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This report must be read with the disclosures and the analyst certifications in
the Disclosure appendix, and with the Disclaimer, which forms part of it.
Issuer of report: The Hongkong and Shanghai
Banking Corporation Limited, Seoul Securities
Branch
View HSBC Global Research at:
https://research.hsbc
KRW480k) and LG H&H (TP to KRW1.1m from KRW1.3m) on
weaker duty-free sales assumptions
What’s new According to press reports (eg Asia Economy, 16 March 2017), China
has banned Chinese group tours from Korea from 15 March, in a reaction to the
Korean government’s decision to deploy the Terminal High Altitude Area Defense
system, THAAD. This was unexpected and, while it is too early to quantify the
potential impact, there’s no doubt this will have a negative effect on Chinese-related
plays such as cosmetic companies and duty-free operators given that a significant
part of their earnings come from Chinese tourists. Last year, 8.1m Chinese (up 34.8%
y-o-y) visited Korea, accounting for 47% of total inbound tourists.
If history repeats itself… In Japan in 2012, tension between China and Japan due
to a territorial dispute (Hankook Ilbo, 23 Sept 2012) resulted in Chinese inbound
tourism to Japan falling by 34.3% y-o-y in October 2012, and subsequent months,
and took a year to recover (see graph 1). How long the China ban will last is not
known, but we think the earnings impact will be limited. In 2015, during an outbreak
of Middle East Respiratory Syndrome in Korea, cosmetic companies’ duty-free sales
growth remained stable due to a rising contribution from overseas duty-free; while in
Hong Kong, in March 2015, when multiple entry individual visit visas for Shenzhen
residents were limited to one visit per week, cosmetic retail sales were less affected
than items such as jewellery (graph 6).
Valuation and risks: We now expect 6.9m Chinese inbound visits to Korea in 2017
(-15% y-o-y vs previous estimate of 9m, up 12% y-o-y) and see weaker growth in the
duty-free channel. We cut 2017e EPS for AmorePacific and LG H&H by 10.2% and
5.7% as we expect duty-free sales to fall 5% y-o-y / remain flat, respectively. We
lower our AmorePacific TP to KRW400k (from KRW480k) and LG H&H to KRW1.1m
(from KRW1.3m) on weaker earnings (see page 5), however, we retain our Buy ratings.
Downside risks include: 1) weaker-than-anticipated Chinese inbound traffic; 2) business
risks in overseas markets; and 3) weak domestic consumption.
17 March 2017
Karen Choi*
Head of Consumer and Retail Research, Asia-Pacific
The Hong Kong and Shanghai Banking Corporation
Limited, Seoul Securities Branch
karen.choi@kr.hsbc
+822 3706 8781
* Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is
not registered/ qualified pursuant to FINRA regulations
Korea Consumer
EQUITIES
CONSUMER
Korea
Korea consumer: Valuation summary
Current_______ TP _______ __ Rating ___Upside/ Market cap 3m ADTV
Company Ticker Currency price OldNewOld New downside(USDm)(USDm)
AmorePacific090430 KS KRW 278,000 480,000 400,000 Buy Buy 43.9% 14,192 45
LG H&H 051900 KS KRW 851,000 1,300,000 1,100,000 Buy Buy 29.3% 11,607 27 Source: HSBC estimates
China restricts tourism to Korea: potential impact
EQUITIES ● CONSUMER
17 March 2017Table 1: Chinese exposure of AmorePacific and LG H&H
Graph 1: It took nearly 1 year to see a pick-up in Chinese arrivals to Japan in 2012
Source: JNTO (Japan National Tourist Organization)
AmorePacific
(KRWbn) 2013 2014 2015 2016 2017e 2018e
Duty-free sales194.1474.5769.7 1,079.5 1,025.5 1,128.1
China sales338.8467.3761.6 1,054.0 1,475.6 2,065.8
Total sales to Chinese532.9941.81,531.32,133.52,501.13,193.9
Consolidated revenue 3,100.43,874.0 4,766.7 5,645.4 6,302.9 7,430.1
% of consolidated
revenue to Chinese17.2% 24.3% 32.1% 37.8% 39.7% 43.0%
LG H&H
(KRWbn) 2013 2014 2015 2016 2017e 2018e
Duty-free sales 98.0299.3635.8 1,031.9 1,031.9 1,135.1
China sales147.8188.0281.8366.0457.5594.7
Total sales to Chinese245.9487.2917.61,397.81,489.31,729.8
Consolidated revenue 3,100.43,874.0 4,766.7 5,645.4 6,302.9 7,430.1
% of consolidated
revenue to Chinese7.9% 12.6% 19.2% 24.8% 23.6% 23.3%
Note: Assume 80% of duty-free sales are to Chinese. Source: Company data, HSBC estimates
-26.2%
36.6%
134.9%
85.4%
8.2%
-34.3%-43.6%-34.3%
-7.8%
-47.1%
-1.3%
-20.9%
-32.7%-27.3%-21.4%-31.5%
-14.7%
28.4%
74.0%
96.1%84.5%83.3%107.3%
27.6%
-75%
-50%
-25%
0%
25%
50%
75%
100%
125%
150%
20112012JulAugSepOctNovDec2013JanFebMarAprMayJunJulAugSepOctNovDec201420152016
(Growth, y-o-y)EQUITIES ● CONSUMER
17 March 2017
Graph 2: Share price performance of Japanese cosmetic names
Source: Bloomberg
Graph 3: Chinese inbound to Korea recovered after 3 months of negative growth in 2015
Source: Korea Tourism Organization
Table 2: Robust duty-free sales growth despite weak Chinese inbound during MERS
(KRWbn) Chinese inbound personsY-o-Y AmorePacificY-o-Y LG H&HY-o-Y
1Q14 1,046,77144.9% 116.4 76.6%151.2301.5%
2Q14 1,622,83060.2% 179.1 125.9%141.7142.2%
3Q14 2,013,81418.8% 195.9 100.3%136.665.4%
4Q14 1,443,45061.1% 211.5 101.8%208.171.9%
1Q15 1,426,26236.3% 239.4 105.7%251.766.5%
2Q15 1,574,788-3.0% 279.1 55.8%277.996.2%
3Q15 1,360,149-32.5% 206.1 5.2%244.779.1%
4Q15 1,622,97112.4% 344.4 62.8%256.023.0%
Source: Korea Tourism Organization, company data
40
60
80
100
120
140
160
180
200
Jan-12Mar-12May-12Jul-12Sep-12Nov-12Jan-13Mar-13May-13Jul-13Sep-13Nov-13
(January 2012=100)ShiseidoKaoKoseNikkei
18.4%27.8%
52.5%
41.6%
-2.3%
32.9%
58.4%
21.6%20.6%19.5%
-45.1%
-63.1%
-32.3%
4.8%
15.6%10.2%10.6%
34.8%
-14.5%
15.9%
-80%
-60%
-40%
-20%
0%
20%
40%
60%
80%
20112012201320142015JanFebMarAprMayJunJulAugSepOctNovDec20162017e2018e
(Growth, y-o-y)
Territorial Dispute
EQUITIES ● CONSUMER
17 March 2017Graph 5: Share price performance of Korea cosmetic names
Source: Bloomberg
-
50
100
150
200
250
300
Jan-15Apr-15Jul-15Oct-15Jan-16Apr-16Jul-16Oct-16
(January 2015=100)AmoreLG H&HKOSPI
MERS
Graph 6: Cosmetic sales showing stable growth (vs jewellery) in Hong Kong
Source: CEIC
21%
28%27%
23%
16%
10%
6%8%
14%16%
8%7%4%
-7%
2%0%
-2%-1%-5%
-7%
-12%
-8%-8%
-4%
43%
59%
52%
36%
17%
7%
0%
7%
18%
49%
18%
9%
1%
-32%
-10%-11%
-17%-15%
-12%
-18%
-23%
-19%
-22%
-4%
23%22%21%20%
19%
15%17%
10%11%
16%
9%
12%
9%8%
14%
7%4%
-3%-4%-6%-5%
2%3%0%
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
60%
70%
1Q112Q113Q114Q111Q122Q123Q124Q121Q132Q133Q134Q131Q142Q143Q144Q141Q152Q153Q154Q151Q162Q163Q164Q16
Total HK Retail SalesJewellery Cosmetics
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