OPM Burdened across All Business Divisions in 2Q21
The author is an analyst of NH Investment & Securities. She can be reached at mj27@nhqv.com. -- Ed.
LG H&H’s 2Q21 earnings slightly missed consensus on: 1) OP decreases at its HDB and refreshment domains; and 2) a narrowing in Chinese business margins at its cosmetics division. The effects of the Covid-19 Delta variant outbreak are to remain a factor for now, but we view expectations towards mid/long-term earnings growth as remaining valid.
Long-term growth momentum expectations remain intact
We maintain a Buy rating and a TP of W2,100,000 on LG H&H. We had boosted our earnings expectations amid the high growth for ‘Whoo’ brand products during the ‘China 618’ event, but the firm delivered slightly lower-than-expected earnings for 2Q21 due to disappointing Chinese subsidiary sales growth and margins. Investor sentiment is expected to remain negative for now due to the recent Covid-19 Delta variant outbreak. But, if combined with DFS sales, cosmetics division sales for China upped 50% y-y. From a mid/long-term perspective, the brand power of ‘Whoo’ and expectations towards earnings growth via business portfolio diversification both remain valid. There may be short-term adjustments, but EV is set to rise gradually over the long haul.
OPM burdened across all business divisions in 2Q21
LG H&H posted 2Q21 consolidated sales of W2,021.4bn (+13.4% y-y) and OP of W335.8bn (+10.7% y-y).
Sales and OP at cosmetics division upped 20.9% y-y and 22.9% y-y. The DFS channel showed strong top-line growth of 89% y-y (‘Whoo’ +100% y-y), but local growth in China (+10% y-y) disappointed due to y-y high-base effects as demand in 2Q20 surged following contracted demand in 1Q20. Chinese subsidiary OPM fell 4-5%pt y-y due to increased digital marketing expenses, including greater live broadcasting costs.
Sales at the home care & daily beauty (HDB) division climbed 7.4% y-y, but OP fell 7.0% y-y. Top-line growth sustained on acquisition effects (W13.3bn, Physiogel) and increased sales at the US subsidiary, but sales for high-margin hygiene products slid W30bn y-y, dampening profitability (OPM -1.9%pt y-y).
The refreshment division (sales +2.9% y-y, OP -6.4% y-y) saw overall raw material price pressure due to a fire at Korea’s largest container can producer and rising PET bottle price, booking a 1.5%pt y-y drop in OPM.