[Click eStock] "LG Saenghwal Geongang, Earnings Uncertainty Highlighted"... Investment Opinion 'Neutral'

[Asia Economy Reporter Ji Yeon-jin] Hana Financial Investment announced on the 23rd that it has lowered the target price for LG Household & Health Care from 2 million KRW to 1.75 million KRW and downgraded its investment opinion from Buy to Neutral, citing increased earnings uncertainty in the second half of the year due to the resurgence of COVID-19 and rising cost ratios.

Park Jong-dae, a researcher at Hana Financial Investment, explained, "In the cosmetics business, logistics are delayed due to the resurgence of COVID-19 in the China region, and in the household goods and beverage businesses, earnings uncertainty has increased due to the burden of rising global raw material prices and a fire at the can factory. We are lowering both earnings estimates and the target price and investment opinion."

LG Household & Health Care posted consolidated sales of 2.0214 trillion KRW in the second quarter, up 13% year-on-year, and operating profit of 335.8 billion KRW, an 11% increase, meeting expectations. The cosmetics business operating profit increased by 23%, driving earnings improvement. Duty-free sales grew by 89%, and especially, sales of the cosmetics brand 'Whoo' increased by 51% to 729 billion KRW.

However, it was pointed out that domestic premium category sales decreased by more than 20%, and operating profit margin improvement was limited due to increased marketing expenses in the China business.

The household goods business saw a 7% increase in sales despite the high base of hygiene products from the previous year, thanks to strong premium product performance and new sales additions from Physiogel. Operating profit decreased by 7% due to a decline in high-margin hygiene product sales. The beverage business saw a 6% decrease in profit due to rising raw material prices such as resin.

Due to the decline in profitability in the household goods and beverage businesses, the overall operating profit margin fell by 4 percentage points year-on-year to 16.6%.

Additionally, the fact that the China business sales growth rate remained at around 10% was seen as a disappointment. During the 618 event, luxury cosmetics line sales increased by 70%

, but sales of Whoo in China are estimated to have increased by only 17% to 191 billion KRW. Due to increased marketing expenses during the 618 event, the operating profit margin of the China business is estimated to have dropped by 5 percentage points year-on-year to 7%.