[Click eStock] "LG Saenghwal Geongang, Recovery Slow but Direction Correct... Buy Recommended"

[Asia Economy Reporter Myunghwan Lee] Meritz Securities announced on the 4th that it has given LG Household & Health Care a buy rating and a target price of 950,000 KRW. The company also forecasted that LG Household & Health Care will show a long-term recovery in its earnings.

Meritz Securities projected LG Household & Health Care's Q3 sales this year to be 1.8931 trillion KRW, down 5.8% from the same period last year, and operating profit to decrease by 29.7% to 240.7 billion KRW. Net profit is also expected to decline by 29.4% year-on-year to 165.7 billion KRW.

Meritz Securities explained that the main reason for the downward revision in Q3 earnings is the sluggish performance of the cosmetics division. The forecasted sales and operating profit for LG Household & Health Care's cosmetics division this year are 845.7 billion KRW and 108.8 billion KRW, respectively, representing a sharp decline of 17.6% and 49.6% compared to the same period last year.

The analysis attributes the large decrease in profits to the poor performance of key channels such as China and the duty-free sector. It cited China's zero-COVID policy and the real estate market downturn as factors contributing to the unfavorable business environment. The resulting contraction in front-end consumption and a sharp drop in demand from daigou (Chinese personal shoppers) make a rebound in duty-free sales unlikely.

However, the essential goods division is expected to deliver solid results. The household goods segment is forecasted to see increases in both sales (5.1%) and operating profit (2.4%) due to the Chuseok holiday effect and consolidated subsidiary earnings. The beverage division is also expected to grow, with sales up 8.2% and operating profit up 5.9% year-on-year, driven by the expansion of carbonated drinks.

Despite the slow pace of LG Household & Health Care's recovery, Meritz Securities recommends buying the stock, citing expected earnings recovery centered on the duty-free sector and the Chinese market.

Specifically, the duty-free sector is showing a clear increase in the number of users. Since the quarantine requirement was lifted in June, the number of arrivals and departures has surged. In August, the number of arrivals reached 310,000, nearly doubling compared to the same period last year, and recovered to about 21% of the average monthly level before the COVID-19 pandemic in 2019.

Meritz Securities also believes that the worst is over for the Chinese market. They see sufficient positive factors, including stimulus policies expected from the Party Congress on the 16th, the November Singles' Day sales event, and the transition to a with-COVID policy after the National People's Congress in March next year. Meritz Securities diagnoses that even the base effect from the removal of lockdowns could lead to high growth.

Hanuri, a researcher at Meritz Securities, advised on LG Household & Health Care, saying, "The pace is slow, but the direction is right," and recommended a buy approach, noting that both earnings recovery and momentum strengthening are valid.