[Click e Stocks] "LG Household & Health Care Faces Multiple Threats in Chinese Market... Investment Rating and Target Price Downgraded"

[Asia Economy Reporter Song Hwajeong] Meritz Securities recommended a conservative approach to LG Household & Health Care on the 10th, citing structural threats scattered across the Chinese cosmetics market that cast a shadow over the entire industry, making it difficult for these issues to be resolved in the short term. The investment rating was downgraded from 'Buy' to 'Hold,' and the target price was lowered from 1.6 million KRW to 1.2 million KRW.

LG Household & Health Care's Q4 performance last year is expected to be sluggish due to a decline in the cosmetics sector. Meritz Securities estimated LG Household & Health Care's Q4 sales at 2.0678 trillion KRW and operating profit at 246.3 billion KRW, representing decreases of 1.3% and 3.9%, respectively, compared to the same period last year. Hanuri, a researcher at Meritz Securities, stated, "Cosmetics sales are estimated to have decreased by 5.1% year-on-year to 1.2576 trillion KRW, and operating profit is expected to have declined by 6.7% to 210 billion KRW," adding, "Duty-free sales were weak (-64.8 billion KRW) due to discount avoidance, and although the Singles' Day event in China was solid (45.7 billion KRW), the reduced contribution from duty-free sales likely widened the profit decline."

Structural threats related to the Chinese cosmetics market are expected to cause difficulties. In the short term, a negative base effect is a concern, while in the mid-to-long term, entering a low-growth phase is a risk factor. Researcher Han explained, "Although there was a 30% growth rate in the first half of last year, a negative base effect is expected to result in a -2% decline in the first half of this year," and added, "The annual growth rate of the Chinese cosmetics market was 23% from 2004 to 2013, 10% from 2013 to 2021, and is expected to enter a single-digit low-growth phase from 2022 onward." The shift of major distribution channels from domestic duty-free to local Chinese markets raises concerns about profitability deterioration. Han said, "Duty-free sales are shrinking due to stricter Chinese regulations that have weakened the operations of daigou (Chinese personal shoppers), and the prolonged COVID-19 pandemic has delayed the rebound in tourist sales," further noting, "In the local Chinese market, competition is intensifying, dependence on wanghong (social media influencers) continues to grow, and the Red Rectification Campaign imposes burdens such as passing on tax liabilities related to wanghong taxation through commission fees."