Coway: Update Following AGM, Revised Dividend Policy and 1Q2020 Results

Coway: Business Model Proves Resilient, Earnings Upgrades Set to Continue

Netmarble Corp: Firing on All Cylinders + Earnings Beat Consensus by Big Amount in 2Q 2020

Korea M&A Spotlight: Who Will Buy Woongjin Coway? (SK Networks, GS Retail, or KKR?)

Korea M&A Spotlight: Woongjin Group Plans to Re-Sell Coway

Shorts Betting Against Coway on Dividend Cut?

Global Emerging Market Equities, Propitious Research

Wium Malan, CFA

Global Emerging Market Equities

Equity Bottom-Up

Coway is the leading water- and air purifier rental company in South Korea and traditionally a low-beta dividend yield play in an Emerging Market with strong macro fundamentals and a relatively stable currency. Coway is a high-quality company having delivered 5yr average ROIC of 17.9% and a 6.6% 5yr average Free Cash Flow margin (to end 2018). This is mostly thanks to its “Cody” distribution force of &gt;13,000 people – more than 3x larger than its closest competitor (sustainable competitive advantage or moat). The bulk of Coway’s revenue is generated through 5yr+ rental agreements, with low churn, which generates stable revenue growth, profitability and cash flows.
Apart from the uncertainty around Covid-19, and the impact this is having on Global Financial markets, the key controversy driving the Coway share price is what impact the recent inclusion of Netmarble (251270 KR) as a key, 25% shareholder will have on, not only its future dividend policy but also profitability. Although we might get some clues as to how this plays out following next week Monday's (30 March 2020) AGM, it could still be months before clarity returns and the share price is once again efficiently priced by the market. In this note, I try to offer insight, stress-testing and analysis on whether this is a rare entry point to a high-quality company or the beginning of a protracted downgrade cycle.
Based on my analysis it seems that these risks are already more than priced in following Coway’s 47% share price correction since the release of their 4Q2019 results on 14 February 2020, which ushered in a cut in dividend and lack of 2020F guidance. Coway currently trades on an 8.2x NTM PE, which is about half its 5yr historical average and a 5.0% 2020F dividend yield, on very conservative dividend pay-out assumptions, a significant discount to its 5yr historical average dividend yield of 3.9%. I estimate fair value at KRW80,000/share (66% upside).

Coway is the leading water- and air purifier rental company in South Korea and traditionally a low-beta dividend yield play in an Emerging Market with strong macro fundamentals and a relatively stable currency. Coway is a high-quality company having delivered 5yr average ROIC of 17.9% and a 6.6% 5yr average Free Cash Flow margin (to end 2018). This is mostly thanks to its “Cody” distribution force of &gt;13,000 people – more than 3x larger than its closest competitor (sustainable competitive advantage or moat). The bulk of Coway’s revenue is generated through 5yr+ rental agreements, with low churn, which generates stable revenue growth, profitability and cash flows.
Apart from the uncertainty around Covid-19, and the impact this is having on Global Financial markets, the key controversy driving the Coway share price is what impact the recent inclusion of Netmarble (251270 KR) as a key, 25% shareholder will have on, not only its future dividend policy but also profitability. Although we might get some clues as to how this plays out following next week Monday's (30 March 2020) AGM, it could still be months before clarity returns and the share price is once again efficiently priced by the market. In this note, I try to offer insight, stress-testing and analysis on whether this is a rare entry point to a high-quality company or the beginning of a protracted downgrade cycle.
Based on my analysis it seems that these risks are already more than priced in following Coway’s 47% share price correction since the release of their 4Q2019 results on 14 February 2020, which ushered in a cut in dividend and lack of 2020F guidance. Coway currently trades on an 8.2x NTM PE, which is about half its 5yr historical average and a 5.0% 2020F dividend yield, on very conservative dividend pay-out assumptions, a significant discount to its 5yr historical average dividend yield of 3.9%. I estimate fair value at KRW80,000/share (66% upside).

코웨이(021240 KR): 불확실성이 가격에 반영된 가운데, 고품질 기업으로의 진입은 드문 기회

Coway Co Ltd

코웨이(021240 KR): 불확실성이 가격에 반영된 가운데, 고품질 기업으로의 진입은 드문 기회