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Sluggish Consumption, but Rising Momentum from Lower Interest Rate
¢ Retail - Dec sales sluggish, but marketing effects continued: Major retailers’ Dec same-store sales are estimated to
have dropped 4-5%YoY. Home appliance and fashion sales were still sluggish. However, luxury goods and
cosmetics continued to perform well thanks to discount sales and other promotional events, offsetting retailers’
lackluster sales after mid-Dec. Considering that Dec 2008 had three less holidays than Dec 2007, they fared quite
well. We advise investors to increase exposure, given the lower interest rate. For short-term top picks, we present
Hyundai Dept. Store (069960, BUY), which has the most attractive valuation and lowest earnings volatility, and CJ
Home Shopping (035760, BUY), which recently had its asset restructured.
¢ Food & Beverage - 4Q08 results to meet market consensus: Earnings are expected to remain stable for food &
beverage (F&B) companies in 4Q08 due to: 1) stabilization of grain prices; 2) eased FX rate volatility; and 3)
recovery of pricing power. 4Q08 results will likely meet our expectation, and a full-fledged recovery is expected in
2Q09, given low grain prices. We present CJ Cheiljedang (097950, BUY) as our top pick, since the company’s
earnings momentum is expected to improve relatively strongly on cost drop and stabilization of FX rate.
Meanwhile, Doosan Corp.’s disposal of its liquor business will likely intensify competition in the soju market. It will
be favorable for Lotte Chilsung (005300, BUY), whose market share is expected to expand based on its regional ties,
but a disadvantage for Jinro.
¢ Fashion - 2009 earnings estimates lowered: Major fashion companies’ 4Q08 earnings will likely come in slightly
short of our expectation. We lower 2009 earnings estimates, given the market slowdown and growing uncertainties
over consumption. In addition, we lower our fair value for Cheil Industries (001300, BUY) to KRW52,000 from
KRW55,000 and for LG Fashion (093050, BUY) to KRW27,000 from KRW32,000. Cheap valuations are providing
downward share price rigidity, but the upside potential is limited as well due to the unclear outlook on
consumption.
¢ Cosmetics - Small luxuries are affordable: Cosmetics had a very solid month in Nov, with retail sales jumping
10.7%YoY. We attribute this to the fact that cosmetics are consumer staples that are bought repeatedly and
premium spending is possible with comparatively low costs. Combined OP of major cosmetics companies in 4Q08
is expected to grow 22%YoY to KRW73.5bn. OP growth for Amorepacific, which has completed commencing a
new distribution channel, is projected to recover. We retain Amorepacific as our top pick.
¢ Pharmaceuticals - Health care spending continues despite the recession: Retail sales grew for pharmaceuticals as
well in Nov, at 18.6%YoY, in a continued strong uptrend. The solid results owe to the fact that pharmaceuticals sales
are less susceptible to economic downturns and that increasing drug consumption, amid a rise in the elderly
population and change in major disease groups, is offsetting negative effects of cut in drug reimbursement price.
Pharmaceutical companies’ OR is projected to grow in 4Q08, but slow margin improvement is expected to continue
due to higher marketing costs upon the launch of blockbuster generics. Yuhan (000100, BUY), Dong-A
Pharmaceutical (000640, BUY), and Green Gross (006280, BUY) will likely meet expectations in 4Q08, while
Hanmi Pharmaceutical (008930, Marketperform) and Daewoong Pharmaceutical (069620, Marketperform) are
expected to show weak results.
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