2Q23 preview
The author is an analyst for Shinhan Securities. She can be reached at hpark@shinhan.com -- Ed.
We now expect Amorepacific to post consolidated operating profit of KRW50.3bn (positive swing YoY) on sales of KRW988.2bn (+5% YoY) for 2Q23, falling short of our previous forecasts by a wide margin. While sales continued to recover alongside the reopening of the global economy, operating profit likely fell short due to: 1) marketing spend for the Sulwhasoo brand’s renewal efforts; 2) inventory clearing costs incurred by Sulwhasoo ahead of the Tmall store renewal in China; and 3) bonus payments booked at the US subsidiary. Among these, inventory-related costs are expected to continue into 3Q23. Meanwhile, the company is unlikely to report a boost in domestic operating profit from channel mix improvement, with duty-free sales seen down by 29% YoY at KRW98.1bn in 2Q23.
Meanwhile, the China unit likely recorded 39% YoY growth in sales, driven mainly by Laneige and Innisfree. Sulwhasoo sales appear to have increased in offline channels on strong demand for renewed products. Sales from North America and Europe should have expanded by roughly 100% YoY. Sales contribution from Asian countries excluding China is also on the rise with top-line growth expected to come in above 30% YoY for 2Q23.
Growth outside China to drive mid/long-term uptrend
Mixed inventory of old and new products in distribution channels makes it hard to determine the actual sales performance of the revamped Sulwhasoo brand and newly released products such as the First Care Activating Serum VI. Nevertheless, we believe positive effects from rebranding efforts are starting to show with the Sulwhasoo brand reportedly enjoying triple-digit top-line growth since March backed by brisk offline sales.
Earnings from Innisfree and Laneige are also continuing on a recovery track. The Innisfree brand is focusing on increasing e-commerce sales in China beyond current 80% levels with most of its stores in the country set to be closed down by 1H23. In North American and ASEAN countries, Laneige and Innisfree brands are increasing their margin contribution with the expansion of customer reach through Amazon and health & beauty stores. In our view, growth in non-China sales to levels on par with China sales in 2023-2024 is a major investment point for Amorepacific in the mid/long-term.
Bottom-fishing opportunities to rise in near term
Large-scale cost issues will likely weigh on near-term earnings momentum, but we urge investors to focus on the undemanding valuations of Amorepacific shares given expectations for a turnaround in earnings from major brands and removal of cost issues in 2H23. We down-adjust our target price in reflection of revised earnings forecasts, but expect bottom-fishing opportunities to emerge in the near term.