Korea Consumer Sector: Feedback from our Europe and Asia marketing trip on the consumer sector

Korea Consumer Sector: Feedback from our Europe and Asia marketing trip on the consumer sector

● Over the past two weeks, we met 65+ investors in Asia and
Europe. Asian investors were generally positive on resilience in
consumption trends, while Europeans seemed to be concerned
about the potential slowdown in consumption growth in 2012.
● For consumers, investors seemed more interested in beta
names, or companies with quality management and growth
potential, or regulatory constraints and impact. Stocks frequently
discussed were: (1) LG H&H and Amorepacific; (2) Lotte
Shopping and HDS group; and (3) E-Mart and KT&G.
● Investors in both Asia and Europe were warming up to LG H&H
and Amore, whereas question marks remain on Lotte despite low
valuations and KT&G due to its lack of pricing power. Overall,
they remained positive on HDS and Hyundai Home Shopping.
● For the mid-term, we like large personal care, laggard department
stores, beneficiary of inbound tourism and recently corrected
Woongjin Coway from the corporate event.

Investors seemingly positive, in our view
The Asian investors seemed more upbeat on the overall market than
the European investors who seemed more concerned about of the
slowdown of overall sales trends at the retailers and the high base
effect that should provide slow numbers for 2012 versus 2011.
Nevertheless, most investors agreed that 1Q12 should see the
toughest base effect for the full year. Hence, if same-store-sales
growth of department stores reaches 3–4% in 1Q, the expectations for
the full year should be higher. Given that consensus has revised down
over the past six months and the valuations have corrected, we felt
investors would take the better-than-expected numbers in the coming
quarters as a positive signal to accumulate.

Key discussions
Investors seemed to be warming up to the idea of higher beta names,
or companies with strong management and structural growth in their
respective submarkets. However, due to the increased regulatory
constraints, the concerns surrounding the hypermarkets and SSM
formats may stay for a while.

Investors showed consistent interests in Amore and LG H&H as still
high-quality executioners. However, a number of investors seemed to
think LG H&H’s 4Q11 was a disappointment, and its 2012 earnings
growth should slow to 15% levels. We argued that the consensus may
be undermining the positive value accretions from the recent
acquisitions of the cosmetics brands, fast penetrations in overseas
that has not been highlighted before, and its beverage business that
ramps up in utilisations and brand adds under Haitai’s facility.

For Amore, most investors seemed to agree that the China story is
still attractive, especially under the influence of the wide-spreading
“Hanryu”, Korean pop-culture wave. However, more investors also
seemed to agree with us that the door-to-door may take a few months
to recover. It seemed many were looking at entry points again.

For the retailers, we felt the investors generally had more confidence
in HDS or Hyundai Home Shopping due to higher prudence in
investments and executions. Lotte Shopping kept being mentioned as
too cheap, but the uncertainty of its investment strategies ahead
seemed to stall the appetite. We thought investors looking at shorterterm
horizon were more interested in Lotte Shopping than the likes of
HDS group. For E-Mart, we believe the regulatory concerns will impact
the sentiment and its earnings by 3–5%. However, we believe the
recent corrections are probably overdone considering the impact on
its fundamental earnings.

Continuous interest in the inbound tourism theme
With the Chinese luxury consumption posting strong growth, we
discussed the potential beneficiaries, both direct and indirect. The
obvious beneficiaries will likely be the hotel or duty-free operators,
travel agencies and casinos that allow foreigners. The indirect
beneficiaries will likely be brand companies, such as cosmetics,
fashion, or even entertainment agencies. Though these are smaller
names, we felt the interest in these smaller names were high.

Korea Consumer Sector Valuation summary