Domestic Demand for Home Appliances Rising
The author is an analyst of NH Investment and Securities. She can be reached at jy.lee@nhqv.com. -- Ed.
Helped by robust sales of white goods and SG&A expense reduction, Lotte Himart’s 2Q20 earnings should surpass expectations. In 2H20, strong earnings should continue on rising domestic demand for home appliances, y-y low-base effect for air conditioner sales, and restructuring at sluggishly performing stores.
Surplus funds + low-base effect for air conditioner sales + SG&A efficiency in play
Upwardly adjusting 2020E EPS for Lotte Himart by 35% on expectations for both strong home appliance sales and profitability improvement driven by restructuring at sluggishly performing stores, we raise our TP on the play from W35,000 to W45,000.
1) Currently, domestic spending by middle-income households is expanding, thanks to: 1) the government’s distribution of approximately W14tn in emergency disaster relief funds; and 2) the redirection of roughly W34tn which would typically be spent overseas, due to Covid-19-related travel restrictions. In addition, demand for large home appliances should remain healthy throughout 2H20, given: 1) a rise in household-related consumption amid an increase in time spent at home due to Covid-19; and 2) the government’s rebate program for buyers of energy-efficient home appliances.
2) In light of both y-y low-base effect for air conditioner sales (-40% y-y in 3Q19) and expectations for a summer heat wave, strong air conditioner sales are anticipated in 3Q20, a factor that should drive up operating leverage.
3) As this year has seen the closure of a total of 12 sluggishly performing stores, improvements in fixed-cost management, and an active reduction in advertising/promotion costs, profitability should also climb moving ahead.
2Q20 preview: Earnings to surpass expectations
We expect Lotte Himart to log non-consolidated 2Q20 sales of W1.09tn (+2% y-y) and OP of W49.2bn (+7% y-y), with both sales and OP exceeding the market’s expectations.
By item, 2Q20 sales growth is estimated at +20% y-y for TVs, +20% y-y for refrigerators, +30% y-y for kimchi refrigerators, and +10% y-y for washing machines. With sales of large household appliances projected to continue flourishing, only air conditioners are to see sales decline (-20% y-y) in 2Q20, weighed upon by y-y high-base effect. While GPM will likely dip 0.2%p y-y due to sluggish sales of high-margin air conditioners, OPM is expected to widen 0.2%p y-y on efforts to reduce SG&A expense.