[Click eStock] Disappointing Cosmetics... LG Saenggeon Falls Short of 2Q Expectations

China Cosmetics Expected Base Performance... Cost Burden in Beverage Sector Also

[Asia Economy Reporter Minwoo Lee] LG Household & Health Care posted growth in its performance in the second quarter of this year compared to the same period last year, but it fell short of expectations. This is interpreted as being due to cosmetics sales in China falling below expectations and cost pressures in the beverage sector having a negative impact.

On the 23rd, Ebest Investment & Securities lowered LG Household & Health Care's target stock price by 4.8% to 2 million KRW, citing these reasons. The closing price the previous day was 1,627,000 KRW. The investment rating was maintained as 'Buy.'

LG Household & Health Care recorded consolidated sales of 2.0214 trillion KRW and operating profit of 335.8 billion KRW in the second quarter of this year. This represents increases of 13.4% and 10.7%, respectively, compared to the same period last year. Although profits have increased for 65 consecutive quarters, both sales and profitability in the cosmetics sector fell short of expectations, missing market consensus by about 4%.

Cosmetics sales amounted to 1.1159 trillion KRW, and operating profit was 219.1 billion KRW, up 20.9% and 22.9%, respectively, compared to the same period last year. Despite the brand 'Whoo' driving the company's overall growth with sales of 728.7 billion KRW, a 51% increase year-on-year, it failed to exceed the high market expectations. Duty-free sales were 491 billion KRW, down 2% from the previous quarter, falling short of the market growth rate (10% growth quarter-on-quarter).

The China business was less than expected. Although cosmetics retail sales increased by 18.3% year-on-year, 'Whoo's sales in China grew by only 17%, which was somewhat disappointing compared to reports of success during the China 6.18 shopping festival. Orin Ah, a researcher at Ebest Investment & Securities, said, "Although there was a base effect from the second quarter of last year, the increase in live broadcasts during the 6.18 event appears to have negatively affected profitability," adding, "There are no major shopping events in the third quarter, but cosmetics live broadcast consumption is expected to increase during the Guanggun Festival in the fourth quarter."

The beverage sector faced higher-than-expected cost burdens. Supply disruptions occurred due to a fire at the can supplier's factory, along with the impact of rising resin prices. In the household goods sector, sales increased by 7.4% year-on-year to 496.2 billion KRW, but operating profit decreased by 7.0% to 58.8 billion KRW during the same period. Excluding the effect of hygiene products, both sales and profits are considered to have grown well.

Researcher Oh explained, "Considering the duty-free store performance, LG Household & Health Care's position remains unchanged, but marketing costs in China and cost pressures in the beverage sector are expected to continue throughout the second half of the year."