Concerns over Chinese Subsidiary Listing and US Subsidiary Earnings

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

 

Cosmax’s OP likely upped 123% y-y in 4Q21. We continue to view the firm as offering high competitiveness among ODM players, but given earnings uncertainties for its US subsidiary and the domestic listing of its Chinese subsidiary, share price rebound momentum is to be tepid for now.

Concerns over Chinese subsidiary listing and US subsidiary earnings

We lower our TP on Cosmax from W145,000 to W93,000, in turn downgrading our investment rating from Buy to Hold. The TP cut reflects downward adjustments to 2022F annual EPS (-8.2%) and our target multiple (24x → 17x). Also factoring in is a reduced sales growth forecast for the firm’s Guangzhou subsidiary in China (due to decreased orders from its largest client) and a potential volume transfer. We adhere to our view that Cosmax offers market-leading technology and competitiveness (as evidenced by its development of hit products in both Korea and China), favorably viewing its collaborations with leading trend makers. But, given Cosmax East’s slowing sales growth, its domestic listing, and continued uncertainties towards the US subsidiary, share price momentum is highly likely to be lacking for now, regardless of corporate fundamentals. Even though Cosmax’s share price has already corrected as of late, we downgrade our investment rating to Hold, as it is difficult to expect a meaningful rebound at this juncture.

4Q21 preview: China’s Guangzhou subsidiary to show negative earnings growth

We expect Cosmax to post consolidated 4Q21 sales of W438.8bn (+23.8% y-y) and OP of W23.4bn (+122.9% y-y). Assuming the absence of one-off items, the firm should record significant OP growth on low-base effects stemming from operating losses at its US subsidiary last year.

The domestic subsidiary should record sales of W214.3bn (+17.6% y-y), helped by new hit product effects and ongoing export growth. Sales at the Shanghai subsidiary in China likely reached W128.7bn (+32.4% y-y), sustaining high growth on increased orders from online customers. But, the Guangzhou subsidiary likely saw a decline in sales to W39.2bn (-7.6% y-y) due to sluggish performance at its largest customer. We believe that an unfavorable earnings trend continued in the US, estimating NuWorld sales at W13.7bn (-48.7% y-y) and Ohio sales at W17.3bn (-27.4% y-y). Moreover, Cosmax West likely suffered goodwill losses due to weak NuWorld earnings.
 

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