[Click eStock] "Orion Holds Ample Momentum Including Short-Term Earnings Improvement"

[Asia Economy Reporter Song Hwajeong] Shinhan Financial Investment maintained a 'Buy' rating, a target price of 160,000 KRW, and its top pick status within the sector for Orion on the 6th, citing short-term earnings improvement and abundant momentum.

Beyond short-term earnings improvement due to easing base and cost pressures, abundant momentum is expected. Orion holds an advantage over competitors in new product launches and channel expansion, with category expansion (nut bars, mass-produced bread, bottled water, etc.) and regional expansion (operation of the India factory, establishment of a US sales corporation, completion of the second factory in Russia, etc.) becoming visible. Additionally, channel restructuring (China, Vietnam) is further expanding the distribution of new products. Researcher Jo Sanghoon of Shinhan Financial Investment said, "This is a valuation premium factor that can offset the lower growth rate of the Chinese confectionery market compared to the past."

Orion's Q4 earnings last year are expected to meet market consensus. Shinhan Financial Investment estimated Orion's Q4 sales and operating profit at 639.5 billion KRW and 109.4 billion KRW, respectively, representing increases of 10.7% and 28.6% year-on-year. Sales growth rates by country are expected to be 3.0% in Korea, 11.6% in China, 19.0% in Vietnam, and 13.2% in Russia, indicating performance growth across all regions. Researcher Jo analyzed, "Even considering one-time costs in the same period last year (stock compensation expenses of the Chinese subsidiary), operating profit is expected to increase by 8%. Early Lunar New Year timing, price hikes, and channel restructuring effects have led to noticeable sales recovery in China; strong new product sales in Korea; easing of regional lockdowns in Vietnam; and portfolio expansion in Russia are the reasons for performance improvement."

The combination of price increases and a decline in cost ratio is expected to have a positive impact. Orion was more negatively affected by rising grain prices than others in the sector. This is because it operates factories overseas directly and procures raw materials locally, with a high proportion of emerging markets where exchange rate fluctuations are severe. Researcher Jo said, "Conversely, in a phase where grain prices stabilize downward, the margin spread can improve more rapidly," adding, "The decline in cost ratio from July compared to the previous year is positive." Along with this, price increases in China and Russia are expected to sharply recover margin spreads from Q4 last year. Researcher Jo explained, "A 1% price increase in China's Choco Pie is expected to increase overall operating profit by 0.6%, and considering the strong brand power, operating profit improvement is possible without a decline in market share."

The current stock price is considered excessively undervalued. Researcher Jo said, "Operating profit this year is expected to increase 14.4% year-on-year to 435.5 billion KRW, showing strength, while the current valuation is at a 2022 price-to-earnings ratio (PER) of 13.7 times, indicating excessive undervaluation," adding, "Now, when the gap between fundamentals and sentiment is widening, is the right time to invest."