AmorePacific Corporation

Rating Outperform Not just a pretty face

Price (25 Jan 2019 close) KRW 181,000
Key Highlights:
12-Month Target Price KRW 191,500
• 4Q18 earnings outlook: Having missed 2Q18 and 3Q18
Key Figures 2017A 2018E 2019E earnings, with revenue from the domestic cosmetics
Revenue KRWbn 5,124 5,266 5,516
segment (contributing 55% of total revenue) and overseas
cosmetics segment (contributing 35% of total revenue) in
Operating profit KRWbn 596 585 756
3Q18 slowing 8.4% and 6.2%, worsening from 2.5% and
EBITDA KRWbn 820 825 1,007
4.8% in 2Q18, respectively, Amorepacific appears on track
Net profit KRWbn 394 452 580 to miss consensus estimates of c.KRW 1.3 bn.
EPS KRW 5,711 6,548 8,409 • Significant increase in CAPEX: 2016 and 2017 saw
Operating margin % 11.6% 11.1% 13.7% increases in CAPEX out of line with previous years (KRW
Net margin % 7.7% 8.6% 10.5%
769 bn and KRW 495 bn in 2017 against KRW 215 bn in
Source: Annual Report FY 2017
2016), suggesting rising revenue growth in the next few
LTM Share Price years ahead as this investment drives growth.
• Increased contribution from overseas sales: While
KRW Vol.
400,000 2,000,000
domestic cosmetics sales continue to be the key revenue
350,000 1,800,000 contributor, they have decreased steadily since 2014 (from
300,000
1,600,000 67% to 55% in 2017), while overseas cosmetics sales’
1,400,000
250,000 1,200,000 contribution increased from 22% to 36% in the same
200,000 1,000,000 period. Spending momentum on cosmetics has increased
800,000
150,000
600,000
significantly from 2017 to 2018.
100,000
400,000 • Daigou and gate baggage regulations: China has
50,000 200,000 recently imposed new regulations on ‘daigous’, aiming to
0 0
replace this grey market with taxable imports via
ecommerce platforms. The Korean Ministry of Land,
Share Volume Share Price KOSPI (Rebased) Transport and Tourism has also announced plans to
Source: Bloomberg prohibit daigou gate baggage (their main channel of
transporting goods purchased for resale in China) from
South Korea beauty and personal care market size (USD bn) airports due to safety concerns. Markets priced in this
18 16.68 potential hit to sales, as AmorePacific shares fell 4% on this
15.47 announcement (KRW 191,500 at 25 October 2018 market
16 14.3
14 12.99 13.48 close vs KRW 183,500 at 26 October 2018 market close.
11.56 • ASEAN expansion: AmorePacific entered the Philippines
12
9.66
10.35 market last November with retail stores for innisfree and
10 8.58 Laneige, and also entered the ecommerce space on Lazada,
8 one of the Philippines largest online retail channels.
6 Investment Thesis:
4 • Short-term weakness priced in, buy in ahead of
2 turnaround: AmorePacific is currently trading considerably
0
below its 52 week high, suggesting that markets have priced
2010 2011 2012 2013 2014 2015 2016 2017 2018 in the worst of its performance in the past 2 quarters, but
Source: Statista not the potential revenue growth as a result of its
expansionary capital expenditure.
Global cosmetics market growth rate • Turnaround in China on new ecommerce regulation:
6% AmorePacific has a reduced exposure to daigous, and also
5.0% stands to benefit from China’s new ecommerce regulations,
5% 4.6% 4.6%
4.2% where it has already established a strong presence.
3.8% 3.9% 4.0% • Strong macroeconomic forecasts: The Korean cosmetics
4% 3.6%
market is forecasted to grow at a CAGR of 3.5%, and the
3% global cosmetics market is forecasted to grow at a CAGR
of 7.1% from 2019 to 2023, a favourable 5-year outlook for
2%
AmorePacific, standing to benefit greatly with a 34%
1% market share in Korea.
• Undervalued: AmorePacific currently trades at 21.5x 1-
0% year forward P/E, 42% below its FY 2017 P/E, and 29%
2010 2011 2012 2013 2014 2015 2016 2017
below its peer average. This represents a good timing to buy
Source: Statista
in ahead of future growth.
AmorePacific Corporation
China contribution to total revenue Downside Risks:
• Ongoing trade friction with China: Majority of
25%
AmorePacific’s less than favourable earnings in 2017 are
19.3%
attributed to Korea’s ongoing diplomatic tension with
20% China due to Korea’s decision to deploy a United States
16.1%
missile defence system. This represents a key risk to
15% AmorePacific’s earnings as China contributes a significant
12.0%
10.9% and growing portion to total revenue (19% in 2016).
10% 9.1%
7.4%
6.2% Valuation:
5% • Methodologies: Valuation is based on a blended DCF
(FCFF) and relative valuation (P/E, EV/Revenue,
0%
EV/EBITDA, 52w high/low.
2010 2011 2012 2013 2014 2015 2016 • DCF: WACC 6.7%, beta 0.67 (calculated) – cosmetics
Source: Bloomberg market has typically been insensitive to macroeconomic
volatility.
Indicative valuation range • Target price: Cautious target of KRW 191,500 – indicating
5.8% upside.
52 Week High/Low 145,500 356,000
Wrong Place, Wrong Time:
• FY 2017 revenue hit by fraying Korea-China relations:
DCF 185,851 213,781
AmorePacific’s sales are heavilty driven by China, which
has been contributing a growing and significant portion of
EV/Revenue 85,278 385,037 revenue. Additionally, there is a considerable segment of
domestic sales contributed by Chinese tourists – which
EV/EBITDA 146,465 474,024 form 31% of total Korean tourism footfall in 2018.
• Turnaround ahead: The number of Chinese visitors to
P/E 91,611 252,445
Korea fell 48% in 2017, but recovered slightly in 2018 –
pointing to signs of recovery.

Historical YoY revenue growth rates

Chinese visitors to Korea (thousands)
30.0%
25.0% 9,000
25.0% 23.0% 8,068
8,000
20.0% 7,000
17.1% 18.4%
15.0% 12.4% 6,000
11.5% 4,790
10.0% 5,000
4,169
8.8% 4,000
5.0%
3,000
0.0%
2,000
2010 2011 2012 2013 2014 2015 2016 2017
(5.0%) 1,000

(10.0%) 0
(9.2%) 2016 2017 2018
Source: Bloomberg, annual reports Source: Korea Tourism Organization
Projected revenue growth rates
60% Growth Projections:
50% • Domestic: Revenue is projected to grow by 2.4% in 2018,
40% before rebounding to the expected CAGR of 3.5% in 2019.
Domestic
• Overseas: Overseas sales are expected to grow by 1.5% in
30%
2018, and reach the expected global cosmetics market
20% Overseas
growth rate of 7.1%.
10% Osulloc • Osulloc: Sales from Osulloc (beauty tea products) are
0% expected to reach 8.1% in 2018 and settle at the historical
2015 2016 2017 2018 2019 average of 5.0%.
(10%)
(20%)
AmorePacific Corporation
Company Name Ticker P/E EV/EBITDA EV/Revenue
L'Oréal OR FP 28.1x 19.4x 4.3x
Estée Lauder EL US 40.7x 16.9x 3.5x
Beiersdorf BEI GR 23.7x 13.9x 2.5x
Shiseido 4911 JP 24.4x 15.6x 2.3x
Shanghai Jahwa 600315 CH 29.8x 33.2x 2.7x
L'Occitane 973 HK 24.8x 10.9x 1.5x
Sa Sa 178 HK 16.0x 9.9x 0.9x
LG H&H 051900 KS 30.6x 15.3x 2.7x
Korea Kolmar 161890 KS 43.8x 28.7x 2.4x
Cosmax 192820 KS 44.2x 22.7x 1.4x
COSMECCA Korea 241710 KS 19.8x 18.3x 1.4x
Amorepacific 090430 KS 36.8x 14.0x 2.1x
Mean 30.2x 18.2x 2.3x
Median 28.9x 16.3x 2.3x
High 44.2x 33.2x 4.3x
Low 16.0x 9.9x 0.9x
Source: CapitalIQ, figures as of FY 2017