Penetration into China to Continue Rising
The author is an analyst of NH Investment & Securities. She can be reached at mj27@nhqv.com. -- Ed.
With demand for food rising in both domestic and foreign markets, Samyang Foods’ cooperation with local distributors and distribution channel expansion should enable it to outperform our previous earnings estimates. And, with rising brand recognition leading to higher penetration and sales, profit leverage effects should be just around the corner.
EV strengthening via exports
We maintain a Buy rating and TP of W120,000 on Samyang Foods. Believing that the expansion of overseas market sales will serve as a long-term growth engine for F&B players, we note that Samyang Foods boasts an outstanding overseas sales growth rate versus peers. Overseas exports, which account for over half of the firm’s total sales, should increase by about 20% y-y this year, despite high-base effect. We attribute this expectation to structural growth factors (local distribution channel expansion and brand awareness growth) rather than to a short-term rise in food demand due to Covid-19.
High growth rate to continue in foreign markets
Thanks to extension of its contract with Ubay (owner of a nation-wide distribution channel in China), Samyang Foods’ penetration into China should continue rising. And, backed by strengthening brand awareness, exports and product sales are climbing but inventory levels are showing no increase. We expect the company’s exports to China to continue strengthening this year despite high-base effect y-y. In the US, Canada, and Southeast Asia, overall awareness of Korean food has increased and consumer interest has expanded. Against this backdrop, Samyang Foods is cooperating with local distributors and solidifying contracts—moves which promise to drive up future earnings growth in earnest.
1Q20 preview: Enjoying solid earnings both at home and overseas
We expect Samyang Foods to report 1Q20 sales of W151.5 (+25.9% y-y) and OP of W21.2bn (+38.4% y-y). At the beginning of the year, concerns existed towards the impact of Covid-19 on exports to China. Nevertheless, sales likely improved on the back of growing food demand in China, despite short-term disruptions to logistics. Sales in North America are estmated to have upped 50% y-y thanks to both US OEM production and new expansion into Canada. In the domestic market, while M/S growth was likely limited, we believe that sales widened on food demand expansion.