Deep-dive 2021-25: Hanssem

Hanssem (009240 KS) is Korea’s leading furniture company, selling home furniture and home remodelling services to consumers and interior packages to construction companies.

The company’s brand name is excellent. It has dominated the kitchen category for many years. Vertical integration enables it to maintain strong quality control, and its scale reduces costs.

Hanssem experienced strong growth until 2016 when Korea’s housing market deteriorated. The government introduced tightening measures, which reduced the pace of construction. IKEA entered the Korean market in 2014. And finally, a sexual assault by a Hanssem employee in 2017 led to a temporary consumer boycott of Hanssem-branded products.

It appears that the situation improved from 2019 onwards. That year, a new CEO took over, and Hanssem’s market share improved. Pre-sales of new apartments has now increased significantly. Sales of existing apartments also picked up during COVID-19.

The government’s plan to build 2 million public housing units appears to benefit the furniture industry, though its impact on home remodelling demand is unclear.

Founder Cho Chang-gul and his affiliated entities have recently decided to sell their stake in Hanssem to private equity firm IMM and Lotte Shopping. It looks like Hanssem’s strategy will shift following the acquisition, though the details have not yet been announced.

What is clear, however, is that capital allocation will improve significantly under IMM and Lotte leadership. IMM proposes cancelling Hanssem’s 6 million Treasury shares and increasing the dividend payout ratio to 50%. In addition, Hanssem will be repurchasing another 3% of shares outstanding until February 2022.

Cancellation of Treasury shares, a return to 7.4% operating margins, and modest top-line growth in line with the experience of Japanese peer Nitori would lead to a P/E 11x by 2024, compared to Hanssem’s historical P/E multiple of 26x.

And the fact that the private equity consortium was willing to pay KRW 220,000 per share suggests that they believe the shares are worth more than the current market price of KRW 93,600.

Risks with Hanssem include competition from IKEA, a post-COVID lull in home furniture demand and the possibility of related party transactions with new shareholder Lotte, a department store operator.

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