Cosmax
The author is an analyst of Shinhan Securities. She can be reached at hpark@shinhan.com -- Ed.
1Q OP results to fall short but China earnings on a recovery path
We now expect Cosmax to post consolidated operating profit of KRW 11bn (- 20% YoY) on sales of KRW401.7bn (+1% YoY) for 1Q23, missing the consensus estimate of KRW14.2bn. In our view, key causes of sluggish earnings include: 1) rise in cost ratio from larger domestic orders for makeup products and time gap between the purchase and input of raw materials; and 2) conservative valuation of certain accounts receivable. In addition, the company could have booked remaining expenses related to the closure of the Ohio unit in 4Q22 and increased costs at the integrated New Jersey unit. Total losses from US operations should have declined with the Ohio unit officially closed from the first week of January, but it may take some time for capacity utilization rates at the New Jersey unit to rise in earnest. Domestic operations appear to have been on a steady growth trajectory with demand rising alongside Korea’s transition into the endemic phase. While the pace of order intake from Japan likely slowed QoQ, sales should have continued upward on strong demand from clients enjoying visible growth. In Southeast Asia, Cosmax is expected to start building a new production plant in 2H23, with existing facilities running at full capacity as of 2H22.
Top-line expansion driven by domestic and China operations
For domestic operations, increasing orders for color makeup products may come at the expense of margins. However, ASP hikes carried out from 2H22 should contribute to gradual improvement in cost ratios from 1Q23 onwards. The Shanghai unit returned to normal operations in early/mid-March, with notable improvement in capacity utilization rates seen in March-April compared with the 40% levels recorded in January. We believe local clients are increasing order placements to meet higher demand expected during China's 618 (June 18) online shopping festival. Construction on a new plant for the joint venture between Cosmax Guangzhou and Yatsen Group is set for completion in June, but we will need to wait until end-May to see whether earnings from the JV will be included in consolidated statements. With half of this year’s KRW70bn-80bn capex budget set aside for capacity expansion at the second Pyeongtaek plant, domestic and China operations are likely to emerge as the main drivers of top-line growth at Cosmax in the near term.
Continue to favor major beneficiary of recovering China demand China’s reopening appears to be in full swing with key consumables brands reporting 20-30% YoY growth in retail sales for March. Stock market focus will likely concentrate on large-cap cosmetics brand companies with potential duty-free earnings gains, but we continue to favor Cosmax as a major beneficiary of recovering China demand.