Korea Consumer:Our thoughts on minimum wage increase
What’s new? According to the Minimum Wage Committee, the 2018 minimum wage hasbeen set at KRW7,530 (up KRW1,060, equivalent to a 16.4% y-o-y increase) on 15 July.
Given President Moon pledged a minimum wage target of KRW10,000 by 2020, thisseems in-line with his commitment. The purpose of this is to increase disposable incomeand hence improve domestic consumption.
According to the Bank of Korea, 14.6% of total employees work below the minimum wage(2016) and 70% of them work under SMEs with less than 10 workers (mainly inrestaurants and small retailers). As such, we believe SMEs will face more of a burdenthan large retailers.
Continue to like convenience store names: On 17 July, BGF Retail and GS Retailshares fell 3-6% after the news on the minimum wage hike. However, we do not expectthis to necessarily cause additional expense for franchisees and believe the recent pullback provides a good buying opportunity. Assuming a franchisee hires one part timeemployee for 16 hours per day, this would incur an additional KRW509k monthly labourcost. However, if we assume the franchisee works an additional three hours per day andreduces employee hours by the same amount, this would more than offset the increase inlabour cost increase (see fig 4 on page 3 for details).
Separately, the earnings impact on E-Mart will be less than KRW20bn (2.9% of 2018eoperating profit) given most part time employees have already been converted to full timein 2013. In addition, we believe reallocation of resources will result in no aggressive newhires (flat number-of-employee growth during 2013-2016).
Valuation and risks: There are no changes to our valuation methodology; we maintainour target price of KRW77,000 for GS Retail and KRW150,000 for BGF Retail. Keydownside risks include 1) new store opening cannibalizing existing stores, 2) weakerthan anticipated domestic consumption and 3) M&A activities with limited synergies.