Lotte Corp: Cash Flow Improvement Underway 

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The author is an analyst of NH Investment & Securities. He can be reached at dongyang.kim@nhqv.com. — Ed. 

Lotte Corp’s earnings visibility is to expand with increased equity stakes in subsidiaries and higher Lotte Shopping earnings. But, the resumption of IPO activity and the formation of an integrated holding company system with Lotte Hotel are both to be delayed on continued sluggish earnings for Hotel Lotte, which sits atop the Lotte Group’s governance structure. Currently, Lotte Corp is trading at 50% discount to NAV, resulting in a lack of valuation merit compared to other major holding companies.

Dividend and brand royalty income to strengthen

Lotte Corp’s dividend income has been normalizing alongside increased equity stakes in Lotte Chemical and Lotte Chilsung, in-kind investment in Lotte Chilsung, Lotte Food, and Lotte International, and improving earnings at Lotte Shopping on restructuring and new business investments. Brand royalty rate has upped from 15bp to 20bp, accordingly beefing up 2022F annual income by W30bn.

However, Hotel Lotte, which sits atop the Lotte Group’s governance structure, is unlikely to recover its earnings and resume IPO activity due to a continued hostile business environment. Accordingly, forming an integrated holding company system with Lotte Hotel, which is the final goal of Lotte Group’s governance restructuring, is on the backburner for now.

We lower our TP from W41,500 to W32,000, taking into account several factors, including share prices changes and additional equity acquisitions for listed subsidiaries, a target multiple base year change (2021 → 2022), higher brand loyalty income, and an unaltered target discount rate (45%). We maintain a Hold rating.

4Q21E: Earnings sapped by one-off factors for main subsidiaries

Lotte Corp should report 4Q21 sales of W2.569tn (+8% y-y) and OP of W32.4bn (TTP y-y), losing ground q-q.

Earnings for major subsidiaries such as Lotte Shopping and Lotte Chemical are to disappoint consensus due to reduced product margins, regular maintenance costs, and provisioning related to voluntary retirement of discount store employees, overshadowing the positive of revenue growth at department and discount stores.

But, 1Q22E OP is to expand sharply to W214.8bn (+405% y-y) on higher dividend income (1Q22E W170.3bn, +65% y-y) and the consolidation of Lotte Chilsung.

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