Soju and Beer Sales Increase Despite Market Contraction
The author is an analyst of Shinhan Investment Corp. She can be reached at hpark@shinhan.com. -- Ed.
1Q20 review: Earnings surprise at OP of KRW56.1bn (positive swing YoY)
Hite Jinro swung into positive territory YoY in 1Q20 with consolidated operating profit of KRW56.1bn. It came as an earnings surprise, exceeding the market consensus (KRW32.1bn) and our estimate (KRW35.1bn) by more than KRW20bn. Consolidated sales jumped 26.2% YoY. Profit growth was mainly driven by increased sales on market share gains and margin improvement. The domestic beer and soju markets contracted by more than 10% and about 2% YoY, respectively, in 1Q due to weak on-trade demand. However, Hite Jinro’s sales climbed by 29.4% YoY from beer products and by 26.8% YoY from soju products. Sales growth with market share gains drove a 4.6%p YoY improvement in the COGS ratio. Marketing expenses (promotions, advertising) decreased by roughly KRW7bn YoY amid sluggish on-trade market conditions.
2Q20 outlook: OP to continue upwards to KRW32.6bn (+207.7% YoY)
We expect earnings to continue improving on market share gains in 2Q. The soju business should see a continued boost from Jinro is Back, which helped expand the market share by more than 10%p YoY in 1Q. We also have no worries over beer sales given steady growth in the market share. Beer and soju sales are forecast to increase 27.7% and 9.7% YoY, respectively. This should drive up consolidated sales by 15.8% YoY. Profit growth should hinge on promotion expenses. With the recent resurgence of COVID-19 cases slowing recovery in on-trade market conditions, short-term earnings are unlikely to be affected by promotion expenses. Consolidated operating profit is projected to surge 207.7% YoY to KRW32.6bn in 2Q.
Retain BUY and raise target price by 17.9% to KRW46,000
There is a possibility that promotion expenses will increase again in 2H20. However, we still expect to see margin improvement, with the cost burden reduced by stronger-than-expected sales growth. Hite Jinro shares are trading at undemanding valuations when compared with the levels recorded during market share gains in 2015-2016 (average PER of 30.7x during beer market share expansion in 2015, 46.2x during soju market share expansion in 2016). We retain our BUY rating on Hite Jinro and raise our target price by 17.9% to KRW46,000.