Growth Picking up in Thailand
The authors are analysts of Shinhan Investment Corp. They can be reached at sanghoonpure.cho@shinhan.com and yk.cho@shinhan.com, respectively. -- Ed.
2Q22 earnings in line with consensus
Coway posted operating profit of KRW176bn (+5.7% YoY) on sales of KRW978.2bn (+8.0% YoY) for 2Q22, meeting consensus estimates. In the domestic market, sales from home appliances increased by 2.7% YoY and rental contracts by 2.1% YoY. In Malaysia, sales rose by 22.4% YoY and operating profit by 30.9% YoY when factoring out the impact of accounting changes and lockdown-related issues in 2021. In the US, sales jumped by 50% YoY on strong demand in both door-to-door and retail channels, and operating profit soared by 845% YoY on the reversal of import duties.
Three investor focus points
In Korea, the total number of rental accounts recorded a net increase of just 5,000 accounts (-91.8% YoY, -92.6% QoQ) with ownership transfers from the expiration of five-year rental contracts concentrated in 2Q22. After stabilizing from 3Q22, rental contract expirations and ownership transfers are expected to increase slightly in 2023 vs. 2022. Coway is preparing to address this issue by releasing innovative products to secure new customers.
In Malaysia, operating profit appears to have declined by 15.4% YoY amid top-line growth of just 16.1% YoY in 2Q22. However, we believe sales actually increased by 22.4% YoY and operating profit by 6.5% YoY when adjusting for accounting method changes. In addition, when factoring out the impact of delays in service checks caused by lockdowns in 2Q21, actual operating profit growth is estimated at 30.9% YoY for 2Q22.
In Thailand, we expect Coway to replicate its success in Malaysia. Due to the country's lagging financial infrastructure, the Thai unit had been slow to grow since its foundation in 2003. However, growth has recently picked up following improvements in financial infrastructure and expansion of sales force. The total number of rental accounts in Thailand exceeded the typical breakeven point of 100,000 accounts at 118,000 (+39% YoY) in 2Q22, but Coway plans to concentrate first on driving further sales growth through the improvement in brand power.
Retain BUY and target price of KRW100,000
Coway’s business model is seen attractive as it guarantees a steady cash flow regardless of external market conditions. After recording weak earnings over the past three years due to the pandemic and cost hikes, the domestic unit is starting to regain market leadership on strengths in R&D. Overseas subsidiaries are humming along, backed by product category expansion in Malaysia and brand power improvement in the US and Thailand. We expect overseas operations to account for 27% in company-wide sales and 29% in operating profit in 2022.