Expected to Deliver Solid Earnings for 2020
The author is an analyst of Shinhan Investment Corp. She can be reached at hpark@shinhan.com. -- Ed.
Initiate coverage with BUY and target price of KRW160,000
We initiate coverage of Orion at BUY for a target price of KRW160,000. Investment points are: 1) increase in sales driven by strong demand for confectionery products in 1Q20 and subsequent improvement in margins; and 2) profit gains on rebound in overseas demand. Our target PER of 21.3x represents a 25% discount to the average PER of the past three years (reflects transition to a holding company structure), or a 10% premium to the end-2019 PER of 19.3x. Given the increase in overseas demand in 1H20, we see room for further upward adjustment in target valuations depending on whether the uptrend continues into 2H20. Taking into account the target price gap and earnings improvement expected in 1H20 and 2020, we recommend Orion as our sector top pick.
2020 growth outlook: Sales +6.6% YoY, OP +13.6% YoY
We forecast full-year 2020 sales at KRW2.16tr and operating profit at KRW372.2bn, with growth to come in at decent levels of 6.6% and 13.6% YoY, respectively, vs. 5% and 16.1% YoY in 2019. Surge in demand for confectionery products at home and overseas in 1H20 should drive top-line growth and margin gains. By region, sales in Korea will likely come in at KRW762.2bn (+4.0% YoY), China at KRW1.03tr (+5.8% YoY), Vietnam at KRW278.5bn (+13.9% YoY) and Russia at KRW87.8bn (+13.4% YoY). Operating profit should reach KRW122.1bn (+13.3% YoY) from domestic operations, KRW185bn (+16.6% YoY) from China, KRW54.6bn (+14.5% YoY) from Vietnam and KRW13.2bn (+5.6% YoY) from Russia. Consolidated operating profit margin should improve by 0.9%p YoY to 17.3% in 2020.
Focus on: 1) improving demand in 1H20; 2) stabilizing sales in China; and 3) overseas market diversification
Orion has remained the unrivalled leader in the instant chocolate pie market since 2015, with its market share reaching 37.9% as of end-3Q19. Concerns over earnings volatility are limited with the market share gap standing at 2.9%p vs. the runner-up and 19%p vs. the third largest player. Orion is expected to deliver solid earnings for 2020, backed by visible growth in demand for confectionery products in 1H20. After falling to 40% levels from the THAAD deployment issue in 2017, the portion of China sales has been stabilizing from 2018. Solid domestic earnings, growth potential added from a diverse range of overseas markets including Vietnam and Russia, and steadier China earnings should drive ample share price momentum going forward.