Uptrend in New Product Sales Continuing
The author is an analyst of Shinhan Investment Corp. She can be reached at hpark@shinhan.com. -- Ed.
Initiate coverage with BUY for a target price of KRW39,000
We initiate our coverage of Hite Jinro with a BUY rating and a target price of KRW39,000. The key investment point is the continued uptrend in soju and beer market shares from 2019. The revision of Liquor Tax Act, which took effect on January 1 this year, is favorable for domestic beers. The change from ad valorem tax (price based) to specific tax (volume based) increases the tax burden on imported beers. Hite Jinro shares rallied 74.7% in 2019 and have gained 7.4% so far this year, driving up valuations to demanding levels. However, we notet the uptrend in sales from the new beer product launched in 1H19, despite sluggish on-trade market conditions. Hite Jinro shares will likely remain stable on continued market share gains. Our target price is based on 2020F EPS and a target PER of 39.8x, which is the PER average of 2015-2016 (market share gains in beer in 2015 and soju in 2016).
2020 growth outlook: Sales +9.5% YoY, OP +73.3% YoY
For 2020, we forecast sales to increase 9.5% YoY to KRW2.23tr and operating profit to soar 73.3% YoY to KRW152.9bn. Operating margin will likely improve by 2.6%p YoY to 6.9% thanks to sales growth and partial conversion of the Masan plant for soju production in2018. Hite Jinro is expected to have posted sales of KRW497.9bn (+17.7% YoY) and operating profit of KRW35.1bn (positive swing YoY) for 1Q. Despite sluggish on-trade market conditions, monthly sales of Terra (launched in March 2019) should have exceeded 2mn boxes in 1Q. We believe the rise in sales led to stronger operating leverage effect.
Keep an eye on promotion spend and market share trend
In early April, Hite Jinro’s main competitor decided to suspend production at some of itsbeer production lines for four weeks due to sluggish demand amid the COVID-19 pandemic and inventory pressure caused by growing market share of Terra. Another competitor plans to release an extension of existing soju product with 0.5%p lower alcohol content in June. We will need to check whether competition will heat up in the market. Hite Jinro booked about KRW200bn in promotion and advertising expenses for 2019, and plans to spend more than KRW200bn in 2020. The actual spending should have been limited in 1Q due to the pandemic and market share gains. We will see how earnings are affected by promotion/advertising spend from 2Q20 onwards. However, a rise in expenses should have a limited impact on Hite Jinro shares given the continued uptrend in new product sales. We rather see upside momentum from strengthening market presence.