Profitability Still Solid
The author is an analyst of NH Investment & Securities. She can be reached at mj27@nhqv.com. -- Ed.
Lotte Chilsung’s 2Q21 OP upped 56% y-y. Advertisement and promotion expenses increased, but fundamentals showed improvement thanks to a strengthened product portfolio and restructuring effects. We expect operating leverage to rise in 2H21 on favorable weather conditions and greater OEM beer production.
Full-fledged earnings leverage effects on display
We maintain a Buy rating and TP of W185,000 on Lotte Chilsung. Although the Covid-19 crisis is prolonging, the firm should enjoy continued earnings improvement thanks to both restructuring and the diversification of product portfolio and business model.
In contrast to last year, when the firm suffered from both a long rainy season and Covid-19, sales at the beverage division should benefit this year from hot summer weather. At the liquor division, the beer factory utilization rate is expected to rise in earnest (+5%pt vs 1H21) on the back of expanded OEM beer production and continued sales growth for high-margin wines. Meanwhile, in 2H21, advertising and promotion expenses are to remain similar y-y, helping to further strengthen operating leverage effects derived from sales increase.
Profitability still solid, despite concerns over increased marketing expense
Lotte Chilsung posted consolidated 2Q21 sales of W668.9bn (+11.9% y-y) and OP of W45.6bn (+55.6% y-y). Although advertising and promotion expenses widened y-y, the scale of increase was smaller than predicted, and sales came in above expectations to meet the recently lowered consensus.
The beverage division delivered 2Q21 sales of W458.8bn (+8.1% y-y) and OP of W42.1bn (+10.5% y-y), with sales showing y-y improvement on low-base and new product launch effects. Although greater raw material costs did present a burden, this negative was partially offset by preemptive ASP mark-ups. And, profitability improved through restructuring and increased sales.
The liquor division posted 2Q21 sales of W164bn (+11.0% y-y) and an operating loss of W300mn (RR y-y). Soju sales fell 7.2% y-y due to stricter social distancing measures, but beer sales jumped 25.1% y-y on low-base effect. Despite an increase in advertising and promotion costs, operating losses were reduced by W10.5bn y-y, thanks to expanded OEM beer production and sales growth for high-margin wines and sakes.