Please Share:: 
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
4Q10 weak, but largely in the price
● KT&G’s 2010 results appear broadly in line with the consensus,
though the 4Q10 results saw some misses. Its domestic tobacco
market share fell in 4Q to 56% given a competitor’s strong
promotional activities to the channels. Exports saw solid growth of
22%, while ginseng sales softened slightly in 4Q to 8%.
● In 4Q, tobacco’s lower input costs helped its profitability, but
ginseng’s margins suffered on higher input costs and the low-end
ginseng “Good Base” promotions.
● For 2011, KTG guided tobacco sales growth of 5.2% and ginseng
sales growth of 31%. To achieve these, it will focus on revamping
the market share to 60%-plus levels, further develop newer markets
(e.g., SEA and China) for exports and strengthen the ginseng
business by developing new channels and leveraging OEMS in
local markets. Management expressed confidence in ginseng.
● We lower our target price to W75,000 after lowering the target
multiple to 11.5x FY11E P/E. This still offers 20% potential upside
to the current price. Catalysts include: (1) tax hike, (may be by
mid-2011), (2) further developments in exports and ginseng
business, and (3) new business endeavours.
Weak operations continued in 4Q10
Tobacco – KTG’s market share fell sharply to 56% in 4Q10, as a
major competitor aggressively pushed to the channel to clear out
inventory. KTG’s market share was 58% in 4Q09, 60% in 1Q10, 59%
in 2Q10 and 60% in 3Q10. KTG stated that management decided not
to stock at the channels in the year-end, which had been an industry
practice in the past. Hence, it will have a cleaner base from 1Q11.
Profitability rose as gross profit margins increased 500 bp YoY in 4Q.
The input cost of leaves has started to play favourably from 2H10 on
stabilisation in the input costs and KRW strengthening.
Exports rose 22% on stronger growth in the relatively new markets
(e.g., China and SEA) on top of the growth in the existing markets
(e.g., The Middle East and Russia). KTG believes marketing activities
will increase in these markets, but expects tobacco’s profitability to fall
in 2011 despite the potential lowering of input costs.
Ginseng – Ginseng’s sales increase was lower than the previous
quarters at 9% (vs full year of 13% YoY). Operating profit margin fell
in 4Q on: (1) higher input costs and (2) launch of the low-end ginseng
“Good Base” that hits gross profit margin from mix change and incurs
high marketing costs, as it is still in a very early stage.
2011 guidance
The company guided that sales will grow 8% on a consolidated basis,
of which tobacco will grow at 5% and ginseng a robust 30%. It
believes domestic market growth will be flat in volume terms; it plans
to continue to improve the mix, which lagged its competitors. The
assumption for strong growth in ginseng largely comes from: 1) further
roll-outs of Good Base in the domestic market; 2) increase in
overseas sales by over 40%, as the company plans to increase
product categories, reinforce the local market distribution channels
and produce locally.
Relative to the sales guidance, its profitability targets are modest, as it
believes marketing activities for Good Base and overseas tobacco will
need to rise.
It continues to search for new business opportunities to leverage its
cash positions. 2010 earnings include the sale of Celtrion (a one-off
impact). It does not expect a meaningful one-off gain this year.
Assume with OUTPERFORM, but lower target price
We assume KTG with OUTPERFORM mainly on valuations. We
believe lower input costs and any positive catalyst in 2011 may lift the
stock price. However, we lower our target price to W75,000 (based on
11.5x FY11 P/E) as we lower our target multiple to reflect the slower
growth opportunities.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
4Q10 weak, but largely in the price
● KT&G’s 2010 results appear broadly in line with the consensus,
though the 4Q10 results saw some misses. Its domestic tobacco
market share fell in 4Q to 56% given a competitor’s strong
promotional activities to the channels. Exports saw solid growth of
22%, while ginseng sales softened slightly in 4Q to 8%.
● In 4Q, tobacco’s lower input costs helped its profitability, but
ginseng’s margins suffered on higher input costs and the low-end
ginseng “Good Base” promotions.
● For 2011, KTG guided tobacco sales growth of 5.2% and ginseng
sales growth of 31%. To achieve these, it will focus on revamping
the market share to 60%-plus levels, further develop newer markets
(e.g., SEA and China) for exports and strengthen the ginseng
business by developing new channels and leveraging OEMS in
local markets. Management expressed confidence in ginseng.
● We lower our target price to W75,000 after lowering the target
multiple to 11.5x FY11E P/E. This still offers 20% potential upside
to the current price. Catalysts include: (1) tax hike, (may be by
mid-2011), (2) further developments in exports and ginseng
business, and (3) new business endeavours.
Weak operations continued in 4Q10
Tobacco – KTG’s market share fell sharply to 56% in 4Q10, as a
major competitor aggressively pushed to the channel to clear out
inventory. KTG’s market share was 58% in 4Q09, 60% in 1Q10, 59%
in 2Q10 and 60% in 3Q10. KTG stated that management decided not
to stock at the channels in the year-end, which had been an industry
practice in the past. Hence, it will have a cleaner base from 1Q11.
Profitability rose as gross profit margins increased 500 bp YoY in 4Q.
The input cost of leaves has started to play favourably from 2H10 on
stabilisation in the input costs and KRW strengthening.
Exports rose 22% on stronger growth in the relatively new markets
(e.g., China and SEA) on top of the growth in the existing markets
(e.g., The Middle East and Russia). KTG believes marketing activities
will increase in these markets, but expects tobacco’s profitability to fall
in 2011 despite the potential lowering of input costs.
Ginseng – Ginseng’s sales increase was lower than the previous
quarters at 9% (vs full year of 13% YoY). Operating profit margin fell
in 4Q on: (1) higher input costs and (2) launch of the low-end ginseng
“Good Base” that hits gross profit margin from mix change and incurs
high marketing costs, as it is still in a very early stage.
2011 guidance
The company guided that sales will grow 8% on a consolidated basis,
of which tobacco will grow at 5% and ginseng a robust 30%. It
believes domestic market growth will be flat in volume terms; it plans
to continue to improve the mix, which lagged its competitors. The
assumption for strong growth in ginseng largely comes from: 1) further
roll-outs of Good Base in the domestic market; 2) increase in
overseas sales by over 40%, as the company plans to increase
product categories, reinforce the local market distribution channels
and produce locally.
Relative to the sales guidance, its profitability targets are modest, as it
believes marketing activities for Good Base and overseas tobacco will
need to rise.
It continues to search for new business opportunities to leverage its
cash positions. 2010 earnings include the sale of Celtrion (a one-off
impact). It does not expect a meaningful one-off gain this year.
Assume with OUTPERFORM, but lower target price
We assume KTG with OUTPERFORM mainly on valuations. We
believe lower input costs and any positive catalyst in 2011 may lift the
stock price. However, we lower our target price to W75,000 (based on
11.5x FY11 P/E) as we lower our target multiple to reflect the slower
growth opportunities.
No comments:
Post a Comment