Korea/Asia, Events, IPOs, Douglas Research Advisory

Douglas Kim

Korea/Asia, Events, IPOs

Equity Capital Markets

Crown Confectionery / Equity Capital Markets

<ul><li>The subscription period for the Haitai Confectionery IPO is from April 27th to 28th. Haitai Confectionery is expected to complete the IPO and its shares are expected to start trading on May 11th. The low and high end of the IPO offer price is from 12,300 won to 15,100 won, implying market cap of 236 billion won to 290 billion won.</li><li>Our base case valuation for Haitai Confectionery is 21,840 won per share (post IPO), representing implied market cap of 420 billion won. This is based on EBITDA estimate of 79 billion in 2016 and EV/EBITDA multiple of 8.5x. </li><li>Honey Butter Chips and Honey Tong Tong snacks have been the biggest drivers of the company's growth in the past two years. These two products represented 11% of the company's sales in 2015, up from 2% in 2014. Honey Butter Chips sales were up 389% YoY to 52.3 billion won in 2015. We expect Honey Butter Chips sales to increase 82% YoY to 95 billion won in 2016.</li><li>We expect the company's sales to grow 8% YoY to 862 billion won in 2016. Aside from Honey Butter Chips and Honey Tong Tong, we estimate the company's remainder sales to increase 3% YoY driven by higher sales of new products such as Takoyaki Balls and higher unit pricing. </li><li>Operating margins are expected to increase from 5.9% in 2015 to 6.3% in 2016, capitalizing on higher economies of scale and lower SG&amp;A cost as percentage of sales. Mainly due to lower interest expense and higher operating margins assumptions in 2016, we expect net margins to climb to 3.2% in 2016, up from 2.1% in 2015. </li><li>Debt Reduction - Major uses of IPO proceeds: The company has a high gearing ratio. This has been one of the biggest risks with the company. The company will be able to improve its balance sheet significantly post IPO. Net debt to equity ratio which was 182% at end of 2015 is likely to decline to about 140% post debt reduction through IPO.</li></ul>

The subscription period for the Haitai Confectionery IPO is from April 27th to 28th. Haitai Confectionery is expected to complete the IPO and its shares are expected to start trading on May 11th. The low and high end of the IPO offer price is from 12,300 won to 15,100 won, implying market cap of 236 billion won to 290 billion won.Our base case valuation for Haitai Confectionery is 21,840 won per share (post IPO), representing implied market cap of 420 billion won. This is based on EBITDA estimate of 79 billion in 2016 and EV/EBITDA multiple of 8.5x. Honey Butter Chips and Honey Tong Tong snacks have been the biggest drivers of the company's growth in the past two years. These two products represented 11% of the company's sales in 2015, up from 2% in 2014. Honey Butter Chips sales were up 389% YoY to 52.3 billion won in 2015. We expect Honey Butter Chips sales to increase 82% YoY to 95 billion won in 2016.We expect the company's sales to grow 8% YoY to 862 billion won in 2016. Aside from Honey Butter Chips and Honey Tong Tong, we estimate the company's remainder sales to increase 3% YoY driven by higher sales of new products such as Takoyaki Balls and higher unit pricing. Operating margins are expected to increase from 5.9% in 2015 to 6.3% in 2016, capitalizing on higher economies of scale and lower SG&amp;A cost as percentage of sales. Mainly due to lower interest expense and higher operating margins assumptions in 2016, we expect net margins to climb to 3.2% in 2016, up from 2.1% in 2015. Debt Reduction - Major uses of IPO proceeds: The company has a high gearing ratio. This has been one of the biggest risks with the company. The company will be able to improve its balance sheet significantly post IPO. Net debt to equity ratio which was 182% at end of 2015 is likely to decline to about 140% post debt reduction through IPO.

Equity Bottom-Up

<a href="https://www.smartkarma.com/entities/5176" target="_blank" data-smartkarma-citation="entities:5176">Crown Confectionery Co Ltd</a> shares are up 24% in the past three days. We think that there are two major reasons for this: 1) There will likely be continued strong demand for Honey Butter Chips after the second main production line is completed next month. (see <a href="https://www.smartkarma.com/insights/honey-butter-chips-category-killer-in-potato-chips" target="_blank" data-smartkarma-citation="insights:2632">Honey Butter Chips - Category Killer in Potato Chips</a>). 2) There has been an explosive demand for its newly released Takoyaki Balls in the past few weeks. <h2>Takoyaki Balls</h2>Takoyaki Balls is a snack developed by Haitai Confectionery, a…

Crown Confectionery Co Ltd shares are up 24% in the past three days. We think that there are two major reasons for this: 1) There will likely be continued strong demand for Honey Butter Chips after the second main production line is completed next month. (see Honey Butter Chips - Category Killer in Potato Chips). 2) There has been an explosive demand for its newly released Takoyaki Balls in the past few weeks. Takoyaki BallsTakoyaki Balls is a snack developed by Haitai Confectionery, a…

Takoyaki Balls - The Second Honey Butter Chips?

<ul><li>Honey Butter Chips is a category killer in the potato chips market in Korea.In less than two years, Honey Butter Chips has become have become the most sought after snack in Korea.</li><li>Our valuation scenarios analysis suggests that based on the 9-10x EV/EBITDA multiples for Crown Confectionery, there is a 8% to 36% upside range over the next one year.However, if the company is able to aggressively export its Honey Butter Chips in overseas markets such as US and China, there is likely to be even further increase in earnings estimates and valuations multiples expansion. </li><li>Honey Butter Chips was launched in August 2014 in Korea by Haitai-Calbee, a 50:50 JV between Haitai Confectionery and Calbee (this JV is a subsidiary of Haitai Confectionery).  Crown Confectionery owns a 85.2% stake in Haitai Confectionary which is planning an IPO in 2016. </li><li>We expect the potato chip market in Korea to increase from 210 billion won in 2014 to 280 billion won in 2015, and 320 billion won in 2016. We estimate Honey Butter Chips's share in the Korean potato chip market to increase from 27% in 2015 to 36% in 2016 (number one brand by estimated sales).</li><li>No other snack product has been promoted in Korea by various social media as Honey Butter Chips.  As a result of unprecedented word-of-mouth marketing through social network media, the company could reduce its own advertising and marketing expenses associated with Honey Butter Chips. </li><li>How did I buy my latest bags of Honey Butter Chips? I must have checked at least five convenience stores and two hypermarkets nearby where I live in Seoul and they were all sold out of them as a result I had to drive to Traders (which is Emart Co's imitation version of COSTCO, and located about 20 minutes from my house by car) and they were also close to being sold out but I grabbed some!</li></ul>

Honey Butter Chips is a category killer in the potato chips market in Korea.In less than two years, Honey Butter Chips has become have become the most sought after snack in Korea.Our valuation scenarios analysis suggests that based on the 9-10x EV/EBITDA multiples for Crown Confectionery, there is a 8% to 36% upside range over the next one year.However, if the company is able to aggressively export its Honey Butter Chips in overseas markets such as US and China, there is likely to be even further increase in earnings estimates and valuations multiples expansion. Honey Butter Chips was launched in August 2014 in Korea by Haitai-Calbee, a 50:50 JV between Haitai Confectionery and Calbee (this JV is a subsidiary of Haitai Confectionery).  Crown Confectionery owns a 85.2% stake in Haitai Confectionary which is planning an IPO in 2016. We expect the potato chip market in Korea to increase from 210 billion won in 2014 to 280 billion won in 2015, and 320 billion won in 2016. We estimate Honey Butter Chips's share in the Korean potato chip market to increase from 27% in 2015 to 36% in 2016 (number one brand by estimated sales).No other snack product has been promoted in Korea by various social media as Honey Butter Chips.  As a result of unprecedented word-of-mouth marketing through social network media, the company could reduce its own advertising and marketing expenses associated with Honey Butter Chips. How did I buy my latest bags of Honey Butter Chips? I must have checked at least five convenience stores and two hypermarkets nearby where I live in Seoul and they were all sold out of them as a result I had to drive to Traders (which is Emart Co's imitation version of COSTCO, and located about 20 minutes from my house by car) and they were also close to being sold out but I grabbed some!

Honey Butter Chips - Category Killer in Potato Chips

South Korea

Crown Confectionery Co., Ltd. produces biscuits, crackers, candies and other snacks.

Price Gauge
52-week Range	0.00 - 0.00
Market Cap (USDm)	0.00
P/E	0.00
Dividend (Yield)	0.00

Crown Confectionery (005740 KS)

Haitai Confectionery - IPO Preview

The subscription period for the Haitai Confectionery IPO is from April 27th to 28th. Haitai Confectionery is expected to complete the IPO and its...

Douglas Kim

Takoyaki Balls - The Second Honey Butter Chips?

Crown Confectionery Co Ltd shares are up 24% in the past three days. We think that there are two major reasons for this: 1) There will likely be...

Douglas Kim

Honey Butter Chips - Category Killer in Potato Chips

Honey Butter Chips is a category killer in the potato chips market in Korea.In less than two years, Honey Butter Chips has become have become the...

Douglas Kim

Price Gauge

52-week Range

Market Cap (USDm)

P/E

Dividend (Yield)