Lotte Corp: Cash flow improvement underway

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The author is an analyst at NH Investment & Securities. He can be contacted at [email protected] — Ed.

Lotte Corp’s earnings visibility is set to expand with increased 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 due to the continued weak earnings of Hotel Lotte, which sits atop the governance structure of the Lotte Group. Currently, Lotte Corp is trading at a 50% discount to NAV, resulting in a lack of valuation compared to other major holding companies.

Dividend and brand royalty income to strengthen

Dividend income from Lotte Corp normalized along with increased holdings in Lotte Chemical and Lotte Chilsung, in-kind investments in Lotte Chilsung, Lotte Food and Lotte International, and improved earnings at Lotte Shopping thanks to restructuring and new business investments. The brand’s royalty rate increased from 15 bps to 20 bps, increasing the 2022F annual revenue by W30 billion.

However, Hotel Lotte, which sits at the top of the Lotte Group’s governance structure, is unlikely to recover its profits and resume IPO activities due to the still hostile business environment. As a result, the formation of an integrated holding company system with Lotte Hotel, which is the final goal of Lotte Group’s governance restructuring, is on the back burner for now.

We are lowering our TP from 41,500W to 32,000W, taking into account several factors including stock price changes and additional stock acquisitions for listed subsidiaries, a multiple base year change target ( 2021 → 2022), higher brand loyalty revenues and an unchanged target discount rate (45%). We maintain a Hold rating.


4Q21E: Result undermined by one-off factors for the main subsidiaries

Lotte Corp is expected to record 4Q21 sales of W2.569tn (+8% yy) and OP of W32.4bn (TTP yy), losing ground qq.

Earnings from major subsidiaries such as Lotte Shopping and Lotte Chemical are expected to disappoint the consensus due to lower product margins, ongoing maintenance costs and provisioning related to the voluntary retirement of discount store employees, eclipsing the positive revenue growth from department stores and discount stores.

But, 1Q22E OP is expected to rise sharply to W214.8 billion (+405% yy) thanks to higher dividend income (1Q22E W170.3 billion, +65% yy) and the consolidation of Lotte Chilsung.

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