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Initiate with Buy and KRW100,000 TPmarket share gains, industry recovery, and new category expansion
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Rating Starts at BuyTarget price Starts at KRW 100,000
Closing price 20 March 2014 KRW 66,600
Potential upside +50.2%
Anchor themesDemographic changes will likely affect the growth outlook for consumer-related companies in Korea. As in the case of Japan, we expect demand for tobacco and liquor in Korea to fall, and the cosmetics and soft drinks markets to grow.
Nomura vs consensusOur FY14F net profit forecast of KRW77.6bn is 3.7% higher than consensus of KRW74.8bn.
Research analysts
South Korea Consumer Related
Cara Song - NFIK [email protected] +82 2 3783 2328
Key company data: See page 2 for company data and detailed price/index chart
Hanssem 009240.KS 009240 KS
EQUITY: CONSUMER RELATED
Initiate with Buy and TP of KRW100,000
Our new top pick as ageless growth is here
Action: Initiate with Buy and KRW100,000 TP (50% potential upside) on market share gains, industry recovery, and new category expansion We initiate coverage of Hanssem (HS) with a Buy rating and TP of KRW100,000, implying 50% potential upside. HS distributes system kitchen furniture and interior furniture in Korea, with c.16% market share in FY13. We are bullish on: 1) its superior branding and growing control on the distribution channel which should enable it to gain further market share; 2) structural turnaround of the B2B market finally after industry consolidation; 3) substantial new category expansion potential (kicking in from FY16F), and; 4) modest recovery of the Korea housing market. We are also positive on its high operating leverage and growing bargaining power as it should support continuous margin gains. We believe the beauty of this business is its strong cash generating ability and an asset-light business structure that is evident in HS’s high ROE of 26%. We forecast a sales CAGR of 17.2% for FY13-15F (18.8% sales CAGR in FY11-13) and net profit growth CAGR of 24.9% (24.8% in FY11-13).
Catalysts: Benefit from industry consolidation and recovery of the property market does not seem to be reflected in the share price Many B2B competitors went bankrupt in 2013, thus implying less competition in terms of volume sales and price. We anticipate gradual recovery of the property market, which should support volume recovery.
Valuation: KRW100,000 TP implies 50% upside potential HS is our new top pick, with significant potential upside of 50%. We derive our TP by applying 22x fair P/E (historical three-year average P/E of Amorepacific) as we think that Amorepacific is the most relevant comparable. Our DCF valuation suggests a TP of KRW130,000 (implying 28x fair P/E).
31 Dec FY13 FY14F FY15F FY16F
Currency (KRW) Actual Old New Old New Old New
Revenue (bn) 1,006 1,183 1,382 1,639
Reported net profit (bn) 61 78 96 121
Normalised net profit (bn) 61 78 96 121
FD normalised EPS 3,396.45 4,306.71 5,300.10 6,720.10
FD norm. EPS growth (%) 55.1 26.8 23.1 26.8
FD normalised P/E (x) 19.6 N/A 15.5 N/A 12.6 N/A 9.9
EV/EBITDA (x) 17.9 N/A 14.1 N/A 11.8 N/A 9.3
Price/book (x) 4.5 N/A 3.7 N/A 3.0 N/A 2.4
Dividend yield (%) 1.1 N/A 1.2 N/A 1.3 N/A 1.5
ROE (%) 25.6 26.3 26.0 26.6
Net debt/equity (%) 1.0 net cash net cash net cash
Source: Company data, Nomura estimates
Global Markets Research 24 March 2014
See Appendix A-1 for analyst certification, important disclosures and the status of non-US analysts.
Nomura | Hanssem 24 March 2014
2
Key data on Hanssem Income statement (KRWbn) Year-end 31 Dec FY12 FY13 FY14F FY15F FY16FRevenue 783 1,006 1,183 1,382 1,639Cost of goods sold -538 -700 -818 -956 -1,133Gross profit 245 306 364 426 506SG&A -198 -226 -264 -305 -354Employee share expense
Operating profit 47 80 100 121 152
EBITDA 54 88 109 131 163Depreciation -6 -7 -8 -8 -9Amortisation -1 -1 -1 -1 -2EBIT 47 80 100 121 152Net interest expense 1 2 4 7 10Associates & JCEs 1 0 0 0 0Other income 3 -1 -1 -1 -1Earnings before tax 52 81 103 127 161Income tax -12 -20 -25 -31 -40Net profit after tax 39 61 78 96 121Minority interests
Other items
Preferred dividends
Normalised NPAT 39 61 78 96 121Extraordinary items
Reported NPAT 39 61 78 96 121Dividends -11 -13 -14 -16 -18Transfer to reserves 29 49 63 79 104
Valuation and ratio analysis
Reported P/E (x) 30.4 19.6 15.5 12.6 9.9Normalised P/E (x) 30.4 19.6 15.5 12.6 9.9FD normalised P/E (x) 30.4 19.6 15.5 12.6 9.9FD normalised P/E at price target (x) 45.7 29.4 23.2 18.9 14.9Dividend yield (%) 0.9 1.1 1.2 1.3 1.5Price/cashflow (x) 54.2 15.8 12.2 11.0 9.8Price/book (x) 5.6 4.5 3.7 3.0 2.4EV/EBITDA (x) 28.3 17.9 14.1 11.8 9.3EV/EBIT (x) 32.6 19.7 15.4 12.7 10.0Gross margin (%) 31.3 30.4 30.8 30.8 30.9EBITDA margin (%) 7.0 8.7 9.2 9.5 9.9EBIT margin (%) 6.0 7.9 8.5 8.7 9.3Net margin (%) 5.0 6.1 6.6 6.9 7.4Effective tax rate (%) 23.8 24.6 24.6 24.6 24.6Dividend payout (%) 27.4 20.7 18.6 17.0 14.4Capex to sales (%) 0.8 2.5 1.7 1.4 1.2Capex to depreciation (x) 1.0 3.6 2.6 2.4 2.2ROE (%) 18.9 25.6 26.3 26.0 26.6ROA (pretax %) 14.1 19.4 19.2 19.6 20.7
Growth (%)
Revenue 9.9 28.4 17.6 16.8 18.6EBITDA -1.0 61.2 24.0 20.0 24.7EBIT 68.9 25.3 20.8 25.8Normalised EPS 4.6 55.1 26.8 23.1 26.8Normalised FDEPS 55.1 26.8 23.1 26.8
Per share
Reported EPS (KRW) 2,190.32 3,396.45 4,306.71 5,300.10 6,720.10Norm EPS (KRW) 2,190.32 3,396.45 4,306.71 5,300.10 6,720.10Fully diluted norm EPS (KRW) 2,190.32 3,396.45 4,306.71 5,300.10 6,720.10Book value per share (KRW) 11,920.26 14,643.53 18,095.86 22,441.71 28,135.45DPS (KRW) 599.73 702.37 798.90 898.76 970.89Source: Company data, Nomura estimates
Relative performance chart (one year)
Source: ThomsonReuters, Nomura research
(%) 1M 3M 12M
Absolute (KRW) 14.8 37.3 203.4
Absolute (USD) 14.4 35.4 214.7
Relative to MSCI Korea 14.8 41.8 204.3
Market cap (USDmn) 1,456.3
Estimated free float (%)
52-week range (KRW) 71400/20050
3-mth avg daily turnover (USDmn)
3.06
Major shareholders (%)
Hanssem Co 23.4
Chang-Gul Cho 22.7
Source: Thomson Reuters, Nomura research
Notes
Nomura | Hanssem 24 March 2014
3
Cashflow (KRWbn) Year-end 31 Dec FY12 FY13 FY14F FY15F FY16FEBITDA 54 88 109 131 163Change in working capital -22 24 22 15 3Other operating cashflow -10 -36 -33 -37 -43Cashflow from operations 22 76 98 109 122Capital expenditure -6 -25 -20 -20 -20Free cashflow 16 51 78 89 102Reduction in investments -5 -1 0 0 0Net acquisitions
Reduction in other LT assets
Addition in other LT liabilities -10 -50 -33 -68 -73Adjustments
Cashflow after investing acts 0 0 45 20 29Cash dividends -11 -13 -14 -16 -18Equity issue 0 1 0 0 0Debt issue 0 0 0 0 0Convertible debt issue
Others 11
Cashflow from financial acts -11 0 -14 -16 -18Net cashflow -10 0 31 4 12Beginning cash 46 35 24 55 59Ending cash 36 35 55 59 71Ending net debt -48 3 -28 -32 -44Source: Company data, Nomura estimates
Balance sheet (KRWbn) As at 31 Dec FY12 FY13 FY14F FY15F FY16FCash & equivalents 35 24 55 59 71Marketable securities 39 103 138 208 283Accounts receivable 74 109 117 137 162Inventories 25 41 55 64 64Other current assets 9 10 10 10 10Total current assets 182 287 374 478 589LT investments 59 60 60 60 60Fixed assets 110 132 149 166 183Goodwill
Other intangible assets 7 7 7 8 9Other LT assets 18 20 21 22 23Total assets 377 506 612 734 863Short-term debt 23 23 23 23 23Accounts payable 107 171 209 245 270Other current liabilities 15 29 34 42 44Total current liabilities 146 222 266 310 337Long-term debt 4 4 4 4 4Convertible debt
Other LT liabilities 12 16 16 16 16Total liabilities 162 242 285 329 356Minority interest 0 0 0 0 0Preferred stock
Common stock 24 24 24 24 24Retained earnings 207 256 319 398 502Proposed dividends
Other equity and reserves -16 -15 -16 -17 -18Total shareholders' equity 215 264 326 405 507Total equity & liabilities 377 506 612 734 864
Liquidity (x)
Current ratio 1.25 1.29 1.41 1.54 1.75Interest cover na na na na na
Leverage
Net debt/EBITDA (x) net cash 0.03 net cash net cash net cashNet debt/equity (%) net cash 1.0 net cash net cash net cash
Activity (days)
Days receivable 33.0 33.1 34.8 33.6 33.3Days inventory 20.5 17.3 21.4 22.6 20.6Days payable 84.4 72.6 84.8 86.7 83.2Cash cycle -30.9 -22.2 -28.6 -30.5 -29.2Source: Company data, Nomura estimates
Notes
Notes
Nomura | Hanssem 24 March 2014
4
Contents
5 Key investment summary
5 HS – strong brand and channel control (B2C market)
5 Major market share gainer in an extremely fragmented market
5 B2B market has finally started to recover
5 New category expansion, substantial upside in long term
6 HS – fastest-growing with strong competitiveness
6 Ongoing market share gains in the B2C market; 3.3% in FY05, 12% in FY13 and Nomura forecasts 22% in FY18F
8 “Kitchen Bach”: Successful premium image building
9 Diversifying B2C distribution channels
14 Favourable industry structure; highly fragmented market
15 Anticipating B2B market recovery
16 Furniture market recovery started from FY13
18 “Category expansion”: Long-term new growth engine
20 Earnings: We forecast 25.5% net profit CAGR in FY13-16F
20 17.7% sales revenue growth in FY13-16F
20 B2B market recovery should help margins recover in FY14F
20 High operational leverage leading to margin growth
20 Strong cash generating business structure
21 No burden from operating cash cycle
23 Valuation: Our new top pick
23 Our TP of KRW100,000 suggests 50% potential upside
25 IKEA entering the Korea market in FY14F – not a threat to HS in the foreseeable future
26 Risks to our view
28 Appendix A-1
Nomura | Hanssem 24 March 2014
5
Key investment summary We have been looking at companies that would outgrow the consumer sector in general, especially during the current economic slowdown and unfavourable changes in the population structure. We picked successful China plays as our preferred stocks, as we believe China is a very difficult market to penetrate but has significant growth potential. We liked companies that were well positioned with premium branding and a strengthening distribution channel (see our anchor report The Great Leap into China, 9 January 2008). Then, we liked cosmetic companies as it is the only major sub-sector within the Korea consumer market, where we expect sustainable market growth thanks to a growing number of aged female population (see our previous anchor report: Finding Younger Market, 10 January 2011). After that, we liked exporting consumer companies that have strong competitiveness to gain market share in the global market as most sub-sectors in the Korea consumer space are very consolidated by large companies and there is very little room for smaller companies to gain market share (see our previous anchor report: Ageless Growth, 28 November 2012). While China growth is slowing, industry consolidation is getting more apparent structurally in major consumer sectors in Korea, and export growth momentum is weaker in general. We now pick HS as our new top pick as we believe it is poised to gain strong market share in the extremely fragmented furniture and interior industry in Korea.
HS – strong brand and channel control (B2C market) For the past five years, despite sluggish furniture and interior market growth (+1.1% y-y in FY08-13, as per National Statistics Office(NSO) estimates), HS has grown rapidly recording a high sales CAGR of 14.8% during the same period, taking market share aggressively away from individual interior and furniture sellers and small-medium sized manufacturers. We attribute this to HS’s strong brand building (superior product quality) and competitive prices (stemming from its impressive sourcing power), and effective direct distribution channel strategy.
Major market share gainer in an extremely fragmented market The furniture and interior industry, relative to other consumer categories, is very fragmented, thus indicating ample room for large companies with superior product quality and effective distribution strategy to take market share away from individual sellers or small-sized manufactures. HS’s aggressive and continuous market share gains look set to bring in additional margin expansion, as the furniture and interior selling business has high operating leverage.
B2B market has finally started to recover As per Financial News (17 March 2014), a number of furniture companies such as Uami and Paroma went bankrupt around the same time in 2013, affected by a prolonged economic recession, and hence this could lead to improving contract conditions and rising contract prices going forward. HS’s B2B sales accounted for 22% of FY13 sales revenue with lower margins. We anticipate B2B sales momentum and margins should continue to pick up thanks to a favourable change in the industry.
New category expansion, substantial upside in long term Currently, the company is into kitchen interiors and the furniture market, which are sizeable and estimated at KRW4.3tn as per NSO). The company has yet to enter the bathroom, floor interiors, windows and doors market, which is estimated at a total of KRW4.35tn, as per NSO. As per management, the company plans to enter new categories starting from early-FY16F. With a strong ‘Hanssem’ brand and distribution power, it looks highly likely for HS to become a major player in these new categories as well, in our view. We like HS not only for its strong short-term earnings momentum, but also for its significant but promising potential earnings upside in the long term. We see IKEA’s (unlisted) expansion into Korea in late-2014 as a positive signal that there is ample growth potential for multinational players to be aggressive.
Nomura | Hanssem 24 March 2014
6
HS – fastest-growing with strong competitiveness Over the past five years, despite sluggish furniture and interior market growth (+1.1% y-y in FY08-13, as per NSO), HS has grown rapidly recording a high sales CAGR of 14.8% during the same period, taking away market share aggressively from individual interior and furniture sellers, and small- and medium-sized manufactures. We attribute this to HS’s strong brand building (superior product quality) and competitive prices (stemming from impressive sourcing power), and effective distribution channel strategy. We forecast HS’s sales growth to remain robust and record a sales CAGR of 17.2% in FY13-15F given further potential market share gains in the B2C market, structural recovery of the B2B market after consolidation, and gradual recovery of the market. In our view, HS looks set to record a double-digit CAGR beyond FY15F as it plans to enter new categories, where the industry size is bigger and competition is even less.
Ongoing market share gains in the B2C market; 3.3% in FY05, 12% in FY13 and Nomura forecasts 22% in FY18F
HS’s overall market share in 2005 was marginal at around 3.3%, which increased rapidly to 12% in 2013 on the back of its strong brand equity, superior product quality, top-notch installation services and effective distribution channel strategy. We forecast sales growth to remain strong at 17.6% over the next five years, as we believe the company looks set to continue gaining market share.
40 years in the kitchen furniture business and ‘Number One’ market share for past 28 years HS entered the kitchen furniture business 40 years ago and has maintained its number one market position for the past 28 years. It also added the interior furniture business from 1996 and has been the largest player in this segment for the past 11 years.
“Hanssem” brand getting stronger on core competence The company manufactures its products with superior designs, sells products through veteran sales representatives, and continues to establish more best-selling agencies. All its processes are fully supported by Enterprise Resource Planning (ERP) and online ordering systems. We believe, its most important competitive edge is its 24-hours After Service (AS) policy. The company’s 2,000 technical experts install products proficiently and resolve product quality issues and claims within one day, which we think is very impressive in terms of the number of technical experts and the quality and speed of service. These look to have all contributed to bring up brand royalty from customers, in our view.
Already 73% of total sales is B2C sales The company has spent more than 10 years to build its B2C distribution channel. As lower price is the only competitive factor in the B2B market and other competitors still heavily depend on the B2B market, we think it was a wise move by HS to build B2C distribution channels. HS’s successful premium branding, which it has built through its kitchen furniture, has been well executed through diversified B2C distribution channels (such as exclusive agencies, affiliated contractors, flagship stores, and on-line channels). Now, the company has strong volume power to better control distribution channels.
Further market share gains, supported by strong price competitiveness compared with product quality Now, the company looks set to have enough volume scale to obtain price competitiveness and provide a competitive price range for a given quality of the product, which we believe should enable HS to gain further market share from individual furniture sellers and interior decorators. We note that a dominant share of the market is still run by individuals with relatively less competitive quality and service offerings.
Nomura | Hanssem 24 March 2014
7
+17.6% sales CAGR to reach 22% market share in FY18F The company plans to manage prices effectively while expanding its distribution channels. We forecast HS’s market share to reach 22% in FY18F by continuing to grow at a CAGR of +17.6%.
Fig. 1: HS sales revenue growth by major categories
Source: Company data, Nomura estimates
Fig. 2: HS sales growth by category (%, y-y)
Source: Company data, Nomura estimates
Fig. 3: HS market share by category (%)
Source: Company data, Nomura estimates
Fig. 4: Hanssem – Core competence
Source: Company data, Nomura estimates
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1.8 2.1 2.4 2.7 3.3 3.9 4.9 5.4 6.9 8.0 9.0 10.111.412.7
5.7 6.3 7.6 7.9 9.6 11.214.7
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Kitchen furniture
Interior furniture
- 3-day delivery & 1-day installation, A/S within 24 hrs- Brand power first rank for 14 years in a row(*KMAC)
- Biggest local buyer to 300 vendors- Price competence by the economy of scale
Package Design (MD)- Continuous investment in MDs for 17 years since 1996- The best and the largest MD team in industry
Package Shopping (Large store)
- Flag Shop (6 stores in Korea) - Major residential area(Bangbae, Nonhyeon, Bundang, Jamsil, Busan) - 6,600㎡(Jamsil), 8,250㎡ (Busan) - Package display for target customers and shopping facility- Agency Stores - Increasing the portion of the large agency store (=over 1,000㎡)
Basic
Core Competence
Period of delivery A/S, Brand power
Buying power
Package OrientedStrategy
Nomura | Hanssem 24 March 2014
8
“Kitchen Bach”: Successful premium image building
The company started to build a high-end quality brand image by launching its premium system kitchen set brand “Kichen Bach” in 2006; it was launched on TV home shopping channels from early-2011. TV home shopping is not only considered to be one of the effective distribution channels for sales, it is also important as it could be used for product advertisement while the product is being sold. Usually, TV home sales personnel allocate one full hour to explain details of the product and it has been extremely effective for Hanssem’s “Kitchen Bach”, premium system kitchen interior brand, as system kitchen furniture requires enough time to describe the details, to compare product quality with conventional products in the market, and to explain the innovative functions and differentiating designs. With a series of appearances through TV home shopping, “Kitchen Bach” helped carve a premium image for the HS brand from 2011. Kitchen furniture sales revenue growth accelerated, recording 35.3% y-y growth in FY11. Despite a weak market in FY12 (-0.3% y-y in FY12), HS’s kitchen furniture sales grew 21% y-y in FY12. Kitchen furniture growth continued to accelerate, and the company recorded even stronger sales growth of 31.5% in FY13.
• “Kitchen Bach” brand concept: The brand concept of “Kitchen Bach” is world’s best kitchen, delivering everlasting value in terms of design, quality, and installation know-how. The philosophy of the brand is to cultivate it as the centre of home interiors and more broadly, the centre of life. Moreover, “Kitchen Bach” is designed to refresh housewives by offering them pride and pure joy. Its values are joy (with friends), happiness (with family), and love (with partners). (Source: Company website)
Fig. 5: HS “Kitchen Bach” image
Source: Company data, Nomura research
Fig. 6: HS “Kitchen Bach” TV home shopping image
Source: Company data, Nomura research
Long-term brand investment pays We analysed the financials of domestic peers Enex (011090 KS, Not rated) and Livart (079430 KS, Not rated), as these two are listed direct peers that provide 2013 reported financials. Our analysis shows that both its competitors have been recording much slower sales growth for the past one decade. We attribute this to high dependency on the B2B market, and a lack of branding and diversified distribution channels. Both Enex and Livart focus more on the B2B business rather than the B2C market, as a result of which they did not invest much in their own brand. Advertisement and promotion expenses as a portion of total sales revenue comparison shows how domestic peers made small brand investments which resulted in high sensitivity of sales revenue to the construction market cycle, and low profitability.
Nomura | Hanssem 24 March 2014
9
Fig. 7: HS, Livart, Enex sales revenue growth comparison (KRWbn)
Source: Company data, Nomura research
Fig. 8: HS, Livart, Enex sales revenue growth comparison (%, y-y)
Source: Company data, Nomura research
Fig. 9: HS, Livart, Enex B2C contribution comparison (%)
Source: Company data, Nomura research
Fig. 10: HS, Livart, Enex marketing cost as % of total sales revenue (%)
Source: Company data, Nomura research
Diversifying B2C distribution channels
The furniture B2B market sells furniture to construction companies who build new apartment buildings and complexes. Ten years ago, HS’s B2B sales contribution accounted for half of total sales revenue (FY03) and it was a major reason for the low profitability (2% OPM in FY03 vs. 7.9% OPM in FY13). Generally, the B2B furniture market is highly sensitive to the housing and construction market cycle, and the key is ‘low prices’ to be competitive as supply contracts are made through price bidding among many furniture companies.
HS started to build a B2C distribution channel in the domestic furniture market, where competition is less fierce and prices relatively high. But it took ten years for HS to build and establish a direct distribution channel. There has to be solid brand awareness and strong brand power among consumers. HS avoided aggressive mass-media advertisements and strived to improve R&D (in terms of function, design, and efficiency), develop new raw materials, and have more effective customer service (installation, claims, and after service [A/S]).
With improving product quality and its ERP system (set in early-2000) supporting fast customer service, the company developed and created new channels to sell products directly to customers such as exclusive agency stores, flagship stores, contracted interior furniture installers and online shopping malls.
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Nomura | Hanssem 24 March 2014
10
As a result, B2C market sales accounted for 73% of total consolidated sales revenue in FY13, up from 45% in FY03.
Fig. 11: Hanssem – B2B, B2C business model comparison
Source: Company data, Nomura research
Fig. 12: Korea furniture market breakdown
Source: Company data, Nomura estimates
Fig. 13: HS operating profit margin comparison by channel
Source: Company data, Nomura research
Fig. 14: HS distribution channels
Source: Company data, Nomura estimates
Fig. 15: HS sales revenue by distribution channels (KRWbn)
Source: Company data, Nomura estimates
B2B B2C
EconomyHousing construction market→ High fluctuation
Durable goods cycle (7~8 years)→ Less affected by market
Market Factors
Brand ApartmentBidding System
Small family, Aging society→ No. of Household increasesHigher income→ Brand preference increasesMarket change: B2B → B2C
Target Operating Margin
BEP ~ 5%(focused on price)
Over 10%(less sensitive to price)
Sustainability Low High
2.01.2 0.9
2.2
3.64.6
5.35.9
6.86.0
7.9 8.38.8
9.3 9.7
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(KRWbn) (%)
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(%)
2007 2008 2009 2010 2011 2012 2013 2014F 2018F
Interior (Agency Store) 100 100 96 92 88 84 80 80 80
Interior (Flag Shop) 3 3 4 4 5 5 5 6 10
Kitchen (Agency Store) 270 250 238 226 210 220 230 230 230
2007 2008 2009 2010 2011 2012 2013 2014F 2015F 2016F FY07-10 FY10-13 FY13-16F
Interior agency store 79 85 93 104 115 96 131 148 167 185 9.6 8.0 12.2
Interior flagship shop 38 46 58 81 104 123 146 169 195 220 28.7 21.8 14.7
Interior online mall 13 17 28 40 72 79 94 108 124 140 44.5 32.6 14.2
Kitchen agency store 112 100 97 102 134 173 218 255 293 331 -2.8 28.5 15.0
Kitchen contractors 1 10 39 66 94 103 145 182 222 266 261.2 30.1 22.3
CAGR (%)
Nomura | Hanssem 24 March 2014
11
Fig. 16: HS sales revenue by distribution channels
Source: Company data, Nomura estimates
Fig. 17: HS sales mix by distribution channels
Source: Company data, Nomura estimates
Effective management of agency stores (100% exclusive franchisees) HS has 80 agency stores for interior furniture and 230 agency stores for kitchen interiors.
HS’s strategy is to increase the number of its large-sized stores (bigger than 330 sq m) to enhance furniture display and attract traffic. An average franchise store is less than 500 m2, but the company has opened around 15 large-sized franchise stores that are 990-1,650 m2 in size, which enables the company to display more furniture brands and items. Individual furniture sellers are less competitive, on average, in terms of price (a lack of scale), display & design, consultation services as well as customer service including A/S.
Thanks to this strategy, HS’s interior agency store sales per store kept improving on growing brand power and fast market share gains, and recorded 14% same-store-sales growth (SSSG) over the past five years despite a decline in the number of stores thanks to HS’s focus on bigger-sized stores and improving efficiency of stores. Also, kitchen furniture agency SSSG has been even faster at a 18.8% CAGR over the past five years, which indicates that strong branding, product quality, effective direct distribution channel management and superior service experience all result in both faster sales growth and margin expansion.
“IK (Interior Kitchen)”: effective distribution channel management After 2008, the company introduced a new brand called “IK (Interior Kitchen)”, which is specially designed for affiliated interior and furniture sellers and installers. There are 20,000 individual interior installers in Korea, according to the company. “IK” brand is designed for interior construction (kitchens, built-in wardrobes, entryways, verandahs, wallpapers, living rooms, etc) supplying to around 3,200 contracted interior and furniture installers. According to the company, 3,200 contracted interior furniture installers are relatively bigger installers and account for c.80% of the total whole remodeling market. These contracted installers are not 100%-exclusive and they can use any brand and items they want. Now, the company’s focus is to have contracted installers to increase the usage of IK brand products.
• “IK” Brand: Post the apartment construction boom in Seoul during 1980-90s, apartment buildings are now old and, according to the company, there is more demand for redecorating the whole home interior and furniture rather than replacing only single items. Usually, home owners hire an individual interior installer to do the whole remodeling. IK brand provides reasonable-priced interiors and kitchen furniture, which installers can use for changing home interiors.
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Nomura | Hanssem 24 March 2014
12
Fig. 18: HS – Kitchen furniture business strategy
Source: Company data, Nomura research
Fig. 19: HS – interior contractor business (IK)
Source: Company data, Nomura research
Fig. 20: HS – exclusive franchise stores business
Source: Company data, Nomura research
Five flagship stores in FY13, 10 by FY18F The company directly operates five large-scale stores in Busan, Jamsil, Nonhyun, Bangbae, and Bundang for the purpose of one-stop shopping, including all types of different interior design items. Flagship shops are big in size (average 6,600 sq m) and generate c.KRW30bn sales per store, according to our estimates. The company just opened its sixth flagship store in Mokdong in February and, as per the company, it eventually plans to have 10 flagship stores by 2018F.
Fig. 21: HS flagship store image
Source: Company data, Nomura research
Fig. 22: HS flagship store image
Source: Company data, Nomura research
Before 2000 After 2000
Purchase motive Single product Whole remodeling
Decision maker Purchaser Interior Contractor
Decision factor Brand Price
Recommendation - Non-brand
Low growth from 2002 to 2008 IK channel alunched
('08~)
Customer Top 20% of 15,000 installer
Brand
Sales person Hanssem employees
Price About 10% premium compared to non-brand
Installation Hanssem
Target market share 30% - KRW400bn per year
Item Expansion
Bathroom, flooring, windows, lighting etc.- Total service (design, installation, AS)- Package desine for spaces
IK (Interior Kitchen)
→ Mutual-beneficial model with the local customers
- Mid-to-low priced product for mid-small apartment
→ Showrooms and home-shopping channel
CustomerMid-to-high end customer who visits store on their own
Brand
Item Expansion
1. Large showroom (12EA) - Size: 330㎡~660㎡ - Jointly operated by local top five dealers2. Home-shopping channel
Agency Store
- Mid-to-high end product for larger apartment
Nomura | Hanssem 24 March 2014
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Fig. 23: HS – distribution network
Source: Company data, Nomura estimates
“Online mall”: direct sales growth In order to strengthen its online distribution channel, the company has launched its new online exclusive brand “HOWIZ”, which we note has become the top business in terms of sales in the industry within a short period. The company started its online business in 2005, and it has been recording a CAGR of 33% for the past three years in the online business, which now accounts for 9.3% of total sales revenue.
Fig. 24: Online mall image
Source: Company data, Nomura research
Fig. 25: HS online mall
Source: Company data, Nomura research
Nomura | Hanssem 24 March 2014
14
Favourable industry structure; highly fragmented market
In the past, the kitchen interior industry was generally very labour-intensive and had a long tail of small-scale production methods that were suitable for small- medium-sized companies. Also, price was the key determining factor for competition in the past; therefore, industry leaders (who could decrease costs via large-scale production) or the smaller companies (who could minimise their selling & administrative expenses) were the only ones who could possess competitiveness.
However, with kitchen furniture transforming into more high-quality and trendy, design and quality have gradually become more important aspects to compete in the market. Therefore, businesses that continuously invest in design R&D like HS have become key players in this market. Also, owing to the complexity of construction and distribution, large corporations failed to enter this market in the past (according to the company’s IR, LG Group entered the market a decade ago and soon retreated due to a lack of operational knowhow). Thus, for the construction and distribution sectors, the systematic process (through which ERP can be computerized) still plays a key role in competition.
Furniture & interior market looks the least consolidated The furniture industry, relative to other consumer categories, has been relatively less consolidated and therefore provided ample room for large companies with superior product quality and effective distribution strategy, to take away market share from individual sellers or small-sized manufactures.
The furniture market is a relatively big category in household consumption. The top-three players in the other major categories are already above 66% (Fig. 26), but in the furniture and interiors market the market share of the top-three players is quite small at 8.9%.
Fig. 26: Korea: industry consolidation by subsector, 2012
Source: Company data, Nomura estimates
Fig. 27: Korea: top-three players’ average OPM (%), 2012
Source: Company data, Nomura estimates
Strengthening power to take market share from individual sellers Apart from kitchen furniture, we believe built-in systems will likely expand in the market into areas of dishwashers, gas ovens, refrigerators, etc. Therefore, in our view, companies such as Samsung Electronics, LG Electronics, and other large scale home appliance companies must team up with kitchen interior companies in order to capture more market share in the domestic built-in appliance markets, which will help create positive synergies. In addition, the importance of design in the kitchen interior industry is also being emphasised by the increasing interest in total interiors. Thus, the industry will continue to grow in line with fashion trends and luxury aspects, in our view.
Branded competitors remain weak too The kitchen furniture market for mass bulk production can be divided into brand companies and non-brand individuals. While brand companies’ market share is continuously growing, non-brand market share is still estimated at around 80%, according to the company. On the one hand, Hanssem’s market share is steady at around over 80% among the brand makers. However, other companies in the same
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Nomura | Hanssem 24 March 2014
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industry such as Enex, Livart, and Boruneo (unlisted) have low market shares as shown below.
The furniture industry, relative to other consumer categories, has been relatively less consolidated and therefore provided ample room for large companies with superior product quality and effective distribution strategy, to take away market share from individual sellers or small-sized manufactures.
Fig. 28: HS: Kitchen furniture market share in branded furniture market
Source: Company data, Nomura estimates
Fig. 29: HS sales revenue comparison with competitors
Note: ranking Source: Company data, Nomura estimates
Anticipating B2B market recovery
The company’s B2B business, accounting for 22% of total sales in FY13, delivers kitchen furniture to construction companies building mid- large-sized apartments. For B2B sales, HS provides kitchen furniture, storage furniture and related products to major construction companies selected by internal and external credit rating institutions in the new construction, reconstruction, and remodelling markets. HS leads the market with its advanced technology, impressive designs, unique house models, and most importantly in terms of product prices thanks to economies of scale.
The domestic B2B furniture market is finally on the path to recovery As per Financial News (17 March 2014), a number of furniture companies such as Uami and Paroma went bankrupt around the same time in 2013 , affected by a prolonged economic recession, and hence this could lead to improving contract conditions and rising contract prices going forward.
After a prolonged period of recession (owing to a stagnant construction industry and severe competition among furniture manufacturers), contract prices have been rising from 2H13, according to the news article. This recovery is mainly driven by improving construction sentiment and mitigated competition following a number of furniture company bankruptcies. In addition, at the end of last year, the revised Housing Bill was passed, which allows for floor extensions (additional three floors at the maximum) when remodeling more than 15-year old houses.
As per the article, B2B furniture refers to kitchen furniture, shoe closets, and built-in closets when building new houses or remodeling. As the B2B furniture market is very sensitive to the construction industry, B2B furniture manufacturers (e.g., Pase and Paroma) went bankrupt in 2013, the worst year in terms of earnings. With an increasing number of furniture companies going bankrupt, the market itself has tried to improve business conditions. In the aftermath of bankruptcies, construction companies have been switching their pricing policy more leniently (from insisting on the lowest spot prices to fixing the price over the entire year).
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Interior Kitchen
Nomura | Hanssem 24 March 2014
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Backed by the efforts of furniture players and construction companies, the average ASP of B2B furniture has recovered significantly, the article added. For instance, Livart’s wood products and kitchen furniture prices increased 56% y-y and 5% y-y, respectively in 2H13. Thus, furniture companies who focused on B2C are now looking into B2B again in order to enjoy the market recovery on the government’s favourable stance. However, they assume it will take some time to reflect the actual impact in their earnings in the coming quarters, according to the article.
Fig. 30: Korea: B2B furniture market player sales
Source: Company data, Nomura estimates
Fig. 31: B2B market profitability comparison (FY12)
Source: Company data, Nomura estimates
Furniture market recovery started from FY13
Korea’s room furniture and interior market size was KRW4.55bn in FY13, according to Korea National Statistics Office (NSO), and growth of the furniture market has remained sluggish for the past few years (see Fig 33: market CAGR of 1.1% in FY08-13), due to a weak property market and economic slowdown. The kitchen furniture industry, which is closely connected to the home construction business and demand to move homes, has a high correlation with nationwide income levels, and the total size of the market is also dependent on the curve of the economic cycle. Of late, there has been a recovery in the number of home transactions in FY13 after a slowdown in the construction and real estate markets for the past few years. In the case of the home interiors industry, the practical value must be considered as well as consumers’ tastes; thus, products that are necessary and relevant to modern people’s lifestyle must also be appealing in terms of fashion. Home interior products just don’t have simple functions, but are also ornately used as decoration. We expect the industry to continue trending in this manner and will be more influenced by the quality of design than from macroeconomic changes.
Property market recovery anticipated in FY14F Our Korea economist, Youngsun Kwon is positive on recovery of the domestic housing market, which will come along with GDP growth recovery. (+4.0% y-y GDP growth in FY14F, after 2.8% in FY13; +4.0% GDP growth is faster than global GDP growth of 3.4% in FY14F, according to him.) If the property market recovers and so do transaction volumes, this will be positive for growth of the overall furniture and interiors market, in our view. In his report, Korea outlook 2014, dated 16 Dec 2013, he has emphasised why he is positive on recovery of the property market, as the Korean government’s comprehensive measures will finally start to pay off soon and real house demand has been picking-up along with economic recovery.
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Nomura | Hanssem 24 March 2014
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Fig. 32: Korea furniture market indicators
Source: Company data, Nomura research
Fig. 33: Korea furniture market growth forecasts
Source: Company data, Nomura estimates
Fig. 34: HS – market share forecasts
Source: Company data, Nomura estimates
Fig. 35: Korea: furniture market forecasts
Source: Company data, Nomura estimates
Number of couples married for 10 years should pick up As per Kookmin Bank research, it takes roughly 10 years for married couples to buy their first house in Korea. That said, the number of couples married for 10 years (natural demand, statistically) should start to pick up in 2H13F, based on our analysis, and hence, we expect housing demand to increase.
Jeonse-to-value ratio continues to rise The Jeonse-to-value ratio has been rising rapidly and we expect it will likely rise continuously going forward as landlords continue to convert Jeonse property into semi-
(Unit: %) 2005 2006 2007 2008 2009 2010 2011 2012 2013
Moving 4.2 9.1 -8.3 -2.5 -6.3 -3.8 0.5 -10.6 -2.7
Marriage 2.9 6.6 0.9 -4 -5.8 6.1 1.5 -1.5 -0.8
APT transaction -8.1 21.4 -28.6 27
Department store sales 5.7 4.6 2.4 5.9 6.4 9.4 9.3 -0.4 1.3
Car sales 4.5 1.8 4.7 -5.3 20.8 5.1 0.7 -4.3 -2.1
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Market growth (%, y-y)
HS sales growth (%, y-y)
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(%)
(KRWbn) 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014F 2015F 2016F 2017F 2018F
Room furniture 4,393 4,928 4,674 4,306 4,135 4,380 4,516 4,565 4,550 4,641 4,734 4,829 4,925 5,024
Kitchen furniture 1,676 1,671 1,485 1,392 1,416 1,500 1,546 1,563 1,558 1,589 1,621 1,654 1,687 1,720
Bathroom interior 2,514 2,506 2,228 2,088 2,124 2,250 2,320 2,345 2,337 - - - - -
Windows and doors 1,676 1,671 1,485 1,392 1,416 1,500 1,546 1,563 1,558 - - - - -
Floor interior 670 668 594 557 566 600 619 625 623 - - - - -
Total 10,929 11,444 10,466 9,734 9,657 10,230 10,547 10,661 10,627 10,840 11,056 11,277 11,503 11,733
Market growth (%, y-o-y) 12.2 -5.2 -7.9 -4.0 5.9 3.1 1.1 -0.3 2.0 2.0 2.0 2.0 2.0
HS Kitchen sales 95 105 113 110 136 169 228 276 363 436 515 597 693 806
Growth (%, y-o-y) 10.9 7.1 -3.0 24.3 23.8 35.3 21.0 31.5 20.2 17.9 16.0 16.1 16.2
MS (%) 5.7 6.3 7.6 7.9 9.6 11.2 14.7 17.7 23.3 27.5 31.7 36.1 41.1 46.8
HS Interior sales 104 130 138 149 179 225 291 298 371 426 485 545 612 688
Growth (%, y-o-y) 24.8 6.4 7.5 20.7 25.6 29.0 2.3 24.7 14.7 14.0 12.3 12.3 12.3
MS (%) 2.4 2.6 3.0 3.5 4.3 5.1 6.4 6.5 8.2 9.2 10.3 11.3 12.4 13.7
MS existing categories 3.3 3.6 4.1 4.5 5.7 6.7 8.6 9.4 12.0 13.8 15.7 17.6 19.7 22.1
MS total categories 1.8 2.1 2.4 2.7 3.3 3.9 4.9 5.4 6.9 8.0 9.0 10.1 11.4 12.7
Nomura | Hanssem 24 March 2014
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Jeonse or monthly rental property, thus decreasing the supply of Jeonse (lump-sum rent payment) property.
Fig. 36: # of couples married for 10 years vs. home price Natural demand impacts home price
Source: Korea statistics, Kookmin Bank, Nomura research
Fig. 37: Jeonse price % change y-y Jeonse price is rising sharply
Source: Kookmin Bank, Nomura research
“Category expansion”: Long-term new growth engine
The home interiors market can be categorised into home furniture, lighting, bathroom, wall paper/tiling, small tools, fabrics, etc. The company’s 2013 home interior sales accounted for around 39% of total sales. The company started its interior furniture business in 1997 and rose to the number one position in the industry after four years and is still the leader. Over the years, the company has expanded categories and product items under major categories such as furniture, fabrics, lighting, and living products in the bedroom, living room, children’s’ room, and living space.
The company plans to enter into bathroom interior market from early-2016F and is currently creating, developing and preparing products and designs. It is also looking at installation methods, sourcing & manufacturing, logistics, A/S, marketing and branding, and price.
According to the company, the bathroom interiors market is 1.5-times bigger than the kitchen furniture market, which is estimated at KRW1,5tn in FY13, as per NSO. On our reading, the bathroom interiors market is roughly around KRW2.2tn. There is no presence of any major branded company in the bathroom interiors market, but c.20,000 individual installers currently operate in this market without any major competition with large companies.
Bathroom interiors market is 1.5-times bigger than kitchen furniture If we assume that HS takes around 5% market share in the bathroom interiors market, and generates 10% operating profit margin as it did in the kitchen furniture business, the amount of net profit from the 5% market share in bathroom interior market would be equal to 10% of our FY14F net profit estimate. Currently, the company is present in kitchen interiors and furniture, which are sizeable markets; however, the company is yet to enter the bathroom, floor interiors, windows and doors markets, which is estimated at KRW4.35tn, as per NSO. If assume a 5% market share in the new categories, the amount of net profit from the new markets would bring in additional net profit of KRW14.7bn, we estimate, which translates into 20% of our FY14F net profit estimate. Assuming a 25% market share in bathroom interiors and total new markets (HS’s current market share in kitchen interiors is 24% in FY13), we estimate net profit to be nearly 51% and 98.6%, respectively of FY14F net profit. Although the bathroom interiors and total new markets business will begin from early FY16F, we see this as a sizeable long-term catalyst.
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y-o-y chg of couples married for 10 years (12m MA, LHS)
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Nomura | Hanssem 24 March 2014
19
Beyond unfavourable demographic changes Some companies in the consumer space are facing unfavourable demographic conditions (See our anchor report, Ageless Growth, dated 28 November 2012). We argued about finding companies and stocks that could grow regardless of demographic structure changes. We liked beauty-related small-caps such as Medy-Tox (086900 KS, Buy) and Cosmax (044820 KS, Buy) as these have strong export growth momentum, while they benefit from an ageing population in the domestic market. Now, we see HS as one of the stocks that could grow structurally, as it has strong brand power, distribution control and also significant room to gain market share going forward while competition is less intense.
Fig. 38: Korea market size by category (KRWtn)
Source: Company data, Nomura estimates
Fig. 39: Korea home interior market breakdown
Source: Company data, Nomura estimates
Fig. 40: HS bathroom market potential: sensitivity analysis (KRWbn)
Source: Company data, Nomura estimates
Fig. 41: HS: new market potential: sensitivity analysis (KRWbn)
Source: Company data, Nomura estimates
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Case 1 Case 2 Case 3 Case 4 Case 5 Case 6 Case 7 Case 8 Case 9 Case 10
Bathroom market (KRWbn) 2,250 2,250 2,250 2,250 2,250 2,250 2,250 2,250 2,250 2,250
Market share (%) 5.0 10.0 15.0 20.0 25.0 30.0 35.0 40.0 45.0 50.0
Sales revenue 101.3 202.5 303.8 405.0 506.3 607.5 708.8 810.0 911.3 1,012.5
Operating profit 10.1 20.3 30.4 40.5 50.6 60.8 70.9 81.0 91.1 101.3
OPM (%) 10.0 10.0 10.0 10.0 10.0 10.0 10.0 10.0 10.0 10.0
Net profit (A) 7.6 15.2 22.8 30.4 38.0 45.6 53.2 60.8 68.3 75.9
(A) as % of FY14F net profit 9.8 19.6 29.3 39.1 48.9 58.7 68.5 78.3 88.0 97.8
Case 1 Case 2 Case 3 Case 4 Case 5 Case 6 Case 7 Case 8 Case 9 Case 10
Bathroom, windows, doors, and floor 4,350 4,350 4,350 4,350 4,350 4,350 4,350 4,350 4,350 4,350
Market share (%) 5.0 10.0 15.0 20.0 25.0 30.0 35.0 40.0 45.0 50.0
Sales revenue 195.8 391.5 587.3 783.0 978.8 1,174.5 1,370.3 1,566.0 1,761.8 1,957.5
Operating profit 19.6 39.2 58.7 78.3 97.9 117.5 137.0 156.6 176.2 195.8
OPM (%) 10.0 10.0 10.0 10.0 10.0 10.0 10.0 10.0 10.0 10.0
Net profit (A) 14.7 29.4 44.0 58.7 73.4 88.1 102.8 117.5 132.1 146.8
(A) as % of FY14F net profit 18.9 37.8 56.7 75.6 94.6 113.5 132.4 151.3 170.2 189.1
Nomura | Hanssem 24 March 2014
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Earnings: We forecast 25.5% net profit CAGR in FY13-16F
17.7% sales revenue growth in FY13-16F
We forecast 17.7% sales revenue growth and a 25.5% net profit CAGR for the next three years, which looks robust. For the past two years (FY11-13), sales revenue recorded a CAGR of 18.8% and operating profit recorded a higher CAGR of 28% thanks to growing bargaining power and operating leverage. During the past two years, gross profit margin gained 1.2pp from 29.2% in FY11 to 30.4% in FY13 owing to increasing purchasing power and operating profit margin improved to 7.9% in FY13 (vs. 6.8% in FY11).
B2B market recovery should help margins recover in FY14F
Gross profit margin in FY13 declined to 30.4% from 31.3% in FY12, largely due to rapid sales recovery of the B2B market, which has lower margins than the B2C market. We expect gross profit margins to recover to 30.8% in FY14F as B2B market consolidation looks set to help prices to rise and thus higher gross profit margin for the B2B business.
High operational leverage leading to margin growth
Operating profit margin improved from 3.6% in FY07 to 7.9% in FY13. Of the total improvement of 4.3pp, 2.6pp came from gross profit margin improvement, as a result of growing contribution of higher-margin B2C sales revenue and growing bargaining power from 300 smaller vendors. The rest, 1.7pp came from operational leverage. While sales, over the past seven years, recorded a CAGR of 12.5%, fixed costs (labour, advertisements, rents, and others) recorded a slower CAGR of 8.0% during the same period. We believe operational leverage should continue, as we forecast robust sales revenue growth of 17.7% for the next three years and fixed-cost growth of 12.6%.
Fig. 42: HS – gross profit margin forecasts
Source: Company data, Nomura estimates
Fig. 43: HS – fixed cost vs. variable cost as a % of sales revenue
Source: Company data, Nomura estimates
Strong cash generating business structure
Currently, the company has net cash (KRW76bn net cash, cash on hold is nearly 42% of total equity) and we expect the cash amount looks set to grow fast thanks to its asset-light business structure. The company outsources majority of its product items from 300 vendors and manufactures only about less than 30% of the products. Franchisees are in charge of all the costs related to operating the retail stores. Average capex for the past three years was KRW26bn, which we estimate is as small as 3% of total sales revenue,
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Nomura | Hanssem 24 March 2014
21
on average. When the company opens flagship stores, it rents the store and we estimate that it costs a mere KRW4bn for store product layout and interior decoration; the capex as a percentage of revenue should remain low and this should help sustain its high ROE of 26% despite the growing amount of cash.
No burden from operating cash cycle
HS’s account payable days is long at around 51 days, while account receivable days and inventory days are relatively short (total 45 days combined, FY13). Cash cycle for the past seven years has been stable and well managed as the company pays within two months after the products are shipped to its warehouse while they are paid within 30 days except direct distribution channels such as flagship shops and on-line stores.
Fig. 44: HS cash position
Source: Company data, Nomura estimates
Fig. 45: HS cash cycle
Source: Company data, Nomura estimates
Fig. 46: ROE comparison by industry universe (%)
Note: As of 2014F
Source: Company data, Nomura estimates
Fig. 47: Korea consumer: sustainability of growth (%)
Source: Company data, Nomura research
(KRWbn) FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14F FY15F FY16F
Cash 32.3 10.8 81.4 98.2 96.7 74.7 102.8 192.3 266.4 353.1
Debt 21.8 42.5 39.4 21.5 27.2 26.8 26.8 26.8 26.8 26.8
Net cash (debt) -10.5 31.8 -42.0 -76.7 -69.5 -47.9 -76.0 -165.5 -239.7 -326.4
Net gearing (%) -7.9 23.2 -28.3 -43.2 -34.3 -22.3 -28.8 -50.6 -59.0 -64.0
Equity 133.4 137.1 148.5 177.5 202.4 214.9 263.9 327.2 406.5 510.1
ROE (%) 11.5 12.8 15.3 18.0 20.7 18.9 25.6 26.3 26.0 26.4
(The number of days) FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14F FY15F FY16F
A/R days 58 45 69 41 37 36 44 39 39 39
Inventory days 13 23 22 17 19 12 17 17 17 17
A/P days 84 63 96 62 77 52 70 70 70 70
Cash cycle -14 5 -6 -4 -21 -4 -9 -14 -14 -14
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Nomura | Hanssem 24 March 2014
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Fig. 48: HS – earnings forecasts
Source: Company data, Nomura estimates
( Wbn) FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14F FY15F FY16F FY13-16F CAGR
Sales revenue 495.4 504.9 542.2 625.2 712.8 783.2 1,006.0 1,182.7 1,382.0 1,639.1 17.7B2C 243.5 258.3 315.6 394.0 518.9 573.6 734.3 862.2 1,000.0 1,142.2 15.9B2B 172.0 153.1 231.5 201.8 158.0 159.1 221.5 274.8 285.0 316.0 12.6China 12.9 24.4 20.2 22.2 24.4 26.9 10.0America 21.2 23.6 25.5 28.1 30.9 33.9 10.0
Gross profit 137.5 142.1 137.3 165.4 207.8 244.8 305.8 364.3 425.6 506.5 18.3GPM (%) 27.7 28.1 25.3 26.5 29.2 31.3 30.4 30.8 30.8 30.9
SG&A 119.6 118.6 108.8 128.4 159.1 197.5 226.0 264.2 304.8 354.4 16.2 Fixed costs 54.5 51.6 56.9 59.3 73.3 91.7 95.5 106.7 120.4 135.7 12.4 Fixed costs (%) 11.0 10.2 10.5 9.5 10.3 11.7 9.5 9.0 8.7 8.3 Labor 41.3 40.0 44.5 47.1 57.3 70.4 74.9 84.2 95.7 108.5 13.2 Advertisement 7.3 5.1 5.7 6.0 10.9 14.1 13.6 14.3 15.0 15.7 5.0 Rent 5.9 6.5 6.7 6.2 5.1 7.2 7.0 8.2 9.6 11.4 17.7 Variable costs 40.5 40.1 33.3 43.7 63.8 77.7 100.4 121.6 144.8 175.1 20.4 Variable costs (%) 8.2 7.9 6.1 7.0 9.0 9.9 10.0 10.3 10.5 10.7 Commission paid 30.0 29.9 18.3 21.2 30.9 36.1 44.7 52.6 61.4 72.8 17.7 Sales promotion 4.1 3.3 6.5 11.7 20.1 28.3 43.2 54.3 66.3 81.9 23.7 Transportation 6.4 6.9 8.4 10.8 12.8 13.3 12.5 14.7 17.2 20.4 17.7Other 24.7 26.9 18.7 25.5 22.0 28.2 30.1 36.0 39.6 43.7 13.3
Operating profit 17.9 23.5 28.5 37.0 48.7 47.3 79.8 100.0 120.8 152.0 24.0OPM (%) 3.6 4.6 5.3 5.9 6.8 6.0 7.9 8.5 8.7 9.3
Other income 9.6 15.7 10.1 10.5 8.6 12.8 12.0 14.1 17.1 19.8 18.2Other expense 5.0 10.6 7.7 6.4 4.8 8.9 10.6 11.2 11.2 11.2 1.8
Recurring profit 22.0 28.5 33.1 39.9 52.6 51.8 81.2 103.0 126.7 160.6 25.5Tax 7.2 11.2 11.2 10.8 13.3 12.3 20.0 25.3 31.2 39.5 25.5Tax rate (%) 32.9 39.3 34.0 27.0 25.2 23.8 24.6 24.6 24.6 24.6
Net profit 14.8 17.3 21.8 29.3 39.3 39.5 61.2 77.6 95.5 121.1 25.5NPM (%) 3.0 3.4 4.0 4.7 5.5 5.0 6.1 6.6 6.9 7.4 6.7
Growth (%, y-y)Sales revenue 13.4 1.9 7.4 15.3 14.0 9.9 28.4 17.6 16.8 18.6Operating profit 89.9 31.3 21.4 29.7 31.9 -3.0 68.9 25.3 20.8 25.8Net profit 62.6 17.2 26.1 34.5 34.0 0.4 55.1 26.8 23.1 26.8
KR
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Valuation: Our new top pick We initiate coverage on Hanssem (HS) with a Buy rating and TP of KRW100,000 implying 50% potential upside. We are bullish on its strong competitiveness to gain further market share in the B2C market, structural turnaround of the B2B market finally after industry consolidation, substantial new category expansion potential (kicking in from FY16F), and a modest recovery of the Korea housing market. We are also positive on its high operating leverage and growing bargaining power as it should support continuous margin gains. We believe the beauty of this business is strong cash generating ability and an asset-light business structure.
We have been highlighting our theme since our anchor report (Ageless Growth, dated 28 November 2012) that companies that could secure sustainable growth during unfavourable demographic changes are those that could export their products to the global market, or have strong potential to gain market share. In most major sub-sectors of the consumer goods market, the industries are consolidated by a few large players and have limited room for individual companies to increase market share. In our analysis, we find that the furniture and interior market is very fragmented as majority of the market is run by small- medium-sized furniture manufactures and individual interior installers. More importantly, most branded interior and furniture companies also lack economies of scale, brand building and brand management execution skills, and have weak control over distribution channels. We highly value HS as the company has been investing aggressively in brand equity and has proactively created effective new distribution channels. Finally, the industry outlook also appears to be improving as we expect the Korea property market will gradually recover and the B2B furniture market also looks set to benefit from a series of competitor bankruptcies.
HS is now our top pick HS is now our top pick, with 50% potential upside to the stock from current levels. Our previous top pick was Medy-Tox (086900 KS, Buy), for which we currently expect 44% potential upside. We changed our top pick as we believe Medy-Tox’s share performance should remain slow until 1Q15F as the company currently faces capacity constraints, which should be resolved from 4Q14F and strong share performance could come from positive news on product development (e.g., successful completion of third clinical test in the US by Allergan. See our report: Weak 4Q13 as order booking delay to FY14F, 12 February 2014).
Our TP of KRW100,000 suggests 50% potential upside
We derive our TP by applying a 22x fair P/E to our 12-month forward EPS of KRW4,555. With our estimated 25.5% net profit CAGR for the next three years, high ROE of 26-27%, sizeable long-term potential from FY16F through expansion into new categories, we find HS’s fundamentals to be very impressive vs. other consumer companies under our coverage. We use a fair P/E of 22x as it is the three-year historical average P/E of Amorepacific (090430 KS, Buy).
22x fair P/E as Amorepacific looks the most relevant comparable We use Amorepacific’s historical average for fair P/E, as we think Amorepacific looks to be the most relevant to compare given our view that both the companies have very similar fundamentals and growth strategy. They both largely target female customers, who tend to be more sensitive to design and brand, in our view. We anticipate an increasing number of aged female population in Korea, which looks favourable to these industries. Secondly, branding and marketing ability is the most important strength to maintain leadership in such a market (either dominant market share or growing market share) as superior design, strong brand and marketing appeal to female customers. Thirdly, branding power enables the companies to better control distribution channels (e.g., Amorepacific invented premium D2D channel as it has strong brands to distribute while it was expanding through building a nationwide exclusive franchise network. HS has been creating diversified B2C distribution channels such as its franchise agency store network while inventing the affiliated contractor distribution channel). Fourthly,
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business profitability and ROE tend to be high and stable as both the businesses are relatively less capital-intensive and have a lean working capital structure.
Fig. 49: HS vs. Amorepacific – a comparison
Note: Squared distribution channel is 100% exclusive Source: Company data, Nomura estimates
Domestic peer comparison less relevant We think it is meaningless to refer to domestic peers’ P/E valuation as HS’s business structure is very different from domestic peers as it focuses on B2C and the direct distribution channel, while other peers are still mostly B2B. In addition, domestic peer market caps are very small and not well covered by brokerage firms, in our view.
DCF price suggests higher TP and justifies premium Our DCF-based TP (based on 0.6 beta, 1.0% terminal growth, and 4.5% market risk premium), is KRW130,000, which is 30% higher than our TP of KRW100,000, which we derive based on 22x fair P/E. At the DCF-based TP of KRW130,000, the target P/E based on 12-month forward EPS basis would be 28x P/E. (Note: we choose P/E over DCF valuation as we think that Amorepacific is the most relevant comparable.) Considering that HS’s high profitability and ROE are likely to be protected by its strong brands and distribution channel control, the company deserves a valuation premium, in our view. Given the fact that HS’s market share in the total furniture and interior market is less than 10% and that competition mostly comprises individual furniture sellers and interior decorators (branded companies lack product quality as well as marketing capability while distribution channel control is also very weak), we believe HS has the potential to become a major player with significant market share in future as it plans to enter new categories where it is even less competitive than existing brands. With limited working capital requirement and small capex, operating free cash flow looks set to grow.
Amorepacific HanssemIndustry CAGR in FY13-16F 6.2 2.0
Market size (Wtn) 11.0 10.5Company market share (%) 34 8.9Position Largest market share Largest market shareTop three market share (%) 59 15.0
Major customer Female (93%) Female (N/A)
BrandPremium Sulhwasoo, HERA Kitchen BachMass Eight others IK, Kitchen Euro
Distribution channels Franchise stores o oDepartment store o xDiscount store o xFlagship shop o oTV home shopping o oOn-line o oD2D market o xAffiliated contractors x o
Company financials Sales CAGR (FY13-16F) 14.6 17.7(FY14F) OP CAGR 13.4 24.0
NP CAGR 13.9 24.9OPM (%) 11.9 8.5Capex as % of sales 10.0 2.1Marketing as % of sales 14.5 5.8ROE (%) 9.1 26.3
Valuation FY14F P/E 21.9 15.7FY15F P/E 19.3 12.7EPS PEG FY14F 1.60 0.63
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Fig. 50: HS – DCF valuation
Source: Company data, Nomura estimates
IKEA entering the Korea market in FY14F – not a threat to HS in the foreseeable future
As per Hankyung, IKEA (unlisted) plans to enter Korea in late-2014 and open a store in Gwangmyeong/Kyunggi province, which is around 30km away from central Seoul (around an hour away by public transportation from central Seoul). Its store size is expected to be 26,000m2, which is two-times bigger than the average hypermarket in Korea. IKEA also plans to open two additional stores in Goyang in Gyeongi province and Gangdong-gu in Seoul.
IKEA’s main strength is low price with modern designs but has more product collections in smaller-sized furniture and household goods and has limited exposure to system kitchens and the home remodeling (bathrooms, floors, windows and doors) categories, which will be a major growth area for HS. In fact, we see IKEA’s expansion into Korea as a positive signal that there is ample growth potential for multinational players to be aggressive.
FY14F FY15F FY16F FY17F FY18F FY19F FY20F FY21F FY22F FY23F
01F 02F 03F 04F 05F 06F 07F 08F 09F 10F
(KRWbn)
EBITDA 109 131 163 195 247
Less tax paid -25 -31 -40 -48 -62
Cash cycle 17 7 0 -1 -4
Cashflow 100 106 124 146 182
Capex -26 -26 -26 -26 -26
FCF 74 80 98 120 156 164 172 180 189 199
FCF growth (%, y-o-y) 40.5 8.1 21.8 22.9 29.9 5.0 5.0 5.0 5.0 5.0
Medium-term growth (%) 5.0%
Terminal growth (%) 1.0%
Terminal value 2,133
PV to FY17F 872
(Less) net debt YB -76
Equity value 3,081
Shares (m) 24
Equity value per share (W) 130,000
WACC
Average debt forecast period 20
Average equity forecast period 538
Korea market risk free rate (Rf) 4.5%
Korea market risk premium (Rm) 8.0%
Company risk premium (Rc) 2.0%
Stock beta (B) 0.60
Cost of equity (CoE= Rf + Rm * B) 10.5%
Korea market risk free rate (Rf) 4.5%
Spread over Rf (m) 3.5%
Cost of debt (CoD=Rf+m) 8.0%
WACC 10.4%
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Risks to our view
If the structural turnaround of the B2B market gets delayed and the survivors expand their businesses, we see a potential risk of HS being unable to increase its market share.
Fig. 51: HS P/E band
Source: Quantiwise, Nomura research
Fig. 52: HS P/B band
Source: Quantiwise, Nomura research
Fig. 53: Global peer valuation
Note: Livart and Enex are based on FnGuide estimates. Global peers are based on Bloomberg consensus
Source: FnGudie, Bloomberg, Nomura estimates
Fig. 54: EPS growth vs. FY14F P/E comparison
Source: FnGuide, Bloomberg, Nomura estimates
Fig. 55: FY14F ROE vs. FY14F P/B
Source: FnGuide, Bloomberg, Nomura estimates
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2007 2008 2009 2010 2011 2012 2013 2014
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ROE (%)
Company Code Rating 3/20/2014 (US$m ) FY14F FY15F FY13-15F FY14F FY14F FY15F FY13-15F FY14F FY14F FY15F FY15FHanssem 009240 KS Buy 66,600 1,456 14.1 11.8 22.0 0.6 15.5 12.6 24.9 0.6 3.7 3.0 26.0 Livart 079430 KS Not rated 14,050 225 6.2 4.6 32.0 0.2 11.9 7.3 79.8 0.1 1.0 0.9 12.6 Enex 011090 KS Not rated 1,300 99 9.9 8.0 29.5 0.3 12.3 10.7 31.7 0.4 1.5 1.3 13.3 Domestic peer average 10.1 8.1 27.8 0.4 13.2 10.2 45.5 0.4 2.1 1.7 17.3 Nitori 9843 JP Buy 4,300 4,841 6.6 6.4 0.6 11.9 12.5 12.2 1.6 7.7 2.0 1.7 15.0 Lixil 5938 JP Neutral 2,647 8,151 9.3 8.7 16.9 0.5 17.7 15.7 75.5 0.2 1.3 1.3 8.2 Toto 5332 JP Neutral 1,334 4,645 8.0 7.9 16.6 0.5 11.1 15.5 35.0 0.3 1.8 1.7 11.4 Home product HMPRO TB Not rated 10 2,893 14.4 12.5 20.9 0.7 25.0 21.7 15.9 1.6 6.1 5.4 26.9 Williams-Sonoma WSM US Not rated 66 6,224 9.8 9.1 9.8 1.0 23.3 20.8 11.8 2.0 5.3 5.0 24.1 Mattress Firm MFRM US Buy 48 1,622 14.0 11.4 20.0 0.7 29.1 24.7 13.4 2.2 5.1 4.6 19.9 Global peer average 10.3 9.3 14.1 2.6 19.8 18.4 25.5 2.3 3.6 3.3 17.6
Hanssem
Livart
Enex
Nitori
Lixil
Toto
Home product
Williams-Sonoma
Mattress Firm
Peer average
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Livart
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Toto
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Mattress FirmPeer
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Nomura | Hanssem 24 March 2014
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Fig. 56: HS management profile
Source: Company data, Nomura research
Fig. 57: HS share ownership
Source: Company data, Nomura research
Position Name Joining Profile
Chang-Gul Cho Founder Seoul National Univ.
Architecture.
Chairman Yang-Ha Choi 1979 Seoul National Univ.
Metal Engineering
Suk-Jun Park 1994 Seoul National Univ.
Former : KEB.
Seung-Su Kang 2010 Seoul National Univ.
Former : Korean Air
CFO Young-Sik Lee 2010 Seoul National Univ.
Former:Sedong Accounting firm
Yoon-Taek Oh 2011 Seoul National Univ.
Accounting Firm Barun CEO
Auditor Cheol-Jin Choi 2012 Busan National Univ.
Former: Ernst & Young Korea
Auditor Young-Bong Lee 2010 Kyoung Hee Univ.
Former: Ernst & Young Korea
Vice President
Vice President
Honorary Chairman
Outside Director
Honorary Chairman
Cho’s Family &
Executives, 35.15%
Individual, 6.80%
Foreign , 16.69%
Treasury stocks, 23.18%
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Appendix A-1
Analyst Certification
I, Eun Jung Cara Song, hereby certify (1) that the views expressed in this Research report accurately reflect my personal views about any or all of the subject securities or issuers referred to in this Research report, (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this Research report and (3) no part of my compensation is tied to any specific investment banking transactions performed by Nomura Securities International, Inc., Nomura International plc or any other Nomura Group company.
Issuer Specific Regulatory Disclosures The term "Nomura Group" used herein refers to Nomura Holdings, Inc. or any of its affiliates or subsidiaries, and may refer to one or more Nomura Group companies.
Materially mentioned issuers Issuer Ticker Price Price date Stock rating Sector rating Disclosures Hanssem 009240 KS KRW 69,300 21-Mar-2014 Buy N/A Cosmax 044820 KS KRW 60,000 26-Feb-2014 Buy N/A Medy-Tox 086900 KS KRW 154,300 21-Mar-2014 Buy N/A Amorepacific 090430 KS KRW 1,204,000 21-Mar-2014 Buy N/A
Hanssem (009240 KS) KRW 69,300 (21-Mar-2014)
Buy (Sector rating: N/A) Chart Not Available
Valuation Methodology We derive our TP of KRW100,000 by applying a 22x fair P/E to our 12-month forward EPS of KRW4,555. With our estimated 25.5% net profit CAGR for the next three years, high ROE of 26-27%, sizeable long-term potential from FY16F through expansion into new categories, we find HS’s fundamentals to be very impressive vs. other consumer companies under our coverage. The benchmark index for this stock is MSCI Korea. Risks that may impede the achievement of the target price If the structural turnaround of the B2B market gets delayed and the survivors expand their businesses, we see a potential risk of HS being unable to increase its market share.
Cosmax (044820 KS) KRW 60,000 (26-Feb-2014) Rating and target price chart (three year history)
Buy (Sector rating: N/A)
Date Rating Target price Closing price 26-Feb-14 74,000.00 60,000.00 11-Nov-13 60,000.00 47,350.00 23-Sep-13 53,000.00 47,350.00 28-Nov-12 54,000.00 44,600.00 29-Aug-12 Buy 37,300.00 29-Aug-12 43,000.00 37,300.00
For explanation of ratings refer to the stock rating keys located after chart(s)
Valuation Methodology Our TP of KRW74,000 is based on the average 12-month forward P/E of 29x (a 15% premium to the historical global peer average) and 12-month forward EPS of KRW2,543. We believe the stronger growth in China and improving ROE warrant a premium over its major global peers. The benchmark index for this stock is MSCI Korea.
Risks that may impede the achievement of the target price Key downside risks include heavy operational and run-up costs in the US operation (FY14F) and slower-than-expected growth in the cosmetics industry in Korea and China.
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Medy-Tox (086900 KS) KRW 154,300 (21-Mar-2014) Rating and target price chart (three year history)
Buy (Sector rating: N/A)
Date Rating Target price Closing price 27-Sep-13 230,000.00 155,200.00 14-May-13 130,000.00 102,200.00 11-Mar-13 132,000.00 104,900.00 28-Nov-12 125,000.00 82,400.00 16-Oct-12 Buy 92,200.00 16-Oct-12 115,000.00 92,200.00
For explanation of ratings refer to the stock rating keys located after chart(s)
Valuation Methodology We use DCF valuation as this is a more appropriate valuation methodology to reflect cash flow incurring from FY16F. Our DCF value of developed market earnings is KRW190,000 with the assumption of 1% long-term growth rate, 0.65 beta, and 10.2% WACC. As it has passed second clinical test (65% of progress of final approval, in our view), we simply apply 50% probability ratio to KRW190,000 DCF value per share from new developed market business. Adding KRW95,000 per share from new market entry to KRW137,000 value per share from existing markets, we derive our TP of KRW230,000 per share. The benchmark index for this stock is MSCI Korea. Risks that may impede the achievement of the target price Rapid appreciation in KRW could deteriorate both sales and earnings.
Amorepacific (090430 KS) KRW 1,204,000 (21-Mar-2014) Rating and target price chart (three year history)
Buy (Sector rating: N/A)
Date Rating Target price Closing price 07-Feb-14 Buy 1,133,000.00 07-Feb-14 1,250,000.00 1,133,000.00 04-Jul-13 980,000.00 903,000.00 06-Feb-13 1,140,000.00 1,016,000.00 28-Nov-12 1,300,000.00 1,243,000.00 08-Aug-12 1,070,000.00 1,000,000.00
For explanation of ratings refer to the stock rating keys located after chart(s)
Valuation Methodology Our TP of KRW1,250,000 is based on 22x fair P/E (three-year historical average) applied to 12M forward EPS of KRW57,030 (April-14 to Mar-15). The benchmark index for this stock is MSCI Korea. Risks that may impede the achievement of the target price Further inventory losses in green tea in FY14F, excessive marketing spending and overseas labour investment are downside risks to our view.
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Distribution of ratings (Global) The distribution of all ratings published by Nomura Global Equity Research is as follows: 42% have been assigned a Buy rating which, for purposes of mandatory disclosures, are classified as a Buy rating; 43% of companies with this rating are investment banking clients of the Nomura Group*. 47% have been assigned a Neutral rating which, for purposes of mandatory disclosures, is classified as a Hold rating; 55% of companies with this rating are investment banking clients of the Nomura Group*. 11% have been assigned a Reduce rating which, for purposes of mandatory disclosures, are classified as a Sell rating; 26% of companies with this rating are investment banking clients of the Nomura Group*. As at 31 December 2013. *The Nomura Group as defined in the Disclaimer section at the end of this report. Explanation of Nomura's equity research rating system in Europe, Middle East and Africa, US and Latin America, and Japan and Asia ex-Japan from 21 October 2013 The rating system is a relative system, indicating expected performance against a specific benchmark identified for each individual stock, subject to limited management discretion. An analyst’s target price is an assessment of the current intrinsic fair value of the stock based on an appropriate valuation methodology determined by the analyst. Valuation methodologies include, but are not limited to, discounted cash flow analysis, expected return on equity and multiple analysis. Analysts may also indicate expected absolute upside/downside relative to the stated target price, defined as (target price - current price)/current price. STOCKS A rating of 'Buy', indicates that the analyst expects the stock to outperform the Benchmark over the next 12 months. A rating of 'Neutral', indicates that the analyst expects the stock to perform in line with the Benchmark over the next 12 months. A rating of 'Reduce', indicates that the analyst expects the stock to underperform the Benchmark over the next 12 months. A rating of 'Suspended', indicates that the rating, target price and estimates have been suspended temporarily to comply with applicable regulations and/or firm policies. Securities and/or companies that are labelled as 'Not rated' or shown as 'No rating' are not in regular research coverage. Investors should not expect continuing or additional information from Nomura relating to such securities and/or companies. Benchmarks are as follows: United States/Europe/Asia ex-Japan: please see valuation methodologies for explanations of relevant benchmarks for stocks, which can be accessed at: http://go.nomuranow.com/research/globalresearchportal/pages/disclosures/disclosures.aspx; Global Emerging Markets (ex-Asia): MSCI Emerging Markets ex-Asia, unless otherwise stated in the valuation methodology; Japan: Russell/Nomura Large Cap. SECTORS A 'Bullish' stance, indicates that the analyst expects the sector to outperform the Benchmark during the next 12 months. A 'Neutral' stance, indicates that the analyst expects the sector to perform in line with the Benchmark during the next 12 months. A 'Bearish' stance, indicates that the analyst expects the sector to underperform the Benchmark during the next 12 months. Sectors that are labelled as 'Not rated' or shown as 'N/A' are not assigned ratings. Benchmarks are as follows: United States: S&P 500; Europe: Dow Jones STOXX 600; Global Emerging Markets (ex-Asia): MSCI Emerging Markets ex-Asia. Japan/Asia ex-Japan: Sector ratings are not assigned. Explanation of Nomura's equity research rating system in Japan and Asia ex-Japan prior to 21 October 2013 STOCKS Stock recommendations are based on absolute valuation upside (downside), which is defined as (Target Price - Current Price) / Current Price, subject to limited management discretion. In most cases, the Target Price will equal the analyst's 12-month intrinsic valuation of the stock, based on an appropriate valuation methodology such as discounted cash flow, multiple analysis, etc. A 'Buy' recommendation indicates that potential upside is 15% or more. A 'Neutral' recommendation indicates that potential upside is less than 15% or downside is less than 5%. A 'Reduce' recommendation indicates that potential downside is 5% or more. A rating of 'Suspended' indicates that the rating and target price have been suspended temporarily to comply with applicable regulations and/or firm policies in certain circumstances including when Nomura is acting in an advisory capacity in a merger or strategic transaction involving the subject company. Securities and/or companies that are labelled as 'Not rated' or shown as 'No rating' are not in regular research coverage of the Nomura entity identified in the top banner. Investors should not expect continuing or additional information from Nomura relating to such securities and/or companies. SECTORS A 'Bullish' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a positive absolute recommendation. A 'Neutral' rating means most stocks in the sector have (or the weighted average recommendation of the stocks
Nomura | Hanssem 24 March 2014
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under coverage is) a neutral absolute recommendation. A 'Bearish' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a negative absolute recommendation. Target Price A Target Price, if discussed, reflects in part the analyst's estimates for the company's earnings. The achievement of any target price may be impeded by general market and macroeconomic trends, and by other risks related to the company or the market, and may not occur if the company's earnings differ from estimates. Disclaimers This document contains material that has been prepared by the Nomura entity identified at the top or bottom of page 1 herein, if any, and/or, with the sole or joint contributions of one or more Nomura entities whose employees and their respective affiliations are specified on page 1 herein or identified elsewhere in the document. 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