Lotte Shopping and E-Mart Listed Among Low PBR Companies

Lotte Shopping and E-Mart have been included in the Korea Exchange's first list of low PBR (price-to-book ratio) companies. Both firms own large retail spaces and real estate, yet their market valuations fall below 20% of their book value. Insufficient profitability relative to their high asset base is cited as a primary reason for this undervaluation.
 
According to the Korea Exchange on November 1, a total of 151 listed companies were selected as low PBR firms, including 96 from the KOSPI and 55 from the KOSDAQ. Alongside Lotte Shopping and E-Mart, companies like Lotte Hi-Mart and BGF were also included. Lotte Shopping's PBR was recorded at 0.17, while E-Mart's was at 0.15. A PBR below 1 indicates that the stock is trading at a value lower than its net assets.
 
Although both companies are in the retail sector, the criteria for selection differ by industry. According to the Global Industry Classification Standard (GICS), Lotte Shopping is classified under discretionary consumer goods, while E-Mart falls under staples. Their PBRs were below the respective industry thresholds of 0.27 and 0.38, which represent the bottom 25% of their sectors. This list was compiled based on companies that have remained in the lower tier of their industry for six consecutive half-year periods or six out of the last seven half-year periods.
 
The low valuation is attributed to their low profitability relative to their asset size. As of the end of the second quarter this year, Lotte Shopping's total assets reached 38.4732 trillion won, but its operating profit was only 89.9 billion won, resulting in an operating margin of just 2.6%. E-Mart also reported total assets of 36.9404 trillion won but recorded an operating loss of 43 billion won during the same period.
 
Lotte Shopping's land asset revaluation in 2024 also impacted its low PBR. The book value of its land increased by approximately 9.47 trillion won, raising its total equity from 10.8364 trillion won at the end of 2023 to 17.0336 trillion won by the end of 2024. Although net assets increased significantly, the stock price did not keep pace, contributing to the low PBR.
 
There is a notable disparity in profitability among different business divisions. In the second quarter, Lotte Shopping's department store division generated an operating profit of 119.7 billion won, while its supermarket division reported an operating loss of 37.8 billion won. E-Mart's standalone operating profit was 25.6 billion won, a 64% increase from the previous year, but it turned to a loss on a consolidated basis. The hypermarket division incurred an operating loss of 27.1 billion won, and SCK Company, which operates Starbucks, reported a loss of 18.4 billion won.
 
The offline retail sector faces significant fixed costs, including store maintenance and labor, which can lead to sharp profit declines with even slight drops in sales. In contrast, platform companies like Coupang and Naver incur lower additional costs as their subscriber base grows after initial investments, while traditional retailers must open new stores to grow, leading to higher cost burdens.
 
Both Lotte Shopping and E-Mart are already taking steps to enhance their corporate value. Lotte Shopping has set a target of over 35% shareholder return from 2024 to 2026 and paid a dividend of 4,000 won per share last year. E-Mart plans to increase its minimum dividend to 2,500 won per share from 2025 to 2027 and will buy back and retire 280,000 shares annually from 2025 to 2026.
 
An industry insider stated, "While expanding dividends and share buybacks are important, ultimately, improving the profitability of the core business and major subsidiaries will be key to resolving the undervaluation."