2Q16 standalone operating profit of W33.8bn (+29.8% YoY) misses expectations

Hyundai Home Shopping Network posted 2Q16 operating profit of W33.8bn, falling short of our estimate (W36.5bn) and the consensus (W35.1bn). Gross profit went up 8.2% YoY. Gross sales of the TV channel grew 7.5% YoY, the highest in the sector.

Profits were weak due to one-off costs and conservative accounting treatment. Costs increased by about W2bn with events celebrating the company’s 15th anniversary. 

Transmission fees increased by about W4bn after the rate of annual increase was adjusted from the low-5% to the low-7% range. The rate applied to 2Q16 is 11%. A 2%p hike in fee rates will increase costs by W5bn annually. Grade upgrade of some IPTV channels also affected the fee rate adjustment.

3Q16 operating profit to increase 22.7% YoY

Gross profit should climb 8.1% YoY in 3Q16. By channel, we expect gross sales of the TV channel to grow 5%, mobile 11.9%, and internet 19.6%. Gross sales of the catalog segment should shrink 38% and others 0.9%. Growth of the internet channel is attributable to the opening of a store in the open market 11st in 1Q16. It is positive that the TV channel continues to expand steadily.

Operating profit is projected to grow 22.7% YoY to W29.6bn, reflecting a 7.2% YoY increase in SO transmission fees. The fee increase seems conservative given that transmission fees to some cable TV operators were lowered by about 3.8% YoY in 2015. Costs will be reversed in 4Q16 if SO transmission fees are lowered. The reversal of SO transmission fees are estimated to be around W8bn if the fees are raised in the 6% (2015) and 5% range (2016).

Retain BUY for a target price of W185,000

We retain our target price for Hyundai Home Shopping Network at W185,000 based on 2017 earnings forecasts. Additional cost hikes are unlikely given decent growth of the high-margin TV channel and conservative accounting practice. We maintain our BUY rating on the company.

Source: Shinhan Investment