20161007-三星证券-Retail_3Q_preview_31页_2mb

Retail Sector 3Q Preview and Investment Summary

Core Content Overview

This document provides an analysis of the Korean retail sector performance in the third quarter of the year and outlines investment strategies for key players such as Shinsegae, Hyundai Department Store (HDS), and Lotte Shopping. The summary includes the reasons for expected performance, key financial metrics, and valuation insights.

Main Points and Key Information

3Q Retail Preview

• Performance Outlook: Domestic retailers are expected to exceed consensus forecasts in 3Q after missing in 2Q, due to factors including easing uncertainties, asset price hikes, recovering consumer sentiment, a low base, and record-setting high temperatures.
• Sector Performance:
  • Department Stores and Home-Electronics Players: Likely to show robust earnings momentum.
  • Large Discounters and Supermarkets: Expected to have weaker performance.
  • Convenience Stores: Maintained structural growth, though momentum slowed due to the absence of cigarette-related positives.
• Key Companies Expected to Exceed Forecasts: Lotte Himart, HDS, Shinsegae, CJ O Shopping, GS Home Shopping, and BGF Retail.
• Impact of High Temperatures: Most beneficial for home appliance players and convenience stores, leading to sales growth of 15–18% y-y for convenience stores.
• Home Shopping: Cable TV sales likely edged up y-y, while mobile sales continued to grow robustly (10–20%).
• Department Store Sales Growth: The average SSS (Same Store Sales) growth for Korean department stores is expected to be 3% in 3Q, up from 2.8% in 1Q and 2.5% in 2Q.
• Discount Stores: Expected to have an average SSS growth of -1% to 0%, with E-mart at 1.2% and Lotte Mart at -2%.

Investment Strategy

• Sector Rally Expected: A sector-wide rally is anticipated in 3Q due to attractive valuations, better-than-forecast results, the Korea Sale Festa, and growth potential.
• Attractive Valuations: Retail stocks underperformed in May–September due to expectations of poor 3Q results, but the sector is now seen as undervalued.
• Top Picks:
  • Shinsegae: Strong performance due to normalization of DFS business and robust department store earnings.
  • HDS: Attractive due to high earnings visibility and growth momentum from new store openings and M&A activities.
  • Lotte Shopping: Expected to rebound once group-related uncertainties ease and corporate governance improves.
  • Lotte Himart: A top small-cap pick due to potential earnings rebound and improved valuations.
• Catalysts for Lotte Shopping: End of group investigations, potential DFS license bid, and Hotel Lotte IPO approval.

Valuation Analysis

• Shinsegae:
  • 3Q Performance: Gross sales expected to rise 23.1% y-y to KRW739.4b, with operating profit up 3% y-y to KRW39.2b.
  • Valuation: Current P/E (2016E) is 11.1x, with a target price of KRW270,000.
• HDS:
  • 3Q Performance: Consolidated gross sales up 13.5% y-y to KRW1.299t, with operating profit rising 10.2% y-y to KRW77.1b.
  • Valuation: Current P/E (2016E) is 10.1x, with a target price of KRW193,000.
• Lotte Shopping:
  • 3Q Performance: Gross sales up 2.7% y-y to KRW7.9t, with operating profit down 1.4% y-y to KRW192.5b.
  • Valuation: Current P/E (2016E) is 21.1x, with a target price of KRW250,000.

Key Financial Data

Summary

The retail sector in South Korea is anticipated to perform well in 3Q, driven by a recovery in consumer sentiment, easing uncertainties, and favorable weather conditions. Department stores and home-electronics players are expected to lead the sector with strong earnings momentum, while convenience stores maintain structural growth. The analysis highlights several key companies, including Shinsegae, HDS, and Lotte Shopping, as top picks due to their strong performance and valuation potential. Investors are advised to monitor the sector for a rally, particularly as companies like Shinsegae and HDS are expected to benefit from their operational improvements and strategic initiatives.