[Into the Stock] 'Cosmax' Blocked by Inflation Barrier

[Asia Economy Reporter Junho Hwang] Last month, with the lifting of the outdoor mask mandate, a 'reopening' wave swept through cosmetic stocks. However, less than a month later, the stock price of Cosmax, an ODM company specializing in color cosmetics, has dropped by 24.32%. Securities firms have also collectively lowered their target prices, dampening enthusiasm. This is due to the inevitable impact of inflation and the expectation that the effects of China's city lockdown measures will affect second-quarter earnings.

According to the Korea Exchange on the 24th, Cosmax's stock price fell from 85,100 KRW on the 2nd to 64,400 KRW on the 20th. On the 17th, it even dropped 12.28% compared to the previous day. The quarterly report released the day before chilled investors' nerves.

With the arrival of spring, the season for outings, demand for color cosmetics increased, resulting in a record-high consolidated sales of 397.9 billion KRW. However, operating profit plunged 41% to 13.7 billion KRW. By country, South Korea saw a 39% decrease, while the U.S. deficit widened from 500 million KRW to 900 million KRW. The Chinese market had recorded a 2,781.7% increase in operating profit in Q1 last year compared to the previous year, but this year’s Q1 results only showed a 2.9% increase compared to last year.

Cost increases due to inflation dealt a direct blow to Cosmax’s performance. Raw material purchase costs rose by about 4.3 billion KRW. The price of glycerin, a key raw material, jumped significantly from 1,420 KRW to 1,930 KRW.

Labor costs also increased. The average labor cost per person rose from 18.47 million KRW in Q1 last year to 23.97 million KRW. This is analyzed as a result of hiring 70 regular employees and 24 contract workers in response to increased reopening demand, along with an approximately 8.3 billion KRW increase in total wages due to bonuses and other expenses.

Researcher Eunjeong Park of Yuanta Securities predicted that Cosmax’s sales in Q2 this year will also show a downward trend, and the decline in operating profit will be even greater. Sales are expected to fall 6% year-on-year to 400 billion KRW, and operating profit is forecasted to drop 92% to 3.3 billion KRW. She lowered the target price from 100,000 KRW set last month to 80,000 KRW, stating, "The burden of additional costs such as rising global raw material prices and labor costs will continue in the first half."

Researcher Eunkyung Park of Samsung Securities observed that the impact of inflation and the effects of China’s city lockdown measures will have a significant influence on the decline in second-quarter earnings. She said, "The impact of lockdowns in major Chinese cities will considerably affect second-quarter results this year," and lowered the target price from 130,000 KRW to 90,000 KRW.