AmoreG (002790) BUY ( initiate ) Growth beyond Amorepacific? 2Q13 results met market consensus

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1 KOREA August 7, 13 Company Earnings Review t AmoreG (79) BUY ( initiate ) Hyerim Kim Analyst Pharmaceuticals, Cosmetics hyerim.kim@hdsrc.com Ernest Kim RA ernest.kim@hdsrc.com Current price (Aug 6) Fair value Preference level within sector KRW38, KRW7, Growth beyond Amorepacific? Q13 results met market consensus Decreased cost burdens expected in H13 at overseas businesses of Etude and Innisfree Initiate with BUY rating and fair value of KRW7, Fig 1: Q13 results met market consensus 1Q13P %Change Market () YoY QoQ Cons. OR 1, OP 1..6 (8.) 1.8 EBT (16.8) 15.7 Parent NP (7.) 5.5 Q13 results met market consensus Q13 OP of Amorepacific Group ( AmoreG ) increased 3%YoY and met market consensus. There were losses due to a decline in earnings from door-to-door sales and increased investments in overseas businesses, but profit was solid thanks to an increased number of stores of Etude and Innisfree and stable sales of major products. Meanwhile, parent NP rose 1%YoY thanks to a low base effect due to the collection of additional taxes (KRW15bn) at Amorepacific during the previous year Fig : Profit contribution of Innisfree and Etude increased F 1F 15F Others (LHS) Etude (LHS) Innisfree (LHS) Amorepacific (LHS) Brand shop profit contribution (RHS) % Decreased cost burdens seen in H13 at overseas businesses of Etude and Innisfree We expect parent NP to grow 13%YoY in 3Q13 and 7%YoY in Q13. Moreover, a gradual profit turnaround is expected at Amorepacific, which accounts for 78% of the company s 13 consolidated OP and 6% of parent NP, thanks to improved cost efficiency and a turnaround at overseas subsidiaries. Relatively solid profit growth is expected at Innisfree and Etude despite fierce competition in the domestic market and increased expansion into overseas markets. Investment burdens, which lasted about a year in launching Innisfree in China, are expected to decrease, while the completion of expansion of Innisfree in Japan and Hong Kong should lead to improved profitability. Fig 3: PER band chart KRW' x 17x 1x 1x Initiate with BUY and fair value of KRW7, We initiate coverage with BUY and a fair value of KRW7, (13 PER of 3.6x and 1 PER of.x). The company s EPS is expected to swell at a CAGR of 1% over the next three years based on an earnings turnaround at Amorepacific, a major subsidiary, and profit growth at unlisted subsidiaries including Innisfree and Etude. Also, Innisfree and Etude will be the strategic brands of Amorepacific Group in its overseas expansion and the company s overseas business is estimated to enter a growth stage. For explanations of equity research ratings and disclosures, please refer to the compliance section at the end of this report.

2 Fig : AmoreG's fair value of KRW7, calculated through NAV valuation () 13F Subsidiaries 3,88. Stake (%) # of shares (') Amorepacific (common), , Based on fair value (KRW1,5,) Amorepacific (preferred) As of previous day Etude Operating value (13F NP * PER 18x) Innisfree Operating value (13F NP * PER 18x) Amos professional As of 1Q13 Pacific Pharm (common) , As of 1Q13 Pacific Pharm (preferred) As of 1Q13 Pacific Glas ,.6 As of 1Q13 Pacific Package , As of 1Q13 Jangwon Industry ,. As of 1Q13 Cosvision , 3.6 As of 1Q13 Other available-for-sale As of 1Q13 Investment value 3,91.6 Discount rate 1% Investment value after discount (A) 3,53. PP&E value (B) 89.9 As of 1Q13 Investment value after discount (A) 3,613. Net cash (Net debt) (D) 31.1 As of 1Q13 NAV (E=C-D) 3,91.1 # of shares (F, 1,) 8,3 Common 7,8 excl. treasury shares Preferred 89 excl. treasury shares NAVPS (G=E/F, W) 7,359 Current price (W) 38, As of previous day Upside % Book value Fig 5: Value of AmoreG's unlisted subsidiaries expected to increase continuously, 3,5 3,,5, 1,5 1, 5 NAV Market cap Note: AmoreG s NAV (Net asset value) trend based on book value of AmoreG's private subsidiaries

3 Parent NP to grow 1% over next three years The company is expected to derive 95.8% of its consolidated OP from cosmetics in 13, with Amorepacific contributing 78%, Innisfree 9.9%, Etude 5.3%, and Amos.5%. OR and parent NP are anticipated to grow 1%YoY and 7%YoY, respectively, to KRW3.85tr and KRW165.1bn in 13, driven by a gradual margin improvement at Amorepacific (cost savings in domestic businesses and growth in overseas businesses) and sound profit growth for Innisfree and Etude. Parent NP is forecast to grow at a CAGR of 1% over the next three years, aided by stable earnings at Amorepacific and increasing earnings contribution from unlisted subsidiaries, including Innisfree and Etude, faring better than its major subsidiary Amorepacific (estimated to grow at a CAGR of 1% in 1-15). Fig 6: AmoreG's quarterly/annual results and estimates 1Q1 Q1 3Q1 Q1 1Q13 Q13P 3Q13F Q13F F 1F 15F OR , ,58.5 3,31.7 3,85.6,98.3,831.1 Cosmetics ,9.8 3,. 3,81.9,77.,86.1 Amorepacific ,55.7,89.5 3,18. 3,8. 3,869.9 Etude Innisfree Amos professional Non-cosmetics AmoreG Pacific Pharm Pacific Glas Pacific Package Jangwon Industry Intercompany transaction (59.) (77.5) (71.1) (37.1) (68.) (3.5) (77.5) (.8) (15.3) (.9) (1.) (6.9) (77.5) OP Cosmetics Amorepacific Etude Innisfree Amos professional Non-cosmetics AmoreG.3. (.) (.1) (1.3) Pacific Pharm (.6) Pacific Glas (.6). 1. (.5) Pacific Package Jangwon Industry (.) (.1) Intercompany transaction EBT NP Parent NP Innisfree and Etude to contribute 15.% to OP in 13 Concerns linger over earnings at domestic one-brand shops amid intensified marketing competition among domestic cosmetics brand shops and government regulations. OP for Innisfree and Etude are projected to swell at a CAGR of % and 1%, respectively, over the next three years, however, fueled by brisk domestic earnings (thanks to improvement in per-store revenues) and full-fledged growth in overseas businesses. As such, the combined contribution of Innisfree and Etude to OP is estimated to climb from 13.3% in 1 to 15.% in 13 and 16.6% in 15. Stable earnings growth is anticipated in non-cosmetics businesses (3.% of consolidated OP) as well, given rises in the royalty rate (.8%.18%) and dividend income as well as margin improvements at subsidiaries such as Pacific Pharm and Pacific Glass. 3

4 Fig 7: Number of domestic major brand stores Fig 8: Comparison of OP at major brand stores 1, 1, 8 6 1,56 The Face Shop Innisfree Missha Etude F 1F 15F Innisfree Etude Missha The Face Shop Note: As of Q13, Missha is estimate Innisfree to grow as AP Group s strategic brand in overseas markets Innisfree and Etude are expected to expand their reach in overseas markets via Amorepacific s overseas subsidiaries, especially in Asia. The number of Innisfree stores, which hit the Chinese market in Apr 1, is expected to surge rapidly from five at end-1 and in Q13 to 5 in 13 and 1 in 1. Revenues from Innisfree in China are projected to ascend from KRW3.bn in 1 to KRW8.6bn in 13 and KRW1.3bn in 1, driven by aggressive store expansion (centered on road shops) and differentiated brand positioning. Exports of Innisfree reflect product sales to the China subsidiary and some royalties from local production. About 3% of Innisfree sales in China are estimated to be booked as AmoreG s exports, given that the ratio of local production in China (output from an in-house factory in Shanghai, ODM partnership with Cosmax, etc.) and imports from Korea is three to seven (based on value). The overseas Innisfree business is forecast to generate stable earnings over the mid/long term, as: 1) investment burden associated with its launch in China is about to dissipate and ) certain levels of product margins are guaranteed. Furthermore, Innisfree is expected to develop into the group s strategic brand overseas over the mid/long term, considering: 1) online channel launches in Japan and Hong Kong in Q13; ) road shop launches in Japan and a foray into India in H13; and 3) store expansion in Asia (Singapore, etc.) in 1. Growth potential of overseas businesses to expand on Etude s China foray in Q13 Etude has 6 stores as of end-q13 mostly in Southeast Asia (Thailand, the Philippines, Malaysia, etc.). Exports are estimated to account for % of total sales. Etude, which hit Japan in 1Q1 and Hong Kong in Q1, is scheduled to advance into China in Q13. The brand is accelerating store expansion not only through existing local agents, but also through the group s overseas subsidiaries in some major countries (e.g., Singapore, Hong Kong, Japan). Against this backdrop, overseas forays of Innisfree and Etude via the group s overseas subsidiaries are more likely to succeed compared to competing brands, as efficient market development is possible with limited investment.

5 Fig 9: Innisfree to increase number of road shops in China Fig 1: Etude to enter China in Q13 following forays into Japan and Hong Kong China HK Japan India Q1 3Q1 Q1 1Q13 Q13 3Q13F Q13F Japan HK China 1Q1 3Q1 1Q13 3Q13F FY-end 1/11A 1/1A 1/13F 1/1F 1/15F (Reporting standard) (IFRS-C) (IFRS-C) (IFRS-C) (IFRS-C) (IFRS-C) OR () 3,58.5 3,31.7 3,85.6,98.3,831.1 OP () NP () Parent NP () EPS (KRW) 17,9 18,656 19,95 3,65 7,6 Adj. EPS (KRW) 17,9 18,656 19,95 3,65 7,6 PER* (x) PBR (x) EV/EBITDA (x) Div. Yield (%) ROE (%) ROIC (%) Note: IFRS-C = Consolidated financial statements; IFRS-P = Individual financial statements Hyundai Securities has not disclosed the material contained in this report to any institutional investor or third party prior to its publication. The author(s) confirms that the material contained herein correctly represents his/her/their opinion and that it has been prepared without any undue influences or interventions. Hyundai Securities Co., Ltd. or any of its affiliates has not taken part in public offerings of the company(ies) covered in this report for the past 1 months. The author(s) of this report does not have any interest in the company(ies) covered herein. Rating: Sector: Overweight (+1% or more), Neutral ( %), Underweight (-1% or more) Company: Strong BUY (+3% or more), BUY ( %), Marketperform ( %), Underperform (-1% or more) Strong BUY =, BUY = 3, Marketperform =, Underperform = 1, Blackout/Universe Exclusion = (Share price -, Fair value, Rating -) All Hyundai Securities Research is available via the following electronic databases: Bloomberg, Thomson Reuters, FactSet. Contact your Hyundai Securities sales representative for access. This report has been prepared for informational purposes only, and does not constitute an offer or solicitation of a contract for trading. Opinions in this report reflect professional judgment at this date based on information and data obtained from sources we consider reliable. However, we do not guarantee that the information and data are accurate or complete, and, therefore, this report is subject to change without prior notice. Individual investment should be made based on each client s own judgment, and we expressly disclaim all liability for any investment decisions and any results thereof. This report is a copyrighted material of Hyundai Securities Co. and, thus, it may not be reproduced, distributed, or modified without the prior consent of Hyundai Securities Co. This report is not prepared for academic purposes, and any third party wishing to quote from it for academic publications should receive the prior consent of Hyundai Securities Co. KRW AmoreG Rating 6, 5, 3, 3, 1, 11/8 1/8 13/8 5