Investment Appeal Remains Lacking
The author is an analyst of NH Investment & Securities. She can be reached at mj27@nhqv.com. -- Ed.
Kolmar Korea’s 4Q19 results missed expectations. In addition to the Covid-19 crisis, uncertainties linger in the domestic and overseas cosmetics markets -- a situation necessitating a conservative approach. Despite solid earnings at the pharmaceutical and CKM divisions, the firm’s role as a cosmetics play is currently limiting its investment appeal.
▶ Uncertainties towards domestic and overseas cosmetics markets
We maintain a Hold rating and TP of W45,000 on Kolmar Korea, adhering to a conservative view until sales decline at the domestic cosmetics division and slow sales growth at new Chinese plants show improvement.
It looks favorable that: 1) sales at the domestic cosmetics division turned up y-y at end-2019 (prior to the outbreak of Covid-19); and 2) combined sales at Chinese subsidiaries are improving. At the pharmaceutical and CKM divisions, consolidated earnings are to remain relatively stable going forward, as Covid-19 effects should be limited. With its shares currently trading at a 2020E P/E of 19x, further downside looks limited; however, the firm’s investment appeal remains lacking prior to confirmation of cosmetics sector improvement.
▶ 4Q19 review: Earnings disappoint on one-off costs and tepid sales at domestic cosmetics arm
On a consolidated basis, Kolmar Korea posted 4Q19 sales of W389.4bn (+2.5% y-y) and OP of W27.8bn (-30.3% y-y), with both figures missing consensus. Weighed upon by a hefty tax burden, the CKM division (CJ Healthcare) turned to net loss (y-y). Meanwhile, the firm booked one-off expenses of W5.0bn stemming from a regularly-scheduled accounting audit.
Sales at the domestic cosmetics division (-7.3% y-y) fell on both high-base effect (y-y) and an overall economic slowdown in the cosmetics industry. However, the degree of decline was smaller than that seen in 3Q19. Combined, sales at Chinese (Wuxi and Beijing) subsidiaries increased 12.6% y-y. A 31.4% y-y drop in sales at the Beijing subsidiary is attributable to the ongoing transfer of volume to the Wuxi plant. Thanks to the greater receiving of new orders from the Beijing plant, the Wuxi subsidiary recorded sales of W8.8bn.
With a QC issue now behind, the pharmaceutical division displayed double-digit sales growth. Meanwhile, the CKM division continued to enjoy a stable earnings stream, displaying 12.5% y-y top-line growth and an OPM of 15% (16.5% on a separate basis), led by strong sales of its K-cap products and new sales contributions from the H&B channel for hangover prevention tablets.