Korea/Asia, Events, IPOs, Douglas Research Advisory

Douglas Kim

Korea/Asia, Events, IPOs

Equity Bottom-Up

Maeil Holdings Co., Ltd. / Equity Bottom-Up

<ul><li>We are reiterating our positive view on Maeil Dairies Co. Since we started our coverage of the company with a positive view three months ago (see <a href="https://www.smartkarma.com/insights/biggest-beneficiary-in-korea-from-china-s-two-children-per-family-policy" target="_blank" data-smartkarma-citation="insights:2027">Biggest Beneficiary in Korea from China’s Two Children Per Family Policy?</a> ), its shares are up 17%, outperforming the market. The company reported outstanding 4Q15 results on 9 March and we continue to believe this stock is likely to outperform the market this year.</li><li>We maintain our price target of 58,000 won based on 9x EV/EBITDA multiple using 2017 EBITDA estimate.</li><li>Maeil Dairies Co. reported better than expected 4Q15 results with its sales up 7.5% YoY to 403.6bn won (vs. our estimate of 399.4bn won and consensus estimate of 395bn won) and operating profit up 187% YoY to 14.9bn won (vs. our estimate of 8.4bn won and consensus estimate of 9.1bn won). </li><li>Over long-term perspective, we like investment themes such as Maeil Dairies Co. that have "big and wide moat"for its core business (milk and baby formula) from Chinese competitors ("China-In"). Any industry that Chinese companies can come into Korea and take away market share is the kind that we prefer to avoid. On the other hand, the company is a key beneficiary of "China-Out" strategy of selling its baby formulas and milk to the high-end consumers in China which we believe will continue to grow rapidly, especially with the approval of the two-children policy in China and Chinese consumers' willingness to buy more high-end, quality baby formula and milk products from Korea. </li></ul>

We are reiterating our positive view on Maeil Dairies Co. Since we started our coverage of the company with a positive view three months ago (see Biggest Beneficiary in Korea from China’s Two Children Per Family Policy? ), its shares are up 17%, outperforming the market. The company reported outstanding 4Q15 results on 9 March and we continue to believe this stock is likely to outperform the market this year.We maintain our price target of 58,000 won based on 9x EV/EBITDA multiple using 2017 EBITDA estimate.Maeil Dairies Co. reported better than expected 4Q15 results with its sales up 7.5% YoY to 403.6bn won (vs. our estimate of 399.4bn won and consensus estimate of 395bn won) and operating profit up 187% YoY to 14.9bn won (vs. our estimate of 8.4bn won and consensus estimate of 9.1bn won). Over long-term perspective, we like investment themes such as Maeil Dairies Co. that have "big and wide moat"for its core business (milk and baby formula) from Chinese competitors ("China-In"). Any industry that Chinese companies can come into Korea and take away market share is the kind that we prefer to avoid. On the other hand, the company is a key beneficiary of "China-Out" strategy of selling its baby formulas and milk to the high-end consumers in China which we believe will continue to grow rapidly, especially with the approval of the two-children policy in China and Chinese consumers' willingness to buy more high-end, quality baby formula and milk products from Korea. 

Outstanding 4Q15 Results Bolster Our Positive View

<ul><li>We are initiating coverage of Maeil Dairies Co. (005990KS) with a BUY rating and a two &nbsp;year target price of 58,000 won.</li><li>A turnaround story with focus on more profitable growth &ndash; Maeil Dairies Co. is a turnaround story. We believe the company is likely to focus on expanding its profitable core businesses, including baby formula and milk, while attaching less importance and capital to non-core businesses over the next two to three years.</li><li>One of the biggest beneficiaries of two children policy in China &ndash; We believe the company is one of the biggest beneficiaries in Korea regarding China&rsquo;s decision to allow two children per family for its baby formula, milk, and baby apparel sales to China. In fact, Maeil Dairies Co. is currently the only company in Korea to sell both baby formula and fresh milk to China, which is a strong testament of the recognition of its high quality dairy products and the Chinese government&rsquo;s willingness to allow exports of its products. Many parents in China purchase baby milk formula from Maeil Dairies Co. since they do not trust the baby milk formula made by companies in China and this offers a significant business opportunity for the company.</li><li>Chairman is buying shares - Maeil Dairies Co.&rsquo;s Chairman Jeong Wan Kim purchased 1.1bn won of the company&rsquo;s shares in October 2015 (average purchase price of 35,879 won), increasing his stake of the company from 15.66% to 15.81%. This share purchase reflects the Chairman&rsquo;s strong conviction in the company&rsquo;s future. It is refreshing to see such major insider shareholder buying shares in the open market; as this kind of share purchase is infrequent in Korea.</li><li>Rebounding earnings &ndash; Bolstered by the company&rsquo;s strong export growth of baby formula in China, improving RTD coffee sales in Korea, increased focus on its core businesses such as dairy and RTD coffee, and less focus and capital investment on non-profitable businesses are likely to result in earnings improvement over the next two years. We expect the company&rsquo;s top line to grow 5% CAGR and net profit to increase 30% CAGR from 2015 to 2017.</li><li>Wide moat for its baby formula and milk businesses &ndash; The baby formula and milk businesses possess high barriers to entry. Maeil Dairies Co. has number two market share in both baby formula and milk in Korea. The baby formula and milk businesses are near oligopolies in Korea with 6-7 local companies competing in these sectors. The company has built one of the best reputations and brand names for high quality baby formulas and milk over the past 40 years. It is extremely difficult to enter these markets in Korea, due to strong consumer loyalty to existing products, high brand awareness of leading products, and existing entrenched relationships among the baby formula and milk producers with distributors, wholesalers, and retailers.</li><li>Price target of 58,000 won - Our two year price target of Maeil Dairies Co. is 58,000 won based on 9x EV/EBITDA multiple using 2017 EBITDA estimate. Our target multiple of 9x is based on an average EV/EBITDA multiple of 9x from 2013 to 2014. Price target of 58,000 won would also imply P/E multiple of 20x in 2017, which is 10% discount to the company&rsquo;s average P/E multiple of 22x from 2010 to 2014.&nbsp;</li></ul>

We are initiating coverage of Maeil Dairies Co. (005990KS) with a BUY rating and a two &nbsp;year target price of 58,000 won.A turnaround story with focus on more profitable growth &ndash; Maeil Dairies Co. is a turnaround story. We believe the company is likely to focus on expanding its profitable core businesses, including baby formula and milk, while attaching less importance and capital to non-core businesses over the next two to three years.One of the biggest beneficiaries of two children policy in China &ndash; We believe the company is one of the biggest beneficiaries in Korea regarding China&rsquo;s decision to allow two children per family for its baby formula, milk, and baby apparel sales to China. In fact, Maeil Dairies Co. is currently the only company in Korea to sell both baby formula and fresh milk to China, which is a strong testament of the recognition of its high quality dairy products and the Chinese government&rsquo;s willingness to allow exports of its products. Many parents in China purchase baby milk formula from Maeil Dairies Co. since they do not trust the baby milk formula made by companies in China and this offers a significant business opportunity for the company.Chairman is buying shares - Maeil Dairies Co.&rsquo;s Chairman Jeong Wan Kim purchased 1.1bn won of the company&rsquo;s shares in October 2015 (average purchase price of 35,879 won), increasing his stake of the company from 15.66% to 15.81%. This share purchase reflects the Chairman&rsquo;s strong conviction in the company&rsquo;s future. It is refreshing to see such major insider shareholder buying shares in the open market; as this kind of share purchase is infrequent in Korea.Rebounding earnings &ndash; Bolstered by the company&rsquo;s strong export growth of baby formula in China, improving RTD coffee sales in Korea, increased focus on its core businesses such as dairy and RTD coffee, and less focus and capital investment on non-profitable businesses are likely to result in earnings improvement over the next two years. We expect the company&rsquo;s top line to grow 5% CAGR and net profit to increase 30% CAGR from 2015 to 2017.Wide moat for its baby formula and milk businesses &ndash; The baby formula and milk businesses possess high barriers to entry. Maeil Dairies Co. has number two market share in both baby formula and milk in Korea. The baby formula and milk businesses are near oligopolies in Korea with 6-7 local companies competing in these sectors. The company has built one of the best reputations and brand names for high quality baby formulas and milk over the past 40 years. It is extremely difficult to enter these markets in Korea, due to strong consumer loyalty to existing products, high brand awareness of leading products, and existing entrenched relationships among the baby formula and milk producers with distributors, wholesalers, and retailers.Price target of 58,000 won - Our two year price target of Maeil Dairies Co. is 58,000 won based on 9x EV/EBITDA multiple using 2017 EBITDA estimate. Our target multiple of 9x is based on an average EV/EBITDA multiple of 9x from 2013 to 2014. Price target of 58,000 won would also imply P/E multiple of 20x in 2017, which is 10% discount to the company&rsquo;s average P/E multiple of 22x from 2010 to 2014.&nbsp;

Biggest Beneficiary in Korea from China's Two Children Per Family Policy?

South Korea

Maeil Holdings Co., Ltd. manufactures dairy products.  The Company produces baby formulas, dry powdered milk, milk, yogurt, fruit juices, and other lactic acid beverages.

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

Maeil Holdings Co., Ltd. (005990 KS)

Outstanding 4Q15 Results Bolster Our Positive View

We are reiterating our positive view on Maeil Dairies Co. Since we started our coverage of the company with a positive view three months ago (see...

Douglas Kim

Biggest Beneficiary in Korea from China's Two Children Per Family Policy?

We are initiating coverage of Maeil Dairies Co. (005990KS) with a BUY rating and a two year target price of 58,000 won. A turnaround story with...

Douglas Kim

Price Gauge

52-week Range

Market Cap (USDm)

P/E

Dividend (Yield)