[Click eStock] "LG Saenghwal Geonhang Fully Reflects Negative Factors... Timing to Catch the Bottom"

[Asia Economy Reporter Myunghwan Lee] Korea Investment & Securities announced on the 29th that it maintains a buy rating and a target price of 1.05 million KRW for LG Household & Health Care. The reason is that the company's stock price is expected to rise thanks to the recovery of the duty-free and Chinese markets.

LG Household & Health Care's consolidated sales for the second quarter of this year recorded 1.8627 trillion KRW, down 8% year-on-year, and operating profit decreased by 35% to 216.6 billion KRW. The duty-free business, a high-profit channel, performed better than market concerns, resulting in operating profit exceeding market and Korea Investment & Securities forecasts by 8% and 20%, respectively.

By segment, Korea Investment & Securities evaluated that the duty-free industry's sales, which had decreased by 68% year-on-year in the first quarter, showed a relatively strong performance with a 32% negative growth in the second quarter. LG Household & Health Care's duty-free division is said to have better margins compared to other channels because it does not incur fixed costs. Even though discount policies within the duty-free industry changed in the second quarter, it is expected that the margin rate remains overwhelmingly higher than other channels.

The Chinese cosmetics business, which recorded a 13% operating profit margin in the previous quarter, is estimated to have achieved about a 15% operating profit margin in the second quarter. With brand renewals in daily necessities and the ongoing preference trend for zero-sugar beverages, daily necessities and beverages also recorded favorable sales growth and operating profit margins.

Korea Investment & Securities analyzed that the negative factors facing LG Household & Health Care have already been somewhat reflected. LG Household & Health Care's performance at the Chinese 618 shopping festival was as expected sluggish, which raised concerns about the brand power of LG Household & Health Care in the market. Although concerns remain that the power of the cosmetics brand has been significantly damaged, it is analyzed that this has already been reflected in the stock price.

Korea Investment & Securities forecasts that even if the recovery of LG Household & Health Care's valuation (brand power) is slow, stock price increases are possible due to earnings per share (EPS) growth driven by the recovery of the duty-free and Chinese industries. Myungjoo Kim, a researcher at Korea Investment & Securities, said, "The current COVID-19 situation in China has improved compared to the first quarter, and accordingly, the decline in LG Household & Health Care's duty-free and Chinese sales in the second half is expected to narrow," adding, "Considering the lowered valuation and improving industry environment, we judge this to be the timing to bottom out LG Household & Health Care."