Korea Consumer:BGF Retail 2Q highlights

2Q17 Review.

    Unlike GS Retail (please refer to page 2) which reported disappointing 2Q earnings,BGF Retail earnings were satisfactory. BGF delivered 2Q17 sales of KRW1.4tn (up12.1% y-o-y) and operating profit (OP) of KRW74.1bn (up 22.5% y-o-y), with the latter5% below our estimate but largely in-line with market expectations. Again, satisfactoryOP growth was the result of many positive achievements such as 1) strong growth ledby the fresh food category (up 13% y-o-y), 2) increased contribution from privatebrands (up 1%pt to 26% of revenue) and 3) cost saving from an improved franchisemix. In new store openings, the company opened a net 495 stores in 2Q and has11,949 stores as of June. In 1H, the company achieved nearly 80% of their openingtarget of 1,400 stores.

    Why we have a Buy rating.

    We think investors should revisit the convenience store space given the structuralgrowth coming from demographic changes, including an increase in single personhouseholds. We also note there are more than 60,000 mom-and-pop stores, whichare likely to convert to franchise stores in the future. In particular, we expectconvenience store operators’ focus will eventually turn to improving profitability ofstores (vs. top line growth) and expect new store opening to slow down, which weview as positive as this should result in stronger same-store-sales growth.

    Cut estimates and target prices for GS Retail and BGF Retail but remain Buy.

    We cut BGF and GS Retail 2017e EPS by 3.5% and 14.9% due to weaker-thananticipatedsame-store-sales growth. We continue to use a SOTP to value the stocksand see fair value at 15x (previously 16.5x) 2017 EV/EBITDA