[Asia Economy Reporter Minji Lee] As the number of confirmed cases of the novel coronavirus infection (COVID-19) decreases, the liquor industry is expected to see demand recover following adjustments to social distancing measures. However, in the case of HiteJinro, there are also forecasts that the high growth last year based on the ‘home drinking’ trend may instead put pressure on its stock price.
According to the Korea Exchange on the 13th, over the past three months until the 12th, HiteJinro’s stock price fell about 9%, from 38,700 KRW to 35,200 KRW. Meanwhile, Lotte Chilsung’s stock price rose 32.5% during the same period, from 88,700 KRW to 117,500 KRW. Both companies’ sales were affected by the high-intensity social distancing measures that significantly shrank the liquor market in entertainment channels, but Lotte Chilsung’s stock price showed an upward trend as home sales expanded and renewed products performed well.
According to the securities industry, Lotte Chilsung is expected to record an operating profit of 6 to 8 billion KRW in the fourth quarter, turning to a profit. Sales are also estimated to rise 0.21% to 521.1 billion KRW. Changes aligned with the low-alcohol and home drinking trends, such as ‘Cheoeumcheoreom FLEX’ and ‘Cloud Saeng Draft,’ are interpreted as having a positive impact. HiteJinro is expected to record an operating profit in the range of 30 to 33 billion KRW recently, which is lower than the previous market estimate (around 35 billion KRW). Lee Kyung-shin, a researcher at Hi Investment & Securities, said, “Due to the impact centered on the business market caused by the increase in COVID-19 social distancing, soju sales in the fourth quarter decreased by 8% compared to the previous year, limiting external growth. The burden from last year’s high growth may affect this year, but if additional cost improvements appear, the stock price could rise.”
A factor raising expectations for Lotte Chilsung’s stock price increase recently is the contract manufacturing (OEM) of craft beer. Currently, Lotte Chilsung’s beer factory utilization rate is about 30%, but it is predicted that by increasing utilization through contract manufacturing of craft beer at the Chungju Plant 1 and producing its own brand at Plant 2, the fixed cost burden can be alleviated. Shim Eun-joo, a researcher at Hana Financial Investment, said, “By taking on the OEM of ‘Gompyo Wheat Beer,’ jointly developed by Daehan Flour Mills and Seven Brau, the beer factory utilization rate this year will increase by about 40 to 50% compared to the previous year. Lotte Chilsung will pursue a profitability management strategy by expanding beer OEM rather than aggressive liquor marketing.” The domestic craft beer market is expected to grow from 88 billion KRW in 2019 to 300 billion KRW in 2024, raising expectations for sales growth through OEM.
The beverage business segment, which had declined due to reduced outdoor activities, is also expected to gradually improve. Since the beverage segment recorded poor performance last year due to COVID-19, a recovery in offline demand this year is expected to bring a base effect. Han Yoo-jung, a researcher at Daishin Securities, said, “The price competition situation is also favorable. While competitors’ carbonated beverage prices continued to rise until January this year, Lotte Chilsung’s last price increase was in 2017.”
According to these trends, target price estimates showed contrasting patterns. For Lotte Chilsung, the target price was raised compared to the previous estimate, but for HiteJinro, the target price was lowered due to concerns about performance. The target price, which had been formed in the 53,000 to 60,000 KRW range, dropped to the 45,000 KRW level. Lotte Chilsung’s target price was adjusted upward from the 100,000 to 130,000 KRW range to a maximum of 160,000 KRW.
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