The author is an analyst for NH Investment & Securities. She can be reached at jiyoony@nhqv.com -- Ed.
In 2023, the consumer goods portion of Korea’s exports surpassed that of capital goods for the first time in 25 years. While domestic consumption should weaken on higher interest expense burden in 2024, consumer goods exports to North America and ASEAN are set to expand. Korean consumer goods exports are to be driven up by structural factors, including: 1) the Korean Wave; 2) the US push to expand inventory in the manufacturing sector amid supply chain reshuffling; and 3) growing urbanization and a rising middle-income class in ASEAN countries. The Korean portion out of the global consumer goods market is estimated climb on mid/long-term capacity addition and production base diversification.
[Cosmetics] We foresee steady sales growth through the cosmetics value chain, aided by a sharp rise in the number of indie brand clients for ODMs and rising export portions for the US and ASEAN. In particular, cosmetics ODMs should enjoy strong growth, based on their globally competitive R&D capability and abundant capacity expansion across the globe. By channel, low-base effects should be the main growth driver for the DFS and China channels, but strong export growth is to support overall growth momentum. We offer Cosmax and AmorePacific as our top picks.
[Textile & apparel] Domestic consumption is to weaken if interest cost burden on households continues. But, while OEMs had a difficult 2023 due to a sharp drop in orders from excess inventory in the US, the industry should recovery upon entering a re-stocking period in 2024. Given the importance of high-quality products, reliable delivery, stable production capacity, and compliance with regulations of the target country, we like Hansae.
I. Korean consumer goods to see higher global market shares
The consumer goods portion of Korea’s exports in 2023 surpassed that of capital goods for the first time in 25 years. While domestic consumption should weaken on higher interest expense burden in 2024, consumer goods exports to North America and ASEAN are to expand. Korean consumer goods exports are set to increase on structural factors, including: 1) the Korean Wave; 2) the US push to expand inventory in the manufacturing sector amid supply chain reshuffling; and 3) growing urbanization and a rising middle-income class in ASEAN countries. The cosmetics and apparel segments stand out in the domestic manufacturing sector. The Korean portion out of global consumer goods market is estimated rise on mid/long-term capacity addition and production base diversification.
II. Cosmetics: Global expansion to kick off in earnest
Korea’s 2023 cosmetics exports (in the year to September) show a 30% y-y rise in non-China exports, with exports to non-China regions rising to represent 60% portion. Steep export expansion to US and ASEAN is to support the Korean cosmetics industry growth, even without China effects. In particular, cosmetics ODMs with strong R&D and numerous indie brand clients are leading the industry’s export expansion drive. Noting the anticipated return of Chinese tourists in full force in 2024, Olive Young’s inventory buildup also looks reasonable.
III. Textile & apparel: End of excessive inventory situation in sight
Affected by higher interest rates and slowing consumption, the textile & apparel sector has suffered a valuation trap amid continued share price de-rating, with shares trading at a 12M FWD P/E of 6x. With the pace of revenge consumption and pent-up demand weakening, both service and goods consumption are declining to the previous levels. In contrast, although 2023 has been difficult for OEMs due to sharply reduced orders from the US, which had been experiencing excessive inventory, OEMs are projected to enjoy better business conditions in 2024, as an inventory restocking period begins. And, large-scale OEMs that comply with global standards and have diversified production bases are well situated to benefit from such a development.
IV. Top picks
We maintain a Positive rating on the cosmetics/textile & apparel sectors. In 2024, consumer goods stocks capable of global market expansion deserve attention. We recommend: 1) Cosmax on structural export momentum and Olive Young-related benefits; 2) AmorePacific on rising North America sales portion and global rebalancing strategy; and 3) Hansae on strong benefits from downstream industry re-stocking.