Retail:1Q preview and forecasts
1Q preview: While we believe consumer sentiment bottomed in January and graduallyimproved throughout the rest of 1Q, the Korean retail sector’s 1Q17 results likely will fallslightly short of consensus estimates, after a strong 4Q16. We believe large retailers willfall slightly short of recently revised consensus projections, China-related plays (such asLotte Shopping) will miss badly, and home shopping firms and Lotte Himart will meet orbeat expectations. A one-off tax refund (not reflected in consensus estimates now) mayhave lifted earnings—Lotte Shopping recognized such a refund in 4Q16.
Investment strategy: Retail stocks have rallied in the past month on attractivevaluations, solid 4Q16 results, rotational trading, and expectations that earnings willimprove. We reiterate OVERWEIGHT on the sector for its valuations, rebounding ROElevels, and anticipation of a consumption recovery. We prefer small caps—such as homeshopping players and Lotte Himart—to large caps.
We expect home shopping players to rerate this year on improving earnings, attractivevaluations, more shareholder-friendly policies, and the disposal of unprofitablesubsidiaries (such as MSO holdings). Lotte Himart will likely deliver in-line 1Q17 results,its earnings should gain momentum as handset sales normalize, and increasing handsetcommission income and growing mobile sales should lead to structural growth.
Meanwhile, E-mart is our top large cap pick for its balanced earnings turnaround.