[Into the Stocks] HiteJinro, Recovery Delayed by Unresolved Social Distancing Measures

[Asia Economy Reporter Song Hwajeong] As COVID-19 cases are rising again, concerns are growing over the delayed recovery of HiteJinro. The combined effects of social distancing and intensified competition suggest that expectations for short-term performance should be lowered.

According to the Korea Exchange on the 6th, HiteJinro's stock price has fallen nearly 8% over the past month. It has been stuck in the 30,000 KRW range this year. The closing price exceeded 40,000 KRW on only one day. After reaching an all-time high of 47,000 KRW in June last year, the stock price has been on a downward trend. In early last month, it repeatedly surpassed 40,000 KRW during trading hours, attempting to stabilize in the 40,000 KRW range, but fell back to the 36,000 KRW range due to the extension of social distancing measures in the metropolitan area.

Delayed Recovery Due to Social Distancing

HiteJinro being stuck in the 30,000 KRW range is due to the impact of social distancing. Since the second half of last year, strengthened social distancing measures have hit liquor sales. In Q4 last year, HiteJinro recorded consolidated sales of 516.6 billion KRW and operating profit of 23.9 billion KRW. These figures represent decreases of 8% and 27%, respectively, compared to the same period the previous year, falling short of market consensus. The upgrade of social distancing levels in November last year worsened the sluggishness in the commercial liquor market, with the beer market size in Q4 last year shrinking by 17% and soju by 12% compared to the previous year, indicating a difficult situation. This trend continued into this year. In Q1, the domestic beer market decreased by 9%, and soju by 4%. Amid the challenging domestic situation, exports increased, allowing HiteJinro's Q1 performance to exceed consensus. Q1 sales were 535.1 billion KRW, the same level as the previous year, while operating profit decreased by 6% to 52.9 billion KRW.

Expectations for Q2 performance also appear to be low. According to financial information provider FnGuide, HiteJinro's Q2 consensus estimates are sales of 589.9 billion KRW, a 1.43% increase year-on-year, and operating profit of 51.2 billion KRW, a 5.36% decrease. Sim Eunju, a researcher at Hana Financial Investment, said, "Short-term profit expectations should be lowered," adding, "Q2 performance is likely to fall short of market expectations due to weak total demand for liquor." Considering that social distancing was fully implemented in the second half of last year, the first half faces a high base burden, and demand in the liquor market remains sluggish. According to Hana Financial Investment, total liquor demand for April and May is estimated to have decreased by more than 5% compared to the same period last year. Researcher Sim said, "Due to the sluggish liquor market, HiteJinro's domestic beer and soju sales are expected to decrease by 7.8% and 4.0%, respectively," adding, "Beer sales, including imported beer, are expected to decline by 4.5%."

Recovery Expected in the Second Half but Burden of Intensified Competition

Recovery is expected in the second half with expanded vaccination and eased social distancing, but the persistent increase in COVID-19 cases in the metropolitan area, the spread of COVID-19 variants, and intensified competition remain variables.

Originally, from July, business hours for restaurants and bars were to be extended from 10 PM to midnight, and private gatherings were to be allowed up to 8 people, easing social distancing. However, as COVID-19 cases increased, the metropolitan area extended existing distancing measures by one week, and outdoor drinking after 10 PM was banned. COVID-19 cases have recorded over 700 daily for four consecutive days recently, and the Delta variant continues to spread. Sim Jihyun, a researcher at eBest Investment & Securities, said, "Concerns over the Delta variant are acting as a new risk factor for contact-based sectors, including dining out, so a conservative approach is needed for the second half, including Q2," adding, "It is not too late to decide the official turnaround point after confirming market conditions and actual sales recovery trends."

Competition is also intensifying. Researcher Sim said, "Although competition is intensifying amid a sluggish business environment, even if the business recovers, competition will temporarily become fiercer," explaining, "Contact industries typically compete fiercely to capture market share early in the recovery phase, especially at the turning point of whether external activities will recover from last year's COVID-19 slump."

Attention should be paid to changes in the beer market landscape in the second half. Cha Jaehyun, a researcher at DB Financial Investment, said, "In the beer market, promotional competition centered on the entertainment market with OB Beer will intensify," adding, "Since the launch of Terra, the rapid rise in beer market share has plateaued, so careful observation of changes in the beer market landscape in the second half is necessary, and it is not considered an active buying point."