Download - Nongshim (004370)
Nongshim (004370)
Simmering with Expectations!
February 13, 2019
Ae Ran Park Analyst
Food & Beverage
82-2-6114-2939 [email protected]
Keep BUY and raise target price to
KRW335,000
Enterprise value expected to recover,
driven by earnings improvements at
home and abroad; Threat from rivals
appears to have tapered off
2019 OP to grow 27.1%; OP to top
KRW100.0bn mark for first time since
2015
We maintain our BUY rating on Nongshim and raise the target price 4.7% to
KRW335,000, which was derived by applying a PER of 13.5x (10% discount applied to
the F&B industry’s average PER of 15.0x) to a 12M-forward EPS of KRW17,046 and
reflecting net cash holdings of KRW616.4bn. The target price represents an implied PER
of 19.7x and PBR of 1.0x and corresponds to the low-end of the stock’s historical
valuation band. Although the share price recently rallied in anticipation of earnings
improvements, Nongshim still offers ample upside potential. If we remove the 10%
discount in light of Nongshim’s ramyeon market share recovery and expansion in
overseas markets, its per-share value could reach KRW360,000.
Nongshim’s dominant standing in the domestic ramyeon market has been damaged by
launches of various new products and deep discounts at rivals over the past three years.
However, 1) such downside factors have already been factored into Nongshim’s
enterprise value, 2) new product launches by rivals pose less of a threat compared to
the past and 3) consumers no longer choose ramyeon products only because of their
cheap price. Against this backdrop, 4) Nongshim’s market share has been increasing
starting in 2H18 through product renewals by adding new flavors to mainstay products
and changing the types of product packages (bowl noodle ⇔ pack noodle), while
growth is continuing in the US and China. This implies the potential of Nongshim’s
enterprise value recovering ahead.
Nongshim’s earnings are forecast to recover from the 2018 slump and improve in 2019.
The company is forecast to turn in OR of KRW2.35tr (+5.6% YoY) and OP of
KRW111.3bn (+27.1% YoY; OPM 4.7%) in 2019.
Buy maintain
Target Price (raised) KRW335,000
Upside/Downside 20.7%
Current price (Feb 13) KRW277,500
Consensus Target Price KRW326,154
Market cap USD1.5bn
Trading Data
Free float 49.6%
Avg T/O Val (3M, KRWbn) 5.3
Foreign ownership 19.8%
Major shareholders Chun-Ho Shin and 4 others 45.5%
NPS 10.6%
Forecast earnings & valuation
FY-end 2017A 2018E 2019E 2020E
OR (KRWbn) 2,208 2,229 2,354 2,453
OP (KRWbn) 96 88 111 120
NP to parent (KRWbn) 91 82 103 110
EPS (KRW) 14,905 13,439 16,900 18,112
EPS Growth (%) -54.5 -9.8 25.8 7.2
PER (x) 23.8 18.9 16.4 15.3
EV/EBITDA (x) 9.4 5.9 5.6 5.1
PBR (x) 1.2 0.8 0.9 0.8
ROE (%) 5.0 4.4 5.3 5.5
Div. Yield (%) 1.1 1.6 1.4 1.4
Share price performance
(%) 1M 3M 6M 12M
Absolute -1.9 18.1 -4.8 -6.3
Relative -7.6 11.1 -2.8 2.0
Source: Nongshim, KB Securities estimates
200,000
240,000
280,000
320,000
360,000
400,000
-30
-20
-10
0
10
20
30
18.2 18.5 18.8 18.11 19.2
Relative performance (LHS)
Stock price (RHS)% KRW
Nongshim(004370) KB RESEARCH
2
Earnings will grow as 1) the domestic ramyeon business’ earnings improve on the
renewal of mainstay products, receding new product effects at competitors and cost
cuts and 2) the US and Chinese subsidiaries sustain growth by expanding distribution
channels. The Chinese subsidiary’s 2018 profit margins have recovered to levels
registered in 2016, before China implemented an unofficial ban on Korean products
in retaliation against the Korean government’s decision to deploy Terminal High-
Altitude Area Defense (THAAD) anti-missile systems, which China considers as a
threat. After suffering from channel expansion and rising production costs ensuing
production line expansions in late 2017, the US subsidiary is also expected to see
profit margins improve on price hikes and easing cost burdens. Nongshim will also
benefit from the effects of a snack price hike in Nov 2018 (5.4% increase based on
ASP) and reduced losses enabled by the fast growth of Baeksansu (bottled water).
Nongshim(004370) KB RESEARCH
3
Investment opinion and risks
Bull-case Scenario
KRW430,000 (Target PER 25.0x)
Base-case Scenario (Target Price)
KRW335,000 (Target PER 19.7x)
Current Price
KRW277,500
Bear-case Scenario
KRW260,000 (F&B avg. PER 15.0x)
Base-case Scenario: Catalysts
1) Earnings improvement following eased
competition in domestic ramyeon market
2) Earnings improve at overseas subsidiaries
that were impacted by cost increases
Bull-case Scenario: Upside risks
1) Meaningful recovery of ramyeon market
share
2) Increased earnings contributions by
overseas subsidiaries
Bear-case Scenario: Downside risks
1) Continued weakness in ramyeon market
share
2) Slower-than-expected improvement in
earnings at overseas subsidiaries
Revised earnings estimates
(KRWbn, %) Previous Revised Change
2018E 2019E 2018E 2019E 2018E 2019E
OR 2,227 2,338 2,229 2,354 0.1 0.7
OP 87 110 88 111 1.2 1.5
NP to parent 81 102 82 103 1.0 1.2
Source: KB Securities estimates
Difference vs. Consensus
(KRWbn, %) KB est. Consensus Difference
2018E 2019E 2018E 2019E 2018E 2019E
OR 2,229 2,354 2,233 2,350 -0.2 0.2
OP 88 111 88 106 -0.1 5.4
NP to parent 82 103 83 98 -1.6 4.8
Source: Fnguide, KB Securities estimates
Valuation and target price
calculation
1) Valuation method:
Reflected PER valuation and net cash
holdings
2) Target price calculation:
Reflected 12M Fwd EPS X PER of 13.5x and
per-share value of KRW616.4bn in net cash
holding
Target PER reflects 10% discount to F&B
industry avg.
3) Target price range:
KRW430,000 ~ KRW260,000
4) Target price valuation:
12M Fwd PER of 19.7x, PBR of 1.0x
OR composition (2019E, %) Earnings sensitivity analysis
(%) EPS change
2018E 2019E
1% rise in FX rate -0.2 -0.2
1%p rise in interest
rate +4.4 +3.5
Source: KB Securities estimates
Peer group comparison
(USDmn, KRWbn, X, %) Market PER PBR ROA ROE Dividend Yield
Cap 2018E 2019E 2018E 2019E 2018E 2019E 2018E 2019E 2018E 2019E
Ajinomoto 8,153 22.2 15.5 1.4 1.3 8.9 8.0 6.8 8.9 1.9 2.1
Nissin 7,199 26.2 29.7 2.3 2.2 14.0 13.6 8.6 8.0 1.5 1.6
Tingyi 7,860 21.3 20.1 2.7 2.6 7.2 7.2 12.9 12.7 2.6 2.8
Ottogi 2,823 16.8 19.2 2.2 2.1 13.5 12.3 13.7 11.3 0.9 1.0
Source: Bloomberg, KB Securities
64.9%
16.9%
18.2%
Ramyeon
Snack
Beverage/Other
Nongshim(004370) KB RESEARCH
4
I. Focus Charts
Target price calculation: SOTP valuation - Keep BUY on Nongshim and raise target price to KRW335,000
- Target price derived by applying 13.5x PER to 12M-forward
EPS of KRW17,046 and reflecting net cash holdings of
KRW616.4bn
- 10% discount applied to F&B industry’s average PER of 15.0x
in order to reflect Nongshim’s weakened standing in ramyeon
market
- Nongshim’s standing as No. 1 domestic ramyeon market player
undermined
- But such concerns already priced in; Impact of rival products
weakened as well
- Target price as high as KRW360,000 when valuation discount is
removed considering Nongshim’s recovering ramyeon market
share and overseas growth momentum
Source: Quantiwise, Nongshim, KB Securities estimates
Nongshim's annual earnings trend and estimates - Nongshim’s 2018 earnings disappointing, but seem to have
bottomed out
- OR of KRW2.35tr (+5.6% YoY) and OP of KRW111.3bn (+27.1%
YoY, OPM 4.7%) expected in 2019
- OP to surpass KRW100.0bn for first time since 2015
- 1) Domestic ramyeon business’ earnings to improve on
renewal of mainstay products, receding new product effects at
competitors and cost cuts; 2) US and Chinese subsidiaries to
sustain growth via distribution channel expansions
Source: Company data, KB Securities estimates
OP contribution growth by major region - Enterprise value expected to recover, backed by improving
ramyeon earnings at home and abroad in 2019
- 1) Domestic: Earnings improvements should be led by
renewals of mainstay products and reduced marketing cost
burden as well as weakening threat from rivals
- 2) US: Earnings were hurt by rising production costs and other
expenses caused by expanding retail channels; Profitability
improvement possible in 2019, buoyed by strong growth of US
market (market share up to 15%) and price markup effects
- 3) China: Earnings pickup materialized in 2018 amid easing
ramifications of THAAD battery deployment and price markup
effects in Aug 2017; Sound earnings expected to continue in
2019 thanks to expansion into western inland regions of China
and strengthening online channel.
Source: Company data, KB Securities estimates
(KRW, x, KRW100mn, %) Content Note
Per-share operating value 230,127 ①
EPS 17,046 12M forward basis
2017 14,905
2018E 13,439
2019E 16,900
2020E 18,112
PER 13.5Applied 10% discount to F&B sector avg. considering weakened
standing in ramyeon market
F&B 15.0
Past avg. 19.5 2013~2017 avg.
Net DER per share -101,339.6 ②
Net debt -6,164.1 12M fwd basis
2017 -4,835.3
2018E -5,485.2
2019E -6,086.9
2020E -6,727.5
Calculated price 331,467 ③ = ① - ②
Target price 335,000 Raised 4.7% compared to existing target price
Current price 277,500 Feb 13 basis
Upside 20.7 Buy
0
1
2
3
4
5
6
15,000
17,000
19,000
21,000
23,000
25,000
13 14 15 16 17 18E 19E
KRW100mn %OR (L) OP (R)
-200
-150
-100
-50
0
50
100
150
Korea China US Japan Australia
% 2018E 2019E
Nongshim(004370) KB RESEARCH
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II. Rating and Valuation
Keep BUY and raise target price to
KRW335,000
We maintain our BUY rating on Nongshim and raise the target price 4.7% to
KRW335,000, which was derived by applying a PER of 13.5x (10% discount applied to
the F&B industry’s average PER of 15.0x) to a 12M-forward EPS of KRW17,046 and
reflecting net cash holdings of KRW616.4bn. The target price represents an implied
PER of 19.7x and PBR of 1.0x and corresponds to the low-end of the stock’s
historical valuation band. Nongshim offers substantial upside potential even from
the current share price that rallied 28.2% from Oct 2018 (short-term trough) in
anticipation of earnings improvements.
Per-share value estimated at
KRW360,000 if F&B industry’s
average PER is applied
We applied a 10% discount to the F&B industry’s average PER of 15.0x to reflect
Nongshim’s weakened domestic ramyeon market standing. If we remove the 10%
discount in light of Nongshim’s ramyeon market share recovery and outstanding
growth in overseas markets, its per-share value could reach KRW360,000, which
would offer 29.7% upside potential from the current share price.
Enterprise value expected to
recover, driven by earnings
improvements at home and abroad;
Threat from rivals appears to have
tapered off
Nongshim’s dominant standing in the domestic ramyeon market has been damaged
by launches of various new products and deep discounts at rivals over the past three
years. However, 1) such downside factors have already been factored into
Nongshim’s enterprise value, 2) new product launches by rivals pose less of a threat
compared to the past and 3) consumers no longer choose ramyeon products only
because of their cheap price. Against this backdrop, 4) Nongshim’s market share has
been increasing starting in 2H18 through product renewals by adding new flavors to
mainstay products and changing the types of product packages (bowl noodle ⇔
pack noodle), while growth is continuing in the US and China. This implies the
potential of a recovery in Nongshim’s enterprise value ahead.
Table 1. Target price calculation: SOTP valuation
(KRW, x, KRW100mn, %) Content Note
Per-share operating value 230,127 ①
EPS 17,046 12M forward basis
2017 14,905
2018E 13,439
2019E 16,900
2020E 18,112
PER 13.5 Applied 10% discount to industry avg. considering
weakened ramyeon market standing
F&B 15.0
Past avg. 19.5 2013~2017 avg.
Net DER per share -101,339.6 ②
Net debt -6,164.1 12M fwd basis
2017 -4,835.3
2018E -5,485.2
2019E -6,086.9
2020E -6,727.5
Calculated price 331,467 ③ = ① - ②
Target price 335,000 Raised 4.7% compared to current stock price
Current price 277,500 Feb 13 basis
Upside 20.7 Buy
Source: Quantiwise, Nongshim, KB Securities estimates
Nongshim(004370) KB RESEARCH
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Table 2. Enterprise value calculated by applying avg. PER of F&B sector
(KRW, X, KRW100mn, %) Content Notes
Per-share operating value 255,697 ①
EPS 17,046 12M Fwd basis
2017 14,905
2018E 13,439
2019E 16,900
2020E 18,112
PER 15.0 Applied F&B sector avg.
F&B sector 15.0
Past avg. 19.5 2013~2017 avg.
Per-share net DER -101,339.6 ②
Per-share value 357,037 ③ = ① - ②
Source: Quantiwise, Nongshim, KB Securities estimates
Fig 1. PER band Fig 2. PBR band
Source: Quantiwise, KB Securities Source: Quantiwise, KB Securities
11.0X
15.0X
19.0X
23.0X
27.0X
0
20
40
60
80
100
13.1 15.1 17.1 19.1
12M Forward EPS
KRW 10,000
0.6X
0.9X
1.1X
1.4X
1.6X
0
10
20
30
40
50
60
13.1 15.1 17.1 19.1
12M Forward BPS
KRW 10,000
Nongshim(004370) KB RESEARCH
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Table 3. Domestic and overseas peer comparison
(KRW100mn, KRW, USDmn,
USD, %, X) OR YoY OP YoY EPS YoY OPM ROE PER PBR
Nongshim 2017 22,083 -0.4 964 7.4 14,905 -54.5 4.4 5.0 23.8 1.1
2018E 22,332 1.1 877 -9.0 13,656 -8.4 3.9 4.7 19.8 0.8
2019E 23,499 5.2 1,056 20.4 16,129 18.1 4.5 5.7 16.8 0.8
2020E 24,424 3.9 1,157 9.6 17,613 9.2 4.7 6.2 15.4 0.8
Ottogi 2017 21,262 5.7 1,461 2.5 38,161 -4.5 6.9 12.1 21.1 2.4
2018E 22,422 5.5 1,504 2.9 44,467 16.5 6.7 15.2 17.5 2.1
2019E 23,625 5.4 1,667 10.9 40,730 -8.4 7.1 14.5 19.1 2.0
2020E 24,790 4.9 1,822 9.3 43,920 7.8 7.3 14.4 17.7 1.8
Samyang Foods 2017 4,585 27.6 433 71.4 3,807 56.6 9.4 15.3 25.4 3.6
2018E 4,781 4.3 562 29.7 5,841 53.4 11.8 20.1 11.8 2.1
2019E 5,081 6.3 608 8.2 6,239 6.8 12.0 17.7 11.1 1.8
2020E 5,490 8.0 690 13.5 6,903 10.6 12.6 16.7 10.0 1.6
Toyo Suisan Kaisha 2017 3,540 10.8 273 15.6 1.5 8.7 7.7 7.9 20.3 1.6
2018 3,509 -0.9 241 -11.8 1.5 0.0 6.9 5.9 24.9 1.4
2019E 3,666 4.5 227 -5.8 1.6 1.7 6.2 6.6 22.6 1.4
2020E 3,768 2.8 248 9.3 1.6 10.4 6.6 6.7 20.5 1.4
Nissin Foods 2017 4,586 17.5 265 20.3 1.5 23.3 5.8 6.7 27.9 1.9
2018 4,661 1.6 308 16.3 2.0 0.0 6.6 8.6 26.2 2.3
2019E 4,175 -10.4 331 7.5 2.5 -9.0 7.9 8.0 29.7 2.2
2020E 4,312 3.3 344 3.9 2.5 5.7 8.0 7.4 28.1 2.2
Tingyi 2017 8,734 4.3 516 28.3 0.0 52.1 5.9 9.9 39.0 3.9
2018E 9,053 3.7 604 17.0 0.0 39.4 6.7 12.9 21.3 2.7
2019E 9,539 5.4 621 2.9 0.0 4.5 6.5 12.7 20.1 2.5
2020E 10,027 5.1 682 9.8 0.1 11.4 6.8 13.1 18.3 2.5
Uni-President 2017 3,155 -0.2 176 21.3 0.0 42.3 5.6 7.1 26.8 1.8
2018E 3,278 3.9 214 21.6 0.0 26.2 6.5 8.4 23.8 2.0
2019E 3,420 4.3 231 8.1 0.0 10.5 6.8 9.0 21.3 1.9
2020E 3,612 5.6 254 10.0 0.0 14.3 7.0 9.5 19.1 1.9
Source: Bloomberg, FnGuide, KB Securities
Note: Earnings estimates based onconsensus
Nongshim(004370) KB RESEARCH
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III. Operating Results & Outlook
4Q18 OP expected to rise 74.2%
YoY; Earnings improvements
expected
1) 4Q18 Preview: Profitability Improvements Expected
We project Nongshim to turn in 4Q18 OR of KRW567.2bn (+4.1% YoY) and OP of
KRW25bn (+74.2% YoY, OPM 4.4%). We credit the solid performance to: 1) a low
base, 2) increased ramyeon sales volume (+6.0%; +5.5% in domestic market), and 3)
reduced cost burdens. In particular, the renewal of existing mainstay items (e.g.,
“Seafood Ansungtangmyun” and “Tempura Udon- flavored Noodle Soup”) incurs
moderate expense burdens, but should bear tangible results.
Ramyeon sales volume and market
share increasing compared to
summer
Nongshim accounted for a 57.5% share of the domestic ramyeon market in 4Q18,
increasing 0.1%p YoY and 2.3%p QoQ. Ramyeon sales volume increased, while
market share grew in 4Q18 compared to 2Q-3Q18, which saw fierce competition in
sales of ramyeon products for the summer season. In 2018, rival Ottogi’s market
share remained trapped at the 23%-level (based on monetary value, Fig 13) after
growth that continued since 2013 came to an end. Samyang Food’s market share
also appears to have dropped after enjoying new product effects (Hot Chicken
Flavor Ramyeon Carbonara) in Dec 2017.
Earnings improvements expected to
continue in 2019 following 4Q18
Reflecting 4Q18 earnings, we project Nongshim to achieve OR of KRW2.23tr (+0.9%
YoY) and OP of KRW87.6bn (-9.2% YoY, OPM 3.9%) in 2019. Weak earnings in 2018
are primarily attributable to unfavorable factors that lasted until 3Q18, such as
declining ramyeon sales volume, cost rises and increased marketing expenses amid
intensifying competition in the domestic market. Also, increased expenses that were
incurred to expand retail channels in China and the US also posed a burden.
However, marked earnings improvements are expected to have been achieved in
4Q18 and this trend is expected to continue in 2019.
Table 4. Nongshim's 4Q18 earnings estimates
(KRWbn, %) 4Q17 1Q18 2Q18 3Q18 4Q18E Change (%, %p) Difference
KB est. Consensus YoY QoQ Consensus
OR 545 563 533 566 567 571 4.1 0.2 -0.6
OP 14 34 6 22 25 25 74.2 15.0 -1.3
EBT 19 42 12 26 30 31 57.5 13.0 -4.8
NP 16 32 8 20 23 25 40.6 15.5 -9.9
NP margin 2.6 6.1 1.2 3.8 4.4 4.4 1.8 0.6 0.0
EBT margin 3.5 7.4 2.2 4.7 5.3 5.5 1.8 0.6 -0.2
NP margin 2.9 5.7 1.4 3.5 4.0 4.4 1.0 0.5 -0.4
Source: Nongshim, KB Securities estimates
Nongshim(004370) KB RESEARCH
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Fig 3. Contribution to 4Q18 OR growth by country Fig 4. Contribution to 4Q18 OP growth by country
Source: Company data, KB Securities Source: Company data, KB Securities
2019 OP to grow 27.1%; OP to top
KRW100.0bn mark for first time
since 2015
2) 2019 Earnings Forecast: OP to Return to KRW100.0bn range
Nongshim’s earnings slumped in 2018. This is likely to be the trough as earnings are
forecast to improve in 2019. The company is forecast to turn in OR of KRW2.35tr
(+5.6% YoY) and OP of KRW111.3bn (+27.1% YoY; OPM 4.7%) in 2019. Earnings will
grow as 1) the domestic ramyeon business’ earnings improve on the renewal of
mainstay products, receding new product effects at competitors and cost cuts and
2) the US and Chinese subsidiaries sustain growth by expanding distribution
channels. The Chinese subsidiary’s 2018 profit margins have recovered to levels
registered in 2016, before China implemented an unofficial ban on Korean products
in retaliation against the Korean government’s decision to deploy THAAD. After
suffering from costs arising from distribution channel expansions and rising
production costs stemming from production line expansions in late 2017, the US
subsidiary is also expected to see profit margins improve thanks to price hikes (5.0%
hike in Oct 2018) and easing cost burdens. Nongshim will also benefit from the
effects of the snack price hike in Nov 2018 (5.4% increase based on ASP) and
reduced losses due to the fast growth of Baeksansu (bottled water).
Fig 5. Contribution to OR growth by country Fig 6. Contribution of OP growth by region
Source: Company data, KB Securities Source: Company data, KB Securities
-100
-80
-60
-40
-20
0
20
40
Korea China US Japan Australia
%4Q17 4Q18E
-100
-50
0
50
100
Korea China US Japan Australia
%4Q17 4Q18E
-150
-100
-50
0
50
100
150
Korea China US Japan Australia
%2018E 2019E
-200
-150
-100
-50
0
50
100
150
Korea China US Japan Australia
%2018E 2019E
Nongshim(004370) KB RESEARCH
10
Table 5. Earnings trend and estimates of Nongshim's major business divisions (K-IFRS standalone)
Source: Nongshim, KB Securities estimates
Fig 7. Nongshim's ramyeon market share Fig 8. Nongshim's snack market share
Source: Company data, Nielsen, KB Securities Source: Company data, Nielsen, KB Securities
1Q 2Q 3Q 4Q 연간 1Q 2Q 3Q 4Q 연간 1Q 2Q 3Q 4QE 연간E 1QE 2QE 3QE 4QE 연간E
OR 478 441 459 485 1,862 459 454 481 462 1,855 469 444 468 473 1,855 480 468 489 491 1,927
GP 514 479 499 525 2,017 498 495 528 501 2,024 518 502 522 528 2,070 535 521 544 547 2,146
Ramyeon 340 317 327 365 1,350 318 324 347 340 1,329 334 323 334 362 1,353 344 332 344 372 1,393
Sales volume (mn units) 58 55 57 64 234 53 54 58 57 222 56 53 56 61 227 58 55 58 62 233
ASP (KRW/unit) 59 57 58 57 58 60 60 60 59 60 59 60 59 60 60 59 60 60 60 60
Snack 82 80 83 82 327 88 83 90 80 341 88 86 87 83 344 91 91 93 88 363
Cooked rice 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
Beverage/Other 91 82 89 78 340 92 88 92 81 353 97 93 101 83 373 100 98 107 86 391
YoY 2.5 -3.6 -2.3 -0.2 -0.9 -3.9 2.9 4.9 -4.8 -0.4 2.2 -2.1 -2.7 2.6 0.0 2.3 5.3 4.5 3.7 3.9
Ramyeon 4.2 -3.6 -5.0 -0.6 -1.3 -6.3 2.2 5.8 -6.7 -1.5 4.7 -0.4 -3.5 6.4 1.7 3.1 2.9 3.0 2.9 3.0
Snack -11.8 -4.8 7.5 3.3 -2.0 6.9 4.5 8.6 -2.7 4.3 -0.7 3.4 -3.0 3.9 0.8 4.0 5.8 6.9 5.9 5.7
Cooked rice -96.9 - - - - - - - - - - - - - - - - - - -
Beverage/Other 18.2 10.2 11.2 5.1 11.3 0.7 7.1 3.6 4.5 3.9 5.1 5.9 9.2 2.2 5.7 3.1 5.1 6.4 3.7 4.6
OP 29 5 16 20 69 26 16 24 10 76 28 3 14 19 65 31 10 20 22 83
OP margin 6.0 1.1 3.5 4.0 3.7 5.7 3.5 4.9 2.3 4.1 6.0 0.7 3.0 4.1 3.5 6.4 2.2 4.2 4.5 4.3
YoY 9.1 -74.9 -50.2 -28.6 -34.4 -8.9 220.8 49.0 -46.6 10.1 8.3 -81.4 -39.8 86.2 -14.6 8.2 243.4 44.0 12.6 28.0
EBT 155 14 27 26 222 36 22 31 17 106 37 11 29 18 95 38 17 31 23 110
EBT margin 32.4 3.2 5.8 5.4 11.9 7.8 4.9 6.5 3.7 5.7 7.8 2.6 6.3 3.7 5.1 7.9 3.7 6.4 4.7 5.7
YoY 387.4 -68.4 -24.8 -27.9 49.3 -77.0 55.4 18.4 -34.0 -52.0 2.9 -48.4 -6.5 2.2 -10.7 3.5 51.0 6.4 32.5 15.5
NP 144 11 20 20 194 27 17 24 13 80 28 8 17 17 71 29 15 22 23 88
NP margin 30.0 2.5 4.3 4.1 10.4 5.9 3.7 5.0 2.7 4.3 6.0 1.9 3.6 3.7 3.8 6.1 3.1 4.5 4.6 4.6
YoY 504.0 -68.2 -25.6 -34.6 68.6 -81.1 55.6 19.7 -36.8 -58.6 4.7 -51.0 -30.0 38.1 -12.0 3.5 76.5 31.0 30.2 25.1
2019E2018E(KRWbn, %)
2016 2017
-15
-10
-5
0
5
10
0
10
20
30
40
50
60
70
80
06 08 10 12 14 16 18E
%p%Sales-based YoY QoQ
-6
-4
-2
0
2
4
20
25
30
35
40
06 08 10 12 14 16 18E
%p%Sales-based YoY QoQ
Nongshim(004370) KB RESEARCH
11
Table 6. Nongshim's earnings trend and estimates by key sales region (K-IFRS consolidated)
Source: Nongshim, KB Securities estimates
1Q 2Q 3Q 4Q Yearly 1Q 2Q 3Q 4Q Yearly 1Q 2Q 3Q 4QE Yearly E 1QE 2QE 3QE 4QE Yearly E
OR 568 527 548 574 2,217 555 536 572 545 2,208 563 533 566 567 2,229 585 572 599 598 2,354
Korea 458 424 443 468 1,794 442 438 461 440 1,782 445 422 444 450 1,761 454 449 464 466 1,834
China 46 41 43 39 169 45 31 39 31 146 44 35 42 36 157 48 39 47 39 173
US 52 48 49 56 204 56 53 56 59 224 58 57 63 66 244 65 64 69 75 273
Japan 8 9 8 9 35 9 10 10 11 39 11 12 11 12 46 12 14 12 13 51
Australia 4 5 4 2 14 4 5 5 4 17 5 6 6 4 21 6 7 7 4 23
YoY 5.2 -0.4 0.3 1.4 1.6 -2.2 1.7 4.4 -5.1 -0.4 1.4 -0.7 -1.0 4.1 0.9 3.9 7.4 5.9 5.4 5.6
Korea 1.5 -4.3 -2.7 -0.5 -1.5 -3.5 3.2 4.1 -6.0 -0.7 0.7 -3.7 -3.7 2.2 -1.2 2.0 6.3 4.5 3.7 4.1
China 27.1 15.5 13.2 10.6 16.6 -3.8 -24.4 -8.2 -19.3 -13.5 -2.0 13.8 6.4 14.4 7.1 10.0 9.5 12.8 9.6 10.5
US 22.1 19.5 17.6 11.2 17.3 7.8 9.8 14.6 6.3 9.5 3.9 9.2 10.7 12.0 9.0 13.0 11.3 10.0 12.8 11.8
Japan 31.3 37.8 19.3 25.7 28.4 8.8 5.4 19.4 15.1 12.1 23.9 22.3 18.1 13.5 19.2 5.7 16.6 8.2 11.9 10.7
Australia 4.9 26.6 5.5 -32.8 1.8 10.2 4.5 14.9 75.9 19.8 31.8 28.5 25.4 -8.8 20.0 8.5 13.5 10.0 6.1 10.0
OR prop. 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Korea 80.7 80.5 80.9 81.6 80.9 79.6 81.7 80.7 80.7 80.7 79.1 79.2 78.5 79.3 79.0 77.7 78.4 77.5 78.0 77.9
China 8.1 7.8 7.8 6.8 7.6 8.0 5.8 6.9 5.8 6.6 7.7 6.7 7.4 6.3 7.0 8.2 6.8 7.9 6.6 7.4
US 9.1 9.1 9.0 9.7 9.2 10.0 9.8 9.9 10.8 10.1 10.3 10.8 11.0 11.7 10.9 11.2 11.2 11.5 12.5 11.6
Japan 1.5 1.7 1.5 1.6 1.6 1.6 1.8 1.7 1.9 1.8 2.0 2.2 2.0 2.1 2.1 2.0 2.4 2.1 2.2 2.2
Australia 0.6 0.9 0.7 0.4 0.7 0.7 0.9 0.8 0.7 0.8 0.9 1.2 1.0 0.6 0.9 1.0 1.2 1.1 0.6 1.0
OP 32 12 23 22 90 32 18 31 14 96 34 6 22 25 88 37 17 28 28 111
Korea 29 5 16 19 69 26 16 23 11 76 28 3 14 20 65 30 10 20 22 83
China 2 3 2 -1 6 0 -3 2 -1 -3 2 1 4 -1 6 2 2 3 0 7
US 2 2 4 2 10 4 3 3 2 13 2 2 2 3 8 2 2 3 3 11
Japan 0 0 0 0 1 0 0 0 0 1 0 0 0 0 1 0 0 0 0 1
Australia 0 0 0 0 0 0 0 0 0 0 0 0 0 0 1 0 0 0 0 1
Adj. -1 1 1 2 4 2 2 3 3 9 3 1 1 3 8 3 3 2 2 9
OP margin 5.7 2.4 4.2 3.9 4.0 5.8 3.4 5.5 2.6 4.4 6.1 1.2 3.8 4.4 3.9 6.4 3.0 4.7 4.7 4.7
Korea 6.2 1.3 3.6 4.1 3.9 5.9 3.6 5.1 2.5 4.3 6.3 0.7 3.2 4.4 3.7 6.7 2.2 4.3 4.8 4.5
China 4.9 7.7 3.8 -3.8 3.3 0.4 -9.6 4.1 -4.4 -1.8 3.7 2.6 10.3 -3.6 3.6 3.8 5.1 6.8 -0.7 3.9
US 4.0 4.6 7.4 4.2 5.0 7.6 6.2 5.3 3.4 5.6 2.7 2.6 3.4 3.9 3.2 3.5 3.7 3.9 4.2 3.9
Japan 1.8 2.2 3.0 0.6 1.9 1.1 2.2 3.0 0.9 1.8 1.8 2.3 1.6 3.5 2.3 1.9 2.5 1.7 3.7 2.5
Australia 3.9 3.3 4.1 -3.3 2.7 1.7 2.9 4.7 -0.5 2.3 2.1 2.8 2.1 3.7 2.6 3.1 4.0 3.4 5.4 3.8
YoY 17.1 -48.7 -39.4 -23.4 -24.2 0.2 47.0 37.7 -35.1 7.4 6.0 -64.6 -30.7 74.2 -9.2 8.9 169.2 30.0 12.8 27.1
Korea 8.6 -72.5 -49.6 -27.1 -33.5 -8.6 192.9 46.6 -43.3 10.3 8.2 -82.1 -39.5 80.8 -14.9 7.7 241.8 42.2 12.8 27.0
China 456.7 366.3 1.1 TR 109.5 -92.6 TR 0.6 LC TR 875.5 TB 165.8 LC TB 12.9 113.1 -25.4 LC 21.3
US 51.8 128.9 179.6 35.9 91.7 103.3 48.9 -17.6 -13.0 22.1 -63.2 -53.4 -29.8 27.9 -37.8 46.8 57.5 27.9 21.9 35.4
Japan TB 151.6 506.1 117.8 1,466.6 -34.1 5.4 22.0 86.4 8.9 98.2 31.6 -39.2 328.7 52.3 11.7 24.0 15.2 17.9 17.9
Australia 83.9 -34.7 18.6 TR -31.8 -52.2 -8.0 32.2 LC 5.7 61.3 24.3 -43.3 TB 32.8 60.4 64.2 74.8 52.6 63.0
OP prop. 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Korea 88.2 43.8 70.1 87.1 77.2 80.5 87.3 74.7 76.1 79.2 82.2 44.2 65.2 79.0 74.2 81.2 56.1 71.3 79.0 74.2
China 7.0 25.7 7.1 -6.7 6.2 0.5 -16.5 5.2 -9.7 -2.7 4.7 14.5 20.0 -5.2 6.4 4.9 11.5 11.5 -0.9 6.1
US 6.4 17.7 16.0 10.6 11.4 13.0 17.9 9.6 14.2 13.0 4.5 23.5 9.7 10.4 8.9 6.1 13.8 9.6 11.3 9.5
Japan 0.5 1.6 1.1 0.2 0.7 0.3 1.2 0.9 0.7 0.7 0.6 4.3 0.8 1.7 1.2 0.6 2.0 0.7 1.7 1.1
Australia 0.4 1.2 0.7 -0.3 0.4 0.2 0.8 0.7 -0.1 0.4 0.3 2.7 0.6 0.5 0.6 0.5 1.6 0.8 0.7 0.8
Adj. -2.4 10.0 4.9 9.2 4.0 5.5 9.3 8.9 18.9 9.3 7.7 10.8 3.7 13.6 8.6 6.7 15.0 6.2 8.2 8.3
2019E(KRWbn, %)
2016 2017 2018E
Nongshim(004370) KB RESEARCH
12
Ⅳ. Investment Points for 2019
Domestic ramyeon market grows
2.9% in 2018
1) Domestic Ramyeon Business: Renewals of Mainstay Items to Take Effect
The domestic ramyeon market expanded 2.9% YoY to KRW2.05tr in 2018, ending a
downtrend that began in 2017. We surmise that the short-term impact of new
product launches by Ottogi and Samyang Food was reflected in early 2018. Sales
growth of bowl noodle products was also positive, because their ASP is higher than
pack noodle products. That said, the ramyeon market is forecast to see limited
quantitative growth, with the convenience food market displaying accelerating
growth on the back of manufacturing technology improvements and product
diversification. Hence, the ramyeon market is forecast to remain flattish in size
compared to 2018.
Fig 9. Domestic ramyeon market size
Source: Industry estimates, KB Securities estimates
Bowl noodle demand to keep
growing due to rising consumer
preference for convenience
A noteworthy change in the domestic ramyeon market is the uptrend in bowl noodle
sales. We believe the uptrend mirrors an increasing number of one-person
households and the expansion of convenience stores, a market segment targeting
consumers in their teens and 20s. The size of the bowl noodle market shot up from
KRW540bn in 2011 to more than KRW800bn in 2018, while the percentage of bowl
noodle products expanded from 29% to 37% of the ramyeon market during the
same period. Growing demand for bowl noodle products is expected to continue
amid a rising preference among consumers for convenience foods. To cope with
such a trend, Nongshim has launched “Mini Cup Noodle” which boasts cost
effectiveness and “Mild Neoguri Cup,” which is a mainstay product that is being sold
in a new type of packaging. Bowl noodles account for a 79% share of the Japanese
ramyeon market and 50% share of the US market for such products.
-6
-4 -2 0 2 4 6 8 10
0
5,000
10,000
15,000
20,000
25,000
12 13 14 15 16 17 18P 19E
KRW100mn % Domestic ramyeon market size (L) YoY (R)
Nongshim(004370) KB RESEARCH
13
Fig 10. Proportion of pack noodles in domestic
ramyeon market
Fig 11. Proportion of bowl noodles in domestic
ramyeon market
Source: Food Information Statistics System, KB Securities Source: Food Information Statistics System, Industry estimates, KB Securities
Domestic ramyeon sales expected to
rise in 2019, backed by product
renewals
Nongshim’s domestic ramyeon sales are estimated to increase 2.5% YoY to
KRW1.23tr in 2019. Sales are expected to grow in 2019 after ending a sluggish trend
seen during 2015-18. Nongshim is sustaining its market share in the 55%-range in
money terms despite continuing price discounts at rivals, while benefiting from
adding new flavors to mainstay products and changing the types of product
packaging (bowl noodles ⇔ pack noodles).
Fig 12. Nongshim's domestic ramyeon sales
Source: Nongshim, KB Securities estimates
Cost burden expected to be offset
by rising ramyeon sales volume
and improving market share
Nongshim is expected to see its marketing cost burden being offset by increasing
ramyeon sales volume and improving market shares. The domestic ramyeon business
has weak structural growth momentum in the face of changing market conditions,
such as a growing preference for convenience foods and expanding food delivery
services. With the threat from rivals having tapered off, however, Nongshim’s
promotional expenses are bound to decline YoY.
Ottogi Foods’s advances slowing During the past three years, Ottogi Foods’s rapid advances threatened Nongshim.
Ottogi Foods’s ramyeon market strategy still has a considerable impact on
Nongshim. Based on retail sales in 1Q-3Q18, the market share gap between
Nongshim’s Shin Ramyun and Ottogi’s Jin Ramen narrowed to 7.8%p (vs. 17.2%p in
2012. After advancing on low-ball promotions, Ottogi Foods’s ramyeon market
50
55
60
65
70
75
10,000
11,000
12,000
13,000
14,000
15,000
12 13 14 15 16 17 18P
KRW100mn %Pack noodle market (L) Proportion ®
20
25
30
35
40
0
2,000
4,000
6,000
8,000
10,000
12 13 14 15 16 17 18P
KRW100mn %Bowl noodle market Proportion (R)
-8
-6
-4
-2
0
2
4
6
10,000
10,500
11,000
11,500
12,000
12,500
13,000
10 11 12 13 14 15 16 17 18E 19E
KRW100mn %Sales (L) YoY growth (R)
Nongshim(004370) KB RESEARCH
14
share has stopped at the 23% range in 2018. Moreover, its promotion strategy
seems to be losing sustainability and impact. Meanwhile, Ottogi Foods’s
convenience food business may be weighed down in 2019 by aggressive marketing
efforts by market leader, CJ Cheiljedang and rising raw ingredient prices. Due to
such developments, Ottogi Foods may alter its ramyeon business strategy.
Fig 13. Sales-based market shares of domestic ramyeon companies
Source: Company data, KB Securities
Fig 14. Volume-based market shares of domestic ramyeon companies
Source: Company data, KB Securities
Fig. 15. Retail sales-based market shares of domestic
ramyeon companies
Fig. 16. Nongshim Shin Ramyun and Ottogi Jin Ramen
market shares
Source: Food Information Statistics System, KB Securities Source: Food Information Statistics System, KB Securities
0
5
10
15
20
25
0
20
40
60
80
10 11 12 13 14 15 16 17 3Q18 누적
% %Nongshim (L) Ottogi Foods (R) Samyang Foods (R)
0
5
10
15
20
25
30
0
20
40
60
80
10 11 12 13 14 15 16 17 3Q18 누적
% %Nongshim (L) Ottogi Foods (R) Samyang Foods (R)
0
5
10
15
20
25
30
0
10
20
30
40
50
60
70
12 13 14 15 16 17 18
% %Nongshim (L) Ottogi Foods (R)Samyang Foods (R) Paldo (R)
0
5
10
15
20
25
12 13 14 15 16 17 18
% Shin Ramyun Jin Ramen Gap (%p)
Nongshim(004370) KB RESEARCH
15
Fig. 17. Annual sales of key Nongshim ramyeon brands Fig 18. Retail store market share of Nongshim's major
brands
Source: Industry data, KB Securities
Note: Sales growth in 1Q-3Q18: Shinramyun +5.2% YoY, Chapagetti +30.6% YoY,
Neoguri -18.2% YoY, Ansungtangmyun +17.5% YoY
Source: Food Information Statistics Service, KB Securities
Fig 19. Retail market shares of Ottogi's major brands Fig 20. Retail store market share of Ottogi's major
brands
Source: Industry data, KB Securities
Note: Sales growth in 1Q-3Q18: Jin Ramen -4.7 YoY, Sesame Ramen -5.1% YoY, Jin
Jjambbong -28.9% YoY
Source: Food Information Statistics Service, KB Securities
0
500
1,000
1,500
2,000
2,500
3,000
3,500
Shin Ramyun Chapaghetti Neoguri Ansungtangmyun
KRW100mn 2016 2017
0
2
4
6
8
10
12
0
5
10
15
20
25
30
12 13 14 15 16 17 18
% % Shin Ramyun (L) Chapaghetti (R) Neoguri (R) Ansungtangmyun (R)
0
50,000
100,000
150,000
200,000
Jin Ramyun Sesame Ramen Jin Jjambbong Ramen
KRWmn 2016 2017
0
1
2
3
4
0
3
6
9
12
12 13 14 15 16 17 18
% % Jin Ramen (L) Jin Jjambbong Ramen (L) Sesame Ramen (R)
Nongshim(004370) KB RESEARCH
16
Fig 21. Annual OR of Samyang's major brands Fig 22. Retail store market share of Samyang's major
brands
Source: Food Information Statistics System, KB Securities
Note: Sales growth in 1Q-3Q18: Samyang Ramen +8.6 YoY, Spicy Chicken Roasted
Noodles -10.7% YoY
Source: Food Information Statistics Service, KB Securities
Fig 23. Annual OR of Paldo Bibimmyeon Fig 24. Retail store market share of Paldo's major
brands
Source: Food Information Statistics System, KB Securities Source: Food Information Statistics Service, KB Securities
3.6% rise in ramyeon ASP to result in
8.6% upward revision of OP
estimates
The scenario for Nongshim’s ramyeon ASP hikes are depicted below <Table 8>. The
scenarios disregard ASP rises induced by increases in the sales proportion of new
premium products and bowl noodles. They also translate 50% of ramyeon sale
increases into OP, assuming 1) a 10% rise in flour (main ingredient) prices and 2) an
ensuing 3.6% ASP hike (average 6.0% price hike for products accounting for 60% of
sales). Based on the above, a 3.6% rise in ramyeon ASP leads to an 8.6% upward
revision in OP estimates.
60,000
65,000
70,000
75,000
80,000
85,000
Samyang Ramen Spicy Chicken Roasted Noodles
KRW100mn2016 2017
-20
-10
0
10
20
30
0
100
200
300
400
500
600
700
13 14 15 16 17
KRW100mn (%)Sales (L) YoY growth ®
0
2
4
6
8
12 13 14 15 16 17 18
% Samyang Ramyun Hot Chicken Flavor Ramen Buldak Ramen Carbonara
0
1
2
3
4
5
6
12 13 14 15 16 17 18
% Bibimmyeon King Bowl Noodles
Nongshim(004370) KB RESEARCH
17
Fig 25. Average monthly wheat price Fig 26. Average monthly palm oil prices
Source: Bloomberg, KB Securities Source: Bloomberg, KB Securities
Table 7. Average annual price trend of major products made by domestic ramyeon manufacturers
Maker Nongshim Ottogi Samyang Foods Paldo
Brand
Shin
Ramyun
(KRW750)
Chapaghetti
(KRW850)
Yukejang Bowl
Noodle (KRW800)
Bibimmyun
(Multi-pack)
Chacharoni
(Pack)
Samyang Ramen
Cham (Pack) Bibim Men
King Bowl
Noodles
Weight 120g * 5 140g * 5 86g 130g * 5 145g * 5 120g * 5 130g * 5 110g
2010 668 747 693 550 652 618 678 798
2011 668 745 691 562 691 612 683 791
2012 623 680 648 577 649 589 714 823
2013 627 724 639 553 649 605 714 812
2014 629 711 640 563 657 595 695 814
2015 623 726 660 583 652 603 715 819
2016 623 714 620 613 666 561 655 806
2017 535 667 600 578 675 541 657 784
2018 533 675 601 580 669 526 653 765
YoY -0.4 1.2 0.2 0.3 -0.9 -2.8 -0.6 -2.4
Source: Food Information Statistics System, KB Securities
Note: Based on unit price
Table 8. Assumption of rise in Nongshim's ramyeon ASP
Source: Nongshim, KB Securities estimates
-20
-10
0
10
20
30
0
50
100
150
200
250
17/01 17/07 18/01 18/07 19/01
USD/ton %wheat price (L) YoY (R) MoM (R)
-40
-20
0
20
40
0
200
400
600
800
17/01 17/07 18/01 18/07 19/01
USD/ton %palm oil price (L) YoY (R) MoM (R)
2017 2018E 2019E
OR 2,208 2,229 2,354 2,354 2,404 2,404
Domestic ramyeon 1,329 1,353 1,393 1,393 1,443 1,443 Assumed 3.6%
Proportion 60.2 60.7 59.2 59.2 60.0 60.0
COGS 1,474 1,549 1,617 1,632 1,642 1,657
Domestic flour purchase cost 155 155 155 171 155 171 Assumed 10.0%
Proportion 10.5 10.0 9.6 10.4 9.4 10.3
GP 734 680 737 722 763 747
SG&A 638 593 626 626 626 626
OP 96 88 111 96 136 121 Assumed No change in SG&A
OP margin 4.4 3.9 4.7 4.1 5.7 5.0 Assumed 50% rise in ramyeon sales amount
Change compared to existing OP - - - -13.9 22.5 8.6
(KRWbn, %)Consolidated earnings
① 10% rise in flour purchase cost② 3.6% ASP rise
in domestic ramyeon①+②
Nongshim(004370) KB RESEARCH
18
US ramyeon market growth being
led by bowl noodle products
2) US Ramyeon Business: Sales Volume Growth Coupled with Selling Price Rises
The US is the world’s sixth-largest ramyeon market, where two Japanese companies,
Toyo Suisan (Maruchan) and Nissin (Cup Noodles), account for more than a 70%
share. The US ramyeon market, which grew 0.9% YoY to USD1.04bn in 2017, has
been exhibiting sluggish growth, burdened by the spread of a wellness trend and
launches of various types of convenience food products. For reference, this trend is
being witnessed in Korea as well. Nevertheless, the US ramyeon market has
managed to achieve moderate growth, buttressed by: 1) a high level of convenience
for consumers and affordable prices, which are appealing points to young
consumers and 2) bowl noodle products. In addition, a variety of new ramyeon
products are hitting the market, including low-salt ramyeon and ramyeon targeting
vegetarians. According to the market research firm Euromonitor, the US ramyeon
market is projected to grow at a CAGR of 2.2% and reach USD1.12bn until 2022.
Fig 27. Size of US ramyeon market
Source: Food Information Statistics System, Euromonitor, KB Securities
Note: Based on instant noodle data
Fig 28. Shares of US package and bowl ramyeon markets
Source: Food Information Statistics System, Euromonitor, KB Securities
Note: Pack ramyeon also referred to as "instant noodle pouches" and bowl ramyeon as "noodle cups"
0
20
40
60
80
100
12 13 14 15 16 17E 18E 19E 20E
% Package ramyeon share
Bowl ramyeon share
-2
0
2
4
6
8
10
0
200
400
600
800
1,000
1,200
03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18E 19E 20E 21E 22E
( USDmn ) (%) market size (L) YoY (R)
Nongshim(004370) KB RESEARCH
19
Sales began in US ramyeon market in
1971 and established local factory in
2005
Nongshim entered the US ramyeon market in 1971, targeting Korean-Americans in
the country. The company built its first US factory in Los Angeles, California in 2005 I
where it m manufactures mainstay items (e.g., Shin Ramyun, Neoguri, Chapaghetti,
Hot & Spicy Bowl Noodle Soup). In 2017, Nongshim became the first Korean
company to sell Shin Ramyun at all of Walmart’s 4,692 stores in the US and
expanded its retail channels to include Costco and Kroger.
Nongshim’s share of US ramyeon
market up from 2% in 2008 to 15%
in 2018
As a result, Nongshim saw its US market share grow from 2% in 2008 to 15% in
2018, rising to third place (Toyo Suisan ranks first with 46% share, followed by Nissin
with 30%). Also, Nongshim maintains a tight level of supply compared to demand in
the US despite a capacity ramp-up at its factory in LA in end-2017. By expanding
bowl noodle production facilities, Nongshim is pursing growth in a burgeoning bowl
noodle market, while boosting further growth potential through the set-up of a No.
2 factory. This points to strong growth continuing in the US market, although it
remains unclear when the No. 2 factory will open, how much it will invest and how
far capacity will grow.
US subsidiary expected to see profit
margin growth in 2019, buoyed by
rising sales volume and price markup
effects
The US subsidiary turned in OR of USD230mn (+11.9% YoY) in 2018, posting a CAGR
of 13% since 2015. The unit achieved stronger profit margins than its domestic
business during 2016-17, but margins were hurt by rising production costs and
increased expenses caused by expanding retail channels in 2018. In 2019, however,
profit margins are expected to improve (OPM: 5.6% in 2017 →3.2% in 2018 → 3.9%
estimated in 2019), driven by a 5% hike in product prices in Oct 2018 and cost cuts.
Table 9. Nongshim's business operations in US
Contents
History Year Note
1971 Entered US ramyeon market targeting Korean-Americans
1994 Established US corporation
2005 Production starts at US factory in Los Angeles (located in Rancho
Cucamonga)
2013 Continued expansion of production facilities
2017 Addition of 1 cup noodle production line (currently operates 2 packaged
noodle and 3 cup noodle production lines)
Earnings 2018 OR reaches USD230mn, +12% YoY
Main
products Shin Ramyun, Neoguri, Chapaghetti, etc.
Market
position Market share rose from 2% in 2008 to 15% in 2018
Others In 2017, Nongshim became the first Korean food company to enter all Walmart stores
Source: Nongshim, KB Securities
Nongshim(004370) KB RESEARCH
20
Fig 29. Earnings performance of Nongshim's US subsidiary
Source: Nongshim, KB Securities estimates
Note: Based on amount reflected in Nongshim's consolidated earnings
Fig 30. US market share of major players Fig 31. Nongshim's share of US ramyeon market
Source: Media reports, KB Securities Source: Nongshim, KB Securities
0
1
2
3
4
5
6
0
500
1,000
1,500
2,000
2,500
3,000
13 14 15 16 17 18E 19E
KRWbn %OR (L) OPM (R)
46%
30%
15%
9%
Maruchan
Nissin
Nongshim
Other
0
2
4
6
8
10
12
14
16
08 11 16 18
%
Nongshim(004370) KB RESEARCH
21
Table 10. Status of major instant noodle manufacturers in US
Company Subject
Nongshim
Overview
- In Jul 2017, Nong Shim became the first Korean food manufacturer to sell products (Shin Ramyun) in 4,692
Walmart stores
- In addition to Walmart, ramyeon products are available in a variety of retail stores and small and medium-
sized food stores
- Market share rose from 2% in 2008 to 15% in 2018, making Nongshim 3rd-largest instant noodle company in
US
- "Shin Ramyun" popular among wide range of American consumers
- Boosting US market share by appealing to taste for Korean-style spicy flavor and premium image
Main products Shin Ramyun, Chapaghetti, Neoguri, Jjawang, Matchampong
Toyo Suisan Kaisha
Overview
- Toyo Suisan is the leading instant noodle maker in the US with the largest market share of 46%
- Japanese food company sells noodles (including ramyeon) and frozen foods
- Maruchan, the representative brand, saw sales grow 19% in 2016
- Chicken, beef and shrimp-flavored products mainly sold at low prices.
- Operates ramyeon noodle factory in California, Virginia and Texas
Main products "Maruchan Instant Wonton Spicy Chinese Soup," "Maruchan Instant Wonton Soup Pork Bone"
Nissin Food USA
Overview
- Nissin, a Japanese food company, was the first to introduce ramyeon in the US
- Mainly sells Asian ramyeon products featuring chicken, beef and shrimp flavors
- In addition to large distributors, Nissin also sells products through retailers and intermediaries.
- Has production facilities in California, Pennsylvania, etc.
Main products Top Ramen, Cup Noodles, Hot & Spicy, Chow Mein, Ramen Bowl, RAOH, Souper Meal, etc.
Source: aT, KB Securities
Nongshim(004370) KB RESEARCH
22
Chinese ramyeon market begins
recovery in 2018
3) Chinese Ramyeon Business: Reorganization Completed and Regional
Expansion Resumes in 2018
China is a massive ramyeon market that accounts for approximately half of the
world’s ramyeon consumption. The growth of China’s ramyeon market was stumped
for several years as rising income levels resulted in dietary changes, increasing
popularity of food delivery services and incidents related to food safety (Taiwanese
ramen company Kangshifu’s cooking oil scandal), but began recovering in 2018.
According to the Chinese Institute of Food Science & Technology, China’s ramyeon
sales increased 8.6% YoY and sales volume 4.5% YoY in 1H18. The increases are
attributable to Kangshifu, Uni-President Enterprises and other major companies
releasing various premium products in line with the changing consumer trends.
Fig 32. Size of China's ramyeon market
Source: Food Information Statistics System, Euromonitor, KB Securities
Note 1: Based on instant noodle data
Note 2: According to recent data, ramyeon sales in China rose 4.5% YoY in 1H18, while sales grew 8.6%, which was
better than expected
Fig 33. Proportion of bowl and pack ramyeon in US market
Source: Food Information Statistics System, Euromonitor, KB Securities
Note: Pack ramyeon also referred to as "instant noodle pouches" and bowl ramyeon as "noodle cups”
-12
-8
-4
0
4
8
0
3,000
6,000
9,000
12,000
15,000
12 13 14 15 16 17 18E 19E 20E 21E
%USDmnChina's ramyeon market size (좌) YoY (R)
0
20
40
60
80
100
12 13 14 15 16 17 18E 19E 20E
% pack ramyeon bowl ramyeon
Nongshim(004370) KB RESEARCH
23
Ramyeon sales in China date back to
1996; Currently operates three local
plants
Nongshim began its foray into China after the Shanghai plant was completed in Sep
1996. The company added production bases in Qingdao (supplies ingredients and
semi-finished goods for ramyeon production) in Jul 1998 and Shenyang in Nov 2000.
Nongshim’s mainstay product in China is Shin Ramyun. The company then obtained
the foundation for growth when the second Qingdao plant was completed in 2002
and the Shanghai plant relocated to a larger facility in 2008. After China’s unofficial
ban on Korean products began to ease in 2018, Nongshim began to expand its
operations to China’s western inland regions.
Reached BEP in 2015; Earnings
improved in 2018 amid easing of
China’s retaliation against THAAD
Nongshim’s Chinese subsidiary reached BEP in 2015 and posted solid earnings due
to the expansion of sales channels and regions until 2016. Earnings deteriorated in
2017 due to China’s retaliation against THAAD, but began to rebound starting in
2018, driven by the easing of China’s economic retaliation and price markups (+10%
in Apr, 2015→ +10% in Aug, 2017). We estimate the Chinese subsidiary’s 2018 OR at
KRW156.9bn (+7.2% YoY: +23.0% if local subsidiary sales are simply combined) and
OP at KRW5.6bn (turn black YoY, OPM 3.6%), which suggests that the Chinese
subsidiary’s earnings returned to levels seen in 2016.
China subsidiary expected to
continue earnings growth in 2019,
backed by expanding sales coverage
and strengthening online channels
The Chinese subsidiary is projected to turn in OR of KRW173.5bn (+10.5% YoY) and
OP of KRW6.8bn (+21.3% YoY, OPM 3.9%) in 2019. Despite the diminishing effects
of price markups compared to last year, earnings look to continue improving,
bolstered by resumed expansions of sales regions into China’s western inland areas
and strengthening online channels. Nongshim’s enterprise value is poised to recover
due to domestic earnings growth combined with marked growth overseas.
Table 11. Nongshim's business operations in China
Subject
History Year Subject
1996 Operations began at Shanghai factory capable of producing 200 mn packs of
ramyeon
1998 Operations began at Qingdao factory manufacturing raw materials and semi-
finished products necessary for ramyeon production
2000 Operations began at Shanghai factory capable of producing 300 mn packs of
ramyeon
2002 Completed construction of 2nd factory in Qingdao
2008 Expansion and relocation of Shanghai factory
Earnings 2018 OR reached USD280mn (consolidated), +23% YoY
Main
products Shin Ramyun, Kimchi Ramyun, etc.
Market
position Market share less than 2% (stood at 2% in 2016 before the THAAD issue emerged)
Others Online sales account for about 6% of OR, aims to strengthen online marketing
Source: Nongshim, KB Securities
Nongshim(004370) KB RESEARCH
24
Fig 34. Earnings performance of Nongshim's Chinese subsidiary
Source: Nongshim, KB Securities estimates
Note: Based on amount reflected in Nongshim's consolidated earnings
Fig 35. Chinese market shares of major players Fig 36. Sales of healthy ramyeon in China
Source: aT, KB Securities
Note: 2016 basis
Source: aT, KB Securities
-8
-6
-4
-2
0
2
4
6
0
500
1,000
1,500
2,000
13 14 15 16 17 18E 19E
KRWbn %OR (L) OPM (R)
46.5%
17.8%
9.9%
7.7%
2.8%
15.3%
Kang Shi
FuTongyi
Jin Mai
LangBaishang
Nissin
Other
0
5
10
15
20
25
0
20
40
60
80
100
12 13 14 15 16 17E
( 100mn Yuan) (%) Well-being ramyeon sales (L) YoY (R)
Nongshim(004370) KB RESEARCH
25
Table 12. Major instant noodle manufacturers in China
Company Subject
TingYi
Overview
- Established in China in 1991 by a joint venture between Tungshin Group of Taiwan and Sanyo Foods of Japan
- Started ramen business in 1992, now it has more than 600 branches and more than 100,000 direct sales stores
- The main characteristic is the reinterpretation of local food by region in China.
- “Dongbeiluandun Noodle” (东北乱炖面) reproduces the local dish “Luandun Noodle” of northeastern China,
“Jiangxiangchuanqi” is a product based on paste found in northern China, “Jiangnanmeishi” contains the flavor of
southern Chinese cuisine
Main products Beef-flavored ramyeon noodles "Hongshaoniurou Noodle" (红烧牛肉面), seafood ramyeon "Haixiayuban Noodle"
(海虾鱼板面), etc.
Uni-President
Overview
- Founded in 1992 as a Chinese branch of Tongyi Group, a food manufacturer in Taiwan
- First to launch premium ramyeon in China's market
- "Tongyi 100" is a popular product released in 1996
- There are two kinds of beef meat noodles - "Laotan Suancai Beef Noodle" (老坛酸菜牛肉面) and "Braised Beef Noodle"
(卤肉面)'
Main products "Tongyi 100," "Qiangmianguan" (巧面馆), "Paste Mix Noodle" (酱拌面), "Xiangbanyicheng" (相拌一城), etc.
JinMaiLang
Overview
- Hebei Hwalong Food Group (established in 1994), changed its name in 2007
- Has 21 ramyeon production plants and 142 production lines
- Exports to 36 countries including North America, Australia, Korea and Japan
- Famous for its premium product, "Yicai Yimian" (一 菜 一面)'
- Premium products account for more than 20% of sales
Main products "Yicai Yimian" (一 菜 一面)'
Source: aT, KB Securities
Snack price hike in Nov 2019 to
have positive effects on 2019
earnings
4) Effects of Domestic Snack Price Hike: Key Driver of Earnings Growth in 2019
Nongshim raised the average factory prices of 19 (out of 23) snack products by
6.7% in Nov 2018. Notable price hikes include the 6.3% hike for Shrimp Cracker and
6.1% each for Onion Rings and Honey Twist Snack. This was the first hike since the
prices of 15 products were raised by an average 7.9% in Jul 2016. Given that the
products whose prices were raised are estimated to account for around 80% of
snack sales, the price hikes boosted ASP by 5.4%. When factoring in the price hikes,
the snack wing’s 2019 OR is forecast to come in at KRW342.0bn (+5.8% YoY),
contributing 36.4% of the company’s overall OP increase.
Nongshim(004370) KB RESEARCH
26
Fig 37. Nongshim's share of snack market
Source: Nongshim, KB Securities
Table 13. Effects of Nongshim's snack price hike
(KRWbn, %) Consolidated earnings
Effects of snack price hike and basic assumptions 2017 2018E 2019E
OR 2,208 2,229 2,354 OR proportion of snacks whose prices were raised in 2018 80 % (assumed)
Domestic snack 321 323 342 OR of snacks whose prices were raised in 2018 259 KRWbn
(assumed)
Proportion 14.5 14.5 14.5 Snack ASP increase due to price hike 5.4 %
YoY -0.4 0.9 5.6 ASP growth effect of domestic snack sales growth in 2019 17 KRWbn
Domestic snack 5.5 0.9 5.8 Existing snack OR growth estimate for 2019 1 KRWbn
Proportion (%p) 0.8 0.0 0.0 Growth of combined OR 19 KRWbn
OP 96 88 111 Reflected 50% of revenue growth due to 2019 price hike on OP 9 KRWbn
OP margin 4.4 3.9 4.7 Company-wide OP growth in 2019 24 KRWbn
YoY 7.4 -9.2 27.1 Contribution of snack price hike 36.6 %
Source: Nongshim, KB Securities estimates
20
25
30
35
40
10 11 12 13 14 15 16 17 18E 19E
%
Nongshim(004370) KB RESEARCH
27
Profit & Loss Statement of financial position
(KRWbn) 2016A 2017A 2018E 2019E 2020E (KRWbn) 2016A 2017A 2018E 2019E 2020E
(Reporting standard) (IFRS-C) (IFRS-C) (IFRS-C) (IFRS-C) (IFRS-C) (Reporting standard) (IFRS-C) (IFRS-C) (IFRS-C) (IFRS-C) (IFRS-C)
Operating revenue 2,217 2,208 2,229 2,354 2,453 Total assets 2,481 2,450 2,529 2,622 2,720
Cost of sales 1,504 1,474 1,549 1,617 1,674 Current assets 1,057 986 1,070 1,144 1,221
Gross profit 713 734 680 737 778 Cash and cash equivalents 179 155 172 188 215
SG&A expenses 624 638 593 626 658 Current financial assets 443 396 446 490 527
Operating profit 90 96 88 111 120 Trade receivables 223 223 229 233 238
EBITDA 175 179 172 194 201 Inventories 169 172 181 185 189
Non-operating accounts 144 23 22 25 27 Other current assets 43 39 43 47 52
Interest income 10 11 3 12 13 Non-current assets 1,424 1,464 1,458 1,478 1,499
Interest expenses 3 3 1 3 3 Investment assets 260 248 254 267 280
Profit on equity method 0 0 0 0 0 Property, plant and equipment 1,092 1,122 1,124 1,128 1,132
Net other non-operating income 136 12 14 14 15 Intangible assets 59 61 60 63 66
Profit before tax 233 119 110 136 147 Other non-current assets 13 33 20 20 20
Income tax expense 34 29 28 33 36 Total liabilities 679 609 629 642 652
Net profit 199 91 82 103 111 Current liabilities 549 489 508 520 529
NP to parent 199 91 82 103 110 Trade payables 279 236 241 246 251
Adj. net profit 199 91 82 103 110 Short-term financial liabilities 40 12 13 13 13
Other current liabilities 221 231 254 260 264
Operating Statistics & Ratios Non-current liabilities 130 120 121 122 124
(%) 2016A 2017A 2018E 2019E 2020E Non-current financial liabilities 59 56 56 56 56
OR growth 1.6 -0.4 0.9 5.6 4.2 Other non-current liabilities 1 0 0 0 0
OP growth -24.2 7.5 -9.2 27.1 7.9 Total equity 1,802 1,841 1,899 1,979 2,068
EBITDA growth -11.6 2.5 -4.4 13.0 4.0 Issued capital 30 30 30 30 30
NP growth of parent 69.8 -54.5 -9.8 25.8 7.2 Share premium 121 121 121 121 121
GP margin 32.2 33.3 30.5 31.3 31.7 Other equity interest -81 -81 -81 -81 -81
OP margin 4.1 4.4 3.9 4.7 4.9 Accumulated other comprehensive income -2 -30 -30 -30 -30
EBITDA margin 7.9 8.1 7.7 8.2 8.2 Retained earnings 1,721 1,788 1,846 1,926 2,013
EBT margin 10.5 5.4 4.9 5.8 6.0 Equity attributable to owners of parent 1,790 1,828 1,887 1,966 2,053
NP margin 9.0 4.1 3.7 4.4 4.5 Non-controlling Interests 13 13 13 13 14
Cash Flow Key Ratio
(KRWbn) 2016A 2017A 2018E 2019E 2020E (X, %, KRW) 2016A 2017A 2018E 2019E 2020E
Cash flow from operating activities 221 103 184 185 189 Multiples
Net profit 199 91 82 103 111 PER 10.1 23.8 18.9 16.4 15.3
Depreciation & amortization 85 83 84 83 81 PBR 1.1 1.2 0.8 0.9 0.8
Other non-cash adjustments 61 48 44 33 36 PSR 0.9 1.0 0.7 0.7 0.7
Investments in working capital -80 -95 4 -2 -4 EV/EBITDA 8.6 9.4 5.9 5.6 5.1
Decrease(Increase) in Receivables -13 -8 -5 -5 -5 EV/EBIT 16.9 17.5 11.6 9.8 8.6
Decrease(Increase) in Inventories 1 -9 -10 -5 -4 Dividend yield, ordinary (%) 1.2 1.1 1.6 1.4 1.4
Increase(Decrease) in Payables -6 -38 4 5 5 EPS 32,764 14,905 13,439 16,900 18,112
Other operating cash flow -45 -23 -30 -32 -35 BPS 294,260 300,600 310,167 323,264 337,573
Cash flow from investing activities -136 -79 -144 -146 -139 SPS 364,482 363,043 366,461 387,001 403,206
Capital expenditure -48 -127 -90 -85 -85 DPS (Annual, Ordnry.) 4,000 4,000 4,000 4,000 4,000
Investments in intangibles -4 -5 -1 -4 -4 Cash dividends payout ratio (%) 11.6 25.5 28.3 22.5 21.0
Changes in investment assets -84 53 -59 -13 -13 Operating performance
Other investment cash flow 0 0 0 0 0 ROE 11.6 5.0 4.4 5.3 5.5
Cash flow from financing activities -76 -47 -24 -22 -22 ROA 8.1 3.7 3.3 4.0 4.2
Proceeds from (repayments of) debt -55 -24 -1 0 0 ROIC 8.3 6.5 5.6 7.2 7.8
Changes in equity 0 0 0 0 0 Financial structure (%)
Dividends paid -23 -23 -23 -23 -23 Total liab./equity 37.7 33.1 33.1 32.4 31.6
Other financing cash flow 2 0 0 0 0 Net debt/equity Net Cash Net Cash Net Cash Net Cash Net Cash
Other cash flow 1 -1 0 0 0 Current Ratio 1.9 2.0 2.1 2.2 2.3
Increase/decrease in cash 11 -24 17 16 28 Interest coverage (x) 26.9 33.5 133.7 36.7 39.4
Cash and cash equivalents at FYE 179 155 172 188 215 Activity ratios
Free cash flow 173 -24 94 100 104 Asset turnover (x) 0.9 0.9 0.9 0.9 0.9
Net cash flow 102 -40 65 60 64 Receivables turnover (x) 10.2 9.9 9.9 10.2 10.4
Net cash (net debt) 523 484 549 609 673 Inventory turnover (x) 13.0 12.9 12.6 12.9 13.1
Source: Nongshim, KB Securities estimates
Nongshim(004370) KB RESEARCH
28
Disclosures Rating and Target Price Changes (Share price ━, Target Price ━)
KB Securities has not provided in advance the material contained in this report to any
institutional investor or third party. The analyst(s), who wrote this report, does not have
any financial interest in the company(ies) covered herein. The author(s) of this report
confirms that the material contained herein correctly represents his/her/their opinion
and that it has been prepared faithfully without any undue influence or intervention.
Proportion of investment rating (as of December 31, 2018)
Buy Hold Sell
70.6 29.4 -
* Note: Based on reports presented with investment ratings over the past one year
Classification and Standards for Investment Rating All KB Securities Research is available via the following electronic databases: Bloomberg,
Thomson Reuters, FactSet. Contact your KB Securities sales representative for access.
This report has been prepared for informational purposes only, and does not constitute
an offer or solicitation of a contract for trading. Opinions in this report reflect
professional judgment at this date based on information and data obtained from sources
KB Securities considers reliable. However, KB Securities does not guarantee that the
information and data are accurate or complete, and, therefore, this report is subject to
change without prior notice. Individual investments should be made based on each
client’s own judgment and we expressly disclaim all liability for any investment decisions
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it may not be reproduced, distributed, or modified without the prior consent of KB
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to quote from it for academic publications should receive the prior consent of KB
Securities.
Investment Rating for Company
(based on estimation of six-month absolute returns)
Buy: +15% or beyond Hold: Between 15% and -15% Sell: -15% or beyond
Note: KB Securities’s classification of investment ratings has shifted from four stages
(Strong BUY, BUY, Marketperform, Underperform) to three stages (Buy, Hold, Sell)
based on Korean reports since February 23, 2017.
Investment Rating for Industry
(based on estimation of six-month absolute returns)
Positive:
To outperform market
Neutral:
To match market performance
Negative:
To underperform market
Notes: The industry rating system of KB Securities has shifted from (Overweight, Neutral,
Underweight) to (Positive, Neutral, Negative) as of Jun 28, 2017
Nongshim (004370)
Date R ating Target Pric e
(KR W) Av g. Max /Min
17-03-09 Hold 300,000 6.16 -3.17
17-05-31 Hold 350,000 -4.52 4.86
17-08-15 Hold 320,000 5.96 10.47
17-11-05 Hold 340,000 -3.68 10.59
18-05-05 6 month later 340,000 -6.26 -5.44
18-05-15 Buy 370,000 -9.74 -3.78
18-06-17 Buy 400,000 -23.36 -12.38
18-08-16 Buy 350,000 -29.08 -25.86
18-09-28 Buy 330,000 -31.42 -26.82
18-11-05 Buy 300,000 -19.18 -14.83
18-12-05 Buy 320,000 -15.32 -9.06
19-02-13 Buy 335,000
Differentia l (% )
200,000
260,000
320,000
380,000
440,000
17.2 17.6 17.10 18.2 18.6 18.10 19.2
NongshimKRW