[Click eStock] "Shinsegae, It's Time to Focus on Duty-Free Shops Now"

[Asia Economy Reporter Kwon Jaehee] Shinhan Investment Corp. maintained its 'Buy' rating on Shinsegae on the 9th, while lowering the target price by 7% from the previous level to 280,000 KRW.

Shinsegae's Q4 earnings showed sales of 2.21 trillion KRW and operating profit of 141.3 billion KRW, missing consensus by 30%. The leverage effect of the core business was limited due to warm weather in October and November, and subsidiaries also underperformed.

The department store saw a slowdown in clothing sales, resulting in a gross profit margin that remained flat compared to the previous year. Growth rates for luxury goods and women's fashion were 9% each. International division's operating profit fell 36% due to brand investment costs and elimination of inefficient businesses. DF (Duty Free) posted an operating loss following the third quarter, reflecting the burden of Incheon Airport lease fees, increased cost ratio due to the KRW-USD exchange rate decline (15 billion KRW), and provision for patent royalties (16 billion KRW).

Over the past two years, department store performance has been very strong, but concerns over peak-out have persisted, leading to continuous valuation adjustments downward. However, this year, benefits from duty-free shops, which are a factor for valuation improvement, are expected. China's zero-COVID policy is also in its final stages, and with the full-scale entry of individual tourists (FIT) rather than daigou who require brokerage fees, profitability recovery of duty-free shops is anticipated.

Researcher Cho Sanghoon of Shinhan Investment Corp. stated, "We lowered the target price by 7% reflecting slower-than-expected subsidiary performance, but attention should be paid to the recovery of the duty-free business rather than short-term earnings weakness." He added, "In particular, the bidding conditions for selecting Incheon Airport duty-free operators are set favorably for duty-free operators, reducing uncontrollable risk factors, and improving bargaining power with brand companies, which is positive."