[Click eStock] Lotte Chilsung "Earnings Are a Surprise, Stock Price at Historic Bottom"

[Asia Economy Reporter Lee Seon-ae] Hana Financial Investment recommended an active buying strategy for Lotte Chilsung on the 29th, expecting its first-quarter earnings to exceed market expectations, which is likely to lead to an upward revision of the annual estimates. The investment opinion 'Buy' and the target price of 160,000 KRW were maintained.

Sim Eun-joo, a researcher at Hana Financial Investment, explained, "Considering the turnaround in the liquor division's performance, we believe that expectations for not only short-term but also mid-to-long-term earnings improvements will be reflected in the stock price," adding, "Since the stock price is positioned at the lower end of its historical band, an active buying strategy seems valid."

The first-quarter consolidated sales and operating profit are estimated at 514.3 billion KRW (YoY 1.4%) and 24.1 billion KRW (YoY 285.1%), respectively. These are expected to surpass the high market expectations (OP 18 billion KRW).

Firstly, beverage sales are expected to inevitably decline due to the low base effect from the previous year. However, cost reductions from logistics efficiency improvements are expected to maintain profits at the previous year's level. The effect of price increases for carbonated beverages is expected to start reflecting in earnings from the second quarter. For reference, Hana Financial Investment estimates the annual profit improvement effect related to price increases at 20 billion KRW. Liquor sales are estimated to increase by 16% YoY due to the previous year's base and strong sales of the new product Cloud Saeng. Profit and loss are expected to be at break-even point to slightly positive due to efficiency improvements in sales personnel and advertising promotion costs. Beer OEM production is expected to begin in earnest from next month.

The company is also expected to be the biggest beneficiary of the government's liquor regulation easing policy. In 2020, the beer operating rate was only about 20%, but this year, a significant increase in operating rate is expected through OEM and beverage production. Plant 1 is expected to raise mid-to-long-term operating rates through OEM, and Plant 2 through production of its own brand beer and beverages. The Gom Pyo Wheat Beer OEM is expected to start in earnest from next month. Related sales contribution is estimated at about 30 billion KRW annually. The beer operating rate is expected to increase by 50%. Considering the expansion of the craft beer market after COVID-19, the possibility of additional OEM production is very high. Functional beverage production is also expected to begin in earnest within the first half of the year.