Chinese Merchants to Drive Growth in 2021
The authors are analysts of Shinhan Investment Corp. They can be reached at jwsung79@shinhan.com and hanny.lee@shinhan.com, respectively. -- Ed.
Duty-free cosmetics sales to more than double YoY in 2Q
LG Household & Health Care is expected to see cosmetics sales from domestic duty-free stores surge 116% YoY to KRW519bn in 2Q21. Duty-free sales were the hardest hit by COVID-19 in 2Q20. Sales to small-scale Chinese merchants have been on a steep uptrend recently, owing to the low base created from the pandemic and China’s cosmetics market growth spurred by vaccination. LG Household & Health Care has been among the three top-grossing cosmetics companies in most of the domestic duty-free stores, and ranked first numerous times in monthly or quarterly sales. Household goods and beverage earnings are likely to stagnate in 2Q21. Overall, we project consolidated operating profit to improve 17.2% YoY to KRW355.4bn thanks to strong cosmetics earnings.
Chinese merchants to drive growth in 2021 and in/outbound travelers in 2022
Domestic duty-free cosmetics sales to small-scale Chinese merchants rebounded in 2H20 and should continue upwards throughout 2021. We expect Chinese merchants to spend more on duty-free purchases in Korea in 2022. With in/outbound traffic likely to pick up from 4Q21 following vaccinations, we can expect an additional boost to duty-free cosmetics sales next year. Increasing cosmetics sales in China are also a plus. We thus believe LG Household & Health Care is poised for earnings growth for the next three years. Consolidated operating profit should reach KRW1.36tr (+11.5% YoY) in 2021 and KRW1.47tr (+7.7% YoY) in 2022. Profit growth in 2022 could beat expectations if Chinese inbound travel is allowed sooner than expected.
Maintain BUY and raise target price to KRW1,950,000
We raise our target price for LG Household & Health Care from KRW1,900,000 to KRW1,950,000 to reflect upbeat expectations for earnings improvement. The revised target price is based on 2021F consolidated EPS of KRW56,184 and a target PER of 35x (past six-year average recorded during growth of Chinese inbound traffic and China-related sales; valuation re-rating possible upon return of Chinese travelers). Our rating remains unchanged at BUY in view of the continuing growth of China’s cosmetics market and the uptrend in domestic duty-free cosmetics sales.