20160118-三星证券-Food___Beverage_OVERWEIGHT_Prices_going_up_13页_628kb

Food & Beverage Sector Update Summary

Core Content

This document provides an analysis of the Food & Beverage (F&B) sector for the year 2016, highlighting investment opportunities, expected performance, and key company insights. The overall outlook for the sector is OVERWEIGHT, as the anticipated price hikes are expected to offset concerns about high valuation multiples.

Main Points

Price Hikes and Valuation

• Price hikes are expected in the first half of 2016 due to:
  • Increased fixed costs since the last price increase in 2012-2013.
  • Regulatory concerns are unlikely to be triggered by modest hikes.
  • A weakening won should positively impact export competitiveness.

4Q Prospects

• Most F&B firms are expected to report disappointing 4Q results, but some exceptions are noted:
  • Nong Shim is expected to outperform due to the success of its new product "Mat Jjawang" and strong sales in the 4Q.
  • Hite Jinro is also anticipated to have a strong 4Q due to potential beer price increases.
• CJ CheilJedang, KT&G, and Lotte Chilsung are likely to miss 4Q expectations, possibly due to:
  • Slow sales and narrowing soybean-soybean meal spread for CJCJ.
  • SG&A cost increases and lackluster alcohol sales for Lotte Chilsung.
  • Cost recognition and weak growth for KT&G.

Investment Recommendations

• BUY recommendations are maintained for all companies except Orion.
• Orion has a revised target price of KRW1,300,000 and a lowered EPS forecast due to concerns about China sales growth and yuan depreciation.
• Nong Shim and Hite Jinro are advised to be monitored closely, with accumulation recommended if their 4Q results are weak.

Key Companies

CJ CheilJedang (097950 KS, KRW409,500)

• Target Price: KRW550,000 (up 34.3%)
• Key Factors:
  • Potential merger with Meihua, a Chinese biotech firm, which could significantly impact the amino-acid industry.
  • Cost synergies and complementary business models between CJ CheilJedang and Meihua.
  • Valuation may be affected by the recent Chinese stock market correction, which could influence the fair value of Meihua.

Lotte Chilsung

• Target Price: KRW3,000,000 (up 29.1%)
• Key Factors:
  • Price hikes in soju and carbonated beverages are expected to boost profits.
  • Earnings visibility is higher due to brand power and supply-demand dynamics.
  • Dividend yield and long-term growth from one-person households and value-based consumption.

KT&G (033780 KS, KRW105,000)

• Target Price: KRW130,000 (up 23.8%)
• Key Factors:
  • Weaker won should benefit cigarette exports.
  • Rising ASPs from duty-free prices, competitors, and exports.
  • Attractive dividend yield.
  • Cost recognition in 4Q 2015 may temporarily affect growth, but fundamentals remain strong.

Hite Jinro (000080 KS, KRW27,600)

• Target Price: KRW33,000 (up 19.6%)
• Key Factors:
  • Beer price hikes are expected, which could boost operating profit.
  • Imported beer prices are likely to rise due to the weakening won.
  • Long-term concerns include forex normalization and economic cycles affecting on-premise sales.

Nong Shim (004370 KS, KRW463,000)

• Target Price: KRW520,000 (up 12.3%)
• Key Factors:
  • Price hikes since November 2011 are expected to improve the bottom line.
  • New noodle products have performed well, with a premium version of Shin Ramen set for launch.
  • Defensive stock appeal due to uncertain economic conditions.
  • Investors are advised to assess the sustainability of Jjawang's success, market share of premium noodles, and operating margin growth.

Orion (001800 KS, KRW1,068,000)

• Target Price: KRW1,300,000 (down 21.7%)
• Key Factors:
  • EPS forecast cut by 9% due to China sales growth and yuan depreciation.
  • Valuation premium may decline if sales remain in single digits and domestic sales stagnate.
  • Foreign investors may find Orion less attractive due to yuan not depreciating against the won.

Key Information

Valuation Metrics

• P/E ratio for CJCJ is expected to decrease from 281.7 in 2013 to 15.7 in 2016.
• EV/EBITDA for CJCJ is projected to drop from 17.4 to 8.0.
• P/B ratio for CJCJ is expected to fall from 2.0 to 1.7.
• ROE for CJCJ is projected to rise from 1.4 to 7.7.

Financial Forecasts

• CJ CheilJedang is expected to report increased operating profit in 2016, driven by price hikes and cost synergies.
• Lotte Chilsung is projected to see modest sales growth and stable operating profit.
• KT&G is expected to report lower operating profit in 4Q 2016 due to cost recognition, but operating profit (excluding one-off gains) is projected to rise sharply.
• Hite Jinro is expected to see significant EPS growth and operating profit due to price hikes.
• Nong Shim is expected to see higher sales growth and EPS growth, with premium noodles set to launch.
• Orion is expected to face lower EPS growth and reduced valuation premium due to China sales and yuan depreciation.

Conclusion

The F&B sector is anticipated to benefit from price hikes, which are expected to improve profitability and operating margins. While 4Q results are expected to be weak for most companies, Nong Shim and Hite Jinro are highlighted as potential outperformers. The merger with Meihua for CJ CheilJedang is seen as a game-changer, while KT&G is expected to benefit from export growth and economic uncertainty. Orion faces valuation risks due to China sales performance and currency fluctuations. Investors are advised to accumulate shares if 4Q results are weak and to monitor the sustainability of price hikes and cost synergies.