Price Hikes Likely
The author is an analyst of NH Investment & Securities. She can be reached at mj27@nhqv.com. -- Ed.
In 2H21, Orion’s earnings momentum should come under the limelight, thanks to: 1) product lineup expansion; 2) diversification of sales channels and raw materials sourcing; and 3) pie price hikes in China.
Overly undervalued
We maintain a Buy rating and TP of W175,000 on Orion. Having dropped to the lowest level in two years in 2Q21 owing to high-base effect, rising raw material costs, and a change in supply chain in China, earnings at the company are expected to recover gradually moving ahead. While the firm is likely to grow in the Chinese confectionery market over the next few decades, it is currently undervalued due to short-term earnings decline. Although the recent supply system change has dampened its earnings, it should both save on costs and help to expand regional coverage. As well as boasting a competitive edge over Chinese peers, Orion has greater capabilities than domestic peers in terms of developing hit products.
Cost burden easing
In 1H21, the Chinese subsidiary’s margins tumbled on a mix of sales decline and raw material cost upsurge. In particular, COGS-to-sales ratio grew sharply y-y. But, having set a new high in March, the ratio finally turned down in July. In 2H21, we do not expect any heavy cost increase. Given that Orion has made efforts to reduce costs (eg, bidding scheme and raw materials sourcing diversification), its operating leverage should shine once raw material costs fall.
Price hikes likely
The Chinese subsidiary has announced plans to jack up prices for some of its pie products in 3Q21. While the level of price hikes has not been disclosed, the subsidiary’s OPM should improve by 1~2%pt assuming that pie prices rise by 5%. While Orion has kept pie prices frozen since 2011, its competitors have raised prices several times. We believe that price hikes are essential in light of Orion’s brand positioning and market share.