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The author is an analyst of NH Investment & Securities. He can be reached at — Ed.

All of Lotte Shopping’s major businesses continue to perform well. Although we lower our TP in consideration of impairment losses, we still see attractive investment merit from a recovery story point of view.

Non-operating side somewhat disappoints

We lower our TP on Lotte Shopping by 10.3% to W130,000 (from W145,000). It is somewhat disappointing that the firm has incurred large-scale impairment losses (goodwill W231.5bn; CGU W27.9bn) due to slow earnings at subsidiary Lotte Hi-Mart. With the visibility of a 2022E NP (excluding minority interest) turnaround losing some luster, we now apply a P/B of 0.32x (the past 3-year average), in turn trimming down our TP.

But, it remains positive to see that OP figures across all of Lotte Shopping’s key business divisions are rebounding in response to restructuring and renewal effects. SSSG rates for the company’s department stores and discount stores are no longer lagging those of their major rivals. We stick to a Buy rating, noting that firm’s shares remain in absolutely undervalued territory (P/B of 0.25x).

3Q22 review: Core business OP improving

On a consolidated basis, Lotte Shopping announced 3Q22 sales of W4,133bn (+0% y-y) and OP of W150.1bn (+419% y-y), with OP exceeding consensus.

SSSG at Lotte Shopping’s department stores and discount stores clocked at 16.5% y-y and 3.7% y-y, respectively. OPM at department store domain improved significantly on brisk sales growth, centering upon the high-margin fashion category. If excluding one-off costs (W60bn in voluntary retirement compensation expenses) incurred in the same period last year, OP at domestic department stores alone upped W129.2bn y-y. Domestic discount store OP jumped 71% y-y in response to store renewal effects.

We also favorably view the fact that earnings figures at important domains such as Supermarket, Cultureworks, and e-commerce are showing y-y improvement. Of particular note, sales strengthened sharply at Cultureworks’ content arm (helped by strong box office performances for Top Gun 2 and Hansan: Rising Dragon). The only disappointment is a significant decline in sales and OP at Lotte Hi-Mart amid a slump in the domestic home appliance market. However, as Lotte Hi-Mart is listed separately, the negative impact of its weak earnings on Lotte Shopping’s share price should prove limited.

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