Operating Profit Trumps Consensus by 44% in Q1

The author is an analyst of NH Investment & Securities. He can be reached at mj27@nhqv.com. -- Ed.

 

Defying Covid-19 concerns, LG H&H 1Q20 OP trumped consensus by 44% on better-than-expected: 1) earnings at its DFS channel; 2) Chinese local consumption; and 3) door-to-door channel sales. With the firm’s Whoo brand showing unrivaled demand despite unfavorable business conditions, further strong earnings performance should lie ahead.

Whoo brand proving unrivaled demand

Adhering to a Buy rating, we raise our SOTP-derived TP on LG H&H by 13% from W1,500,000 to W1,700,000, reflecting a 11% boost in 2020E EPS.

The company’s Whoo brand is proving its brand power, delivering robust sales despite a general dampening in consumption amid the Covid-19 crisis. DFS channel worries are to be in play this quarter, but we predict DFS sales will remain stable thanks to strong demand for Whoo brand products. With the pandemic subsiding in China since mid-March, sales growth in China should soon get back to the pre-Covid-19 crisis level after 2Q20.

1Q20 review: Delivers strong China-related sales (better-than expected DFS channel sales + local consumption)

LG H&H has delivered an earnings surprise for 1Q20, posting consolidated sales of W1.90tn (+1.2%y-y) and OP of W333.7bn (+3.6% y-y), with OP beating consensus by 44%. Defying Covid-19, OP beat consensus by 44% on better-than-expected: 1) earnings at the DFS channel (-16% y-y); 2) Chinese local consumption (-6% y-y); and 3) door-to-door channel sales (+7% y-y).

The cosmetics division achieved sales of W1.07tn (-6.4% y-y) and OP of W221.5bn (-10.0% y-y). The Whoo brand is showing a solid sales trend despite an unfavorable business environment (DFS channel: -10% y-y; Chinese local consumption: -5% y-y). But, with SU:M brand sales being dealt a serious blow by the Covid-19 crisis, the firm is in strong need of cultivating a second brand.

The household goods division recorded sales of W479.3bn (+19.4% y-y) and OP of W65.3bn (+50.7% y-y). Earnings significantly improved on the addition of some New AVON sales (previously included only in the cosmetics sector), higher demand for hygiene products, and eased promotion expenses.

The beverage division recorded sales of W350.5bn (+5.0% y-y) and OP of W46.8bn (+43.9% y-y), supported by increased online and delivery food sales, an improved product mix (solid sales of high-margin products such as Monster and Coke Zero), and eased promotion expenses.

 

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