Excessively Undervalued
The author is an analyst of NH Investment & Securities. She can be reached at mj27@nhqv.com. -- Ed.
Given strong brand power, we believe that LG H&H’s Whoo products will remain competitive in China. Margins should recover at the household goods and beverage divisions on fading high-base effects. At their current valuation level, H&H shares offer strong upside.
LG H&H shares excessively undervalued compared to peers
Although reiterating a Buy rating, we lower our TP on LG H&H from W1,900,000 to W1,650,000. While changes to our earnings forecasts remain negligible, we reduce our target multiple for the cosmetics division from 35x to 30x, and switch our base year for TP calculations to 2022F (previously used 2021~2022 average), in light of: 1) the delayed emergence of a second-leading brand following Whoo; and 2) the firm’s heavy reliance on Whoo sales.
In 2022, LG H&H’s earnings should continue trending upwards, given that: 1) luxury cosmetics products are to perform relatively better amid slowing China consumption; 2) the household goods arm should see structural profitability improvement following the acquisitions of Boinca and Physiogel; and3) the beverage business is to benefit from recent ASP hikes. Given such, LG H&H’s current valuation, which is at a 40% discount to global peers, looks excessively low. Despite the TP cut, the firm’s shares still boast robust upside.
Whoo’s strong competitiveness remains intact
It is too early to be concerned about any erosion in the brand power and competitiveness of LG H&H’s Whoo brand. With the brand’s annual sales exceeding W1tn, high-base effects are to limit sales growth momentum. That said, Whoo maintains its sound reputation as one of top luxury cosmetics brands in China. Although Whoo booked negative y-y sales growth for3Q21, we believe this drop will prove to be a temporary phenomenon. Going forward, we forecast that Whoo’s sales will continue to expand at a double-digit pace.
Sound earnings growth to sustain in 2022
We see consolidated 2022F sales of W8,808.9bn (+6.5% y-y) and OP of W1,402.9bn (+6.7% y-y), as negative base effects are to fade for all divisions, and as efforts to recover profitability should begin yielding tangible results.