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Retail 2017 Outlook Summary

Core Content

The Retail 2017 Outlook document outlines the expected performance of the retail sector in South Korea, focusing on key trends, consumption outlook, and investment opportunities. It highlights that the retail sector, which had been derating since 2009, is expected to rebound in 2017 due to improving ROE and valuations, with the "Big Three" offline retailers—Lotte Shopping, Hyundai Department Store, and Shinsegae—leading the recovery.

Main Points

• Sector Megatrends: The retail sector has experienced a shift in consumer behavior, with a focus on value and convenience. Department stores are evolving by opening shopping-themed entertainment parks and outlets, while discount stores are diversifying into warehouse-type and online formats.

• Domestic Consumption Outlook: Private consumption is expected to grow modestly in 2017 at 3.4%, driven by low interest rates and rising asset prices. However, challenges such as increasing rents, household debt, and global uncertainties remain.

• 2017 Outlook by Format:

  • Department Stores: Expected to lead the growth with 4.1% sales increase, supported by new store openings and improved profitability.
  • Home Electronics Retailers: Benefit from rising handset market share and mobile commissions, with strong valuations.
  • Discount Stores: Growth is expected to stabilize, with E-mart retaining a competitive edge and Lotte Mart starting to benefit from store remodeling.
  • Home Shopping Firms: Face stiff competition, especially from T-commerce, but are expected to maintain steady operating margins through cost control.
  • Supermarkets: Likely to stagnate, with 1.5% sales growth in 2017 and operating losses expected.

• Opportunities: The document identifies several areas for growth, including shopping-themed entertainment parks, warehouse-type discount stores, online grocery malls, handset distribution, and low-priced retail operations in Vietnam.

Key Information

Investment Strategy

• Retail stocks are expected to outperform due to improving operating results, attractive valuations, and positive non-operating events.
• Top picks:
  • Large caps: Shinsegae and Lotte Shopping.
  • Small caps: Lotte Himart for its attractive valuation and growth potential in the handset business.
  • Home shopping: GS Home Shopping.

Valuation Summary

• The valuation summary includes metrics such as P/E, P/B, and EV/EBITDA for major players, indicating a rebound in valuations and expected stock price targets.

Sector Performance

• Department Stores are expected to see significant sales growth due to new store openings and improved profitability.
• Discount Stores like E-mart and Lotte Mart are expected to improve profitability, with E-mart leading in growth and market share.
• Convenience Stores are expected to grow at a slower pace in 2017, but still outperform other formats.
• Home Shopping Firms are expected to see slower growth due to competition but improved margins through cost reduction.
• Supermarkets are expected to face continued challenges, with limited growth and operating losses.

Conclusion

The retail sector in South Korea is expected to recover in 2017, with the "Big Three" leading the way. Department stores and home electronics retailers are highlighted as the most attractive formats, while discount stores and convenience stores are expected to see gradual improvement. The document emphasizes the importance of diversification, cost control, and strategic expansion in driving future growth.