Sensitive to Chinese Consumption
The authors are analysts of Shinhan Investment Corp. They can be reached at jwsung79@shinhan.com and hanny.lee@shinhan.com, respectively. -- Ed.
Initiate coverage with BUY and target price of KRW230,000
We initiate coverage of Amorepacific at BUY for a target price of KRW230,000, based on the 12-month forward EPS forecast of KRW5,238 and a target PER of 44x. Our target PER is based on the past four-year average to reflect high sales share(90%) of cosmetics and strong brand exposure/awareness in China. Cosmetics sales could temporarily weaken in domestic and Chinese markets due to the COVID-19 pandemic. However, we expect growth to resume in both markets from 2H20, with cosmetics consumption already on a steep recovery track in China. Amorepacific will likely see sales growth ahead of peers once cosmetics sales start to recover in key markets.
Sensitive to Chinese consumption due to large profit share of cosmetics
Amorepacific boasts well-known brands like Sulwhasoo, Hera, Laneige, and Innisfree. The company expanded into the Chinese market ahead of competitors and established broad coverage through various sales channels. The US subsidiary is also delivering sales growth.
The company generates 91% of sales and almost 100% of profit from cosmetics, which is far higher than peers. As such, it sees relatively strong sales when market conditions are positive on growth in Chinese cosmetics consumption, duty-free sales to small-scale Chinese merchants, and Chinese inbound traffic. The duty-free channel contributes to only 31% of total cosmetics sales but its operating profit share is high at 43%, driving up domestic operating margin as a result. Despite little change in sales, overseas operations (mostly China) have seen sharp profit declines over the past few years due to increased costs (marketing expenses, etc.).
2020 consolidated OP forecast at KRW329bn (-23.1% YoY)
For 2020, we forecast consolidated sales of KRW5tr (-10.4% YoY) and operating profit of KRW329bn (-23.1% YoY). Earnings should be negatively affected by the COVID-19 pandemic. By division, domestic operating profit from cosmetics is projected at KRW254.5bn (-19.5% YoY) and household goods at KRW3.3bn (-0.2% YoY). Operating earnings from Asia operations (including China) will likely come in at KRW85.1bn (-29% YoY). Cosmetics operating profit should decline YoY in 1H20 but turn around in 2H20. Consolidated operating profit is expected to reach KRW53.3bn (-71.4% YoY) in 1Q, KRW62.8bn(-28.4% YoY) in 2Q, KRW130.6bn (+21.5% YoY) in 3Q, and KRW82.3bn (+79.2% YoY) in 4Q20.