Top dog : Lotte Himart is Korea`s leading offline seller of electronic appliances and we believe will soon become top dog online as well. Backed by an overhaul of its online mall and launch of mobile shopping in 2H15, its online sales should surge from KRW90b in 2015 (2.2% of total) to KRW290b in 2016 (7.2%) and KRW460b in 2017 (11%). We expect Korea`s online electronics market to expand at an 11.9% CAGR through 2020, and Himart to dominate with strong buying power, a well-established delivery system, and efficient inventory management. This offline/online success would contrast with the situation in the US and China, where pure online players (like Amazon) dominate online. Himart is already the top-selling retailer on Korean comprehensive online shopping malls and should take the top position among all online retailers of home electronics next year. 

Strong margins : Despite robust growth and aggressive marketing, Himart`s online operating margins are on par with its offline margins, because high-margin, easily deliverable small appliances make up much of its online sales. Even as it starts selling more large products, we believe online margins will remain solid, thanks to: 1) strategies that create synergies between the online and offline businesses; and 2) a trend in market growth toward high-margin goods. Under an omni-channel strategy, the retailer plans start a pickup service at affiliate 7-Eleven stores and open omni-sales pilot zones (as UK multichannel retailer Argos has done) next year. 

Shareholder friendly : Himart has raised its DPS by about 30% a year for the past three, paying KRW250 in 2013, KRW330 in 2014, and KRW430 in 2015. With its net profit likely to increase 11.7% and the Lotte Group`s vowing to return more value to shareholders, we expect it to pay KRW550 in 2016 (implying a current yield of 1.2% and payout ratio of 11%). Dividends should increase in in 2017 in both absolute and payout terms as the group become shareholder friendly. 

Mounting momentum : We estimate that Himart`s sales and operating profit will rise a respective 2.4% and 2.1% in 2016 to KRW3.9t and KRW163.6b on strong sales of air conditioners and robust online revenue. Momentum should build in 2017 and 2018, with sales climbing a respective 5.5% and 5.6% to KRW4.2t and KRW4.4t and operating profit 10.6% and 12.9% to KRW180.9b and KRW204.3b, on: 1) robust growth in the online business; 2) profitability gains?as handset sales normalize and subscriber numbers increase; 3) store openings?14 in 2H16 and 12 in 2017; and 4) increasing apartment move-in volume. 

NDR feedback : We accompanied Himart on an overseas non-deal roadshow over Nov 23-25, and found investors to be bullish on the company`s: 1) stable cash-generating abilities; 2) growth potential in the online and handset businesses; and 3) shareholder returns. There was much interest in the online business and omni-channel strategies, but most were unaware of the degree of Himart`s online competitiveness. They were positive on the firm`s handset sales, new services (such as appliance installation and cleaning services), and increasing dividend. They were less impressed with shop-in-shop stores, questioning costs, restructuring, and the possibility of renegotiating rents. 

Rally just starting : Himart has bounced off a bottom of KRW42,000 since posting 3Q results, and we expect shares to rally well into 2017. Despite political turmoil in Korea and the Galaxy Note 7 issue, we expect the firm`s operating profit to increase 7% y-y in 4Q to KRW28.4b on base effect and a rise in apartment move-in volume. Next year`s share performance should benefit from the release of pent-up handset demand, rapid growth in online sales, and shareholder-friendly policies. The stock is trading at 8.5x 2017 P/E?the sector average is 11x?and we maintain BUY on Himart with a 12-month target price of KRW70,000. The stock remains our top pick among small-cap retailers.

By OJ Nam, Analyst at Samsung Securities

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