Well Deserves Valuation Premium
The author is an analyst of NH Investment & Securities. She can be reached at jiyoony@nhqv.com. -- Ed.
F&F’s two-track strategy (domestic M/S growth and China expansion) is proving effective. Favorable momentum should strengthen further moving into 2H22 thanks to recovering DFS channel sales and Chinese consumption rebound. We expect F&F to solidify its global brand status in 2022.
Leading K-fashion stock; well deserves valuation premium
Initiating coverage on F&F, we present a Buy rating and TP of W1mn. Our TP is derived by applying a target P/E multiple of 18x to 2022E NP. The P/E multiple of 18x represents the valuation level of FILA Holdings, a peer company adopting a similar business strategy (expansion from domestic to global), enjoyed during its aggressive 2019 overseas market expansion (into China and the US). Given: 1) likely robust sales growth (+71% y-y) in China in 2022; and 2) a high combined sales portion for the DFS channel, Shanghai, and Hong Kong (57% of total) this year, F&F should be viewed as a global apparel play.
F&F looks set to book 2022 sales of W1,912.4bn (+29% y-y) and OP of W564.0bn (+33% y-y). We believe that F&F shares deserve a valuation premium, given the firm’s superior earnings growth momentum in the sector based on its strengthening brand power. Despite lingering concerns regarding the spread of Covid-19 in China and uncertain Korea-China relations, its shares offer strong valuation merit, trading at a 2022E P/E of 14x as of Mar 24 (share price of W773,000). Our TP offers 29% upside.
To outperform domestic market growth
Backed by its unparalleled branding capabilities, F&F is expected to outperform the domestic casual/sportswear market with a CAGR of 2%. By brand, y-y domestic growth of 7% is projected for MLB Adults, 9% for Discovery, and 9% for MLB Kids. In particular, MLB Kids should post robust growth, offsetting y-y high-base effect, helped by the return to school, a bottoming-out of the kids’ clothing market, solid demand for premium goods, and DFS channel growth.
To fare well on store openings + online channel in China
For 2022, MLB China’s sales are estimated at W657bn (+71% y-y). The online and offline businesses are expected to see sales growth of 60% and 73%, respectively. Backed by 300 offline store openings, top-line growth should continue at the offline business. Expectations are mounting for Tmall events in 2H22, including celebrations of the Mid-Autumn Festival and Singles’ Day, in line with improving consumer sentiment in China. DFS sales for MLB adult and kid lines are projected to expand by 20% and 37% y-y, respectively.