Strengthening Luxury-focused Portfolio
The author is an analyst of NH Investment & Securities. She can be reached at mj27@nhqv.com. -- Ed.
AmorePacific’s 4Q21 results are likely to miss consensus due to the sluggishness of Innisfree in China. However, sales growth for high-end products should drive overall earnings improvement going forward.
Strengthening luxury-focused portfolio boosting prospects for earnings rebound
We maintain a Buy rating on AmorePacific but lower our TP from W250,000 to W200,000. The downward revision in TP reflects a cut to our target P/E multiple (35x → 28x, at a 20% discount to the global peer average) in consideration of volatility in the external environment, the firm’s high dependence on China, and intensifying market competition.
Company-wide earnings improvement is unlikely to materialize until 1Q22 due to y-y high-base burden at Innisfree in China. However, from 2Q22, sound sales growth for Sulwhasoo should drive overall earnings growth, backed by reinforcement of the brand’s premium position via a focus on the high-end Jinseol and Concentrated Ginseng product lines. From end-2022 (at the earliest), the firm is to roll out its AmorePacific brand (positioned above Sulwhasoo) in China, and through such efforts, a diversified brand portfolio should be achieved in the premium segment. We view now as being the time to focus on Sulwhasoo’s growth potential.
4Q21 preview: Weighed down by Innisfree
We forecast consolidated 4Q21 sales of W1.2tn (+4.2% y-y) and OP of W43.8bn (TTP y-y). We revised down our previous OP estimate due to: 1) the weaker-than-expected performance of Innisfree in China; and 2) the reflection of additional incentives.
At the domestic division, 4Q21 cosmetics sales and OP are estimated at W601.1bn (+14.3% y-y) and W40.3bn (TTP y-y), respectively. Sales growth at DFSs (+15% y-y) and online channels (+30% y-y) likely offset sales decline in traditional channels such as door-to-door, department stores, and Aritaum. The overseas division likely recorded 4Q21 sales of W510bn (-6.0% y-y) and OP of W14.9bn (-71.5% y-y). At the Chinese business, we believe that overall sales fell 8% y-y despite the high 30% y-y estimated sales growth of Sulwhasoo, as sales of Innisfree are believed to have plunged more than 50% y-y. China OPM likely slid to around 3%.