LG Saenggeon Posts Record Q2 Earnings but Faces Downgrade and Weakness

[Asia Economy Reporter Park Ji-hwan] LG Household & Health Care recorded its highest-ever performance in the second quarter of this year, but securities firms have been lowering their target stock prices one after another. The stock price is also weak as it failed to meet the expectations of the securities industry.

According to the Korea Exchange on the 23rd, as of 9:20 a.m., LG Household & Health Care's stock price was trading at 1,533,000 KRW, down 93,000 KRW (5.72%) from the previous day. Despite announcing record-breaking earnings the day before, the stock closed down 3.73%, continuing a sharp decline for two consecutive days.

LG Household & Health Care announced through a disclosure the day before that its sales for the first half of this year reached 4.0581 trillion KRW, and operating profit was 706.3 billion KRW, marking an all-time high for the first half of the year with increases of 10.3% and 10.9% respectively compared to the first half of last year. The second quarter also set a new record with sales of 2.0214 trillion KRW and operating profit of 335.8 billion KRW, up 13.4% and 10.7% respectively.

Despite the record-breaking performance, LG Household & Health Care's weak stock price is interpreted as being due to the second-quarter results falling short of the securities industry's initial expectations. The consensus estimates for LG Household & Health Care's second-quarter consolidated sales and operating profit were 2.0785 trillion KRW and 351 billion KRW, respectively. These figures fell short of expectations by 2.75% and 4.33%. In particular, the underperformance in the cosmetics sector had a significant impact.

Shin Soo-yeon, a researcher at Shin Young Securities, analyzed, "With China's sales growth rate at around 10%, intensified market competition, increased marketing costs due to the use of live commerce, and expanded losses of mid-to-low-end brands," adding, "Considering that China's cosmetics retail sales increased by 18.3% year-on-year in the second quarter, the performance did not even meet the market growth level."

Most securities firms are also lowering their target prices for LG Household & Health Care, lowering expectations. Among the 15 securities firms that presented target prices for LG Household & Health Care on this day, 9 firms (60%) simultaneously lowered their target prices. This is due to logistics delays caused by the resurgence of COVID-19 in the Chinese region affecting the core cosmetics business, along with increased global raw material costs in the household goods and beverage businesses, which have increased performance uncertainties.

In the case of Hana Financial Investment, along with lowering the target price, the investment opinion was also downgraded from 'Buy' to 'Neutral.' Park Jong-dae, a researcher at Hana Financial Investment, evaluated, "Due to the resurgence of COVID-19 in the second half of the year and rising cost ratios, performance uncertainties are highlighted, making it difficult to expect stock price momentum for the time being," adding, "A conservative approach seems advisable until uncertainties are alleviated."