[Click eStock] "Cosmax, Q2 Expecting Recovery in Chinese Sales"

Korea Investment & Securities Report

[Asia Economy Reporter Minji Lee] Korea Investment & Securities maintained its buy rating on Cosmax on the 25th and raised the target price by 26.7% to 95,000 KRW.

Cosmax's consolidated sales in the fourth quarter amounted to 382.3 billion KRW, down 9.2% year-on-year, and operating profit was 7.7 billion KRW, a decrease of 74.6%. Operating profit is expected to fall short of market expectations by about 36%. This is because both Cosmax and its clients suffered business setbacks due to the resurgence of COVID-19 in China since December last year.

Sales from the Chinese subsidiary are estimated to have decreased by 26% compared to the same period last year. Since a high proportion of Korean subsidiary clients export products to China, sales of the Korean subsidiary are also expected to show slight negative growth. The Ohio and NuWorld subsidiaries in the U.S., which recorded significant losses over the past two years, were merged as of January 1 this year. Related one-time costs and goodwill impairments are likely to be reflected, but these were not included in the earnings estimates.

Myungjoo Kim, a researcher at Korea Investment & Securities, explained, "The reasons for Cosmax's weak stock price and performance were the cost ratio deterioration due to rising raw material prices and the Chinese government's continued zero-COVID policy, such as city lockdowns causing net losses in the U.S. subsidiaries," adding, "Sales of the Chinese subsidiary are expected to resume stable growth from the second quarter."

Expectations for performance improvement are also rising due to price increases. Cosmax began partial price hikes for Korean clients starting from the third quarter of last year. In China, where new products are frequently launched, some of the cost burden is naturally passed on to clients when they release new products. With the recovery of orders from Chinese clients, Cosmax's cost ratio is also expected to improve.

Researcher Kim said, "Considering the abolition of the zero-COVID policy, sales and operating profit this year will clearly improve compared to last year," and analyzed, "Although the listing of the subsidiary Cosmax East remains uncertain, a stock price recovery trend is expected."