[Click eStock] "Lotte Je-gwa, Paused Briefly in Q2"

Gradual Escape from COVID-19, Favorable Weather for Ice Cream Expected to Boost Q3 Recovery
Shinyoung Securities "Maintains Lotte Confectionery Target Price at 180,000 Won"

[Asia Economy Reporter Gong Byung-sun] Lotte Confectionery posted second-quarter results below market consensus due to an unfavorable business environment. However, it is expected to return to normal in the third quarter with hot weather and recovery from COVID-19.

According to Shin Young Securities on the 30th, Lotte Confectionery's second-quarter sales increased by 2.4% year-on-year to 509.1 billion KRW, while operating profit decreased by 2.5% to 20.1 billion KRW. These figures are 1.0% and 13.3% below the respective consensus estimates of 514 billion KRW and 29 billion KRW.

The unfavorable business environment throughout the second quarter is interpreted as having negatively impacted the results. The domestic confectionery segment saw stagnation in recovery of its main products, gum and candy, due to the expansion of remote work and decreased use of large supermarkets since last year. As a result, sales in the confectionery segment fell 3.6% year-on-year. The ice cream segment also saw sales decline by 1.1% during the same period. Kim Jeong-seop, a researcher at Shin Young Securities, explained, “This is due to the base effect from last year and continued unfavorable weather conditions in April and May.” In April, cold spells and early summer weather alternated, and in May, it rained every other day, which adversely affected ice cream sales.

The overseas segment grew sales by 16% year-on-year as it gradually recovered from COVID-19. All overseas subsidiaries except Myanmar, where political issues such as democratization movements are ongoing, recorded external growth. However, due to depreciation of emerging market currencies, subsidiaries in Kazakhstan, Pakistan, and Russia showed declines in sales and profits in KRW terms.

However, from the third quarter, recovery is expected thanks to favorable weather and COVID-19 recovery. In the domestic confectionery segment, a dramatic demand recovery for gum and candy is unlikely, but new product launches and expansion of online channels are expected to offset the sluggishness. The ice cream segment is expected to see solid sales growth due to the base effect caused by last year’s prolonged rainy season and hot weather. The overseas segment is expected to benefit from eased regional lockdowns and expanded global vaccine distribution. Researcher Kim said, “Regions with high foreign capital ratios such as Kazakhstan, China, India, and Russia plan to proactively raise prices due to currency impacts.”

Accordingly, Shin Young Securities maintained a ‘Buy’ investment rating and a target price of 180,000 KRW for Lotte Confectionery. The closing price on the previous day was 142,000 KRW.