Hanwha Investment & Securities analyzed on the 5th that Hyundai Department Store's foreign-customer sales growth is recovering. It kept its investment opinion at "buy (BUY)" and raised the target price to 190,000 won from 160,000 won. The previous trading day's closing price was 125,000 won.
Lee Jin-hyeop, an analyst at Hanwha Investment & Securities, said, "The foreign-customer sales growth rate, which had lagged competitors, has been improving rapidly in the second quarter," and noted, "Discount factors applied to the value of the department store business will gradually be resolved."
Hyundai Department Store shares have risen about 37% this year, but they have been relatively sluggish compared with competitors Lotte Shopping and Shinsegae. Lee said, "The main reasons are the weak earnings of consolidation subsidiary ZINUS and the relatively low foreign-customer sales growth rate."
In fact, Hyundai Department Store's first-quarter operating profit in the department store business increased 40% from a year earlier, but operating profit on a consolidation basis fell 12% due to deteriorating results at ZINUS. Accordingly, this year's earnings forecasts were not raised as much as competitors'.
It was also relatively left out of the benefits from the recovery in foreign spending. While competitors with strengths in tourist-dense districts such as Myeong-dong and Busan saw foreign-customer sales jump 90% to 100% in the first quarter, Hyundai Department Store's foreign-customer sales growth rate was only 22%.
However, it projected that sales growth will gain traction from the second quarter. Lee said, "With the peak season increasing inbound tourists, demand will expand from Myeong-dong to Gangnam," and forecast, "The growth rate, which was only 22% in the first quarter, will expand to about 40% in April and about 70% in May."
Lee said, "From the second quarter, same-store sales growth (SSSG) at department stores also appears to be recovering again in the order of Shinsegae, Hyundai Department Store, and Lotte Shopping," adding, "If the current trend continues, the valuation discount versus competitors needs to narrow."
While the weak results at ZINUS may continue for the time being, the impact is seen as limited. The burden of the earnings base will ease in the second half, and Hyundai Department Store's equity stake in ZINUS is only about 38%, so the impact on controlling net income is relatively small.
Lee said, "It is time for Hyundai Department Store's lagging share price to start catching up with competitors," adding, "The recovery in foreign-customer sales and the improvement in department store earnings will serve as a catalyst for a re-rating."