GS Retail: Regulatory setbacks likely to weigh on 1Q14

l Equity Research l
South Korea l Retail
1 May 2014
GS Retail
Regulatory setbacks likely to weigh on 1Q14 results
 We expect GS Retail (GSR) to post softer revenue and IN-LINE (unchanged)
earnings than consensus and our previous estimates. We
PRICE as of 30 Apr 2014
expect sales and operating profit to rise 7.6% and 10.1%
KRW 28,700
YoY, respectively, in 1Q14.
 BGF’s IPO and new players’ entry into the CVS market
should intensify competition in 2014 and beyond. We cut
our 2014-16E earnings by 3.0-4.3% to account for 1Q14
earnings revisions and our 2014-16 outlook.
Bloomberg code
 We maintain our In-Line rating and price target of KRW
28,000. The stock appears fairly valued at 17.4x 2014E
earnings, at more than a 50% premium to the KOSPI.
EPS adj. est. change 2014E
1Q14 earnings preview. We believe lower sales rebates in
Year-end: December
Sales (KRW bn)
EBITDA (KRW bn)
EBIT (KRW bn)
Pre-tax profit (KRW bn)
Net profit adj. (KRW bn)
FCF (KRW bn)
EPS adj. (KRW)
DPS (KRW)
Book value/share (KRW)
EPS growth adj. (%)
DPS growth (%)
EBITDA margin (%)
EBIT margin (%)
Net margin adj. (%)
Div. payout (%)
Net gearing (%)
ROE (%)
ROCE (%)
EV/sales (x)
EV/EBITDA (x)
PBR (x)
PER adj. (x)
Dividend yield (%)
convenience stores (CVS) and the government’s regulations on
super supermarkets (SSM) should put downward pressure on
GSR’s 1Q14 earnings.
 GS25 (CVS): We expect continued new store openings to boost
GS25’s revenue by 9.0%, albeit at a slower pace than in 2013.
However, we forecast worsening franchisee-contract terms and
the government’s ban on volume purchase incentives to limit
operating profit expansion to 8.6% YoY.
 GS Supermarket (SSM): We expect GS Supermarket earnings
to recover from a low base, but are concerned that shorter
business hours – an additional negative operational factor –
could weigh on the division.
 GS Watsons (Drugstore): We forecast equity-accounted losses
to rise YoY due to aggressive new store launches by 50%owned GS Watsons.
PRICE TARGET
KRW 28,000
Reuters code
007070 KS
007070.KS
Market cap
12-month range
KRW 2,209.9bn (USD 2,144mn)
KRW 22,950 - 34,150
-3.7%
2012
4,378
293
140
162
123
(15)
1,603
400
19,798
32.0
33.3
6.7
3.2
2.8
24.9
46.0
8.4
6.5
0.6
9.6
1.5
16.5
1.5
May 2014, could pose downside risks to GSR’s fundamentals and
investor sentiment, as (1) BGF Retail is likely to focus on improving
its sales and profitability and (2) investor interest in GSR could
weaken after it loses its status as Korea’s only listed CVS operator.
Valuation. We believe GSR’s multi-year growth story for its CVS
business is largely in the price, given that the stock trades at a
50%+ premium to the KOSPI. Moreover, intensifying competition
could put further pressure on current valuations.
Yunice Kim
Tyler Ahn
+82 2 3703 5162
Equity Research
Standard Chartered Securities Korea Ltd
+82 2 3703 5170
Equity Research
Standard Chartered Securities Korea Ltd
2013
4,709
327
155
159
119
104
1,546
450
20,969
-3.6
12.5
6.9
3.3
2.5
29.1
34.3
7.6
6.6
0.6
8.9
1.3
19.1
1.5
-3.0%
2014E
5,051
342
166
170
127
78
1,645
450
22,614
6.4
0.0
6.8
3.3
2.5
27.4
33.8
7.5
6.8
0.6
8.2
1.3
17.4
1.6
2015E
5,358
365
181
187
140
99
1,821
500
24,435
10.7
11.1
6.8
3.4
2.6
27.5
29.5
7.7
7.0
0.5
7.6
1.2
15.8
1.7
Source: Company, Standard Chartered Research estimates
Share price performance
GS Retail
CU at the bourse. We believe BGF Retail’s IPO, scheduled on 19
2015E
KOSPI INDEX (rebased)
36,000
29,000
22,000
4-13
7-13
Share price (%)
Ordinary shares
Relative to index
Relative to sector
Major shareholder
Free float
Average turnover (USD)
10-13
1-14
-1 mth
6
8
-
4-14
-3 mth -12 mth
13
-3
12
-3
GS (65.8%)
34%
5,699,800
Source: Company, FactSet
Important disclosures can be found in the Disclosures Appendix
All rights reserved. Standard Chartered Bank 2014
007070 KS
KRW 28,700
KRW 28,000
http://research.standardchartered.com
Equity Research l GS Retail
1Q14 preview and 2014 outlook
GSR is scheduled to report its 1Q14 results on 9 May 2014. We expect GSR to post
weaker revenue and earnings than consensus and our previous estimates. We
forecast GSR to deliver 6.4% earnings growth in 2014, which is largely in the share
price, in our view. On the other hand, intensifying competition could be a concern in
2014 and beyond.
In-line to weaker 1Q14 earnings results
We expect GSR’s sales and operating profit to rise 7.6% and 10.1% YoY,
respectively, in 1Q14. We believe lower sales rebates in the CVS segment and the
government’s regulations on SSM should put downward pressure on GSR’s 1Q14
earnings. By division, we forecast the CVS business’ sales to increase 9.0% YoY, on
continued new store openings. However, shorter business hours (opening hour
changed from 08:00 to 10:00 local time) could put pressure on the SSM business.
We expect worsening franchisee-contract terms and the government’s ban on
volume purchase incentives to limit operating profit expansion in the CVS business to
8.6% YoY. In October 2013, the Fair Trade Commission (FTC) announced that it
would ban some vendors’ sales rebates to hypermarkets, supermarkets and
convenience stores. The FTC decided to introduce a new regulation on sales
rebates, as some rebates are not relevant to sales performance and continued to
burden smaller vendors. We expect SSM to recover from a low base, but are
concerned that shorter business hours – an additional negative operational factor –
could drag the division’s revenue. As for the non-operating side, we forecast equityaccounted losses to rise YoY due to aggressive new store launches by 50%-owned
GS Watsons.
Figure 1: GSR – 1Q14 earnings preview
(KRW bn)
1Q14E
1Q14E
Difference
Ours Consensus vs. consensus
1Q13
YoY
2014E
Ours
Sales
1,175.3
1,189.7
Operating profit
15.9
Net profit
2014E
Difference
Consensus vs. consensus
2013
YoY
-1.2%
1,092.8
7.6%
5,050.8
5,115.0
-1.3%
4,708.6
7.3%
16.7
-4.7%
14.4
10.1%
165.6
173.1
-4.3%
155.0
6.8%
13.0
13.7
-4.8%
11.7
11.2%
126.7
135.8
-6.7%
119.0
6.4%
Operating profit
1.4%
1.4%
1.3%
3.3%
3.4%
3.3%
Net profit
1.1%
1.2%
1.1%
2.5%
2.7%
2.5%
Margin (%)
Source: Company, Bloomberg, Standard Chartered Research estimates
Earnings recovery in 2014 appears priced in
After a 3.6% earnings decline in 2013, we forecast GSR to post 6.4% earnings
growth in 2014, as we expect (1) its CVS business to achieve decent 8.4% sales
growth thanks to continued space expansion efforts (c.500 stores) and (2) its SSM
business to post 18.6% YoY operating profit growth on normalisation of operations
(low base effect). In the meantime, lingering regulatory risks could put some pressure
on GSR’s earnings.
1 May 2014
2
Equity Research l GS Retail
Figure 2: GSR – Divisional quarterly forecasts
(KRWbn)
1Q14E
2Q14E
3Q14E
4Q14E
2014E
Sales
1,175
1,254
1,362
1,259
5,051
YoY chg
7.6%
7.1%
7.3%
7.2%
7.3%
GS25
786
858
947
897
3,488
GS Supermarket
1,438
356
367
381
333
Others
33
29
35
29
124
Gross profit
256
287
313
274
1,129
YoY chg
6.0%
5.7%
6.9%
6.9%
6.4%
GS25
135
161
178
165
639
GS Supermarket
101
104
114
98
417
20
22
21
11
73
16
51
66
33
166
YoY chg
10.1%
8.3%
10.4%
-2.8%
6.8%
GS25
11
38
50
32
131
GS Supermarket
2
6
13
-3
18
Others
3
6
2
4
16
13
38
51
25
127
YoY chg
11.2%
15.1%
9.6%
-11.1%
6.4%
GPM
21.8%
22.8%
23.0%
21.7%
22.4%
OPM
1.4%
4.0%
4.8%
2.6%
3.3%
NPM
1.1%
3.0%
3.7%
2.0%
2.5%
Others
Operating profit
Net profit
Source: Company, Standard Chartered Research estimates
We believe the market’s expectation of YoY earnings recovery in 2014 is already in
the share price. Nonetheless, we are concerned that GSR’s earnings momentum,
particularly in the CVS business, will continue to weaken. We note that the CVS
market is maturing, and thus offers little room for additional growth. As a result, we
expect the number of new store openings by GSR to continue to decline YoY in the
next few years. On the other hand, BGF’s IPO, combined with powerful new entrants
in the CVS market, could pose further downside risks to our earnings forecasts.
Stiffer competition likely in 2014
We are concerned that, in addition to BGF Retail’s IPO, the entry of new players into
the CVS market will naturally intensify competition, which could weigh on GSR’s
sales and earnings.
E-Mart and Tesco-Homeplus, the No.1 and No.2 hypermarket chains in Korea,
recently decided to expand more aggressively into the CVS market. This should not
lead to significant downside risk to GSR’s earnings in the near term, given (1)
consumers’ lower brand recognition of ‘With Me (E-Mart)’ and ‘365 Plus (Homeplus)’
than existing players’ brands and (2) less scalability (<100 versus 7,000+ stores).
Nevertheless, we believe both new entrants could become formidable contenders in
the longer term (see our report GS Retail: Competitive landscape a concern in 2014,
published 24 January 2014).
We believe there are good reasons for the two largest hypermarkets to expand into
the seemingly mature CVS market. We assume that both E-Mart and Homeplus
regard CVS stores as an ideal retail format in the next decades, as small-portion
grocery shopping at nearby stores is likely to be increasingly popular with a rising
aging population and solo/dual economy. Armed with their dominance in food
retailing and/or a differentiated business model, E-Mart and Homeplus’ CVS chains
are likely to be attractive franchise options for the owners of mom-and-pop stores and
1 May 2014
3
Equity Research l GS Retail
even other CVS franchise stores. To cope with powerful new entrants, existing
players will likely reinforce omni-directional marketing and promotional activities
towards consumers, franchisee candidates and existing stores. Therefore, it is
evident that potential expansion by the two hypermarkets’ into the CVS market could
hurt GSR’s sales and/or profitability.
Figure 3: Single/dual-person households on the rise
Single
Two
Three
Four
Five
Six
Figure 4: Household consumption breakdown
Seven +
100%
Single households
2 ppl households
4 ppl households
5 ppl+ households
100%
80%
12%
35%
80%
32%
60%
8%
10%
24%
28%
60%
40%
34%
40%
20%
20%
18%
20%
0%
9%
3%
2006
11%
2010
2006
2007
2008
2009
2010
2011
2012
2013
2014E
2015E
2016E
2017E
2018E
2019E
2020E
2021E
2022E
2023E
2024E
2025E
2026E
2027E
2028E
2029E
2030E
0%
Source: NSO
25%
3 ppl households
27%
26%
6%
5%
21%
18%
27%
27%
25%
28%
30%
14%
16%
18%
20%
2015E
2020E
2025E
2030E
23%
Source: KIET
Earnings revisions
We revise down our 2014E-16E earnings by 3.0-4.3% to account for 1Q14 earnings
revisions and our 2014-16 outlook. In particular, we (1) fine-tune our revenue growth
assumptions, (2) reduce consolidated gross margin assumptions by 36-42bps to
reflect worsening franchisee-contract terms and the government’s ban on volume
purchase incentives, and (3) decrease equity-accounted loss estimates.
Figure 5: GSR – Earnings revision summary
New
(KRW bn)
Old
Change (%)
2014E
2015E
2016E
2014E
2015E
2016E
2014E
2015E
2016E
5,050.8
5,357.8
5,608.0
5,021.3
5,329.0
5,608.1
0.6%
0.5%
0.0%
Operating profit
165.6
181.1
192.6
169.3
185.1
198.5
-2.2%
-2.1%
-3.0%
Net profit
126.7
140.2
148.9
131.5
144.6
155.6
-3.7%
-3.0%
-4.3%
Operating profit
3.3%
3.4%
3.4%
3.4%
3.5%
3.5%
Net profit
2.5%
2.6%
2.7%
2.6%
2.7%
2.8%
Sales
Margin (%)
Source: Standard Chartered Research estimates
1 May 2014
4
Equity Research l GS Retail
CU at the bourse
BGF Retail (CVS brand name: CU) is scheduled to go public on 19 May 2014. CU’s
major shareholders include the Chairman of Bogwang Group (34.9%) and Japan
FamilyMart (25%). According to the company announcement, FamilyMart intends to
sell its BGF retail shares along with BGF Retail's IPO, and 20% of FamilyMart’s 25%
ownership will be offered to the public.
Figure 6: BGF Retail shareholders – pre-IPO
Figure 7: BGF Retail shareholders – post-IPO
Others (5.8%)
Others
(25.8%)
ESOP (3.3%)
FamilyMart
(25%)
S. Hong and
related party
(65.9%)
Source: Company, Standard Chartered Research
S. Hong and
related party
(65.9%)
ESOP (8.3%)
Source: Company, Standard Chartered Research
Fundamental changes in the competitive landscape
It is logical to assume that CU will try to deliver better earnings throughout the year,
which would intensify competition within the CVS subsector. We highlight that both
CU and GS25’s profitability was at similar levels in 2010-11 (BGF Retail: trend
analysis and six-year financials on page 7), but CU’s profitability dipped in 2012 due
to expenses related to a corporate identity change from FamilyMart to CU. CU’s 2013
earnings improved from a low base in 2012.
Figure 8: Korea CVS – Store count
CU
9,000
GS25
Figure 9: Korea CVS – Sales trend
7-Eleven
8,000
GS25
7-Eleven
3,000
7,000
2,500
(KRWbn)
6,000
(Stores)
CU
3,500
5,000
4,000
3,000
2,000
1,500
1,000
2,000
500
1,000
0
2007
2008
2009
2010
Source: Companies, Standard Chartered Research
2011
2012
2013
0
2007
2008
2009
2010
2011
2012
2013
Source: Companies, Standard Chartered Research
Declining scarcity value as the sole listed CVS operator
We think a CU IPO would likely overshadow GSR’s status as the only listed CVS
operator, and thus investor interest in GSR could weaken. We would not rule out the
possibility of GSR’s share price fluctuating with the pricing of CU IPO in the near
term, although we believe GSR’s share price performance is essentially a function of
its own fundamental earnings in the longer term.
1 May 2014
5
Equity Research l GS Retail
BGF Retail: Trend analysis and six-year financial data (parent)
Growth
Income statement (KRW bn)
Sales growth & earnings growth
Sales growth
100%
NP growth
50%
0%
-50%
-100%
2008
2009
2010
2011
2012
2013
Year end: Dec
Sales revenue
Gross profit
EBITDA
Depreciation & amortisation
EBIT
Net interest (expense) / income
Others
Income tax
PAT
Minorities
Net income
2008
1,754.0
335.0
82.9
42.1
40.8
5.6
13.3
17.0
42.6
0.0
42.6
2009
1,999.1
400.0
104.0
47.1
56.9
3.3
3.7
14.9
49.0
0.0
49.0
2010
2,289.6
471.2
128.7
53.9
74.8
5.1
6.1
20.2
65.8
0.0
65.8
2011
2,602.8
473.2
162.2
69.4
92.8
5.8
1.7
23.0
77.4
0.0
77.4
2012
2,857.2
544.2
150.6
90.6
59.9
6.2
-7.0
16.8
42.3
1.1
42.3
2013
3,076.1
718.2
192.7
98.3
94.5
-1.9
-9.5
22.0
61.1
0.0
61.1
2008
40.8
42.1
27.2
6.2
116.3
-17.0
99.2
-60.6
5.6
-3.0
-7.9
-37.9
-4.5
2009
56.9
47.1
29.1
-13.1
120.0
-14.9
105.0
-61.9
3.3
-1.1
-7.9
-24.9
12.7
2010
74.8
53.9
22.2
6.6
157.6
-20.2
137.3
-74.3
5.1
0.0
-7.2
-68.3
-7.4
2011
92.8
69.4
48.7
-22.7
188.2
-23.0
165.2
-134.7
5.8
2.1
-12.0
-24.2
2.3
2012
59.9
90.6
-50.3
54.3
154.5
-16.8
137.7
-129.2
6.2
3.4
-12.0
13.8
19.9
2013
94.5
98.3
48.0
-30.3
210.5
-22.0
188.5
-55.2
-1.9
-5.9
-12.3
-135.7
-22.5
2008
148.9
260.8
53.4
6.7
22.5
43.5
535.8
223.2
1.5
0.0
119.2
343.9
191.9
0.0
191.9
283.8
2009
169.0
279.0
36.6
9.7
35.2
55.8
585.4
262.3
0.5
0.0
116.8
379.6
205.8
0.0
205.8
300.2
2010
196.5
303.2
88.9
15.2
27.8
73.3
704.9
303.2
0.5
0.0
136.8
440.5
264.4
0.0
264.4
370.8
2011
271.7
337.3
84.4
13.7
30.0
85.5
822.7
347.5
0.6
1.9
142.6
492.6
330.0
0.0
330.0
443.4
2012
317.9
368.2
49.0
3.4
49.9
99.2
887.6
291.7
4.6
1.2
213.5
511.1
376.5
0.0
376.5
497.4
2013
305.0
249.8
235.0
31.8
148.8
56.3
1,026.7
362.2
0.0
0.0
463.9
826.1
200.6
0.0
200.6
323.0
Margins
Operating and net profit margins
OPM
4%
NPM
3%
2%
1%
0%
2008
2009
2010
2011
2012
2013
Cash flow
Op cash flow generated & capex
OP cash flow
(KRWbn)
300
Capex
Year end: Dec
Operating profit
Depreciation & amortisation
Working capital
Others
Operational cash flow
Tax paid
After-tax operational cash flow
Capex
Net interest
Debt
Dividends
Others
Net flow
Balance sheet (KRW bn)
200
100
0
2008 2009
2010
2011
2012 2013
Balance sheet
Net cash
100
80
(KRWbn)
Cash flow (KRW bn)
60
40
20
0
2008 2009 2010 2011 2012 2013
Returns
ROE & ROCE
ROE
45%
ROCE
35%
25%
15%
5%
2008
2009
2010
2011
2012
Source: Company, Standard Chartered Research
1 May 2014
2013
Year end: Dec
Tangible assets
Other LT assets
Stocks
Debtors
Cash and liquid assets
Other ST assets
Total Assets
Current creditors
Current borrowings
Long-term borrowings
Others
Total liabilities
Shareholders’ funds
Minority interests
Equity
Total capital employed
Key data & ratio
Year end: Dec
EPS (KRW)
Chg %
DPS (KRW)
CFPS (KRW)
BVPS (KRW)
Wtd avg shares (000)
ROE (%)
Post-tax ROCE (%)
Capex/sales (%)
Capex/depreciation (%)
Net debt/equity (%)
Total debt/Total capital (%)
Net interest cover (%)
2008
2009
2010
2011
8,116.6 10,220.9 13,716.0 16,147.0
27.5%
25.9%
34.2%
17.7%
1,500.0 1,500.0 2,500.0 2,500.0
-858
2,639
-1,540
469
36,553
42,915
55,135
68,831
5,249
4,795
4,795
4,795
22.2%
23.8%
24.9%
23.5%
15.0%
16.3%
17.7%
17.5%
3.5%
3.1%
3.2%
5.2%
144.0% 131.5% 137.8% 194.2%
-10.9%
-16.9%
-10.3%
-8.3%
0.5%
0.2%
0.1%
0.6%
nm
nm
nm
nm
2012
2013
8,585.2 2,478.2
-46.8%
-71.1%
500.0
400.0
4,037
-915
76,403
8,140
4,928
24,640
11.2%
30.4%
8.5%
18.9%
4.5%
1.8%
142.5%
56.2%
-11.7%
-74.2%
1.2%
0.0%
nm 5071.3%
Source: Company, Standard Chartered Research
6
Equity Research l GS Retail
Valuation
We believe GSR’s multi-year growth story for the CVS business and 6.4-10.7%
earnings growth in 2014-15E are largely in the share price, given the stock trades at
a 50%+ premium to the KOSPI PER and domestic peers’ average PER. On the other
hand, we are concerned about competition headwinds and potential downside risks
to GSR’s earnings over the next 12 months.
Further valuation expansion appears limited
We believe that GSR is a gradual valuation de-rating story, and thus expect its
valuation gap with the KOSPI as well as domestic peers to narrow over time. GSR’s
earnings momentum in the CVS business, its main growth driver, should decelerate
over the next few years, in our view. Furthermore, CU’s IPO and E-Mart’s/Homeplus’
entrance into the CVS market could accelerate saturation in the CVS subsector.
Applying valuations of global CVS peers is not appropriate, in our view. We believe
GSR should trade at a certain discount to global CVS peers because the high-margin
food segment accounts for only 46-47% of the CVS business versus 60-70% for
global peers. Moreover, we still expect the low-margin supermarket business to
account for c.10% of GSR’s operating profit in 2014E.
Maintain our price target of KRW 28,000
We maintain our In-Line rating and price target of KRW 28,000. We value GSR
based on a blend of DCF and PER methodologies. Our 12-month price target
translates to 17.0x 2014E PER and 15.4x 2015E PER, and implies 2.4% potential
downside. We summarise our valuation results below.
 Intrinsic DCF analysis – Fair value of KRW 29,000.
 Relative PER analysis – Fair value of KRW 27,800. We arrive at this fair value
using a 12-month forward PER target of 16.8x and our 12-month forward EPS
estimate of KRW 1,655.
Figure 10: Fair value and implied PER
(KRW)
Fair value
Implied PER (x)
DCF valuation
29,000
17.5
Note
Based on DCF
PER valuation
27,800
16.8
Mid-cycle valuation (three years)
Price target
28,000
16.9
Source: Standard Chartered Research estimates
DCF valuation – Fair value of KRW 29,000
We derive our intrinsic fair value using DCF valuation to capture the stock’s long-term
growth potential. Our DCF model assumes (1) a WACC of 8.3% and (2) a perpetual
growth rate of 1.0% after 2022.
1 May 2014
7
Equity Research l GS Retail
Figure 11: DCF valuation
(%, KRW bn)
Revenue
2014E
2015E
2016E
2017E
2018E
2019E
2020E
2021E
2022E
2023E
5,050.8
5,357.8
5,608.0
5,809.9
5,980.1
6,149.2
6,316.9
6,483.0
6,646.8
6,808.2
(% YoY)
7.3%
6.1%
4.7%
3.6%
2.9%
2.8%
2.7%
2.6%
2.5%
2.4%
EBIT
165.6
181.1
192.6
202.6
211.7
214.6
217.3
219.8
222.0
224.0
(% OPM)
3.3%
3.4%
3.4%
3.5%
3.5%
3.5%
3.4%
3.4%
3.3%
3.3%
42.3
45.0
47.8
50.3
52.5
53.3
53.9
54.6
55.1
55.6
123.3
136.2
144.8
152.3
159.2
161.4
163.4
165.3
166.9
168.4
Tax on EBIT (assuming 24.2% tax rate)
NOPLAT
(% NOPLAT margin)
2.4%
2.5%
2.6%
2.6%
2.7%
2.6%
2.6%
2.5%
2.5%
2.5%
Depreciation
142.9
148.9
160.6
169.3
173.2
155.9
140.3
126.3
113.7
102.3
Gross cash flow
307.2
325.9
344.5
361.8
373.6
357.6
343.9
332.0
321.1
311.1
8.4
7.7
6.6
5.4
4.6
6.5
6.2
5.9
5.7
5.8
(200.0)
(195.0)
(190.0)
(185.0)
(180.0)
(153.0)
(130.1)
(110.5)
(94.0)
(79.9)
81.1
101.1
121.0
145.9
166.4
182.5
194.3
204.2
212.0
218.3
0.9
0.9
0.8
0.7
0.7
0.6
0.6
0.5
0.5
0.5
76.8
88.5
97.9
109.0
114.8
116.3
114.3
110.9
106.4
101.2
Change in working capital
Capex
Free cash flow (FCF)
Discounting factor
PV of FCF
Sum of PVFCF
1,036.1
PV of terminal value
1,390.5
Investment securities
Terminal value calculation
11.9
207.8
Net debt
Minority interest
0.0
Equity value
218.3
WACC (%)
8.3%
Perpetual growth (%)
2,231
Shares outstanding (mn)
FCF (terminal year)
Terminal value
1.0%
3,000.0
77.0
Fair value per share
29,000
Source: Standard Chartered Research estimates
Figure 12: Sensitivity analysis
Figure 13: Assumptions
WACC (%)
Perpetual growth
(%)
WACC
Terminal year
-1.0%
0.0%
1.0%
2.0%
3.0%
6.8%
31,300
34,200
38,000
43,500
51,800
Weight of debt
20.0%
7.3%
29,000
31,400
34,500
38,800
45,200
Weight of equity
80.0%
7.8%
26,900
28,900
31,500
35,000
40,000
Cost of debt
6.9%
8.3%
25,100
26,800
29,000
31,800
35,800
Cost of equity
9.1%
4.2%
6.9%
8.8%
23,400
24,900
26,700
29,100
32,300
Risk-free rate
9.3%
22,000
23,200
24,800
26,800
29,400
Risk premium
9.8%
20,600
21,700
23,100
24,800
26,900
Beta
Source: Standard Chartered Research estimates
8.3%
0.70
Source: Standard Chartered Research estimates
12-month forward PER – Fair value of KRW 27,800
We set GSR’s 12-month forward PER at 16.8x, the middle of its historical range. The
company has traded between 12.8x-22.4x 12-month forward earnings since its IPO in
December 2011. We believe the stock should trade at the middle of its historical
valuation (if not lower), as earnings momentum in the CVS business, the company’s
main growth driver, should gradually decelerate over the next few years.
1 May 2014
8
Equity Research l GS Retail
Figure 14: GSR  12M forward PER
Figure 15: GSR  12M forward PBR
40,000
40,000
1.9x
21x
36,000
36,000
19x
17x
28,000
15x
32,000
KRW
KRW
32,000
1.7x
1.5x
28,000
1.3x
24,000
24,000
1.1x
13x
20,000
Jan-12
Jun-12
Nov-12
Apr-13
Sep-13
Feb-14
Source: FactSet, Standard Chartered Research estimates
20,000
Jan-12
Jun-12
Nov-12
Apr-13
Sep-13
Feb-14
Source: FactSet, Standard Chartered Research estimates
Where we stand relative to consensus
Our 2014 and 2015 net profit estimates are 6.7-9.7% lower than the Street’s,
reflecting our conservative stance on the counter versus the market.
Figure 16: Where we stand relative to consensus
Our estimates
(KRW bn)
Sales
Consensus
Difference
2014E
2015E
2014E
2015E
2014E
2015E
5,051
5,358
5,115
5,511
-1.3%
-2.8%
OP
166
181
173
195
-4.3%
-7.1%
NP
127
140
136
155
-6.7%
-9.7%
Source: Bloomberg, Standard Chartered Research estimates
1 May 2014
9
Equity Research l GS Retail
Income statement (KRW bn)
Year-end: Dec
Sales
Gross profit
SG&A
Other income
Other expenses
EBIT
Net interest
Associates
Other non-operational
Exceptional items
Pre-tax profit
Taxation
Minority interests
Exceptional items after tax
Net profit
Cash flow statement (KRW bn)
2011
3,982
846
(752)
0
0
94
22
0
13
0
129
(36)
(0)
0
94
2012
4,378
993
(853)
0
0
140
(3)
(1)
26
0
162
(38)
0
0
123
2013
4,709
1,061
(906)
0
0
155
(13)
(5)
22
0
159
(40)
0
0
119
2014E
5,051
1,129
(963)
0
0
166
(12)
(4)
21
0
170
(43)
0
0
127
2015E
5,358
1,195
(1,014)
0
0
181
(13)
(2)
21
0
187
(46)
0
0
140
94
215
123
293
119
327
127
342
140
365
1,215
1,215
300
77
1,603
1,603
400
77
1,546
1,546
450
77
1,645
1,645
450
77
1,821
1,821
500
77
Year-end: Dec
Cash
Short-term investments
Accounts receivable
Inventory
Other current assets
Total current assets
2011
30
732
79
133
19
994
2012
52
426
92
149
12
731
2013
44
380
108
153
17
702
2014E
10
380
116
164
18
689
2015E
44
380
123
174
19
741
PP&E
Intangible assets
Associates and JVs
Other long-term assets
Total long-term assets
683
110
12
1,195
2,001
749
131
11
1,293
2,183
707
150
16
1,305
2,178
764
154
12
1,398
2,328
810
159
10
1,478
2,457
Total assets
2,994
2,914
2,880
3,016
3,198
Short-term debt
Accounts payable
Other current liabilities
Total current liabilities
505
419
33
957
210
361
31
602
60
382
38
480
60
409
41
510
60
434
43
538
Long-term debt
Convertible bonds
Deferred tax
Other long-term liabilities
Total long-term liabilities
404
0
32
167
603
543
0
37
207
787
538
0
36
211
786
538
0
36
190
765
538
0
36
204
778
Total liabilities
1,559
1,389
1,265
1,275
1,316
Shareholders’ funds
Minority interests
1,430
4
1,524
0
1,615
0
1,741
0
1,882
0
Total equity
1,435
1,524
1,615
1,741
1,882
Total liabilities and equity
2,994
2,914
2,880
3,016
3,198
878
77
701
77
554
77
588
77
554
77
Net profit adj.
EBITDA
EPS (KRW)
EPS adj. (KRW)
DPS (KRW)
Avg fully diluted shares (mn)
Balance sheet (KRW bn)
Net debt (cash)
Year-end shares (mn)
Year-end: Dec
EBIT
Depreciation & amortisation
Net interest
Tax paid
Changes in working capital
Others
Cash flow from operations
2011
94
121
22
(36)
41
(241)
1
2012
140
153
(3)
(38)
(87)
57
221
2013
155
172
(13)
(40)
1
20
294
2014E
166
177
(12)
(43)
8
21
316
2015E
181
184
(13)
(46)
8
21
334
Capex
Acquisitions & Investments
Disposals
Others
Cash flow from investing
(188)
215
0
(243)
(216)
(193)
306
0
(137)
(23)
(146)
35
0
(10)
(121)
(200)
0
0
(38)
(238)
(195)
0
0
(40)
(235)
Dividends
Issue of shares
Change in debt
Other financing cash flow
Cash flow from financing
(39)
0
402
(156)
208
(23)
0
(156)
2
(177)
(31)
0
(155)
5
(181)
(35)
0
0
0
(35)
(35)
0
0
0
(35)
(8)
0
(84)
21
0
(15)
(7)
0
104
(34)
0
78
34
0
99
2011
2012
2013
2014E
2015E
21.2
5.4
2.4
2.3
27.7
14.6
-82.0
-82.0
-82.0
-40.0
22.7
6.7
3.2
2.8
23.7
9.9
32.0
32.0
32.0
33.3
22.5
6.9
3.3
2.5
25.3
7.6
-3.6
-3.6
-3.6
12.5
22.4
6.8
3.3
2.5
25.5
7.3
6.4
6.4
6.4
0.0
22.3
6.8
3.4
2.6
24.8
6.1
10.7
10.7
10.7
11.1
Efficiency ratios
ROE (%)
ROCE (%)
Asset turnover (x)
Op. cash/EBIT (x)
Depreciation/capex (x)
Inventory days
Accounts receivable days
Accounts payable days
6.6
4.8
1.4
0.0
0.5
11.8
6.3
41.5
8.4
6.5
1.5
1.6
0.7
15.2
7.1
42.1
7.6
6.6
1.6
1.9
1.0
15.1
7.8
37.2
7.5
6.8
1.7
1.9
0.7
14.8
8.1
36.8
7.7
7.0
1.7
1.8
0.8
14.9
8.1
37.0
Leverage ratios
Net gearing (%)
Debt/capital (%)
Interest cover (x)
Debt/EBITDA (x)
Current ratio (x)
61.2
44.6
4.7
3.3
1.0
46.0
32.6
3.1
2.8
1.2
34.3
24.9
3.6
2.1
1.5
33.8
23.9
4.0
1.7
1.3
29.5
22.5
4.4
1.6
1.4
Valuation
EV/sales (x)
EV/EBITDA (x)
EV/EBIT (x)
PER (x)
PER adj. (x)
PBR (x)
Dividend yield (%)
0.5
9.3
21.1
19.1
19.1
1.2
1.3
0.6
9.6
20.1
16.5
16.5
1.5
1.5
0.6
8.9
18.7
19.1
19.1
1.3
1.5
0.6
8.2
16.9
17.4
17.4
1.3
1.6
0.5
7.6
15.3
15.8
15.8
1.2
1.7
Change in cash
Exchange rate effect
Free cash flow
Financial ratios and other
Year-end: Dec
Operating ratios
Gross margin (%)
EBITDA margin (%)
EBIT margin (%)
Net margin adj. (%)
Effective tax rate (%)
Sales growth (%)
Net income growth (%)
EPS growth (%)
EPS growth adj. (%)
DPS growth (%)
Source: Company, Standard Chartered Research estimates
1 May 2014
10
Equity Research l GS Retail
Disclosures appendix
The information and opinions in this report were prepared by Standard Chartered Bank (Hong Kong) Limited, Standard Chartered Bank Singapore Branch, Standard
Chartered Securities (India) Limited, Standard Chartered Securities Korea Limited and/or one or more of its affiliates (together with its group of companies, ”SCB”)
and the research analyst(s) named in this report. THIS RESEARCH HAS NOT BEEN PRODUCED IN THE UNITED STATES.
Analyst Certification Disclosure: The research analyst or analysts responsible for the content of this research report certify that: (1) the views expressed and
attributed to the research analyst or analysts in the research report accurately reflect their personal opinion(s) about the subject securities and issuers and/or other
subject matter as appropriate; and (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views
contained in this research report. On a general basis, the efficacy of recommendations is a factor in the performance appraisals of analysts.
Where “disclosure date” appears below, this means the day prior to the report date. All share prices quoted are the closing price for the business day prior to the
date of the report, unless otherwise stated.
Recommendation and price target history for GS Retail
KRW
40,000
2
36,080
4
32,160
1
5
3
6
28,240
24,320
20,400
Jan-12
Date
1 2 Jun 12
Apr-12
Recommendation
OUTPERFORM
Jul-12
Oct-12
Price target
30,000
Date
3 4 Mar 13
2 24 Oct 12 OUTPERFORM
40,000 4 17 Jul 13
Source: FactSet prices, SCB recommendations and price targets
Jan-13
Recommendation
TERMINATION
IN-LINE
Apr-13
Jul-13
Price target
34,000
Oct-13
Date
Jan-14
Recommendation
Apr-14
Price target
5 4 Nov 13
IN-LINE
33,000
6 24 Jan 14
IN-LINE
28,000
Recommendation Distribution and Investment Banking Relationships
% of covered companies
currently assigned this rating
% of companies assigned this rating with which SCB has provided
investment banking services over the past 12 months
OUTPERFORM
54.4%
12.7%
IN-LINE
35.4%
11.5%
UNDERPERFORM
As of 31 March 2014
10.2%
7.7%
Research Recommendation
Terminology
OUTPERFORM (OP)
IN-LINE (IL)
UNDERPERFORM (UP)
Definitions
The total return on the security is expected to outperform the relevant market index by 5% or more over the next 12 months
The total return on the security is not expected to outperform or underperform the relevant market index by 5% or more over the next
12 months
The total return on the security is expected to underperform the relevant market index by 5% or more over the next 12 months
SCB uses an investment horizon of 12 months for its price targets.
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1 May 2014
11
Equity Research l GS Retail
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SECURITIES TO U.S. PERSONS UNLESS EITHER (A) THOSE SECURITIES ARE REGISTERED FOR SALE WITH THE U.S. SECURITIES AND EXCHANGE
COMMISSION AND WITH ALL APPROPRIATE U.S. STATE AUTHORITIES; OR (B) THE SECURITIES OR THE SPECIFIC TRANSACTION QUALIFY FOR AN
EXEMPTION UNDER THE U.S. FEDERAL AND STATE SECURITIES LAWS NOR DO WE OFFER OR SELL SECURITIES TO U.S. PERSONS UNLESS (i) WE,
OUR AFFILIATED COMPANY AND THE APPROPRIATE PERSONNEL ARE PROPERLY REGISTERED OR LICENSED TO CONDUCT BUSINESS; OR (ii) WE,
OUR AFFILIATED COMPANY AND THE APPROPRIATE PERSONNEL QUALIFY FOR EXEMPTIONS UNDER APPLICABLE U.S. FEDERAL AND STATE LAWS.
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transmitted in any form, or translated in any way without the prior written permission of Standard Chartered Bank.
1 May 2014
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