Growth led by Household Goods and Beverages
The authors are analysts of Shinhan Securities. They can be reached at hpark@shinhan.com and jieun.ju@shinhan.com. – Ed.
Growth led by household goods and beverages than cosmetics
We now expect LG H&H to post consolidated sales of KRW1.99tr (-1.7% YoY) and operating profit of KRW176.6bn (-26.8% YoY) for 4Q22, in line with market consensus. The YoY decline in cosmetics sales should have slowed down to 9.9% in 4Q22 as economies reopened at home and abroad. Growth in sales of household goods and beverages likely continued at 3Q22 levels.
The luxury cosmetics brand The History of Whoo is expected to have recorded sales of KRW304bn (-10.5% YoY) in 4Q22 thanks to the slight upturn in duty-free sales. Cosmetics companies in general likely saw demand in China continue to fall short on a YoY basis, but the easing of lockdowns in the country should have helped to narrow the YoY decline in sales in 4Q22. Meanwhile, we believe steady sales growth continued for beverages with high margin contribution such as Coke Zero, as well as higher-priced household goods through e-commerce and discount store channels despite the decline in purchasing power of households.
Cost control efforts and overseas growth seen positive
The QoQ decline in USD/KRW exchange rate should have helped to ease the overall cost burden in 4Q22. Improvement in sales mix led by high-margin products likely continued for beverages and household goods. With consumption in China yet to snap back to normal levels, we believe cosmetics companies focused on improving profit by remaining conservative on marketing spend in 4Q22.
Sales in overseas markets excluding China have continued to record single-digit growth. We find it particularly positive that US sales growth has been exceeding 10% levels, helping to gradually diversify overseas sales away from China. Additional mid/long-term strengths of LG H&H include M&A opportunities with well-known overseas brands and steady growth driven by household goods and beverages during periods of weak cosmetics sales.
Earnings gains seem slow, but risks are also limited
Expectations continue to grow for an upturn in earnings from cosmetics, but actual progress has been slow due to the high base from massive sales volume posted by The History of Whoo in the past. Adjustments made to earnings forecasts remain limited, but our target price is slightly raised to KRW890,000 in reflection of the change in valuation base to 2023. We continue to recommend BUY on LG H&H.