

0

5

10

15

20

25

30

35

0 5 10 15 20 25

(2012 P/E, x)

(2012 OP growth, %)

Excluding stake

AvgLotte Confectionery

Hyundai Green Food

Cheap and good Good but expensive

Cheap but not good Just expensive



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293

-

Food and beverage sector index has risen 17% YTD,outperforming the market by 26%p

- In particular, the sectors P/E premium to the Kospi has

reached 31% - higher than its average over 2004~2008

(28%; when the F&B sector received premium)

-

Food and beverage sectors market cap to the Kospis marketcap is 1.8% in 2011 higher than its historical avg of 1.2%

- Considering the sector accounted for 1.3% of the Kospi

during past economic uncertainties such as in 2003 (during

credit card crisis) and over 2008~2009 (global financial crisis),

we believe any additional rally will be limited even if the

current unstable economic conditions continue

Source: DataGuide Note: Excluding KT&G

Source: DataGuide

Premium to Kospi high in 2011 Food and beverage sector market cap to Kospi marketcap highest in ten years

Food and beverage sectors premium high in 2011

-30

-20

-10

0

10

20

30

4050

60

'01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12

(%)

-30

-20

-10

0

10

2030

40

(%)Food/beverage sector premium (LHS)

OP growth (RHS)

0.0

0.5

1.0

1.5

2.0

2.53.0

3.5

'00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '110

200

400

600

800

1,0001,200

1,400Kospi market cap (RHS)

Food/beverage market cap-to-Kospi market cap (LHS)

(%) (Wtn)



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-

Rapid sales and operating profit growth in 2011 thanks to pricehikes (which had been delayed)

- Additional price hikes to be difficult in 2012; thus, sales and

operating profit growth to have difficultly attaining the level they

reached in 2011

Note: Based on adjusted operating profit



Sales and operating profit growth to slow in 2012 Sectors 2012 P/E less attractive than other sectors

Sales and operating profit growth to slow y-y in 2012

-

Food and beverage sectors 2012 P/E higher than other sectorsgiven rise in share prices

- But, the relative price merit of the F&B sector has dropped given

2012 operating profit growth should come to 12%similar or

lower than the growth set to be witnessed in other sectors

0

2

4

6

8

10

12

14

Sales growth OP growth

'11E '12F

(%)

0

5

10

1520

25

Electricity/gas

Trans

portation

Pharmaceutical

Food/b

everage

Retail

Electronics

Con

struction

C

hemical

Manufacturing

Service

Trans

portation

Textile/apparel

Medical

Machinery

Steel/metal

Telecom

Financial

Non-metal

Banking

KOSPI

KOSDAQ

(x)

-70

-50

-30

-10

1030

50

(%)2012 P/E (LHS) 2012 OP growth (RHS)



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295

2012 sales and operating profit growth (y-y) by company: Growth to slow y-y

HGF Farmsco B inggraeLotte

SamkangOrion CJCJ

Lotte

ConfecMuhak KT&G

Nong

shim

Crown

ConfecDaesang

Hite

JinroOttogi

Lotte

Chilsung

F & B

sector

2010sales 34.1 12.2 9.0 18.6 5.1 3.2 7.6 17.6 -10.0 2.7 6.6 19.2 3.5 0.7 6.6 3.8

2010 OP -18.5 34.5 4.4 15.7 17.8 15.5 33.4 21.0 -10.3 2.0 26.4 35.5 -23.9 -15.6 28.3 0.52011 sales 99.9 9.5 6.6 15.1 21.0 14.6 10.8 26.0 3.4 5.7 6.4 14.0 2.0 5.0 11.7 9.7

2011 OP 297.5 93.6 -14.2 14.6 30.7 13.2 21.5 40.9 8.9 6.1 -5.3 40.2 13.3 5.3 19.2 12.5

2012 sales 44.2 14.9 8.1 24.1 17.5 11.5 8.8 6.7 3.5 5.5 5.3 6.5 3.3 3.9 5.9 8.1

2012 OP 63.1 35.0 32.7 28.2 27.2 14.6 13.7 10.2 9.8 10.3 8.9 7.4 7.4 6.9 5.1 11.9

Food & beverage plays with higher earnings growth potential than sector average

Note: Based on IFRS non-consolidated. Orion, CJCJ and KT&G based on IFRS consolidated. Operating profit based on adjusted operating profit.


(Unit: % y-y)

0

20

40

60

80

HG

F

Farmsco

Binggr

ae

LotteSamka

ng

Orion

CJCJ

Lotte

Confectionery

Food&beverage

Muhak

KT&

G

Nongshim

Crown

Confectionery

Daesang

HiteJinro

Ottogi

LotteChilsung

2012 sales growth

2012 operating profit growth

(%)



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YTD share price performance by company: Shares have already rallied strongly

Food & beverage plays trading at a lower P/E than sector average


OrionLotte

Chilsung

Hite

JinroHGF Nongsh im

Lotte

ConfecKT&G Binggrae CJCJ Ottogi Daesang

Lotte

SamkangMuhak

Crown

ConfecFarmsco

F&B sector

average

2010 33.6 13.9 -11.1 38.2 -18.3 17.0 0.5 8.7 5.6 -14.5 -2.9 10.1 55.5 93.4 12.5 13.4

2011 61.4 37.6 -28.4 34.7 7.4 12.9 11.7 -1.4 39.4 4.6 70.3 14.3 58.3 -14.9 35.6 23.3

Vs 2011 peak 61.9 52.1 7.1 56.9 32.7 23.3 22.6 18.6 60.8 26.2 102.1 64.1 95.8 17.2 97.7 34.22011 P/E 29.2 23.9 14.2 15.8 12.4 13.8 11.6 10.9 10.4 8.7 8.1 8.4 5.9 6.8 5.0 12.3

2012 P/E 22.1 19.9 17.6 12.6 11.3 10.9 10.7 9.0 8.5 8.1 7.7 7.5 5.7 4.9 3.7 10.7

(Units: %p, x)

- Food and beverage plays forecasted to post higher sales and operating profit growth in 2011 and 2012 as well as trade at a lower P/E

than the sector average: CJCJ, HGF (P/E of 5.6x when excluding stake value), Binggrae, Lotte Samkang, Farmsco

- Food and beverage plays expected to record lower sales and operating growth and trade at a higher P/E than the sector average are:

Orion, Nongshim, KT&G, Hite Jinro, Lotte Chilsung

-40

0

40

80

Orion

LotteChilsung

HiteJinro

HGF

Nongshim

Lotte

Confectionery

KT&G

Food&beverage

Binggrae

CJCJ

Ottogi

Daesang

LotteSamkang

Muhak

Crown

Confectionery

Farmsco

(%)

0

20

40(x)2011 share performance (LHS) 2011 P/E (RHS) 2012 P/E (RHS)



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Note: Based on adjusted operating profit


Note: Each divisions sales / (parent-based sales + bio subsidiarys sales)Source: CJCJ, Woori I&S Research Center estimates

Operating profit growth vs P/E premium and P/E Bio division portion to increase to 23% by 2014

1. Premiums less than F&B average, but growth potential high: CJCJ

-

To date in 2011, CJCJs shares outperformed the Kospi by49%p, attributable to: 1) raising its major product prices (price

hikes were delayed); and 2) positive earnings momentum at

the bio division (stemming from rising meat demand in China)

- Nevertheless, CJCJs shares are trading at a 2012 P/E of

8.8x (below the sector average); thus, shares to retain

upward trajectory over the long term

-

In 2012, CJCJs net profit growth to exceed 20% thanks to: 1)the stabilization of grain prices; 2) a declining forex rate; and 3)

growth momentum at the bio division stemming from lysine

capacity expansion

- CJCJs bio division to expand thanks to rising meat demand in

developing nations and capacity expansions; the bio divisions

sales contribution to increase to 23% in 2014, surpassing the

foodstuff divisions

-80

-60

-40

-20

0

2040

60

0

3

6

9

12

15

P/E premium (LHS)

Operating profit growth (LHS)

P/E (RHS)

(x)(%)

'09 '10 '11 '12

10

15

20

25

30

35

'08 '09 '10 '11E '12F '13F '14F

Bio division

Foodstuff division

(%)

23%

20%



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298

Source: DataGuide, Woori I&S Research Center estimates Source: Hyundai Green Food, Woori I&S Research Center estimates

Operating profit growth vs P/E premium and P/E Foodstuff distribution division to expand sharply

2. Premiums less than F&B average, but growth potential high: HGF

- Following the merger with Hyundai Food System and

Hyundai F&G, Hyundai Green Food (HGF) in process ofrealizing sales growth and cost reductions (thanks to a

growing operations competitiveness in the foodstuff

distribution market)

- Even stripping out merger effects, HGFs sales should grow

at least 15% y-y in 2012; excluding its stake value (around

W1tn), shares fall to an attractive P/E of 6x, and offer strong

upside potential

- The B2B division is set to grow strongly in 2012 (over 20%)

thanks to: 1) the fact that conglomerates are increasing theirmarket share in the food distribution market; and 2) growing

operations competitiveness

- For the B2C foodstuff distribution division, each new Hyundai

Department Store (HDS) branch opened will likely result in

HGF recording an additional W30bn in sales pa; furthermore,

sales should grow further as HGFs exposure rises

-60-40

-20

0

20

40

60

80100

120

02

4

6

8

10

12

1416

18

P/E premium (LHS)

Operating profit growth (LHS)

P/E (RHS)

(x)(%)

'09 '10 '11 '12

P/E considering stake value 0

100

200

300

400

500

600

700

'10 '11E '12F '13F '14F

(Wbn)

B2C

B2B

Foodstuff distribution division CAGR 15%



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Operating profit growth vs P/E premium and P/E Earnings to grow 33% y-y in 2012

3. Premiums less than F&B average, but growth potential high: Binggrae

-

In 2011, Binggraes shares plunged due to sluggish earningscaused by soft sales and higher costs

- However, the weak sales stemming from bad weather

should prove short lived, and will likely rebound in 2012; the

company is expected to diversify its business portfolio going

forward following its success in entering a new business

category

-

Margins should improve in 4Q11 thanks to a price hike; also,we expect a price rise of Together and Cledore, both of which

use a large amount of milk

- Following soft earnings in 2011, the ice cream division should

see earnings improve in 2012

- In addition, we are positive over the fact that sales of Acafela

(ads began being aired in 2011) should double y-y in 2011

Note: Based on adj. operating profit


Source: DataGuide

-40

-30

-20

-10

0

10

2030

40

0

2

4

6

8

10

12

P/E premium (LHS) OP growth (LHS)

P/E (RHS)(%) (x)

'09 '10 '11 '12

0

200

400

600

800

1,000

'08 '09 '10 '11E '12F

0

2

4

6

8

10

12Sales (LHS)

OP margin (RHS)

(Wbn) (%)



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Operating profit growth vs P/E premium and P/E Earnings to grow 28% y-y in 2012

4. Growth potential high Premiums less than F&B average, but : Lotte Samkang

-

Lotte Samkangs shares recently fell sharply currently tradingat a 2012 P/E of 7x due to soft earnings at the ice cream

division following bad summer weather

- However, all of its other divisions continue to generate sound

earnings; in particular, the oil division is growing rapidly, which

should bolster its future earnings

-

Falling raw material prices (soybean oil and palm oil) shouldhelp bolster the companys oil business margins in 2012

- The ice cream division expected to see earnings improvement

in 2012, following sluggish earnings in 2011 due to unfavorable

weather



Source: DataGuide

-60

-40

-20

0

20

40

60

01

2

3

4

5

6

7

8

9

10


P/E (RHS)

(%) (x)

'09 '10 '11 '12

0

200

400

600

800

1,000

'08 '09 '10 '11E '12F5

6

7

8

9

Sales (LHS)

OP margin (RHS)

(Wbn) (%)



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Operating profit growth vs P/E premium and P/E Attractive investment on anticipated rapid growth overlonger-term

Growth potential high, but premium expensive than F&B average: Orion

- YTD 2011, Orions shares have rallied 61% y-y; after the

recent sharp rise, shares trade at demanding 2011 P/E of 29x

- Despite solid sales growth, earnings will likely fall below

expectations in the near term due to continuing marketing

expenses

- Bottom-line growth should slow y-y in 2012, and thus, shares

offer limited upside in the near term

- Top-line growth should continue at its overseas divisions

(includes China, Vietnam, and Russia); in particular, the

company is seeking to diversify to new regions in China by

establishing plants in Shenyang in 2012 and Sichuan in 2016

- Sales exceeded W100bn in Vietnam in 2011, and it will likely

take the number-one spot in the food and beverage sector;

success in Vietnam bodes well for its advance into Indochina

(Units: No., Wbn) 2010 2011ENo of

lines

Sales

per line

Additional

lines

Estimated

sales growth

China

OFC 525 656 17

12.8

0

358.4OSC 44 55 7 7

OFS 118 165 12 2

OFG 29 58 5 19

Shenyang 30 384.0

Vietnam

Ho Chin Min

107

6

8.9

6

106.8Hanoi 6 6

Total 53 70 849.2


Source: DataGuide, Woori I&S Research Center estimatesNote: Sales per line annualized

Source: Orion, Woori I&S Research Center estimates

-100

-50

0

50

100

150

200

0

10

20

30

40


P/E (RHS)

(x)(%)

'09 '10 '11 '12



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Operating profit growth vs P/E premium and P/E Shares to rebound after bottoming, but only whenproduct prices are raised

Earnings growth potential limited and valuations demanding: Nongshim

- So far in 2011, Nongshim shares have been weak following

the discontinuation of Shinramen Black, but valuations

remain high: 2011 P/E of 12x and a 2012 P/E of 11x

- Shares to remain subdued due to lack of momentum, at least

until ramen prices are raised

- Nongshims market share has fallen in 2011 following the

shelving of Shinramen black and strong competition from new

ramen products; its ASP growth is likely to slow

- Despite rising costs, Nongshim was unable to raise product

prices, thus, weak earnings growth expected in 2011; in 2012,

positive y-y earnings growth expected on low-base effects, but

a meaningful earnings improvement is only expected when

product prices are raised

Note: Based on adj operating profit


Source: NongShim, Woori I&S Research Center estimates

-30-20

-10

0

10

20

30

40

50

60

02

4

6

8

10

12

14

16


P/E (RHS)

(x)(%)

'09 '10 '11 '12

65

70

75

'01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11

(%)

M/S declines

300

400

500

600

'02 '04 '06 '08 '10 '12F

ASP growth slows

(won/pack)



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Earnings forecasts and valuations (IFRS consolidated) Bio divisions strong earnings to drive up CJCJs salesand operating profit growth

Top picks 1: CJCJ (097950.KS); Target price of W400,000

(Wbn) 2010 2011E 2012F 2013F

Sales 5,669 6,550 7,351 8,201

Adj operating profit 443 502 575 675

Adj OP margin (%) 7.8 7.7 7.8 8.2

Operating prof it 400 502 575 675

Net pro fit 686 371 457 517

NP excl. minor ity in terests 683 370 455 515

EPS (won) 54,396 28,200 34,377 38,997

P/E (x) 4.0 10.7 8.8 7.8

P/B (x) 1.1 1.4 1.2 1.1

ROE (%) 29.2 12.3 13.5 13.6Net Debt(-Cash) 1,341 1,318 1,388 1,194

- Investment points: 1) margins to improve going forward

thanks to stabilizing grain prices; 2) operating/non-operating

profit rising y-y on a decline in won/dollar forex rate; and 3)

strong bio division earnings to continue thanks to lysine

capacity expansion and increasing meat consumption in

emerging markets

Note 1: Adj operating profit = sales COGS- SG&A expenseNote 2: EPS, BPS, and ROE based on net profit and shareholders equity excluding minority interestsSource: Woori I&S Research Center estimates


Market cap (Wbn) 3,956 Dividend yield (2010) 1.8%

- Bio divisions sales growth should increase its contribution to

total sales up to 23% by 2014, exceeding that of the foodstuff

divisions

- We are positive toward CJCJ on the fact that it should be

able to grow by diversifying overseas sales, offsetting (over

the mid- to long term) likely low growth at the domestic

foodstuff division

0

2,000

4,000

6,000

8,000

10,000

'09 '10 '11E '12F '13F

5

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8

9Sales (LHS)

OP margin (RHS)

(Wbn) (%)



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Earnings forecasts and valuations (IFRS consolidated) Merger-driven top- and bottom-line expansion

Top picks 2: Hyundai Green Food (005440.KS); Target price of W20,000

(Wbn) 2010 2011E 2012F 2013F

Sales 395 789 1,138 1,292

Adj operating profit 13 49 80 108

Adj OP margin (%) 3 6.3 7.1 8.4

Operating prof it 26 52 84 112

Net pro fit 78 86 113 139

NP excl. minor ity in terests 78 86 113 139

EPS (won) 1,067 918 1,153 1,419

P/E (x) 10.5 16.5 13.1 10.7

P/B (x) 1.0 1.3 1.2 1.1

ROE (%) 9.2 7.8 9.4 10.5Net Debt(-Cash) -190 -84 -83 -131

- The merger with Hyundai F&G has strengthened HGFs sales

capability within the food distribution market; sales growth

and cost reduction synergies are expected to continue

- Even when excluding expected positive merger effects, sales

and operating profit growth should both exceed 15% in 2012

Note 1: Adj operating profit = sales COGS- SG&A expenseNote 2: EPS, BPS, and ROE based on net profit and shareholders equity excluding minority interestsSource: Woori I&S Research Center estimates


Market cap (Wbn) 1,459 Dividend yield (2010) 0.4%

- Under Hyundai Department Store Groups mid- to long-term

growth vision, HGF is set to become a core food business

subsidiary

- Excluding the value of its stake holdings (around W1tn), the

shares trade at a 2011 P/E of 5.6x, and we believe ample

upside exists

0

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400

600

800

1,0001,200

1,400

'09 '10 '11E '12F '13F

0

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10Sales (LHS)

OP margin (RHS)

(Wbn) (%)


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Woori Investment & Securities does not have a stake greater than or equal to 1% in companies mentioned in this report as of the preparation date.

Woori I&S has not provided this material to any institutional investor or other third party in advance. The Korean version of this material was distributed on November 23, 2011. The analyst does not own share(s) of the companies mentioned in this material as of the preparation date.

Woori I& S is an issuer and LP (liquidity provider) of ELW taking HDS, LotteShopping, Shinsegae, CJ O Shopping, CJCJ, Orion and Nongshim as an underlying asset. Hi-Mart, Hotel Shilla, Binggraeand LotteSamkang are not our coverage. The sector analyst has attended an overseas IR meeting with expenses partly covered by Orion. This report correctly reflects the analysts opinion and was written without any external influence or intervention.

Investment ratings and target price history for the companies mentioned in this report can be found in the 2012 Outlook Theme & Industryreport on the WOORI I& S website (www.wooriwm.com).

South Korea_Consumer Sector Research_2011dec

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