Stable Sales Growth Backed by Expansion at Home and Abroad
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 KRW105,000
We initiate our coverage of Cosmax with a BUY rating and a target price of KRW105,000, based on 12-month forward EPS of KRW4,083 and a target PER of 26x. We applied a 20% discount to the average PER of past six years (Chinabound sales growth period) to reflect the impact of COVID-19 on market conditions. A temporary dip in earnings caused by the pandemic (temporary plant shutdown in China, slowing global demand for cosmetics, etc.) was taken into account. The mainstay ODM (original design manufacturer) business should see sharp earnings improvement upon confirmation of demand upturn as the current crisis subsides.
Stable sales growth backed by expansion at home and abroad
Cosmax is Korea’s leading cosmetics ODM. Combined sales of overseas subsidiaries accounted for 49% of consolidated sales in 2019. The sales share of overseas operations is projected at 48% for 2020. Meanwhile, the company derived a greater share of operating profit at home (KRW40.2bn) vs. abroad (KRW13.8bn) in 2019. We expect a similar trend for 2020.
Amid the COVID-19 pandemic, a new opportunity was found with ODM of hand sanitizers. In 1Q20 alone, hand sanitizer sales were 15-16 times higher than those of last year. We forecast YoY growth in orders for 2Q and 3Q, albeit at a slower pace than 1Q. Hand sanitizers manufactured at the domestic plant in Pyeongtaek carry high margins due to large orders. The China plant is in normal operation from March. Cosmax hopes to secure new clients (Shanghai subsidiary) this year, in addition to the Chinese online cosmetics brand Perfect Diary (Guangzhou subsidiary). In the US, hand sanitizers are manufactured at the Ohio plant and production is scheduled at the New Jersey plant in the near future. The plant in Indonesia also manufactures hand sanitizers, keeping sales steady.
2020 consolidated operating profit forecast at KRW57bn (+5.6% YoY)
For 2020, we forecast consolidated sales of KRW1.4tr (+5.1% YoY) and operating profit of KRW57bn (+5.6% YoY). A slight improvement in earnings is expected despite COVID-19. Domestic standalone operating profit is projected at KRW44.5bn (+10.8% YoY) and combined operating profit of subsidiaries at KRW12.5bn (-9.5% YoY). Profit growth at subsidiaries will likely pick up heading into 2H20. By quarter, consolidated operating profit is estimated at KRW6.9bn (-49.0% YoY) for 1Q, KRW14.5bn (+10.5% YoY) for 2Q, KRW17.6bn (+69.5% YoY) for 3Q, and KRW18bn (+6.3% YoY) for 4Q.