Consumption in China Recovering
The author is an analyst of NH Investment & Securities. She can be reached at mj27@nhqv.com. -- Ed.
We have further revised down our 1H20 earnings estimates in light of rising uncertainties both at home and overseas amid the Covid-19 crisis. But, given both the start of recovery in local consumption in China and a strengthening in Amorepacific’s digital marketing, we believe that 1Q20 will represent the bottom point in terms of the firm’s quarterly earnings and share price.
Expect gradual earnings recovery after 2Q20
We maintain a Buy rating and a TP of W240,000 on Amorepacific. We have revised down our 1H20 earnings estimates in light of rising uncertainties (both at home and overseas) and abnormal business conditions due to the Covid-19 crisis. But, leaving our 2H20 and 2021 earnings forecasts unaltered, we stick to our existing TP. With outside activities still being limited in Korea, and with the number of Covid-19 cases having expanded significantly since March in ASEAN countries, the US, and Europe, uncertainties towards Amorepacific’s domestic and overseas earnings are to continue in 2Q20. That said, we positively view a recent rapid improvement in terms of both local consumption and operating environment in China. Assuming that restructuring efforts (including both a cutting in the number of weak performing offline stores and beefed up marketing for digital channels) are carried out at a brisk pace after 2Q20, both earnings improvement and a re-evaluation of EV are to be in the cards for Amorepacific once the Covid-19 crisis dissipates.
1Q20 preview: Earnings declines inescapable both at home and overseas
Making downward adjustments to our 1Q20 earnings estimates, we now size Amorepacific’s sales and OP for the quarter at W1.65tn (-26.6% y-y) and OP of W62.7bn (-66.4% y-y), respectively. The cuts to our estimates reflect a longer-than-expected earnings downturn at the firm’s duty-free shop (DFS) channel due to: 1) Chinese government restrictions on travel to foreign countries; and 2) decreased air routes.
We believe that Amorepacific’s 1Q20 DFS channel and Chinese business sales dropped 40% y-y and 25% y-y, respectively. Although operations resumed at most offline stores in China in March, we believe that some time will be needed before sales recover to the level seen last year, noting shortened operating hours and reduced customer traffic. Looking at e-commerce traffic, a high growth rate continues to be seen in Korea, and logistics in China appears to have normalized in March. However, related cumulative earnings are inevitably to show decreases compared to corresponding periods last year. Meanwhile, with the number of Covid-19 cases having ballooned since March in both North America and Europe, Amorepacific’s US and European businesses are to suffer an inescapable drop in sales growth?we believe that they will continue to operate in the red for now.