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).


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


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


5

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


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



6

Table 2. Enterprise value calculated by applying avg. PER of F&B sector

(KRW, X, KRW100mn, %) Content Notes


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


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


7

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


8

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



9

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


%4Q17 4Q18E

-100

-50

0

50

100


%4Q17 4Q18E

-150

-100

-50

0

50

100

150


%2018E 2019E

-200

-150

-100

-50

0

50

100

150


%2018E 2019E


10

Table 5. Earnings trend and estimates of Nongshim's major business divisions (K-IFRS standalone)


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


11

Table 6. Nongshim's earnings trend and estimates by key sales region (K-IFRS consolidated)


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


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)


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


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)


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)


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


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)


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


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


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


-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


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


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)


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


20

Fig 29. Earnings performance of Nongshim's US subsidiary


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

%


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


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


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


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


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



24

Fig 34. Earnings performance of Nongshim's Chinese subsidiary


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


Note: 2016 basis


-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)


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)'


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.


26

Fig 37. Nongshim's share of snack market


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 %


20

25

30

35

40

10 11 12 13 14 15 16 17 18E 19E

%


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



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

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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

Nongshim (004370)

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