20151126-三星证券-2016_outlook__Turnaround_plays_to_shine_64页_4mb

Sector Update Summary

Core Content

This document provides a comprehensive analysis of the Korean retail sector, focusing on performance in 2015, outlook for 2016, and investment strategies. It highlights the impact of government policies, economic conditions, and consumer behavior on various retail formats, including department stores, discount stores, convenience stores, food-material distributors, and home shopping companies.

Main Points

• 2015 Review:
  Domestic consumption was weak throughout 2015, with a slight recovery in October due to the Korean Black Friday event and government stimulus. Retail shares outperformed the Kospi for the first time in three years, driven by strong performances in convenience stores and food-material distributors. However, home shopping companies underperformed due to regulatory issues and a health supplement scandal.

• 2016 Outlook:
  Private consumption is expected to grow by 2.3% in 2016, up from 1.8% in 2015. The government's measures, including tax cuts and consumption incentives, are anticipated to boost demand. The real estate market and low inflation/interest rates will also support consumption. The document forecasts that convenience stores, food-material distributors, and home electronics retailers will be the most promising formats in 2016, though convenience stores may see slowed growth due to valuation and reduced cigarette price effects.

• Investment Strategy and Top Picks:

  • Shinsegae is recommended due to its duty-free growth and expansion plans.
  • CJ O Shopping is a top pick for small caps, with a potential capital gain from selling its stake in CJ HelloVision to SK Telecom.
  • Hyundai Home Shopping and GS Home Shopping are undervalued and should be considered for addition to portfolios.
  • E-mart is highlighted as a defensive stock with strong prospects in online and warehouse-type discount stores.

• Consumption Drivers:

  • Government-led initiatives such as tax cuts, reverse mortgage loans, and the Korean Black Friday event.
  • Low inflation and interest rates.
  • Increasing popularity of online and warehouse-type shopping.
  • Rising disposable income and changing consumer preferences.

• Key Challenges:

  • Structural negatives like growing household debt, an aging population, and rising youth unemployment.
  • Deflationary pressures and the potential for a weak won to reduce demand for imports.
  • Continued decline in traditional discount store performance due to shifting consumer preferences.

Key Information

Retail Formats and Performance

2016 Growth Projections

• Department Stores: Expected to grow by 3.3% in 2015 and 4.5% in 2016, driven by new store openings and realignment toward outlets and shopping malls.
• Discount Stores: Combined sales growth expected to be 0.2% in 2015 and 1.2% in 2016, with E-mart gaining market share.
• Convenience Stores: Growth may slow in 2016 due to valuation and reduced cigarette price effects.
• Home Shopping Companies: Likely to recover gradually from 2016, with E-mart and CJ O Shopping being highlighted.
• Home Electronics Retailers: Expected to grow significantly over the next two to three years due to rising sales of small electronics and increased commissions from subsidies.

Investment Recommendations

• Top Picks: Shinsegae, CJ O Shopping, Hyundai Home Shopping, GS Home Shopping, and E-mart.
• Avoid: Lotte Himart, as it is less attractive compared to other formats.
• Defensive Play: E-mart is recommended for its strong performance in online and warehouse-type stores.

Consumer Sentiment and Trends

• Consumer Sentiment Index (CSI): Improved in May 2015, but dipped sharply in June due to the MERS outbreak.
• Online Shopping Growth: E-mart's online mall saw 30% year-on-year growth, supported by improved logistics and customer satisfaction.
• Chinese Tourists: Expected to boost sales at department and discount stores, especially in areas like Gangnam and Sogongdong.

Conclusion

The Korean retail sector is expected to show gradual recovery in 2016, with a focus on home shopping, home electronics, and online/warehouse-type discount stores. While department stores are under pressure due to structural challenges, those realigning toward shopping malls and outlets are better positioned for growth. The document recommends strategic investments in companies with strong fundamentals and growth potential, such as Shinsegae and E-mart.