Outlook Brighter for Household Goods
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 for a target price of KRW34,000
We initiate our coverage of Aekyung Industrial with a BUY rating. Our target price of KRW34,000 is based on the 12-month forward EPS forecast of KRW1,738 and a target PER of 20x (average PER of 2018-2019, backed by growth in domestic home shopping sales and China earnings, at a 20% discount reflecting the slowdown caused by the COVID-19 outbreak). The outlook is brighter for household goods (including hand sanitizers and face masks) due to the pandemic. The low YoY base created from changes in sales channels for cosmetics in China from mid-2019 should come into play during 2Q20-3Q20. In addition, domestic cosmetics demand is expected to rebound in 2H20.
Household goods at home and online sales in China to drive growth
Aekyung Industrial transformed from a household goods maker into a cosmetics company, but is once again benefiting from strengths in household goods amid the COVID-19 pandemic. The recently launched hygiene product brand Labccin (hand sanitizers, hand cleaners, wet wipes, etc.) is posting better-than-expected sales and profits. Cosmetics operating profit, which jumped from KRW10.2bn in 2015 to KRW68.8bn in 2018 but dipped to KRW48.7bn in 2019 from channel changes in China, should record a steep rebound in 2020. Impact of the COVID-19 outbreak could push back the upturn in profit by roughly two quarters, but we expect cosmetics earnings to continue on an uptrend going forward. The company’s flagship brand Age 20’s, widely popular in Korea (home shopping, duty-free), Japan (home shopping, online) and China (online), generates nearly 90% of total cosmetics sales.
Aekyung Industrial relies on the duty-free channel for a relatively smaller share of sales (25% as of 2019) compared to LG Household & Health Care (39%) and Amorepacific (31%). With the online channel accounting for an increasing portion of sales in China, we expect to see gradual improvement in exports backed by growth in online sales in China in the aftermath of the outbreak.
2020 consolidated OP forecast at KRW61.2bn (+1.0% YoY)
For 2020, we forecast consolidated sales at KRW686.9bn (-2.1% YoY) and operating profit at KRW61.2bn (+1.0% YoY). Cosmetics operating profit is projected to slide 7.8% YoY to KRW44.9bn on a dip in domestic home shopping and duty-free sales. Operating profit from household goods should increase 35.9% YoY to KRW16.3bn on brisk sales of hygiene products during the pandemic. By quarter, we expect consolidated operating profit to reach KRW16bn (-30.4% YoY) in 1Q, KRW9.8bn (+60.1% YoY) in 2Q, KRW17bn (+14.2% YoY) in 3Q, and KRW18.5bn (+10.9% YoY) in 4Q.