OP to Bottom out from 2Q21 Trough
The author is an analyst of KB Securities. She can be reached at leesunhwa@kbfg.com. -- Ed.
Maintain BUY, target price of KRW400,000
We maintain BUY and our TP of KRW400,000 for Nongshim. For 2Q21, revenue declined YoY because of the COVID-19-induced boost recorded in 2Q20 while OP fell YoY on more burdensome fixed costs. In 2H21, however, revenue should reverse course on ramyun price hikes, so we leave 2021E-23E OP CAGR largely unchanged.
2Q21 OP of KRW17.3bn (-58.3% YoY) below market consensus
Nongshim posted 2Q21 consolidated revenue of KRW647.9bn (-3.0% YoY, +2.1% QoQ) and OP of KRW17.3bn (-58.3% YoY, -39.0% QoQ; 2.7% OPM), which fell short of the market consensus/our estimate of KRW19.9bn/KRW19.8bn. Korea/China revenue took downturns because of a high base effect (2Q20 pandemic boost) while profitability deteriorated significantly with more burdensome costs.
Revenue drop on unfavorable comparison base; OP hit by rising promotional expenses
Back in 2Q20, consolidated revenue jumped 17.6% YoY thanks to pandemic-induced hoarding demand, so there was no need for marketing spending. In 2Q21, however, Korea/China revenue declined (-5.3% YoY/-23.5% YoY) and OP slumped with rising promotional expenses related to the launch of Bae Hong Dong Bibimmyun. North America, Japan and Australia continued solid top-line growth as the company expanded supply via large retailers while mainstay products enjoyed a stronger market presence.
Price hikes to have positive impact in 2H21; company-wide OP to bottom out from 2Q21 trough
Nongshim raised domestic ramyun prices by an average of 6.8% (effective Aug 16), the first increase since Dec 2016. Since the announcement of the increase at end-July, customers have been hoarding products, so we expect the price effect to be more prominent in 4Q21 vs. 3Q21. Also, the company looks likely to raise prices in overseas markets, perhaps first in China, as the last hike there was in August 2017. For North America, the U.S. No. 2 factory, scheduled to start operations at end-2021, should accelerate top-line growth. In terms of company-wide OP, we forecast QoQ improvements in 3Q21 and 4Q21 following a 2Q21 trough.