Consolidated Subsidiary KGC to Benefit from Seasonality
The author is an analyst of KB Securities. She can be reached at leesunhwa@kbfg.com. -- Ed.
Maintain BUY and target price of KRW100,000
We maintain BUY and our TP of KRW100,000 for KT&G. The company’s 2Q21 earnings proved somewhat disappointing as manufactured cigarette exports to the Middle East slumped and major subsidiaries (incl. Korea Ginseng Corporation) took a hit from the COVID-19 pandemic. However, the company has seen an increase in the number of countries for e-cigarette exports (via local distributor Philip Morris International)—from three last year to five in 2Q21 (Kazakhstan, Serbia, Armenia, Kyrgyzstan, Uzbekistan)—and we expect the global tobacco business and NGPs (next-generation products) to bring about stable earnings growth going forward. Accordingly, we leave our 2021E-23E earnings unchanged and retain our TP of KRW100,000.
2Q21 OP at KRW330.1bn (-16.2% YoY), below market consensus
KT&G reported 2Q21 consolidated revenue of KRW1.35tn (+2.1% YoY, +6.5% QoQ) and OP of KRW330.1bn (-16.2% YoY, +3.9% QoQ, 24.5% OPM), with OP missing the market consensus of KRW389.5bn by 15.3%.
Continuing impact from COVID-19 pandemic in 2Q21
2Q21 standalone revenue grew 4.7% YoY as the heat-not-burn business enjoyed solid demand at home and abroad and the Prugio apartment construction project (in Hwaseo-dong, Suwon) saw progress as scheduled. OP, however, slumped 11.8% YoY on KRW appreciation as well as higher bad debt expenses (+KRW16.0bn YoY) in relation to deteriorating market conditions in the Middle East. Consolidated subsidiary KGC continued to suffer—with revenue and OP down 6.6% and 67.7% YoY, respectively—as performance by the DFS channel remained sluggish amid the pandemic, and low-margin home shopping channels have been scaled back as part of efforts to increase operating efficiency.
Operating conditions to improve in 2H21
In 2H21, we expect KT&G’s standalone earnings to continue increasing on brisk NGP exports, while KGC should benefit from seasonality (Chuseok peak season). We predict the number of countries for e-cigarette exports (via PMI) to rise to around 10 in total. As for e-cigarette devices, some are manufactured in Vietnam and are therefore not reflected in the export data provided. KGC plans on offsetting the sluggish performance by its DFS channel by promoting its online channel and targeting Chinese social influencers in its marketing.