Whoo’s Brand Power Remains Solid

The author is an analyst of NH Investment & Securities. She can be reached at mj27@nhqv.com. -- Ed.

 

We believe that LG H&H’s OP grew only 0.3% y-y in 3Q21, weighed upon by Covid-19 effects, a rising raw materials cost burden, and an adverse y-y base burden. However, Whoo’s brand power appears to remain solid. Despite the rocky external environment, we view a recent drop in the firm’s share price as being excessive.

Chinese demand for Whoo brand products remains solid

Although adhering to a Buy rating, we lower our TP on LG H&H from W2,100,000 to W1,900,000, reflecting downward revisions to 2021E and 2022F EPS (-7.6% and -8.5%, respectively) made in consideration of the inevitable impact of local operations in China from both Covid-19 effects and a higher raw materials cost burden.

Although there are concerns about a slowing in local cosmetics consumption in China, the extent of such is to be relatively light for Whoo, which has established itself as a luxury brand. Demand in China, including at the DFS channel, remains solid. Accordingly, we view a recent drop in LG H&H’s share price as being excessive, largely attributing the 2H21E earnings deceleration to external environmental factors rather than an entry into a structural downturn. While concerns linger towards the earnings slowdown, any further decline from the current share price (12-month FWD P/E of 22.6x) should be limited.

3Q21 preview: Earnings to arrive sluggish

On a consolidated basis, we expect LG H&H to post 3Q21 sales of W2.12tn (+2.8% y-y) and OP of W328.5bn (+0.3% y-y).

We size 3Q21 cosmetics sales at W1,164.4bn (+1.8% y-y) and OP at W200.5bn (+1.4% y-y). Top-line growth in China (3Q21E: +12% y-y) likely lost some steam due to both pandemic-related logistics issues and an adverse y-y base burden at the DFS channel (+15% y-y).

The household goods division should book sales of W524.1bn (+3.0% y-y) and OP of W66bn (-1.1% y-y). While base effects stemming from the incorporation of Physiogel have now run their course, margins were likely sapped by a fall in sanitary product sales and a higher raw materials cost burden.

For the beverage division, we estimate sales of W439.3bn (+5.1% y-y) and OP of W61.9bn (-2.0% y-y). Although sales were likely helped by both favorable weather conditions and ASP hikes, we believe OPM was drained by both container can supply-demand issues and increased aluminum (raw material) costs.

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