Cosmetics
The author is an analyst for Shinhan Securities. She can be reached at hpark@shinhan.com -- Ed.
2Q23 earnings to miss expectations
LG H&H is expected to have registered consolidated operating profit of KRW183.6bn (-15% YoY) on sales of KRW1.78tr (-5% YoY) in 2Q23, coming short of our estimates. Sales from household goods and beverages likely increased by 2% and 8% YoY, respectively, continuing on an uptrend as in 1Q23. The cosmetics division should have seen sales fall 15% YoY, weighed down by sluggish duty-free sales and lack of growth in the Chinese market. Duty-free sales are estimated to have dropped 36% YoY to KRW212.8bn. After the void in demand early this year created by Chinese daigou shoppers’ boycott of Korean duty-free shops, restocking demand has picked up since March with the reopening from the pandemic, but has not been strong enough to reverse the decline in duty-free sales.
Operating margin likely remained weak across all divisions in 2Q as in the previous quarter. The cost burden has gone up with prices of some raw materials (orange concentrates, sugar, etc.) rising sharply due to extreme weather events in Brazil and Thailand and India’s restriction of sugar exports. Profitability took a hit with a drop in sales of chemical ingredients. In addition, the household goods division had to cover more of the common costs for the cosmetics business. Effects of improvement in sales channel and product mix do not appear to be as significant as a year ago.
Efforts needed to move away from China into other markets
Given the slow improvement in cosmetics earnings, a dramatic change is required for The History of Whoo brand which accounts for the lion’s share of sales. The brand seems to be seeing the effects of improved channel mix with the portion of e-commerce in China sales rising to high-40% levels, but it ranks lower on e-commerce sites than it did three years ago. While its expansion on Douyin and new Chinese platforms like Kuaishou is positive, we believe long-term growth will hinge on market share gains in ASEAN countries and North America as China is no longer a growth driver for Korean cosmetics brands.
Take a long-term approach
We lower our target price for LG H&H on downward revision of our earnings forecasts. Korean cosmetics brands are moving away from China towards other markets for growth. In the long-term perspective, we will need to pay attention to the company’s efforts to improve the financial health of overseas subsidiaries, including in the US, and revamp The History of Whoo brand.