Hanssem (009249 KS Equity)

ValuePenguin Singapore, August 31st 2016Great Company, ST Cyclical Volatility Creates LT

Opportunity

2

Table of contents

• Thesis – Pg. 3• Industry Background– Pg. 4• Business Model – Pg. 6• Scale Advantage – Pg. 9• Demand Advantage – Pg. 14• Long-Term Opportunity –

Pg. 17

• Business’s Weaknesses – Pg. 19• Healthy Demand Pipeline – Pg.

22• Mgmt Team & Ownership – Pg.

25• Financial Summary – Pg. 27• Valuation – Pg. 29• Risk Factors – Pg. 32

3

Thesis• Market is concerned about peak Korean housing market, and Hanssem stock has declined by 55% in the last 12

months. It is now trading at 17x 2017 PE with $2.4bn of market cap.• Sell-side analysts have written positively about the company, but they have been reluctant to hold their ground & have been

lowering their price targets along with decline in stock price & short-term cyclical market volatility.

• My research shows that Hanssem is the clear leader in the Korean home furnishing industry, and has significant competitive advantage that should help it to continue growing its market share and revenue through:• Category expansion, especially into bathrooms & lifestyle• Long-term opportunity in aged home refurnishing• Ramp up of move-in volumes in the market in 2017-2018

• It also shows that Hanssem has a proven business model with a great long-term opportunity that succeeded in Japan (Nitori), and is being copied successfully in China (SuoFeiYa).

• Therefore, I believe the recent price decline has created an opportunity to buy a great company at a good price.• My 12-month price target for Hanssem is KRW205,000 (24x ‘17 PE, 1x PEG, $3.4bn) with 38% upside by

comparing it to its domestic and regional peers. Over the long-term, I believe Hanssem could be worth $5bn, representing roughly 100% upside.

4

Industry Background

• The Korean home furnishing industry is quite fragmented, and each vertical is dominated by different players.

• In 2015, roughly 12 trillion KRW was spent on home furnishing.

Kitchen % Mkt Shr Interior%Mkt Shr for Brand Players

Bathroom % Mkt Shr Others (Window, Floors) Total Market

1 Hanssem 22% Hanssem 67% Daelim B&Co 5% LG Hausys

(Rev:2,768,000)

2 Livart 6% Livart 10% IS Dongseo 3% Ace Bed (Rev:192,733)

3 Enex 6% Borneo 8% Kelim Ceramics 3% Etc

Total Market

(KRW mn)4,000,000 2,000,000 3,000,000 3,000,000 12,000,000

5

Home furnishing market is expected to grow rapidly because of few factors• Massive number of move-ins occurring

in the next few years as apartments that were pre-sold are constructed.

• Growth in aged homes (+20 years) that need remodeling

• Growth in disposable income that has led to boom in decorating & personalizing homes.

• Transition from “Jeonsae” to monthly rent, which drives up refurbishing demand

6

Business Model• Hanssem manufactures custom-made

furniture (i.e. kitchen cabinets & wardrobes), and sells it through different channels like:• Flagship stores: 9 stores• Franchisee stores: 80 Interior + 220

Kitchen Bach stores• Online Channels: +10 channels• ik partner stores: +3,000 stores

• Hanssem also has a B2B business with construction companies, preinstalling its products in apartment complexes

Interior Agency Store13%

Interior Direct (Flagship)

14%

Online7%

KitchenBach25%

ik20%

Element (B2B)21%

7

Indicators of Big Moat: Market Share & ROIC

2000 20150%

10%

20%

30%

40%

50%

60%

70%

80%

Hanssem's Market Share Among Brands (excluding local mom & pops)

Kitchen Interior 2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

ROIC

Recession led byCredit Card Bubble Burst

Kitchen & interior furnishing: still dominated by unbranded local interior services, but Hanssem is consolidating the market.

Kitchen Market (KRWmn) 2000 2015 Mkt Shr 2000 Mkt Shr 2015 2000-2015 CAGR

Hanssem 239,671 879,000 20% 22% 9%HyundaiLivart 58,700 240,200 5% 6% 10%

Enex 123,600 236,800 10% 6% 4%동양토탈 43,800 N/A 4% 0% N/ABorneo 6,900 N/A 1% 0% N/A

Total Brand Makers 472,671 1,356,000 40% 34% 7%Non Brand Makers 709,007 2,644,000 60% 66% 9%

Total 1,181,678 4,000,000 100% 100% 8%Hanssem % Mkt Shr in

Brand Market (excluding non-brands) 51% 65% *GDP per Capita tripled from 2000 to 2015

8

Interior Market (KRW mn) 2000 2014

Mkt Shr 2000 among brands

Mkt Shr 2014 among brands 2000-2014 CAGR

Hanssem 59,995 1,209,390 17% 67% 24%

Borneo 55,800 148,068 16% 8% 7%

Livart 35,200 184,780 10% 10% 13%

Sub-Total 150,995 1,542,238 42% 86% 18%

Others 205,100 250,450 58% 14% 1%

Total 356,095 1,792,688 100% 100% 12%

9

Scale Advantage: Listed prices are competitive, even to IKEA, on price per volume basis

Wardrobe*** Kitchen Bed (Single) Drawer Bookshelf Dining Table Set Bathroom

Metrics Price*^ Volume* P/V Price Length P/L Price Area P/A Price Volume P/V Price Volume P/V Price Volume P/V Price Installation

Hanssem 688 4.0 171 1,057 1.70 622 349 2.6 136 169 0.47 363 82 0.66 124 132 1.27 104 2,640 1 Day

Livart 95 0.6 155 1,125 1.80 625 250 2.3 109 199 0.45 443 72 0.65 110 110 1.30 84 N/A

Enex 80 0.4 185 N/A 147 2.4 62 139 0.46 304 149 0.84 177 204 1.06 192 N/A

IKEA** 199 1.1 179 N/A 389 2.4 162 149 0.38 388 200 0.90 221 120 1.33 90 N/A

Dalim B&Co N/A 2,290 +3 Days

Royal Common Bath N/A 2,890 +3 Days

*Price in 1,000 KRW; Volume in Cubic Meter; Length in Meter; Area in Square Meter. **IKEA Charges another 50,000 KRW for delivery. *** Wardrobes are custom made except for IKEA.^Prices were collected on various e-commerce sites & brands' direct websites

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Actual prices are even better because of cross-Selling offers that others can’t easily match

• $500 worth of Free Kitchen Cabinet for Kitchen Customers• Free Shoe Closet worth $4-500 for Kitchen

+ 1 (Bath, Wardrobe, etc.) Customers

11

More on pricing: Estimates from Hanssem vs Local Store

• These are actual quotes that I got from Hanssem ik & a local interior shop for renovating a 20-year old, 50 PY apartment in Seoul (165 sq m, 4 bed + 2 bath).

• The difference between estimated renovation cost is about 5,000,000 KRW ($5,000).

• However, local player uses many non-branded goods (low quality) and lack A/S service. Therefore, Hanssem offers the better value.

(in 10,000 or 万 KRW) Local Player Hanssem ik

Windows 1,120 1,430

Kitchen 320 360

Bathroom (2) 450 600

Floor 820 1,011

Doors (8) 360 200

Others 155 180

Total 3,225 3,781

*Data from company filings 12

Despite competitive pricing, Hanssem earns higher margin than direct competitors; Other big players are B2B & sell different products

Hanssem Hyundai Livart Enex Borneo KCC LG Hausys ByuckSan Ace Bed Daelim B&Co

Revenue (‘15) 1,710,544 694,210 308,322 43,789 3,414,388 2,768,561 442,823 192,733 180,939

Y/Y 29% 8% 18% -19% 0% -1% 3% 14% 23%

GM 31% 23.0% 20.7% 10.1% 25.9% 27.4% 22.8% 54.4% 23.5%

EBIT 146,730 40,344 8,094 (13,473) 309,211 150,060 61,002 34,368 12,128

OPM 9% 6% 3% -31% 9% 5% 14% 18% 7%

ROIC 43% 10% 6% -31% 3% 6% 13% 7% 4%

Business Description

Home furnishing, B2C

80%

Home furnishing, B2B

50%

Home furnishing, B2B

50%

Home furnishing, +90%B2C

Paint & Construction

Material 90%, Mostly B2B

Construction Material 60%,

Mostly B2B<20% in Oven

Tops, B2B 100% Bed, B2C 100% Bath, B2B

• IKEA is running at around 40% GM vs. Hanssem at high 30’s% for comparable products• KCC (manufacturer of construction materials) is attempting to enter the interior design market. LG Hausys made a similar move last year, but ended up backing

out because of difficulty in managing conflict of interest (Hanssem is a relatively big customer) & B2C retail. I suspect KCC will go through a similar process, but this situation is worth monitoring closely.

*Data from company filings 13

Competitors Can’t Aggressively Lower Price Further Due to Low Margin

• In fact, most firms seem to be raising prices in 1H 2016 after cutting prices in 2015.

• Enex is the only one cutting price aggressively since Q1 2016, but it seems to be a last resort move.• Enex likely will either discontinue the price cut

or go out of business because of their low margin (0% OPM in Q2), not unlike what happened to Borneo in the past.

• It also has not impacted Hanssem much (Hanssem is growing faster than Enex).

• My contact at LG Housys noted that LG Housys dropped Enex as a partner because of its low product quality, and replaced with Livart.

Avg Price Increase 1H 2016 2015

Hanssem 4% 0%

LG Livart 5% -2%

Enex -19% 0%

LG Hausys 1% -5%

Daelim 3% 2%

Revenue 2016 1H 1H 2015 Y/YEnex 186,580 162,632 15%Livart 339,935 334,791 2%Hanssem (B2C) 682,900 590,800 16%

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Demand Advantage: High Search Costs

• Home furnishings (especially custom made products and renovations) have high search cost:• They are purchased very infrequently, often every 10-20 years.• Products are expensive and highly personal/variable, and hence are difficult decisions for

consumers.

• To take advantage of this situation, Hanssem built the following to reduce complexity for consumers:• Vertical integration into service & distribution• One-stop shop for home furnishing products across categories like kitchen, bathroom,

bedroom and living room.• Well recognized brand: #1 in its categories by high margin for more than a decade

reinforced by ads with top stars

Vertical Integration into Service & Distribution

• Among the B2C Players, Hanssem has invested the most amount of infrastructure in distribution & service, namely # of stores and installation staff.

• Installation staff’s skillsets are highly specialized (especially for kitchen), and are relatively scarce resource in the industry.• Network effect: the more projects a company can

provide, more commission staff can earn, and more staff company can recruit & retain.

• Because of these assets, Hanssem is able to offer not only better service at purchase & after sale, but also expand product category more easily.

• Competitors normally outsource sale, installation and A/S service to local mom & pops, and thus cannot guarantee quality.

Hanssem Hyundai Livart Enex Borneo

Revenue 1,710,544 694,210 308,322 43,789

EBIT 146,730 40,344 8,094 (13,473)

Employee 2,809 397 451 170Installation

Staff 3,500 600 120 N/A

# of stores 3,302 140 158 146

PP&E 207,629 132,190 14,048 4,847

Rev/Employee 609 1,749 684 258

Rev/Store 518 4,959 1,951 300

Rev/PP&E 8.24 5.25 21.95 9.04

EBIT/Employee 52.24 101.62 17.95 (79.26)

EBIT/Store 44.44 288.17 51.23 (92.28)

EBIT/PP&E 0.71 0.31 0.58 (2.78)

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One Stop Shop & Product Scope Expansion

• Conversation with local interior stores:• Hanssem is leveraging its ik partners to promote Hanssem’s bathroom products by bundling it with the company’s

popular products like kitchen & wardrobe (i.e. distribution advantage).• Customers have been very receptive because 1) they trust Hanssem to have high quality & great A/S service (i.e. brand

strength), 2) Hanssem offers bundling discounts as I showed in page 10 (i.e. scale & pricing advantage) and 3) they like the simple & elegant way of unifying their home design via one firm (i.e. complexity reduction).

• Conversation with Hanssem employee:• Lifestyle goods like storage boxes & kitchenware are being sold at flagship & franchise stores, and are the fastest

growing category at Hanssem because Hanssem can leverage its foot traffic, despite the fact that these products are priced significantly higher than IKEA’s because they are outsourced and sold on OEM basis (i.e. distribution advantage).

• Conversation with LG Housys employee:• LG Housys tried to compete against Hanssem with its own flagship stores, but ultimately decided to pull back &

wholesale its floor products to Hanssem (i.e. scale & distribution advantage). Tried to wholesale its window products as well, but Hanssem refused.

• Also of note, when LG Housys replaced Enex with Livart as a partner, it actually wanted to partner with Hanssem instead of Livart, but was refused.

LT Opportunity: Lessons from Japan & Nitori

• Nitori (Hanssem of Japan) has been growing revenue & market share even in a mature market with no population growth (30 consecutive years of profit growth).

• It benefited from Japan’s home furnishing market’s sustained growth up until 2009, likely because of aged home renovation.

• But even after the market slowed down in 2011, Nitori kept growing via market share gains & product scope expansions, a strategy followed by Hanssem today.

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2007 2008 2009 2010 2011 2012 2013 2014 2015Nitori Market Share 6% 6.5% 7.0% 7.5% 8.0% 8.5% 9.0% 9.5% 10.0%

Nitori Revenue 217,229 244,053 286,186 314,291 331,016 348,789 387,605 417,285 458,140

Nitori Rev Y/Y 12% 17% 10% 5% 5% 11% 8% 10%Home Furnishing Market 3,620,483 3,754,662 4,088,371 4,190,547 4,137,700 4,103,400 4,306,722 4,392,474 4,581,400 Market Y/Y 3.7% 8.9% 2.5% -1.3% -0.8% 5.0% 2.0% 4.3%

2015 Japan Korea Population (mn) 125 50 GDP (USD mn) 4,123,260 1,377,870 GDP per Capita (USD) 32,986 27,557 Home Furnishing Market (USD mn) 45,000 12,000 Home Market per Capita (USD) 360 240

Nitori (Yen) Hanssem (Krw)Rev (mn) 458,140 1,710,544 Y/Y 10% 29%GM 53.2% 30.7%EBIT 73,040 146,730 OPM 15.9% 8.6%ROIC 13.3% 42.9%

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LT Opportunity: +166 trillion KRW potential in aged homes

Apmts 15 years or older

(mn)

Refurbishing Market (mn KRW)

Avg Size of Apmt (PY)

Avg Size of Apmt (sq

m)

Renovation Cost per PY (KRW)

2013 7.3 146,000,000

2014 7.7 154,000,000

2015 8 160,000,000

2016 8.3 166,000,000 20 66 1,000,000

2017 8.6 172,000,000

2018 9 180,000,000

2019 9.3 186,000,000

2020 9.6 192,000,000

• Apartments that are +15 years old are growing quickly, from 8.3mn in 2016 to almost 10mn in 2020, accounting for about 50% of homes.

• Typically, an average sized home of 20 PY will cost 20,000,000 KRW to gut & renovate ($1,000 per PY).

• This translates to about 166-200 trn KRW in potential market, of which Hanssem should be able to take meaningful share.

• Aged home renovation should help Korea’s market catch up to Japan, from 12trn KRW in 2015 to 25-30 trn KRW in the next few years. Remodeling alone can add about 6 trn KRW per year in market size.• As shown in last page, Koreans spend 1/3 less than Japanese on

home furnishing, but should catch up as demand for renovating aged home picks up. Korea is generally 5-10 years behind Japan.

• In comparison, Hanssem’s total revenue was only 1.7 trillion KRW in 2015.

About 1/3 of the Refurbishing Market is Kitchen, Bathroom & Furniture

19

Business’s Weaknesses: Cyclical End Market

1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16

-100%

-50%

0%

50%

100%

150%

200% Q/Q Growth of B2C Rev vs Housing Market Indicators

Housing Transaction Q/Q Apmt Pre-Sale Q/QB2C Revenue

1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16

-100%

-50%

0%

50%

100%

150%

200% Q/Q Growth of B2B Rev vs Housing Market Indicators

Housing Transaction Q/Q Apmt Pre-Sale Q/QB2B Revenue

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Recent Experience Confirms Cyclicality Still Exists in Business

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Housing Transactions Y/Y Apartment Pre-Sale Y/Y

Slowdown in Housing market led to revenue deceleration and stock decline

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Though Business Is Getting Less Cyclical

• While B2C is less cyclical than B2B, it is true that both have never been completely immune to cyclical downturns.

• However, Hanssem’s business is definitely less cyclical than it used to be given that B2C is now 80% of revenue compared to <60% prior to 2006 (more on this on Pg 23).

2002

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-30%

-20%

-10%

0%

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50%

60%

70%

B2C Rev Y/Y Element (B2B) Rev Y/YContruction Approval Y/Y Housing Transactions Y/YApartment Pre-Sale Y/Y

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Demand Pipeline Is Healthy: Move-in volume in 2017-2018

• Typically, pre-sale translates to move-in on a 3-year lag basis.

• Pre-sale of apartments peaked in 2015, and construction will be complete in 2017-2018, implying 34% higher households moving in for those periods than for than 2015-2016. 20

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- 100,000 200,000 300,000 400,000 500,000 600,000 700,000 800,000 900,000

2014-15 Apartment Sales Boom To Lead to High Move-In volumes in 2017-2018,

r > 0.8

Apmt Pre-Sale Move In (3-Yr Lag)Apartment Approvals (RHS)

Analogy with History• Past: Red Highlight

• After sluggish growth in 2008-2010, Apmt pre-sale grew 42% in 2011.

• Construction for these units were completed around 2013, and move-in volume grew 50% over 2 years during 2013-2014.

• At the same time, Hanssem accelerated its revenue growth from 10-15% in 2010-2012 to 30% p.a. in 2013-2015.

• Now: Blue Highlight• Pre-sales again was flat in 2012-2013, leading to low move-in

volume growth in 2015-2016• Coincidentally, Hanssem revenue began to decelerate in Q4 2015.• Hanssem’s revenue growth should accelerate meaningfully in 2017

as strong pre-sales growth in 2014-2015 translates into strong move-in growth in 2017-2018.

23

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

-40%-30%-20%-10%

0%10%20%30%40%

Since B2C became +60% of Rev in 2006, Move-In Volume & Hanssem's

Rev have had high correlation. R = 0.6

Move In Y/Y Hanssem Rev Y/Y

Y/Y 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016est 2017est2018es

tHanssem Rev 13% 2% 7% 15% 14% 10% 29% 32% 29% 15% 23% 19%Housing Transactions -20% 3% -3% -8% 23% -25% 16% 18% 19%

     

Apartment Pre-Sale 9% -14% -10% -13% 42% 5% 0% 15% 52% -14%   Apmt Move-In -10% 15% 7% 2% -27% -31% 11% 34% 2% 3% 34% 0%

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Housing market has been recovering

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Housing Market has been recovering

Housing Transactions Apartment Pre-saleContruction Approval

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Contruction Approval Y/Y Housing Transactions Y/YApartment Pre-Sale Y/Y

25

Management Team & Ownership• Cho, Chang-Gul: Founder, family

owns 26% of company• Choi, Yang-Ha: CEO, since 1979,

owns 4.4% of company• Gang, Seung-Soo: President, since

1995, in charge of interior biz & launching China., owns 0.65% of company

• After the IPO in 2001, Hanssem management went through some mishaps while trying to restructure & westernize its ranks.

• However, they’ve executed phenomenally well since then, expanding their business by solidifying and relying on their competitive advantage (scale & infrastructure) vs. trying random new things.

• They’ve also bought back shares consistently until 2012 before their shares soared in 2014.

• Insiders recently bought roughly $7mn of stock on August 12th (first purchase since 2014) via Hanssem Inc.

26

Management & Ownership: Insiders Control the Company

Name Shares % of Outstanding*1 Hanssem (Treasury) 5.45 23.2%2 Chang-Geol Cho (Founder) & Family 6.21 26.4%3 Yang-ha Choi (CEO) 1.03 4.4%4 Hanssem Subsidiaries 0.85 3.6%5 Seung-Soo Kang (Vice Chairman) 0.15 0.6%6 NPS 1.43 6.1%7 Truston Asset Mgmt 1.08 4.6%8 Massachusets Mgmt LLC 0.96 4.1%9 Kylin Mgmt 0.96 4.1%

10 Prudential 0.31 1.3%11 BlackRock 0.27 1.1%12 Samsung Life Insurance 0.22 0.9%13 Vanguard Group 0.20 0.9%14 Meritz Investment 0.20 0.9%15 Mirae Asset Global 0.17 0.7%

Total* 23.53 100%*Including treasury shares for the purpose of understanding the extent to which insiders control the company.

27

DJ 2015 2016 2017 2018 2019 2020 Consensus 2015 2016 2017 2018PE 25.47 24.87 19.07 15.15 12.59 10.62 PE 25.47 25.01 20.79 18.13 EV/EBITDA 16.95 16.81 13.08 10.45 8.73 7.40 EV/EBITDA 16.04 13.17 11.43 FCF Yield 5.7% 3.4% 4.8% 6.0% 7.3% 8.7%

Rev 1,710,544 1,959,788 2,412,040 2,872,375 3,361,206 3,873,164 Rev 1,710,544 1,939,000 2,230,000 2,544,000 Y/Y 15% 23% 19% 17% 15% Y/Y 13% 15% 14%GP 525,470 615,638 757,292 901,767 1,055,183 1,215,855 EBIT 146,730 152,637 183,431 210,044 % of Rev 31% 31% 31% 31% 31% 31% % of Rev 8.6% 7.9% 8.2% 8.3%SG&A 378,740 470,140 566,916 661,634 766,526 874,488 EBITDA 157,178 166,052 202,198 233,062 % of Rev 22% 24% 24% 23% 23% 23% % of Rev 9.2% 8.6% 9.1% 9.2%EBIT 146,730 145,498 190,375 240,133 288,657 341,367 NP 114,714 123,730 148,160 171,394 % of Rev 8.6% 7.4% 7.9% 8.4% 8.6% 8.8% % of Rev 6.7% 6.4% 6.6% 6.7%EBITDA 157,178 158,450 203,697 254,954 305,183 359,790 EPS 6,342 6,458 7,769 8,906 % of Rev 9.2% 8.1% 8.4% 8.9% 9.1% 9.3%NP 114,714 117,421 153,123 192,704 231,895 274,820 Rev Y/Y 2015 2016 2017 2018% of Rev 6.7% 6.0% 6.3% 6.7% 6.9% 7.1% Base Case 15% 23% 19%EPS 6,342 6,495 8,469 10,659 12,826 15,201 Bear Case 8% 2% 13%Bear Case EPS 6,342 6,132 5,717 7,803 9,793 12,214 Bull Case 17% 26% 22%Bull Case EPS 6,342 6,720 9,069 11,631 14,242 17,134 EBIT MarginFCF 165,955 100,221 139,236 176,352 212,537 252,684 Base Case 7.4% 7.9% 8.4%Capex (35,069) (24,433) (38,141) (43,008) (48,347) (53,519) Bear Case 7.4% 6.6% 8.1%% of Rev -2.1% -1.2% -1.6% -1.5% -1.4% -1.4% Bull Case 7.6% 8.1% 8.6%

Financial Summary• I believe it’s reasonable to expect

Hanssem’s revenue to grow about 45% over the next 2 years until 2018 (20% CAGR).

• Move-in volume is supposed to stay at a 34% higher level than in 2016 over 2017-2018, and Hanssem should be able to grow faster than this rate due to its new businesses like bathroom & Hanssem’s competitive advantage.

• Not only that, the 166 trn TAM remodeling market should be able to add another 10-15% of growth over the next two years (Hanssem is 1-2% of the market only).

• In contrast, sell-side is only expecting 35% revenue growth over the next two years (16% CAGR), essentially in-line with the move-in market growth. This doesn’t give Hanssem credit for market share gain or benefit of aged home remodeling

2007-2009

2009-2011

2011-2016

Analyst Ratings• Analyst ratings & price

targets tend to be pro-cyclical and momentum driven, and thus often miss structural changes.

• This time is no exception, and analysts have been lowering their target price along with stock price decline. This implies that 2017-2018 estimates are likely too low.

28

29

Valuation & Recommendation• Hanssem is trading at 17x 2017 PE ($2.5bn mkt cap), while growing revenue by 23%.• Although Hanssem is not immune to its cyclical end market, it seems sufficiently de-risked after stock’s +50%

decline. Given its competitive advantages, it certainly deserves a premium to its domestic peers that are trading at 10-15x PE.

• I expect consensus estimates and Hanssem’s multiple to rise as Hanssem benefits from 1) category expansion, 2) increase in move-in volumes and 3) emergence of remodeling demand for aged homes

• Base Case 12-month Price Target: KRW 205,000 ($3.3bn) at 24x 2017 PE & roughly 1x PEG (38% upside). I triangulate my Price Target with DCF and SOTP methods (next slide).• Its Chinese counterpart SuoFeiYa is trading at 30x 2017 PE while growing revenue by 40%.• Its Japanese counterpart Nitori is trading at 20x 2017 PE while growing revenue by 9%.

• Long-Term Price Target: Hanssem could be worth $5bn (304,000 KRW stock, 90% upside) based on 20x 2020 PE, on par with Nitori when Hanssem’s revenue growth decelerates to a more “mature” state closer to Nitori’s.• Japan market is about 2x Korea’s likely mature state of +20 trn KRW, and Nitori’s market cap of $13bn is a bit more than 2x my

$5bn fair value for Hanssem.

• Given more time, I could also consider hedging out the Korean housing market exposure with shorts in the space (possible candidates: KCC, Livart, Hausys)

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Valuation & RecommendationActual Stock Price:

147,000 2017 PE Target Price Implied Market Cap % Upside Note

Base Case 24x 203,265 3,674,942 38% Nitori 20x, SuoFeiya 30x, Livart 12x, KCC 16x

Bear Case 17x 97,189 1,757,132 -34%

Bull Case 28x 253,940 4,591,124 73%

DCF SOTP 2017 Rev 2017 OP 2017 NP PE MultipleWACC 9% B2C 1,833,874 165,049 131,542 26xPerpetual Growth Rate 2% B2B 489,688 24,484 20,949 12xSum of FCF PV 727,079 Total 3,671,482 Terminal Value 3,965,196 Target

Price 203,074 PV of TV 2,861,183 % Upside 38%Fair Value 3,588,263 Target Price 198,471 Average of 3 methods Target Price % Upside% Upside 35% 201,603 37%

LT Target Price 2020 EPS 2020 PE TP Market Cap % Upside15,201 20x 304,012 5,496,409 107%

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Comparable Companies

PUBLIC COMPSMkt Cap P/E Multiple P/Book EV/EBITDA ROE Revenue Growth Revenue

As of Aug 24 2016 USD 2014 2015 2016 2017 2014 2015 2016 2017 2014 2015 2016 2017 2015 2015 2016 2017

HANSSEM CO LTD 3,348 33.3x 25.1x 24.7x 20.5x 8.5x 6.6x 6.2x 5.1x 30.7x 24.3x 21.4x 17.2x 26% 29% 13% 15%HYUNDAI LIVART C 361 #N/A N/A 14.0x 13.3x 11.9x 1.8x 1.6x 1.5x 1.3x 8.1x 7.6x 6.5x 10% 8% 7% 10%KCC CORP 3,978 12.7x 24.2x 17.0x 15.4x 0.7x 0.7x 0.7x 0.7x 10.2x 10.5x 10.2x 9.8x 3% 0% 5% 7%LG HAUSYS LTD 896 15.6x 14.0x 10.8x 9.5x 1.2x 1.2x 1.2x 1.1x 6.3x 6.1x 6.2x 5.6x 10% -2% 5% 6%SUOFEIYA HOME-A 4,041 78.7x 56.0x 40.5x 29.8x 12.9x 11.0x 7.9x 6.6x 59.0x 40.0x 27.0x 19.2x 25% 35% 42% 40%HOLIKE 1,720 77.9x 65.8x 49.6x 37.0x 22.1x 11.8x 10.0x 8.2x 24% 20% 31% 35%NITORI HOLDINGS 12,725 29.3x 27.2x 22.0x 19.5x 4.1x 3.8x 3.3x 2.9x 16.3x 15.0x 12.9x 11.1x 16% 8% 13% 9%LIXIL GROUP CORP 6,569 22.3x 396.6x 45.0x 15.4x 1.0x 1.1x 1.1x 1.0x 9.3x 8.8x 5% 7% 3% 1%TOTO LTD 6,783 22.1x 18.9x 16.0x 17.5x 2.4x 2.4x 2.2x 2.0x 11.7x 10.5x 9.4x 8.7x 13% 6% -1% 2%HOME DEPOT INC 167,161 29.8x 25.3x 21.6x 19.2x 18.5x 25.9x 30.1x 37.5x 15.2x 13.8x 12.4x 11.4x 97% 6% 7% 5%ETHAN ALLEN 927 21.8x 20.6x 16.2x 14.6x 2.6x 2.5x 2.3x 2.1x 9.6x 8.3x 7.4x 15% 1% 6% 5%WILLIAMS-SONOMA 4,815 17.1x 16.0x 15.2x 13.9x 4.1x 4.0x 3.8x 3.6x 7.1x 7.1x 7.1x 6.6x 26% 6% 5% 5%Median 4,010 22.3x 24.7x 19.3x 16.5x 3.3x 3.1x 2.8x 2.5x 11.7x 10.5x 9.8x 8.8x 15% 7% 6% 6%

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Risk Factors• Cyclical downturn in Korea, especially in housing & consumption.• Hanssem may decide to make massive investments in China and

wastes capital (more on this in next slide).• Possible bad M&A activity (currently cash rich & essentially no

debt), though has not happened before.• IKEA is planning to open 5 more stores in Korea by 2020. While its

1st store has not had much impact on Hanssem because of different target markets, IKEA may change its strategy to be much more aggressive than before.

(CNY '000) SuoFeiYa Holike Oppein

Rev 3,195,700 1,082,000 Private

Y/Y 35% 20% Planning to IPO

COGS 2,006,200 670,100

GP 1,189,500 411,900

GM 37.2% 38.1%

SG&A 603,800 233,800

% of rev 19% 22%

EBIT 585,700 178,100

OPM 18.3% 16.5%

PP&E 1,291,000 448,300

ROIC 15% 14%

Store 1,861 1,174 3,064

China Expansion: Risky Adventure

• Hanssem is planning to launch its China sales in Shanghai in Q3 2017.

• Hanssem is quite serious about its China expansion, as they put their #2 executive on this project.

• However, many of the advantages that Hanssem enjoys in Korea (scale, brand, infra) are gone in China, and actually works against them because of strong incumbents.

• This could result in a meaningless waste of capital & margin compression leading, bearing risk to the stock.

• Of note, Nitori is also planning to expand its operation to China, and market there could become even more competitive than it is now.

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