Lock & Lock's solid growth attracts renewed attention

By Lee Gyu-sun

Lock & Lock, is a Korean kitchen and household product brand with a presence in about 120 countries.

In 1998, the company released four-sided lock type containers for the first time in Korea. Due to the superior quality of these containers, the company established solid brand recognition in major markets, including the U.S. and Europe. Furthermore, the company made advances into the world’s largest consumer market, China in 2004.

Food containers account for 48 percent of the company’s total revenues, with outdoor and other kitchen and household items making up 24 and 28 percent, respectively. Revenue from other kitchen/household items is steadily rising due to continuous new product launches. Notably, the proportion of plastic containers being manufactured is decreasing, while that of glass and ceramic containers is rising.

By region, China contributes the lion’s share of revenue at 45 percent, followed by 37 percent in the domestic market with profits from Southeast Asian countries at 6 percent. Chinese and Southeast Asian revenue contributions are expected to increase steadily, with revenue from these regions anticipated to expand by 30 to 40 percent annually.

The company currently operates 20 overseas subsidiaries in 10 countries, five of which are production subsidiaries. The most recently established is the Chilean subsidiary set up in July 2011. The company plans to add new overseas subsidiaries, particularly in emerging markets, including South America and Southeast Asia.

Among the top three players in the global food container market, Lock & Lock lags far behind Tupperware and Rubbermaid with a global market share of just 9 percent. However, the company’s global presence is expected to improve steadily thanks to its expansion into emerging economies. Lock & Lock’s growth should accelerate in line with economic growth in these markets, especially China.

A breakdown of the company’s operating costs, show raw materials at 34 percent, labor costs and depreciation at 16 percent, and outsourcing at 50 percent, excluding plastic products. Polypropylene accounts for 26 percent of total raw material costs, thus, prices of the thermoplastic polymer greatly affect company profits.

Lock & Lock CEO Kim Jun-il holds a 52.8 percent stake in the company, with an 11.3 percent stake held by other parties and 1.4 percent by employees. No changes to the ownership structure are expected in 2012.

KDB Daewoo Securities suggests a buy rating and a target price of 42,000 ― up around 38 percent from the current price. The company’s stock is currently trading at a record-low valuation due to poor earnings in 2011, but is expected to improve for two reasons.

Firstly, earnings are anticipated to recover significantly in 2012. Secondly, the company’s long-term growth momentum from rapid Chinese and Southeast Asian revenue growth and product category expansion, which has warranted a valuation premium, remains solid.

Investment points

The Chinese market remains attractive. Chinese revenues ― forecast at 280 billion won in 2012, accounting for 47 percent of the total revenue ― are projected to increase 28.9 percent each year between 2011 and 2015.

The growth will be based on strong market dominance, boosted by expansion into second- and third-tier cities, product diversification, and the rapid growth of distribution channels.

Lock & Lock is currently operating three subsidiaries in first-tier cities and 24 branch offices in second and third-tier cities in China. Given that China has 274 second and third-tier cities, the company has high potential to increase revenues through regional expansion there. The proportion of revenue from second- and third-tier cities out of the company’s total revenues will rise steadily by establishing new branch offices and through an aggressive franchise expansion, according to Daewoo Securities.

The rapid growth of franchise and home shopping revenues boosts confidence in the Chinese revenue outlook. Based on our conservative estimate, the company’s Chinese franchise revenues are forecast at 10 billion won in 2012 and 110 billion won in 2015.

Its Chinese home shopping revenues are projected to climb 41.0 percent each year between 2011 and 2015, boosted by industry growth and a solid income generated through Korean home shopping channels.

Lock & Lock’s revenues from Southeast Asia are projected at 41 billion won for 2012, accounting for 7 percent of total revenues, and are forecast to show a compound annual growth rate of 43.6 percent between 2011 and 2015.

Such a robust performance should be driven by growth in consumption owing to increases in population and personal income in this region, increasingly modernized distribution channels, synergies from domestic retailers’ advances into the region, and successful brand positioning.

Product category expansion is also driving Lock & Lock’s growth. Product diversification should continue to lower the contribution of plastic food containers to total revenues, which stands at only 32 percent. The company’s core competitiveness comes from its superior research and development capability, strong brand power, and dominance over distribution channels.

Risks related to Lock & Lock include concerns about cannibalization, and a potential decline in profitability arising from the implementation of its top-line growth strategy.

In 2012, revenues and operating profits are projected to improve 27.3 percent and 51.2 percent, respectively, while net profit is forecast to rise by 65.9 percent. Notably, operating profit margin is anticipated to rise by 2.9 percentage points from 15.4 percent in 2011 to 18.3 percent in 2012.

An increase in selling, general and administrative expenses, including personnel, lease, and transportation spending, pushed down operating profit margin sharply in 2011. However, price hikes by an average of 9.8 percent in May and July 2011 and sales growth are expected to steadily offset larger expenses.

In addition, cost reduction from the operation of a Vietnamese glass factory, and a one-off factor ― no operating profit margin on business to business sales of 8 billion won due to a promotion at China-based Amway in 2011 ― should also boost the company’s profitability.