Cosmecca Korea: Where to Lean Is Englewood Lab

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

We maintain a conservative approach towards Cosmecca Korea’s shares, noting persisting uncertainties towards both the firm’s domestic operations and its Chinese subsidiaries. But, if earnings growth at Englewood Lab becomes visible, EV re-rating should be in the cards.

Concerns linger towards earnings volatility

Maintaining a Hold rating, we lower our TP on Cosmecca Korea from W16,000 to W11,500. We calculated our new TP by applying a target multiple of 24x to 12M FWD EPS of W510. The cut in TP reflects downward revisions (of 28% and 25%, respectively) to 2020E and 202F EPS estimates made in light of persisting uncertainties towards both the firm’s domestic operations and its Chinese subsidiaries.

With domestic and foreign market woes continuing to expand, concerns are mounting towards Cosmecca Korea’s earnings growth. Possessing a smaller customer base compared to major ODMs, the company faces large fluctuations in its sales. In addition, with the firm supplying only a small number of online-based customers (a segment which has grown rapidly of late), its earnings has been subject to high volatility as well. That said, if OTC orders at subsidiary Englewood Lab are realized, growth potential in the US market should come into the spotlight, laying a path for a re-rating of the firm’s EV.

EV to re-rate if earnings growth at Englewood Lab becomes visible

Englewood Lab recently obtained an OTC (general medicine) manufacturing license from the US Food and Drug Administration (FDA), a development which should enable Cosmecca Korea to produce functional cosmetics in the US (via Englewood Lab). With post-acquisition business restructuring now complete, Englewood Lab turned to the black last year. With Cosmecca Korea standing as the only Korean ODM player specializing in OTC cosmetics production, its earnings should rise in response to US OTC production. Such success would represent a good example of a domestic ODM player reducing its dependency (via the targeting of the US market) upon the Chinese market.

1Q20 preview: To show y-y earnings stability

We expect Cosmecca Korea to post 1Q20 consolidated sales of W87.3bn (+2.6% y-y) and OP of W2.5bn (+3.9% y-y). We believe that sales at the firm’s domestic business upped 2.7% y-y in 1Q20, led by steady sales to major clients. Although Englewood Lab experienced some raw material procurement issues in March due to the Covid-19 crisis, we believe that earnings remained stable y-y on both restructuring benefits and an increased number of clients. But, we believe that its Chinese subsidiaries suffered declining sales and widening losses due to sluggish sales at customers.