COVID-19 Outbreak Stokes Demand for Health Functional Foods
The authors are analysts of Shinhan Investment Corp. They can be reached at changmin.yoon86@shinhan.com and kimkyuri@shinhan.com, respectively. -- Ed.
Chong Kun Dang Healthcare preview:1Q20 sales +25% YoY, OP +35% YoY
Chong Kun Dang Healthcare, a health functional food manufacturer and key subsidiary of Chong Kun Dang Holdings, is expected to have extended growth in1Q20 with sales of KRW101.6bn (+25.1% YoY) and operating profit of KRW20.2bn (+34.9% YoY). It has enjoyed a boost from the COVID-19 outbreak. The Lunar New Year’s holiday in January and brisk performance of other products drove earnings growth.
Probiotics sales likely came in at KRW55.7bn (+24.6% YoY) for 1Q. Strong growth is sustained despite high base effect (2019 full-year sales growth of 124% YoY). Sales from other products (Iker, Eye Clear, Krill Oil, Real Man) should have amounted to KRW30.3bn (+41.6% YoY).
2020F sales growth of 22% YoY;all products to grow steadily in the wake of COVID-19
The COVID-19 outbreak has stoked demand for health functional foods. The number of first-time consumers is on the rise. Considering that health functional foods are taken consistently over time, the market is expected to grow steadily even after the pandemic comes to an end.
For 2020, we forecast Chong Kun Dang Healthcare to deliver sales of KRW432.5bn (+22.2% YoY) and operating profit of KRW82.5bn (+36.7% YoY). The subsidiary has strength in new product development, manufacturing, distribution, and marketing. Earnings are on a fast growth path, driven by continuing growth of the mainstay product Lacto-Fit and full-fledged marketing efforts for other products that started in 2Q-3Q of 2019. Sales of other products should reach KRW132.7bn (+26.6% YoY) for the full year.
Ample upside given solid growth of functional food subsidiaries and value of other subsidiaries
The fair value of Chong Kun Dang Holdings’ stakes in six major subsidiaries is estimated at KRW1.08tr. The enterprise value of Chong Kun Dang Healthcare alone stands at KRW1.32tr. The equity value of the six subsidiaries comes to KRW808.5bn when applying a 25% discount for holding company. Chong Kun Dang Holdings currently has a market capitalization of KRW571.1bn. We see ample upside potential given solid growth of health functional food subsidiaries (Chong Kun Dang Healthcare, Chong Kun Dang Bio) and the value of other subsidiaries. Its enterprise value is poised to rise going forward.