[Into the Stocks] Even 'Hu' Shrinks... Securities Firms Lower LG Saenggeon Target Prices

Sales Share-Heavy 'Hu' Sales Slowdown
Next Month's Guanggunje Special Demand Difficult to Expect
Living Health and Beverage Sectors Also Face Cost Increase Pressure

[Asia Economy Reporter Minji Lee] LG Household & Health Care is expected to show sluggish performance and stock price trends for the time being due to the poor performance of its main cosmetics brand. It is also predicted that the growth in other business sectors (household health and beverages) will not be significant due to rising raw material prices.

As of 9:20 a.m. on the 28th, LG Household & Health Care was trading at 1,188,000 KRW, down 2.7% from the previous trading day. The stock price has fallen about 14% over two trading days, which is interpreted as reflecting the securities industry's analysis that investment attractiveness has decreased due to the Q3 earnings shock.

Looking at LG Household & Health Care's Q3 performance, sales recorded 2.01 trillion KRW, and operating profit was 342.3 billion KRW. Compared to the same period last year, sales decreased by 2.9%, while operating profit increased by 4.5%. The significant decline in cosmetics sales negatively affected the performance. Operating profit increased due to the effect of restructuring premium offline stores in Korea, which is considered a one-time factor.

The cosmetics division recorded sales of 1.0267 trillion KRW, a 10.2% decline compared to the same period last year, while operating profit increased by 9% to 215.6 billion KRW. All channels, including duty-free (-5%), overseas (-3%), and pure domestic (-34%), showed lower-than-expected sales growth rates, which had a negative impact.

In particular, ‘Whoo,’ which accounts for 60% of total cosmetics sales, showed about a 3% decline, failing to surpass last year's high performance. Other brands such as ‘Sum’ fell by 28%, while ‘O Hui’ grew by 10%. Soyeon Jeong, a researcher at Kyobo Securities, said, "The duty-free sector showed sluggish performance due to the downturn in the duty-free industry caused by COVID-19 and shipment delays resulting from the logistics crisis that has continued since last month." She added, "China, the largest overseas sales market, also showed sluggish performance due to a slowdown in retail sales growth and restrictions on intercity movement." Accordingly, while ‘Whoo’ showed an average annual growth rate of 50% from 2016 to last year, its future growth rate is expected to fall short of this level.

The household health division recorded an operating profit of 63.6 billion KRW, down 4.7% from a year earlier, which is analyzed to be due to a decline in sales of high-margin hygiene products and the burden of raw material costs. The beverage division posted an operating profit of 63.2 billion KRW, growing by 0.1%. Although demand from delivery and online channels increased significantly, the rise in raw material prices pressured profitability.

The securities industry expects LG Household & Health Care to report sluggish results in Q4 as well. The estimated operating profit for Q4 is 262.5 billion KRW, which has been revised downward by 5.4% compared to two months ago. Most securities firms have lowered their target prices, with Yuanta Securities giving the lowest target price of 1.45 million KRW and a neutral investment opinion. This is based on the judgment that next year's growth rate of ‘Whoo’ (3%) will fall short of China's cosmetics growth rate (4%), and growth in other regions is also sluggish, limiting short-term growth momentum.

The special demand from next month's Guanggun Festival is also expected to be difficult to anticipate. Eun Kyung Park, a researcher at Samsung Securities, explained, "Market uncertainty is increasing due to regulatory measures that could negatively affect cosmetics marketing activities, such as the Chinese government's promotion of frugality and the ban on appearances by ‘Nyangpao’ (feminized men)."