[Into the Stocks] "A Drink with BLACKPINK Jennie and Cheoeum Cheoreom"... Lotte Chilsung Begins Counterattack

Jenny Model Effect "Choeumcheoreom Market Share Recovers to Mid-14%"
Cloud Saeng Draft Successfully Settled, Liquor Turnaround
Clear Performance Improvement This Year... Continued Upward Revisions of Target Prices in Securities Firms

[Asia Economy Reporter Lee Seon-ae] What kind of alcohol is BLACKPINK's Jennie drinking these days? In the commercial where Jennie is swinging, she drinks a glass of soju. 'Cheoeumcheoreom,' which has a smoother yet more soju-like taste. Previously, only beautiful stars like Lee Hyori, Shin Min-a, and Suzy drank 'Cheoeumcheoreom.'

What is Lotte Chilsung Beverage's intention in choosing the hottest star Jennie? It is a counterattack. After the difficult days due to various issues such as COVID-19, they have a strong will to make this year a 'year of counterattack.' With the gradual normalization of the economy following the distribution of COVID-19 vaccines, they are betting on a true 'revenge alcohol consumption.' Although the road ahead is tough, the market seems to be on Lotte Chilsung Beverage's side. The stock price is responding positively to the flawless turnaround in performance. In particular, the normalization of the 'beverage' business division and the 'alcohol' sector, which was once the ugly duckling, are expected to contribute this year. In addition to 'Cheoeumcheoreom,' the beer 'Kloud Saeng (生) Draft' is also settling stably in the market, emitting good energy.

◆The Market Welcomes Jennie's Cheoeumcheoreom

According to securities and alcohol industry sources on the 2nd, the market share of Cheoeumcheoreom has been on the rise since Jennie was appointed as the model. Lee Young-gu, CEO of Lotte Chilsung, recently stated at the regular shareholders' meeting, "Cheoeumcheoreom's market share expanded to 19%, then retreated to 13%, but has now recovered to 14-15%," emphasizing the recovery of soju market share. Although the alcohol business is facing difficulties, he clearly stated that there are no plans for restructuring.

The market is welcoming 'Jennie's Cheoeumcheoreom.' The current soju market share is about 14.5%, with a target of 17%.

Kloud Saeng Draft is evaluated as having successfully settled in the market. CEO Lee said, "Kloud Saeng Draft, launched last year as a successor to 'Pitts,' has successfully settled in the market," adding, "Although it has not yet entered entertainment channels and restaurants due to the COVID-19 situation, once conditions improve, it will compete head-to-head with competitors."

According to convenience store industry data, Kloud Saeng Draft recently ranked 4th in domestic beer sales, following Cass, Terra, and Filite. It rose six places from 9th since its first release.

The current beer market share is about 3.5%, with a goal to raise it to 7%.

Lee Jung-eun, a researcher at Korea Investment & Securities, projected an incremental sales increase of 40 billion KRW in the alcohol division this year, with 15 billion KRW from soju and 20 billion KRW from beer. She also noted that the rapidly growing wine business has been reorganized, and the home-use market, where Lotte Chilsung has strengths, is expanding, leading to a positive change in the business environment.

In fact, Lotte Chilsung's alcohol business performance has shown clear signs of rebound since the fourth quarter of last year. A Lotte Chilsung official explained, "In the fourth quarter of last year, the alcohol division grew by 10.7% thanks to Kloud Saeng Draft and Cheoeumcheoreom Flex, and beer especially grew by a whopping 65% compared to 2019," adding, "This year is the most important year, and we expect performance improvement."

Business diversification is also actively underway. In 2021, to support the craft beer craze sweeping the beer market, they decided to proceed with a 'Craft Beer Cluster Creation' project to develop alongside craft beer companies. They also plan to renew the domestic premium beer Kloud in the first half of the year.

Kim Hye-mi, a researcher at Cape Investment & Securities, said, "This year is a year of counterattack for Lotte Chilsung to make up for last year's poor performance," adding, "Both beverage and alcohol divisions are expected to switch to growth." She predicted profit improvement in the beverage division by reducing SKUs with low profit contribution, various cost-cutting efforts, expanding high-growth main categories (such as zero-calorie carbonated drinks), focusing on online channels, and price increases. For the alcohol division, improvements through increased operating rates and cost reductions, as well as expectations for post-COVID-19 entertainment consumption, are seen as positive factors. The target stock price was raised to 180,000 KRW.

◆Meaningful Performance Improvement Even with Conservative Approach

Daishin Securities estimated Lotte Chilsung's consolidated sales this year at 2.36 trillion KRW (+5% yoy) and operating profit at 147.8 billion KRW (+52% yoy). This exceeds the average operating profit growth rate of 7% among 17 companies covered in the food and beverage sector, recommending it as the top pick among mid-cap stocks in the sector.

Alcohol sales are estimated at 639.7 billion KRW (+5% yoy) and operating profit at 9.3 billion KRW (turning positive yoy). External growth is expected to be driven by increases in beer and soju market shares (+0.5~1.0%p yoy each) and beer contract manufacturing sales after March. Profit improvement is analyzed to be mainly due to reduced fixed cost burdens from increased beer operating rates and ZBB cost-cutting effects across the alcohol sector.

Beverage sales are estimated at 1.72 trillion KRW (+5% yoy) and operating profit at 138.5 billion KRW (+13% yoy), assuming that price increases will gradually be reflected from the second quarter. The estimate is conservative, assuming that the sharp decline in beverage sales due to COVID-19 in 2020 will continue into 2021.

Han Yoo-jung, a researcher at Daishin Securities, explained, "Both beverage and alcohol divisions are conservatively estimated to continue being affected by COVID-19 in 2021," adding, "We plan to revise profit estimates upward if market conditions change."

Lee Kyung-shin, a researcher at Hi Investment & Securities, analyzed, "Although the alcohol division reflects the contraction of the on-premise market due to COVID-19 issues, the issue of declining market dominance has been resolved for now, and additional beer growth centered on new products is also meaningful." He added, "The cost-cutting trend remains significant, and attention should be paid to the operating profit turnaround trend combined with the improvement in major product sales. If meaningful improvements in beer process operating rates such as OEM are reflected in performance, growth exceeding expectations is also possible." Hi Investment & Securities expects Lotte Chilsung's consolidated sales and operating profit to grow by 3.4% and 184.2%, respectively, this year.

◆Focus on Lotte Chilsung OEM Operating Rate

Recently, the market is focusing on Lotte Chilsung's OEM operating rate. The OEM for 'Gompyo Wheat Beer' is expected to start in earnest from next month. Related sales contribution is estimated at about 30 billion KRW annually. Plant 1 is expected to increase its operating rate through OEM, while Plant 2 will produce its own brand beer and beverages, raising the long-term operating rate. Shim Eun-joo, a researcher at Hana Financial Investment, explained, "With the expected benefits from the government's alcohol regulation easing policy, beer operating rates were only about 20% in 2020, but meaningful increases are expected this year through OEM and beverage production," adding, "Considering the expansion of the craft beer market after COVID-19, additional OEM production possibilities are very high, and functional beverage production is expected to start in earnest within the first half."

On the same day, Samsung Securities raised Lotte Chilsung's target stock price to 165,000 KRW, focusing on strategies to increase beer operating rates. Lotte Chilsung is currently negotiating with various companies, starting with OEM contract production of Gompyo Wheat Beer. The current beer plant operating rate is estimated at about 20%. They plan to transfer Kloud products, previously produced at Plant 1, to Plant 2 and use Plant 1 as a craft beer cluster. These efforts are positively evaluated as they raise the low operating rate and indirectly target the growing craft beer market. Samsung Securities researcher Cho Sang-hoon said, "The operating rate will recover to the mid-30% range, and if Kloud Saeng Draft sales continue to do well, the alcohol division's profit contribution could increase further," adding, "They also plan to enter markets with high growth potential such as popular wine and hard seltzers."

Meanwhile, Lotte Chilsung's stock closed at 134,000 KRW the previous day. The stock price has risen 25.2% so far this year. Securities firms believe there is still room for further increase compared to past stock price trends.