[Click eStock] "AmorePacific, Conservative Approach Needed for Q3 Earnings"

[Asia Economy Reporter Song Hwajeong] Shin Young Securities on the 28th downgraded the target price of Amorepacific from 270,000 KRW to 230,000 KRW, stating that a cautious approach is still necessary for the third-quarter earnings. The investment opinion was maintained as 'Buy.'

Amorepacific's stock price has been declining since the end of May due to concerns over poor second-quarter earnings this year. At the end of 2020, Amorepacific reduced fixed costs through offline store restructuring and aimed for a full-scale earnings turnaround, which raised market expectations. However, profitability in the Asian region declined unexpectedly, resulting in second-quarter earnings falling short of market consensus. A cautious approach is also advised for the third-quarter earnings. Shin Suyeon, a researcher at Shin Young Securities, explained, "This is because difficult business conditions continue in core channels excluding digital, such as traditional channels, duty-free shops, and China, due to the resurgence of COVID-19 and intensified competition."

Shin Young Securities identified three risk factors for Amorepacific: ambiguous stock price levels, continued sluggishness in major channels excluding digital, and margin decline due to intensified local competition in China. Researcher Shin analyzed, "Although Amorepacific's stock price has fallen over four months, the 12-month forward price-to-earnings ratio (PER) based on the previous day's closing price is about 31.8 times. Considering that the lowest 12-month forward PER in the past five years was 20.2 times, it is still premature to say the stock price has bottomed out." He added, "Moreover, the current third-quarter operating profit consensus is around 100 billion KRW, which poses a burden due to potential further downward revisions of the consensus."

In the third quarter, sluggishness continues in major channels excluding digital, including traditional channels, the slowdown in the duty-free industry itself, closure of Innisfree stores in China and poor online sales, and the impact of COVID-19 resurgence in Asia and Europe. Researcher Shin said, "Although a strong earnings turnaround is necessary to reduce valuation pressure, it is regrettable that the environment makes achieving this difficult."

On the other hand, improvements in sales channels and brand mix compared to the past, a valid direction of recovery, and opportunities for inorganic growth through the consolidation of Cosvision subsidiaries and the merger with Estra were cited as positive factors. Researcher Shin stated, "Amorepacific, which hit its lowest point in the past five years due to COVID-19 and restructuring last year, will continue its earnings turnaround in 2021 and 2022." He explained, "Considering COVID-19 uncertainties, overseas earnings are expected to recover to 2019 levels in 2022, and duty-free shop earnings in 2023."

Researcher Shin added, "Although the possibility of a short-term stock price rebound due to third-quarter earnings weakness is low, starting from the fourth quarter, it is worth expecting valuation relief through the recovery of growth in China and profitability improvement domestically." He also noted, "Furthermore, if vaccination rates increase and COVID-19 related situations ease, the recovery speed of Amorepacific's highest-margin channel, the duty-free shops, could accelerate, which should also be kept in mind."