The author is an analyst for Shinhan Securities. He can be reached at sanghoonpure.cho@shinhan.com -- Ed.
3Q23 OP meets consensus at KRW84.3bn (+12.3% YoY)
Lotte Chilsung Beverage posted operating profit of KRW84.3bn (+12.3% YoY) on sales of KRW830.4bn (+5.9% YoY) in 3Q23, meeting the consensus estimate. Sales came in at a record high despite unfavorable weather conditions, helping to offset the effect of high costs.
The beverage business registered sales growth of 5.7% YoY on price hikes for major product categories, brisk sales of high-margin carbonated drinks, and discontinuation of money-losing stock keeping units. The liquor business saw sales rise 4.3% YoY on increased sales volume of Saero. With monthly sales of Saero reaching KRW11bn, the company’s soju market share stood at 8.5% in 3Q23. Operating profit from liquor products soared 110% YoY with capacity utilization for soju production rising to 82% to meet robust demand.
Visible growth in overseas earnings expected in 2024
Pepsi-Cola Products Philippines is included as a consolidated subsidiary from 4Q23. The subsidiary’s operating profit, which has remained low despite sharp sales growth (CAGR of 10%), will likely improve with the adoption of Lotte Chilsung Beverage’s zero-based budgeting (ZBB) program. The company guidance for an operating margin of 6% in 2024 and 8.5% in 2025 points to room for upward revision of our operating profit forecasts by 24% for 2024 and 34% for 2025.
In our view, the inclusion of Pepsi-Cola Products Philippines in consolidated statements has three implications. First, visible growth in overseas sales is expected, with overseas market exposure to rise from 12% in 2022 to 21% in 2023 and 38% in 2024. Second, the subsidiary is likely to serve as a production base for further expansion into Southeast Asian markets for beverage and soju products. Securing local production facilities will help to create a virtuous cycle of falling logistics costs and rising production efficiency levels. Third, the increase in overseas sales share could spark a re-rating of shares going forward.
Focus on new products and market share gains than short-term earnings
We retain our BUY rating on Lotte Chilsung Beverage. Market expectations are rising for the liquor business that has been a weak link for the company. Various efforts put in place for the beer business are seen positive, such as hybrid production, renewal of Kloud beer, and collaboration with overseas brands. Saero sales are expected to reach KRW130bn this year on growing market penetration, pushing up the company’s soju market share to 23% even after accounting for cannibalization of the market share of original Chum Churum products. The launch of a new Kloud beer product at the end of November should be able to provide additional momentum.