[Into the Stocks] BTS Chooses Coway, Institutions Also Coway... Everyone Shopping

Stable Growth Potential in Overseas Business... Institutional Investors Like Pension Funds and Investment Trusts Focus on Net Buying
Domestic Business Faces Challenges 'Fundamental Improvement Confirmed'... Stock Undervalued 'Increase Weight'

[Asia Economy Reporter Lee Seon-ae] "BTS is Coway." Global artist BTS shouts this in Coway's commercial video. Every time BTS calls out Coway, numerous love calls have accumulated. Like world-class BTS, Coway has now begun to spread its wings as a 'world-class' company. While we were drinking Coway water from Coway water purifiers and sleeping on Coway mattresses with BTS, Coway's stock price began to soar. Institutional investors had already put Coway in their shopping baskets. Securities firms rushed to release Coway reports, stating that Coway's corporate value, which is sweeping overseas markets, needs to be re-evaluated. Compared to the target stock price, the current stock price is still undervalued.

◆Undervaluation Resolution and Pension Fund Love Calls= According to the Korea Exchange on the 14th, Coway closed at 76,600 KRW, up 9.59% (6,700 KRW) from the previous day. The intraday high reached 77,500 KRW. The upward trend continued on the 15th. As of 10:20 AM, Coway rose to 78,500 KRW. The stock price, which had been hovering around the 65,000 KRW level for a while, began to soar without hesitation. This is a response to the record-breaking quarterly performance in the first quarter of this year and the growth potential. But will the upward phase end here? Securities firms have started to look at Coway again, and target price upgrades have been made.

The reason for revisiting Coway is that it is a leading representative of 'K-Rental,' which is sweeping overseas markets.

Coway's sales and operating profit in the first quarter of this year were 879 billion KRW and 170.7 billion KRW, up 14.3% and 23% respectively compared to the same period last year. This is the highest quarterly performance ever. Net profit was 125.8 billion KRW, up 23.8%, also a record high quarterly performance. What is the driving force behind continuing the momentum of last year's record performance, which entered the 3 trillion KRW sales club?

It is thanks to achieving the highest-ever performance in overseas markets. Overseas subsidiary sales in the first quarter were 294.2 billion KRW, up 56.4% year-on-year. Especially in Malaysia, a Southeast Asian hub, sales reached 240.4 billion KRW, up 56.8% from last year. The U.S. subsidiary, a foothold in the American market, also grew 57.9% to 42.9 billion KRW in sales, entering a growth trajectory.

Securities firms expect a re-evaluation of corporate value. The general consensus in the securities industry is that the business model, which generates stable cash flow regardless of external economic conditions, is attractive.

Researcher Cho Sang-hoon of Samsung Securities said, "The key going forward is the sustainability of strong overseas business performance and the success of self-management products that fit post-COVID-19 trends." He analyzed, "We believe overseas business can maintain high growth potential as the number of new accounts in Malaysia is rapidly increasing, category expansion beyond water purifiers is occurring with air purifiers and mattresses, and sales are strong in the U.S. mainly through online sales channels." He added, "Coway is investing in product development and management methods that can meet consumer needs in the changing rental market. Although profit growth is limited in the short term, from a long-term perspective, it can lead to an increase in corporate value." Samsung Securities maintained a buy rating and a target price of 90,000 KRW.

Hana Financial Investment maintained a buy rating and raised the target price to 100,000 KRW. The 100,000 KRW target price corresponds to a 12-month forward price-to-earnings ratio (12MF PER) of 14 times. This is based on high entry barriers domestically and internationally, visibility of performance based on brand awareness, and growth potential in overseas business. Since 2018, the profit share from overseas business has increased to over 10%, contributing 68% and 33% respectively to total sales and operating profit growth in 2020. The consolidated sales and operating profit for 2021 are forecasted at 3.712 trillion KRW and 689 billion KRW, up 15% and 14%, respectively.

Researcher Park Jong-dae of Hana Financial Investment said, "Coway has been neglected without clear investment demand as it moved away from the dividend stock investment category. In a market where fundamentals and performance are emphasized like recently, it can be a reasonable investment alternative. The current stock price at a 12MF PER of 10.7 times makes increasing exposure valid," he emphasized.

Institutional investors who have noticed Coway's growth potential are buying Coway shares intensively, especially pension funds and investment trusts. From April 14th to 10:30 AM on this day, institutional net purchases of Coway reached 73.095 billion KRW. Pension funds bought 46.463 billion KRW worth, and investment trusts purchased 12.553 billion KRW worth.

◆Overseas 2.1 Million Accounts 'Surprise' and Product Performance 'World-Class'= The BTS effect was tremendous. It became the driving force for firmly engraving the name Coway in the global rental subscription economy market and securing overseas competitiveness. The bright outlook for Coway's overseas business is due to the increase in global account numbers.

The total number of overseas subsidiary accounts increased by 32.7% year-on-year, surpassing 2.1 million accounts. This was due to the effective marketing strategy through BTS. In March, Coway appointed BTS as a global model and is focusing marketing efforts on key products from Icon water purifiers to Sleepcare mattresses.

Kim Soon-tae, Coway CFO, said, "Despite uncertain management environments such as COVID-19, we continue to grow thanks to innovative product launches and strategic marketing communication. We will maintain solid growth by strengthening competitiveness in the domestic market and expanding sales channels overseas."

Like BTS, Coway's products have also proven to be 'world-class.' Recently, Coway's ice water purifier (AIS 3.0 IoCare) was recognized for its water purification performance not only domestically but also in overseas certification bodies. It passed the domestic KC certification as well as the rigorous certification tests of the U.S. Water Quality Association (WQA), an international certification body, securing purification performance against 103 harmful substances, earning recognition for world-class filter technology and increasing consumer trust.

According to Coway, the WQA certification requires passing strict standards not only for purification performance but also for the absence of about 190 harmful and toxic substances in all parts that come into contact with water, as well as structural integrity tests of the product.

In fact, the AIS 3.0 IoCare is equipped with Coway's proprietary 'RO membrane filter system.' Coway's RO membrane filter boasts powerful purification performance, filtering everything from heavy metals to ultra-fine ionic substances as small as 0.4 nanometers dissolved in water. Additionally, AIS 3.0 IoCare has significantly enhanced ice-making performance through innovative technology. To produce abundant ice without shortage in summer, it applies a dual cooling system that separately produces ice and cold water, making ice faster and more plentiful, and applies cooling coils to the cold water tank to make the cold water colder. It also devised a wave-generating ice-making technology that periodically generates waves during ice production to remove bubbles in the water before freezing, producing harder and clearer ice.

◆Need to Enhance Domestic Business Competitiveness= To sustain growth, Coway needs to strengthen its competitiveness in the domestic market. Researcher Lee Na-yeon of Daishin Securities, who maintained a buy rating and a target price of 94,000 KRW, emphasized, "For Coway's valuation undervaluation to be fully resolved, enhancing competitiveness in the domestic market is necessary."

According to Daishin Securities, Coway's domestic market share is estimated to have decreased by 3.6 percentage points (based on the total number of accounts of the top 7 companies). In the first quarter of this year, the growth rate of account numbers was sluggish compared to competitors (Coway domestic accounts: 6.34 million at the end of 2020 → 6.36 million in Q1 2021 vs. LG Electronics total accounts: 2.62 million at the end of 2020 → 2.7 million in Q1 2021), making it difficult to strengthen market dominance. Also, due to Coway's changed dividend policy, dividends decreased to about 90 billion KRW, making a decline in return on equity (ROE) inevitable over the next 2-3 years, which is another reason why past valuations are hard to apply.

Lee said, "Nevertheless, the combined sales and profit contribution of overseas subsidiaries in 2021 is expected to expand to 33.3% and 29.0%, respectively (2019: 21.5%, 16.1% → 2020: 27.7%, 23.2%). Considering the significant increase in net account additions in Malaysia (annual average net additions: 78,000 in 2018 → 92,000 in 2019 → 101,000 in 2020 → 171,000 in Q1 2021 [our estimate]), a trading strategy based on buying low is considered valid."

However, the fundamentals of the domestic business are expected to improve gradually. The domestic business has seen a decline in rental sales volume compared to the previous year since the second half of last year due to COVID-19 impacts, and the net increase in rental accounts also decreased compared to the first half of last year, but fundamental improvement signals are emerging. The cancellation rate has fallen below 1% since the second half of last year and remains low. After the change of the largest shareholder, service managers were converted to full-time employees, and labor and welfare costs are expected to increase by about 50% in 2021. This confirms organizational stabilization through personnel management.

Researcher Ahn Ji-young of IBK Investment & Securities said, "Coway is focusing on organizational restructuring, R&D, and customer marketing-centered PMI in 2021, so momentum is expected to strengthen mainly through domestic performance improvement in the second half. The target price is maintained at 95,000 KRW with a buy rating based on first-quarter results and improved profitability of overseas business," she said.

This content was produced with the assistance of AI translation services.