[Click eStocks] Dongwon Industries & F&B 2Q Strong Performance... Positive Signs for Food & Beverage Industry

Strong Performance of US Subsidiaries... Domestic Food and Beverage Companies Expected to Do Well in the US
Domestic Processed Foods Also Playing a Key Role... Positive Outlook for CJ CheilJedang, Ottogi, and Others

[Asia Economy Reporter Minwoo Lee] Dongwon Industries and Dongwon F&B showed overall strong performance in the second quarter. This was due to solid sales from their U.S. subsidiaries and processed food products. Expectations are rising among major processed food companies centered around the Dongwon affiliates.

On the 4th, Kiwoom Securities issued an 'Overweight' investment rating for Dongwon Industries and Dongwon F&B for these reasons. Dongwon Industries recorded consolidated sales of 720.9 billion KRW and operating profit of 89.8 billion KRW in the second quarter, representing increases of 7.7% and 55.4% year-over-year, respectively. On a separate basis, operating profit was 12.1 billion KRW, down about 3 billion KRW (20%) from the previous year, but this was offset by an approximately 35 billion KRW increase in operating profit from key subsidiaries.

The key variables for Dongwon Industries' separate financial results are tuna prices and catch volume. Tuna prices were similar to the same period last year, but the decline in catch volume is interpreted as the cause of the seafood division's performance drop. Meanwhile, Starkist, the number one canned tuna company in the U.S., showed strong results. This was due to increased at-home consumption demand amid the COVID-19 pandemic in the U.S. Starkist's sales growth rate compared to the previous year was estimated at 24% in Q1 and 58% in Q2.

Dongwon F&B posted consolidated sales of 757.2 billion KRW and operating profit of 16.8 billion KRW in the second quarter, up 6.8% and 16.1% year-over-year, respectively. On a separate basis, operating profit was 10.9 billion KRW, a 58% increase from the previous year. However, the operating profit of major subsidiaries decreased by about 1.7 billion KRW year-over-year, offsetting the improvement effect on the parent company's results.

Dongwon F&B's separate processed food sales amounted to 409.3 billion KRW, a 5.8% increase year-over-year. During the same period, the operating profit margin improved by 0.9 percentage points (P). This was attributed to increased sales of canned ham, refrigerated ham, frozen foods, and the effect of new shelf-stable home meal replacement (HMR) product launches amid the COVID-19 pandemic. Kiwoom Securities analyst Sangjun Park explained, "The improvement in profitability compared to the previous year without significant product group improvements was due to reduced sales at discount stores, increased sales at general supermarkets, and reduced discount rates on convenience food products. The underperformance of major subsidiaries was due to reduced external activities, leading to poor results in food ingredient distribution and group catering, causing Dongwon Home Food's operating profit to decline compared to the previous year."

Since Dongwon affiliates typically announce their results earlier than most major food and beverage companies, their performance can serve as a barometer for forecasting the second-quarter results of key food and beverage companies. The strong performance of Starkist, a U.S. subsidiary of Dongwon Industries, is expected to raise the earnings expectations for CJ CheilJedang, Nongshim, and Pulmuone. Analyst Park stated, "The impact of COVID-19 was greater in the U.S. than in Korea, with strict lockdowns in major cities leading to a much larger reduction in external activities. Therefore, the performance of CJ CheilJedang's U.S. processed food subsidiary (including Schwan's), Nongshim's U.S. subsidiary, and Pulmuone's U.S. subsidiary is expected to exceed market expectations. The strong separate results of Dongwon F&B will also raise earnings expectations for major domestic processed food companies such as CJ CheilJedang, Daesang, Ottogi, and Pulmuone."