[Click eStock] "LG Saenggeon, Earnings Outlook Weak... Target Price Down"

Hana Securities forecasted on the 21st that LG Household & Health Care's first-quarter earnings this year will fall short of expectations. Accordingly, it maintained a 'Buy' investment rating but lowered the target price to 760,000 KRW.

Researcher Park Eun-jung of Hana Securities stated, "First-quarter sales are expected to increase by 1% year-on-year to 1.7 trillion KRW, while operating profit is projected to decrease by 18% to 144.3 billion KRW, falling 18% short of consensus."

Researcher Park said, "A downward revision of profit estimates for the cosmetics segment is inevitable due to decreased sales in China," adding, "Despite last year's low base effect, duty-free and Chinese sales are expected to decline by 25% and 11%, respectively, compared to the same period last year."

She identified three main factors for the sluggish performance: the overall sharp decline in daigou demand due to the crackdown on commission fees in the duty-free channel; the reopening transition period in China, with local consumption only beginning to increase in March; and LG Household & Health Care's passive marketing stance amid rapidly changing external conditions.

China demand (duty-free + local China) accounts for 55% of LG Household & Health Care's cosmetics sales. Most of this is postpaid sales, which are believed to have more than twice the margin compared to the company's overall cosmetics margin. Researcher Park explained, "Profit resilience sharply declined as sales dropped nearly 40% last year," noting, "Cosmetics margins fell from 20% in 2021 to 10% in 2022."

Researcher Park judged that the three major hurdles of the contraction in Chinese demand have been overcome. He analyzed, "The duty-free market has improved since hitting a low point in January through February and March, and from the second quarter, the reopening effect is expected due to daigou (inventory replenishment) and tourist inflows."

However, he recommended, "LG Household & Health Care's duty-free performance is below the market growth rate despite the low base, so it is better to approach it with a long-term perspective."