[Click eStock] "Orion, Despite Raw Material Cost Burden, Rising Expectations for Next Year's Performance"

Shinyoung Securities Report
Operating Profit Declines in November Due to Commodity and Currency Burdens

[Asia Economy Reporter Minji Lee] Shin Young Securities maintained a buy rating and a target price of 175,000 KRW on Orion on the 16th, stating that although profits have decreased recently due to raw material cost burdens and currency effects, solid performance is expected next year.

Orion's combined sales and operating profit by country in November were 182 billion KRW and 29.2 billion KRW, respectively, representing changes of 4.7% and -7.3% compared to the same period last year. By segment, sales in Korea were 63.6 billion KRW (0.5%), China 81.2 billion KRW (9.4%), Vietnam 28.5 billion KRW (7.5%), and Russia 8.7 billion KRW (1.9%), all showing increases compared to the same period last year. Operating profit increased only in Korea by 3.9% to 10.7 billion KRW, while China recorded 9.1 billion KRW (-21.6%), Vietnam 7.5 billion KRW (-1.3%), and Russia 1.9 billion KRW (-5%), all showing decreases.

Researcher Jeongseop Kim of Shin Young Securities explained, “Despite the effects of new product launches and expanded market dominance by region, sales growth in China and Vietnam slowed compared to the previous quarter due to differences in holiday timing,” adding, “Operating profit recorded a decline due to burdens from major raw material prices and currency effects.”

In Korea, sales slightly increased due to strong sales of new products despite a high base burden last year. New products such as ‘Kkobuk Chip Choco Churros’ (3.2 billion KRW), ‘Choco Pie Banana Flavor’ (1.2 billion KRW), ‘Custard Large Pack’ (2.0 billion KRW), and ‘Dr. You Nut Bar’ (4.3 billion KRW) recorded meaningful sales. However, the raw material cost ratio increased due to price rises caused by poor potato harvests. The selling and administrative expense ratio improved by 0.8 percentage points compared to the same period last year due to strategic cost efficiency.

In China, sales growth slowed as holiday volume decreased by about 11.2 billion KRW compared to the same month last year due to the later Lunar New Year next year. Excluding the Lunar New Year volume effect, the sales growth rate is about 15%. Operating profit faced cost burdens due to increases in major raw materials such as potato flakes, as well as increased incentives and advertising promotion expenses.

In Vietnam, sales growth slowed as holiday volume decreased by about 0.5 billion KRW compared to the same month last year due to the later Tet holiday next year. Operating profit declined due to price increases in major raw materials such as palm oil and rice. In Russia, sales in local currency increased by 27% thanks to strong sales of jam Choco Pie, but due to a 21% depreciation of the ruble against the Korean won, sales in won terms grew by only 1.9%.

Researcher Kim said, “Although performance improvement slowed due to some raw material burdens and currency effects, there is no fundamental change in basic strength such as market dominance expansion,” adding, “Considering the timing difference effect of holiday volumes next year, this year’s high base burden can be sufficiently offset.” He continued, “With new product strategies by channel, channel structure efficiency, and strategic market investment, a solid performance trend will continue next year.”