3Q22 Earnings to Serve as Barometer of Brand Competitiveness
The author is an analyst of KB Securities. She can be reached at shinay.park@kbfg.com. -- Ed.
Maintain HOLD, target price of KRW750,000
We maintain HOLD and TP of KRW750,000 (17.0x 12m fwd P/E) on LG H&H. We revise down 2022E/2023E/2024E OP by 5%/2%/2%. We continue to recommend a conservative approach based on short-term concerns about earnings uncertainty stemming from China’s lockdown measures and mid-/long-term concerns about deteriorating earnings momentum.
3Q22 earnings to serve as barometer of brand competitiveness
We expect earnings to continue to be sluggish in 2Q22. This has been reflected in the stock price, which has fallen 35% YTD. We see earnings impacted by:
(1) weakened Whoo competitiveness;
(2) COVID-19 lockdowns in China (demand contraction, sales disruptions); and
(3) a sudden suspension of activity by wanghong (Chinese internet celebrities), on which LG H&H has been highly dependent on as a revenue driver.
However, it is too early to measure the impact of each aforementioned factor. In terms of 3Q22 earnings, level of brand competitiveness should be determined once the impact of COVID-19 lockdowns is excluded from performance. If improvements are not clearly visible, the stock may fail to bounce back. For DFS, we expect revenue to drop 28% YoY in 3Q22 and then rebound on the base effect in 4Q22. China subsidiary revenue should decline 5-10% YoY in 2H22.
2Q22 preview: Earnings in line with consensus; China subsidiary/DFS revenue down 38% YoY/42% YoY
We forecast 2Q22 consolidated revenue at KRW1.76tn (-13% YoY) and OP at KRW197.1bn (-41% YoY), which is in line with the market consensus.
▶Beauty revenue/OP should decrease 30% YoY/61% YoY, with OPM at 10.8% (-8.8pp).
(1) China revenue should drop 38% (-44% based on RMB), with Whoo at -35% and Su:m at -40%. We expect operating loss of 50%.
(2) DFS revenue should be sluggish at KRW284.8bn, down 42% YoY but up 75% QoQ.
(3) Net domestic revenue (excl. overseas, DFS) should fall 15% (DPS at -5%, D2D at -11%).
▶HDB revenue should increase 7% YoY but OP should decline 10% YoY, as OPM is likely to fall 1.9pp YoY on rising raw/subsidiary material prices.
▶Refreshment revenue/OP should increase 9% YoY/2% YoY. OPM should widen by only 0.9pp YoY on rising raw/subsidiary material prices despite mix improvement and price hikes.