Philippine Markets Newsletter

This Korean furniture company is benefiting from the At-Home Revolution both locally and internationally, leading to a recovery to 11% returns

June 16, 2021

The At-Home Revolution is fueling the home furniture industry, and Korea’s largest furnishing company is riding on this trend.

The company expanded in its domestic and global markets to remain competitive. However, as-reported metrics do not recognize its success, reporting lackluster returns. Uniform Accounting, on the other hand, sees how profitable this company actually is.

Also below, Uniform Accounting Embedded Expectations Analysis and the Uniform Accounting Performance and Valuation Tearsheet for the company.

Philippine Markets Daily:
Wednesday Uniform Earnings Tearsheets – Asia-listed Focus
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The “At-Home Revolution” is more than just a trend that resulted from most people spending a lot more time at home than before.

Consumers’ abrupt shift in behavior because of the pandemic rewarded companies that adapted and supplied the work-from-home, study-at-home, and play-at-home needs. For example, this trend boosted the PC market during the pandemic—the opposite direction the industry was heading because of the post-PC era.

However, it is not just computer hardwares, softwares, cloud, games, or smart TV companies that are experiencing the benefits of the At-Home Revolution.

With consumers’ spending habits leaning toward real estate and other home investments like remodeling and redecorating, the home furnishing industry also saw an upward trend. Furthermore, the growing demand for At-Home Revolution devices gave a sales boost to the furniture that complement it.

The current upside in the home furnishing market is benefiting South Korea’s largest furniture retailer—Hanssem Co., Ltd.

Hanssem started off as a kitchen furniture company in 1973. It was one of the first companies in the country to introduce the concept of “stand-up” kitchen, removing all the inconveniences of the traditional kitchen wherein the fire was set low on the ground. This western kitchen concept has made cooking easier for Koreans.

With a goal of contributing to the development of residential settings, the firm expanded its interior furniture offerings to bedrooms, living rooms, study rooms, and others. It also incorporated technology to its offerings, conquering the current limitations of having just plain furniture at home.

To create a differentiated living culture at home, Hanssem partnered with Samsung to develop new smart home solutions by combining their expertise in furniture and technology.

Moreover, in order to stay ahead of the competition, Hanssem has been expanding domestically and internationally.

In 2014, before the arrival of IKEA in South Korea, Hanssem opened its sixth flagship store in Mokdong. In the following years, it then opened more flagship stores in other downtown areas for better consumer accessibility.

To expand its global presence beyond its markets in the U.S. and Japan, Hanssem opened a flagship store in Shanghai in 2017.

Given this growth, Hanssem is expected to accumulate a wider customer base, which should lead to robust returns. However, as-reported metrics show its recent return on assets (ROAs) are trending below 5% as if it’s not benefiting from the At-Home Revolution.

Uniform Accounting provides a more accurate view of how profitable Hanssem is. The company actually has had stronger returns for the past 15 years, with current Uniform ROA at 11% in 2020.

What as-reported metrics fail to do is to consider the company’s excess cash on the balance sheet. While most companies inherently need some level of cash to operate, the portion of that balance that is earning limited or no return—or excess cash—ends up diluting as-reported ROAs.

When excess cash remains included in the company’s asset base while computing its performance metrics, the company’s profitability and capital efficiency may appear weaker than it actually is.

Removing excess cash allows investors to see through the distortions that come from management carrying much more cash on the balance sheet than what is operationally required.

Hanssem has had a significant amount of excess cash sitting idly in its balance sheet, ranging from 8% to 27% of its as-reported total assets, for the past sixteen years except in 2014.

After excess cash and other necessary adjustments are made, we can see that Hanssem’s current returns are actually a lot stronger than what as-reported metrics show. Without these adjustments, it appears that the company’s expansion efforts are not translating into profitability, leading to significantly poorer valuations.

Hanssem’s profitability is much more robust than you think

As-reported metrics are distorting the market’s perception of the firm’s profitability. If you were to just look at as-reported ROA, you would think that the company is a weaker business than real economic metrics reveal.

Hanssem’s Uniform ROA has been higher than its as-reported ROA in the past fifteen years. For example, when Uniform ROA was at 27% in 2015, as-reported ROA was only 14%.

The company’s Uniform ROA for the past sixteen years has ranged from 1% to 27%, while as-reported ROA has ranged only from 1% to 14% in the same timeframe.

Specifically, Uniform ROA gradually improved from 1% in 2005 to 27% in 2015, before subsequently declining to 6% in 2019. It then recovered at 11% in 2020.

Hanssem’s Uniform earnings margins are weaker than you think but its robust Uniform asset turns make up for it

Volatility in Uniform ROA has been driven by trends in both Uniform earnings margins and Uniform asset turns, with peaks and troughs lining up historically with that of Uniform ROA.

Uniform margins steadily expanded from immaterial levels in 2005 to a peak of 7% in 2016, before falling to 2% levels in 2019. It then improved to 3% in 2020 following the At-Home Revolution trend.

Meanwhile, Uniform turns gradually increased from 2.3x in 2005 to 4.1x in 2015 before falling back to 2.5x in 2019. It then rebounded to 3.3x in 2020.

SUMMARY and Hanssem Co., Ltd. Tearsheet

As the Uniform Accounting tearsheet for Hanssem Co., Ltd. (009240:KOR) highlights, the Uniform P/E trades at 20.6x, which is below the global corporate average of 23.7x but around its own historical average of 22.2x.

Low P/Es require low EPS growth to sustain them. In the case of Hanssem, the company has recently shown a 75% Uniform EPS growth.

Sell-side analysts provide stock and valuation recommendations that in general provide very poor guidance or insight. However, sell-side analysts’ near-term earnings forecasts tend to have relevant information.

We take sell-side forecasts for Korean International Financial Reporting Standards (K-IFRS) earnings and convert them to Uniform earnings forecasts. When we do this, Hanssem’s sell-side analyst-driven forecast is a 35% and 25% EPS growth in 2021 and 2022, respectively.

Based on the current stock market valuations, we can use earnings growth valuation metrics to back into the required growth rate to justify Hanssem’s KRW 117,500 stock price. These are often referred to as market embedded expectations.

Hanssem is currently being valued as if Uniform earnings were to grow 5% annually over the next three years. What sell-side analysts expect for Hanssem’s earnings growth is above what the current stock market valuation requires in 2021 and 2022.

Furthermore, the company’s earning power is 2x above the long-run corporate average. Also, cash flows and cash on hand are 6x above its total obligations—including debt maturities, and capex maintenance. All in all, this signals a low credit and dividend risk.

To conclude, Hanssem’s Uniform earnings growth is in line with its peer averages, and the company is trading above its average peer valuations.

About the Philippine Market Daily
“Wednesday Uniform Earnings Tearsheets – Asia-listed Focus”

Some of the world’s greatest investors learned from the Father of Value Investing or have learned to follow his investment philosophy very closely. That pioneer of value investing is Professor Benjamin Graham. His followers:

Warren Buffett and Charles Munger of Berkshire Hathaway; Shelby C. Davis of Davis Funds; Marty Whitman of Third Avenue Value Fund; Jean-Marie Eveillard of First Eagle; Mitch Julis of Canyon Capital; just to name a few.

Each of these great investors studied security analysis and valuation, applying this methodology to manage their multi-billion dollar portfolios. They did this without relying on as-reported numbers.

Uniform Adjusted Financial Reporting Standards (UAFRS or Uniform Accounting) is an answer to the many inconsistencies present in GAAP and IFRS, as well as in PFRS.

Under UAFRS, each company’s financial statements are rebuilt under a consistent set of rules, resulting in an apples-to-apples comparison. Resulting UAFRS-based earnings, assets, debts, cash flows from operations, investing, and financing, and other key elements become the basis for more reliable financial statement analysis.

Every Wednesday, we focus on one company listed in Asia that’s relevant to the Philippines and that’s particularly interesting from a UAFRS vs as-reported standpoint. We highlight one adjustment that illustrates why the as-reported numbers are unreliable.

This way, we gain a better understanding of the factors driving a particular stock’s returns, and whether or not the firm’s true profitability is reflected in its current valuations.

Hope you’ve found this week’s Uniform Earning Tearsheet on an Asian company interesting and insightful.

Stay tuned for next week’s Asia company highlight!


Angelica Lim
Research Director
Philippine Markets Daily
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