[Into the Stock] LG Household & Health Care Brightens Up with Expanded Vaccine Rollout

[Asia Economy Reporter Song Hwajeong] LG Household & Health Care is seeing a positive turnaround with the expansion of vaccine vaccinations. Recently, it has shown continuous strength, breaking its all-time high. Although there are concerns about a base effect burden in the second half of the year, it is analyzed that this has already been reflected in the stock price.

According to the Korea Exchange on the 22nd, LG Household & Health Care rose to 1,728,000 KRW during the day, rewriting its all-time high in just one day. LG Household & Health Care has recently shown continuous strength, surpassing the 1.7 million KRW mark for the first time based on the closing price and appears to have successfully stabilized. It has risen more than 9% since the beginning of this month.

Recovery of Duty-Free Sales Amid Strong Performance in China

With the rapid recovery of Chinese consumption due to the expansion of vaccine vaccinations, the strength of cosmetics stocks is continuing. In particular, expectations for sales recovery in China have increased through the recent '618 Shopping Festival,' the largest online shopping event in China in the first half of the year. According to LG Household & Health Care, during the 618 Shopping Festival that ended on the 20th, six luxury cosmetics brands including Whoo, Su:m37, O Hui, belif, VDL, and CNP recorded sales of 580 million yuan (approximately 89.3 billion KRW) on Tmall, a 70% increase compared to the previous year. Among them, Whoo grew by 72%, ranking 5th among luxury cosmetics brands following Est?e Lauder, Lanc?me, La Mer, and Shiseido. Whoo's representative popular product, the 'Cheongidan Hwahyun' set, ranked 3rd in single product sales across all Tmall categories, following the iPhone 12 and Gree air conditioners, and ranked 1st in the cosmetics category. Park Jongdae, a researcher at Hana Financial Investment, said, "This year's 618 event clearly shows the recovery of China's consumer economy and serves as a milestone reaffirming the brand power and capabilities of Korean cosmetics companies."

Whoo achieved a scale of sales in China (including duty-free sales) comparable to global brands, based on strong demand from China despite COVID-19. Park Eunjeong, a researcher at Yuanta Securities, said, "It is estimated that sales from the Chinese subsidiary alone have reached about 40% of Lanc?me and Est?e Lauder's sales in China," adding, "While the Chinese cosmetics market grew by 9% in 2020, LG Household & Health Care grew by 21%, and Whoo by 25%, expanding their market share."

Growth in duty-free sales is also expected. Shinhan Financial Investment forecasted LG Household & Health Care's domestic duty-free sales growth rate in the second quarter to be 116%, more than double that of the previous year. Sung Junwon, a researcher at Shinhan Financial Investment, explained, "The second quarter of last year was the period when duty-free cosmetics sales were most severely impacted by COVID-19," adding, "Thanks to the base effect from COVID-19 and the growth of the Chinese cosmetics market due to vaccine effects, sales by 'bottari-sang' (informal traders) at domestic duty-free shops have recently risen sharply. LG Household & Health Care consistently ranks within the top three in cosmetics sales at most domestic duty-free shops and often ranks first on a monthly or quarterly sales basis."

The growth trend in cosmetics sales by bottari-sang, which began in the second half of 2020, is expected to continue until the end of this year, and next year, inbound and outbound travelers are expected to drive sales growth. Researcher Sung said, "Bottari-sang are expected to increase their cosmetics purchases at Korean duty-free shops this year and next," adding, "If the number of inbound and outbound travelers begins to increase from the fourth quarter of this year due to vaccine effects, cosmetics sales growth at duty-free shops through general tourism-related travelers can be sufficiently expected in 2022." Considering the growth in cosmetics sales in China as well, performance improvement over the next three years is considered quite predictable. Shinhan Financial Investment estimated LG Household & Health Care's annual consolidated operating profit to increase by 11.5% year-on-year to 1.36 trillion KRW this year and to grow by 7.7% to 1.47 trillion KRW in 2022.

Base Effect Burden in the Second Half of the Year

While a low base effect will be seen until the second quarter, from the second half of the year, a base effect burden is expected. In particular, the household goods and beverage sectors, which performed well during COVID-19 last year, are expected to reflect the base effect burden starting from the second quarter. Yuanta Securities forecasted that LG Household & Health Care's operating profit in the household goods and beverage sectors will decrease by 28% and 1%, respectively, compared to the same period last year.

However, concerns about the base effect burden are already reflected in the stock price. Han Yujeong, a researcher at Daishin Securities, said, "In the second half of last year, LG Household & Health Care's duty-free sales grew compared to the same period the previous year, showing performance that greatly exceeded the market," adding, "Although a significant base effect burden is expected in the second half, related concerns are judged to have been preemptively reflected in the stock price."