[Click eStock] "LG Saenghwal Geongang, Expecting Improvement in Cosmetics and Household Goods Performance"

Daishin Securities Report
Target Price Raised by 7%, Set at 1.93 Million KRW

[Asia Economy Reporter Minji Lee] Daishin Securities on the 23rd raised its operating profit forecast for LG Household & Health Care for next year, maintaining a buy rating and increasing the target price by 7% to 1.93 million KRW.

LG Household & Health Care's consolidated sales for the third quarter were 2.0706 trillion KRW, and operating profit was 327.6 billion KRW, up 16% and 5% respectively compared to the same period last year. The cosmetics segment was supported by strong demand. Sales of The History of Whoo in the duty-free channel increased by 7% year-on-year. Sales of The History of Whoo at the local Chinese subsidiary grew 29% during the same period, outperforming market growth rates in both channels. Although sales recorded 1.1438 trillion KRW, down 2% year-on-year, performing well, operating profit fell 7% to 197.9 billion KRW due to sluggishness in domestic premium brands.

The household goods segment expanded the share of premium products centered on hair care and fabric softeners to 39%, a 4% increase from the same period last year. Due to the warm reflection of Physiogel's performance (sales of 10 billion KRW), household goods sales rose 27% from a year earlier to 508.8 billion KRW. Operating profit grew 48% to 66.7 billion KRW. The beverage segment recorded sales of 183.5 billion KRW and operating profit of 63.1 billion KRW, growing 4% and 15% year-on-year respectively, thanks to strong carbonated beverage sales continuing from the first half despite unfavorable weather conditions.

Yujeong Han, a researcher at Daishin Securities, said, “China's cosmetics online channel grew 36% year-on-year, and offline sales grew 17%. The online channel led the external growth, improving the operating profit margin of Chinese cosmetics by 2 percentage points.”

Next year, a rapid turnaround of New Avon and performance contributions from derma products centered on Physiogel are expected. Assuming New Avon's profitability improves to the mid-single digits and Physiogel's sales in the Asian region reflect warm contributions, operating profit is estimated to increase by 3% year-on-year even with conservative external growth. Researcher Han said, “It is necessary to keep open the possibility of brand mix improvement for New Avon and regional and product expansion for Physiogel. Although a 30% price-to-earnings ratio (PER) of the peer group average was applied, the discount rate was adjusted to 20% to reflect expectations of external growth and profitability improvement.”