20160412-三星证券-Retail__1Q16_preview_and_2016_outlook_29页_2mb

Retail Sector Summary

Core Content

This document provides an analysis of the retail sector in South Korea, focusing on the performance of key companies such as Lotte Shopping, Hyundai Department Store, and E-mart, with an outlook for the first quarter of 2016 (1Q16) and the full year 2016 (2016E). It outlines expectations for sales and operating profit growth, compares performance across different retail formats, and offers investment recommendations.

Main Points

1Q16 Preview

• Retailers: Earnings are expected to rebound from the impact of MERS in 2H15. Department stores and TV home shopping companies are projected to show strong results, while discount stores are expected to be sluggish. Convenience stores are anticipated to have robust sales growth of around 30% but face declining operating profits due to a high base.
• Department Stores: Same-store sales (SSS) likely rose 2.8% y-y in 1Q, up from 1% in 4Q, driven by normalization of consumption and improving industry conditions. Hyundai Department Store is expected to post strong results.
• Home Shopping Companies: Operating profit is likely to maintain y-y growth, with Hyundai Home Shopping expected to perform best. Sales are expected to slightly rise, and mobile-related costs are projected to decrease.
• Convenience Stores: Expected to post sector-high operating profits in 1Q, but sales growth may weaken in the near term.

Investment Strategy

• Retail stocks, which had rallied 15% earlier in the year, have been correcting.
• Earnings are expected to grow on a low base due to MERS effects in Q2-Q3 2015.
• A basket buy approach is recommended for TV home shopping stocks, as they are seen as undervalued.
• For large caps, Lotte Shopping is highlighted as a top pick due to a low base and improved corporate governance.
• A buy-and-hold approach is suggested for convenience stores, which are expected to grow structurally despite near-term earnings weakness.

Valuation Metrics

Key Information

• Lotte Shopping:

  • 1Q16 consolidated sales expected to be KRW7.4t (up 3.4% y-y), operating profit KRW263b (down 1.4% y-y).
  • Operating profit is expected to grow 21.6% y-y in 2016, marking the first growth in five years.
  • Fair value per share is estimated at KRW320,315, with a target price of KRW320,000.
  • The company is considered undervalued with a P/B of 0.5x.

• Hyundai Department Store:

  • 1Q16 gross sales and operating profit are expected to rise 16% and 18% y-y to KRW1.32t and KRW108.8b.
  • The company is considered the safest bet among large retailers with the best earnings visibility.
  • Fair value per share is estimated at KRW193,000, with a target price of KRW193,000.
  • Expected to grow 19% and 20% in 2016 for gross sales and operating profit, respectively.

• E-mart:

  • 1Q16 gross sales expected to rise 5.2% y-y to KRW3.37t, with operating profit down 1% y-y to KRW192.3b.
  • Earnings are expected to recover in 2016 due to base effects and improved performances at affiliates.
  • Parent-based gross sales and operating profit are projected to grow 6% and 5% y-y to KRW13.6t and KRW658.6b.
  • The core discount store business is expected to continue suffering from structurally declining consumer demand.
  • Risks include competition from Coupang and other discount stores, as well as investment burdens from online malls and convenience stores.

Summary Table

Conclusion

The retail sector is showing signs of recovery, with department stores and home shopping companies expected to outperform. While discount stores and convenience stores face challenges, they are anticipated to grow structurally. Lotte Shopping and Hyundai Department Store are highlighted as top picks, with E-mart also showing potential for recovery in 2016. Investment strategies include a basket buy for TV home shopping stocks and a buy-and-hold approach for convenience stores.