20160429-三星证券-Finding_a_compass_for_OEM_earnings_31页_2mb

Sector Update Summary: Apparel (OVERWEIGHT)

Core Content Overview

This report provides an analysis of the performance and valuation of two leading Korean apparel original equipment manufacturers (OEMs): Hansae and Youngone. It highlights the importance of tracking apparel buyers' performance, particularly their COGS (Cost of Goods Sold), as a key indicator for forecasting OEM earnings. The report also discusses the impact of vendor consolidation, currency fluctuations, and subsidiary operations on the financial outlook of these companies.

Main Points and Key Insights

1. Buyer Performance as the Key Indicator

• Apparel buyers' COGS is the most reliable metric for forecasting dollar-denominated sales for Korean OEMs.
• Sales growth tends to lag behind buyers' COGS growth by two quarters for Hansae and one quarter for Youngone.
• Vendor consolidation by buyers can impact OEMs, but it is difficult to forecast due to its dependence on suppliers' and buyers' discretion.

2. Forecasted Earnings Growth

• Youngone is expected to see operating profit growth of 20.3% in 2016 and 21% in 2017, following a slowdown in 2015.
• Hansae is projected to have operating profit growth of 19.1% in 2016 and 21% in 2017, with a base effect causing a slowdown in 2016.
• The report notes that Hansae's gross margin will decrease due to subsidiary disposals, while Youngone's gross margin will slightly increase from acquisitions.

3. Valuation and Investment Recommendations

• Youngone is recommended as a short-term BUY with a 12-month target price of KRW61,000, based on a 17x 2016 P/E.
• Hansae is recommended as a long-term BUY with a 12-month target price of KRW67,000, based on a 21.5x 2016 P/E.
• Both companies are seen as attractive investment opportunities due to their profit momentum and improving cost competitiveness.

4. Impact of Currency Movements

• Hansae benefits significantly from a stronger dollar, as over 90% of its sales are directed to US clients.
• The KRW/USD exchange rate is expected to continue strengthening in 2016 and 2017, which will favor Hansae.

5. Subsidiary Activities and Their Impact

• Hansae has disposed of subsidiaries like Hansae Dream and FRJ, which were distribution-focused and had high gross margins but low operating margins.
• Youngone has acquired subsidiaries like Scott Sports, which will increase its gross margin but lower its operating margin.

Key Financial Metrics

Outlook and Strategic Focus

• Youngone is the preferred short-term pick due to its turnaround potential and attractive valuation.
• Hansae is favored long-term for its profit momentum in 2017, steady margin improvements, and benefits from a strong dollar.
• Investors should focus on buyers' results rather than vendor consolidation, as the latter is hard to predict.

Conclusion

The report underscores the importance of monitoring buyers' COGS to forecast OEM earnings and highlights the distinct growth trajectories of Hansae and Youngone. Youngone is expected to recover in 2016 and show improved performance in 2017, while Hansae is projected to benefit from market trends and currency movements in the coming years. Both companies are recommended as BUYs based on their valuation and growth potential.