[Into the Stocks] Q1 'Earnings Shock' LG Household & Health Care... 630,000 KRW VS 1,100,000 KRW Temperature Gap

Stock Price Falls Over 37% Since Early Year
"Despite Considering China Lockdowns, Earnings Decline Larger Than Competitors"

Mixed Investment Opinions and Target Prices from Securities Firms

[Asia Economy Reporter Minji Lee] Can LG Household & Health Care's stock price recover after an earnings shock in the first quarter?

As of 10 a.m. on the 16th, LG Household & Health Care's stock price stood at 696,000 KRW, up 0.29% from the previous trading day. Earlier this month, LG Household & Health Care maintained the 800,000 KRW level, but after the first-quarter earnings announcement last week, it plummeted to 680,000 KRW. Since the beginning of the year, it has fallen by more than 37%.

In the first quarter, LG Household & Health Care failed to meet even the lowered market expectations. First-quarter sales were 1.645 trillion KRW, down 19.2% compared to the same period last year, and operating profit plunged 53% to 175.6 billion KRW. Market estimates predicted sales of 1.0994 trillion KRW and operating profit of 338 billion KRW, missing by 18% and 48%, respectively.

The cosmetics division, which accounts for the largest share at 55%, saw sales and operating profit fall to about half of previous years' levels. Sales dropped 40% to 699.6 billion KRW, and operating profit decreased 73% to 69 billion KRW. Duty-free channel sales fell sharply by 68% year-on-year to 168.2 billion KRW. Sales in the Chinese market also declined by 32% during the same period, and pure domestic sales decreased by 16%.

By brand, the poor performance of the flagship product ‘Whoo’ was particularly painful. Whoo's sales plummeted 72% in the duty-free market and 38% in the Chinese market. Another brand, ‘Su:m37’, was also shunned in the duty-free market (-43%) and China (-29%). Shin-ae Park, a researcher at KB Securities, diagnosed, "Even excluding the impact of China's lockdowns, the stagnation of Whoo's sales, which was a core growth driver, has become a reality, raising concerns about earnings." In fact, competitors like Est?e Lauder achieved over 25% growth in the online market in the first quarter, and AmorePacific increased Sulwhasoo sales by 14.4%.

The household goods division recorded sales of 552.6 billion KRW, growing 6%, but operating profit fell 16.7% to 55.2 billion KRW due to rising raw material costs. The beverage division's sales and operating profit rose 9.9% and 2.6%, respectively, to 392.7 billion KRW and 51.4 billion KRW.

The outlook after the second quarter is also bleak due to the sharp decline in earnings from China and the cost burden from rising raw material prices. According to financial information provider FnGuide, the annual sales estimates from major securities firms have been revised down 12% from 8.5162 trillion KRW two months ago to 7.4887 trillion KRW. Operating profit estimates also dropped 33% to 891 billion KRW.

Major securities firms agree that the operating environment will be difficult this year. However, target stock price forecasts vary widely, ranging from the 600,000 KRW level to 1.1 million KRW.

Samsung Securities, which gave a neutral investment opinion and the lowest target price of 630,000 KRW, viewed that the earnings uncertainty has increased due to the high dependence on the single brand ‘Whoo’. Eun-jung Park, a researcher at Samsung Securities, explained, “There is an ongoing social campaign in China cautioning against conspicuous consumption, and while the company expects sales to increase if logistics normalize, in reality, there will not be significant changes in earnings.”

IBK Investment & Securities, which set the highest target price at 1.1 million KRW compared to the current stock price, emphasized the possibility of the Chinese market normalizing in the second half. Ji-young Ahn, a researcher at IBK Investment & Securities, said, “If the Chinese market recovers, the stock price could also recover quickly. The beverage and household goods divisions will offset raw material cost burdens through demand recovery and price increases.”