* Focus on Chinese subsidiary

- Chinese subsidiary to see lofty growth in 1Q10

We predict The Basic House will see strong sales growth in 1Q10 from its wholly owned Chinese subsidiary. We expect January-February RMB based sales to increase by no less than 45% thanks to the success of the menswear division and robust Chinese apparel consumption. Despite the KRW’s appreciation to the RMB, we estimate 1Q09 equity-method gains will record W7.3bn. We believe this figure is reasonable and easily attainable considering 2010F equity-method gains from its Chinese subsidiary. We forecast equity-method gains from the Chinese subsidiary will rise 24% to W24.4bn.

- New brands continue to enjoy phenomenal success

The rapid sales growth of same-store sales is notable. In 2009, same-store sales growth plunged 9.6% (+15.3% in 2008). In Jan-Feb, growth recorded a 24% YoY increase. It was mainly because cash cow divisions, such as women’s luxury suit wear and casual wear sales growth increased from +7.6% in 2009 to the 20% level. In addition, mid- to high-priced casual menswear brands’ (Mind Bridge and I’m David) sales rose 40% in January-February from 16% and 28%, respectively, in 2009. The menswear division enjoyed lofty growth thanks to brand awareness and the boom in the consumption market. Therefore, we believe it will help The Basic House expand the number of stores. The company plans to increase the number of stores from the current 500 to 700 by 2010.

- Sluggish domestic sales to continue through 1Q10, signs of gradual recovery nearing 2H10

We believe sluggish domestic sales continued through 1Q10. The company executed restructuring by shuttering 70 stores (437→367) in 2009. In 1H10, the company reflected almost all negatives by cutting the number of stores. We expect Jan-Feb domestic sales to dip 10% YoY. However, we believe The Basic House will turn for the better in 2H10 as. 1) Same-store sales should see YoY growth. 2) The company plans to expand the number of stores considering the sales recovery of street shops. 3) The clearing out of inventory should reduce the COGS ratio.

- Maintain BUY and price target of W11,500

We expect 1Q10 sales to drop 4% YoY to W39.5bn and operating profit to turn to red. But, EBT should record W5.2bn thanks to greater equity-method gains. The results are similar to 1Q09’s. Excluding KRW appreciation, it shows an improvement. We maintain BUY and our price target of W11,500 on the back of 1) the rapid growth of the Chinese subsidiary, 2) the possibility of a turnaround in the domestic division, and 3) a low valuation.