[Click e-Stock] LG Household & Health Care Performs Well in China, Disappoints in U.S.

Recovery in 'Daigong' Demand in China... Achieves Breakeven Point
U.S. Business Underperforms... Increased Marketing Investments

LG Household & Health Care posted first-quarter results that met market expectations this year. While profitability in the Chinese market was better than feared, the company underperformed in the U.S. market.

On April 29, Korea Investment & Securities maintained its 'neutral' investment rating on LG Household & Health Care, citing these factors. This rating has remained unchanged for two years and six months since it was first issued in October 2022. The previous day's closing price was 319,000 won.

First-quarter results were in line with market consensus. On a consolidated basis, sales were 1.6979 trillion won and operating profit was 142.4 billion won, down 1.8% and 5.7%, respectively, compared to the same period last year. Sales met market expectations, while operating profit exceeded them by 3.9%.

The main reasons for operating profit surpassing market expectations were reduced marketing expenses in the beauty division and stronger-than-feared sales to 'Daigong' (Chinese bulk buyers). Notably, Daigong sales were expected to decline by 50.3% year-on-year, but the actual decrease was only 20.2%. The operating margin of the duty-free channel within the beauty division is estimated to be in the double digits, which is considered very favorable. However, due to sluggish domestic demand, sales and operating profit in the beverage division fell short of market expectations.

Overall, strong profitability in the local Chinese business played a key role. The operating margin is estimated to be around 3%, which is the breakeven point estimated by Korea Investment & Securities. Recovery in Daigong demand and better-than-expected duty-free sales contributed significantly to the profitability of both the beauty division and the company as a whole.

However, profitability in the U.S. business was disappointing. The U.S. business (LG H&H brands and acquired brands), which had rebounded in the second to fourth quarters of last year, returned to losses in the first quarter of this year. This appears to be due to increased local marketing investments. LG Household & Health Care also decided on a paid-in capital increase of approximately 186 billion won for its U.S. subsidiary (LG H&H USA).

Kim Myungjoo, a researcher at Korea Investment & Securities, stated, "It is positive that the profitability of the Chinese business remains solid in the first quarter of this year, as it did in the fourth quarter of last year." She added, "Nevertheless, unlike the fourth quarter of last year, Chinese sales declined in the first quarter of this year, and improvement in U.S. business profitability has been slow, so a cautious approach is warranted."