[Click eStock] "Cosmetics Stocks Surge on China's Stimulus... Prioritizing Structural Improvement"

Shinhan Investment Corp. diagnosed on the 26th that although the stock prices of major domestic cosmetics companies such as Amorepacific and LG Household & Health Care surged sharply due to expectations of China's economic stimulus measures, fundamental structural improvements should come first. They maintained Kolmar Korea as the top preferred stock within the sector.

Researchers Hyunjin Park and Juejin Ju stated, "Since September, the cosmetics sector stock prices have shown a recovery trend as valuation appeal reemerged amid high expectations for second-half earnings growth. Moreover, on the 24th, the People's Bank of China announced an economic stimulus package, causing stock prices to surge mainly among large companies with high exposure to China."

The two researchers added, "China has announced plans to present additional economic stimulus policies within the year, which will positively impact the sentiment of Chinese consumer stocks for the time being. For example, Cosmax has a high dependence on its Chinese business, and if consumption power improves in the local Chinese market due to interest rate cuts, demand for cosmetics will naturally recover."

They further predicted, "Additionally, if investment increases through lower financing costs, leading to overseas expansion and mergers and acquisitions (M&A) by local cosmetics companies, Cosmax, Kolmar Korea, and Cosmecca Korea's Chinese production subsidiaries are expected to benefit."

However, they analyzed, "Since the poor performance of Amorepacific and LG Household & Health Care in China is not simply due to decreased consumption power, the stock price rise may not last long. Both companies are attempting structural changes in their Chinese businesses through renewing aging brands and restructuring channels."

They continued, "Due to intensified competition in the Chinese cosmetics market, the visibility of earnings recovery for Korean cosmetics companies originating from China is relatively low. The effects of China's economic measures will have greater influence only if accompanied by mid- to long-term corporate structural improvements."

For this reason, they judged that it is more appropriate to approach the cosmetics sector through the U.S. consumption growth story. In particular, the volume for the U.S. Black Friday in October to November is expected to be a key point to observe export growth trends.

The two researchers said, "The direct and indirect effects related to China's economic stimulus measures will be strengthened for OEM companies' Chinese subsidiaries. We maintain a continuous top-preferred opinion on Kolmar Korea, and Cosmax is also approachable for buying to narrow the stock price gap." Additionally, Aekyung Industrial was cited as a beneficiary stock, being the only brand company with relatively solid Chinese performance.