[Click e-Stock] "Lotte Chilsung, Limited Short-Term Earnings Rebound...Target Price Lowered"

Target Price Lowered by 7% from Previous Level

Daishin Securities announced on May 8 that it has lowered its target price for Lotte Chilsung from 150,000 won to 140,000 won, citing limited potential for a short-term earnings rebound. The investment rating remains 'Buy'.

Jung Hansol, a researcher at Daishin Securities, stated, "We have reduced our target price by 7% from the previous level due to a downward revision in earnings estimates. Domestic consumption remains sluggish, resulting in continued declines in sales volume. Although the company plans to recover sales through new product launches, weather variables in the second and third quarters, as well as an overall decrease in sales volume due to weakened consumption and ongoing raw material cost pressures, are expected to limit a short-term rebound in standalone earnings."

In the first quarter of this year, Lotte Chilsung posted consolidated sales of 910.3 billion won, down 3% year-on-year, and operating profit of 25 billion won, down 32%, both falling short of consensus estimates (the average of securities firms' forecasts).

On a standalone basis, the beverage division recorded sales of 408.2 billion won and operating profit of 13 billion won, down 5% and 46%, respectively, compared to the same period last year. Jung commented, "Due to the domestic economic downturn, demand continues to weaken, resulting in negative growth across all categories except zero-calorie carbonated drinks and energy drinks. On a positive note, exports, which account for 7% of the beverage division, increased by 7%, driven by strong performance of key export brands Milkis and Let's Be in Russia and Southeast Asia. However, a decline in sales volume led to weaker fixed-cost leverage, while higher exchange rates, rising prices for certain raw materials, and increased labor costs expanded cost burdens. As a result, the operating margin fell by 2.4 percentage points, leading to continued profit decline."

The liquor division saw sales decrease by 3% to 192.9 billion won, while operating profit rose by 12% to 14.2 billion won. Jung explained, "Despite unfavorable conditions such as a shrinking nightlife market and changing liquor trends, sales volume of Saero remained stable, and we estimate Saero sales rose 5% to 40 billion won. However, all categories except Saero posted negative growth. Due to a low base effect from last year's malt-related fines and reduced advertising and promotional expenses, the operating margin improved by 1.4 percentage points, resulting in higher operating profit."

Overseas subsidiaries posted sales growth of 9% to 340.5 billion won, but operating profit plunged 74% to 600 million won. Jung analyzed, "The Philippine and Pakistan subsidiaries achieved solid growth, with sales up 5% and 40%, respectively. However, in Myanmar, customs clearance issues caused production disruptions, resulting in a 43% drop in sales. This customs issue has now been resolved, and growth is believed to have recovered. However, in the Philippines, a one-off cost of 3.4 billion won was incurred during the factory integration process, leading to a wider deficit, while in Myanmar, the sales decline resulted in a turnaround to a loss, causing overseas operating profit to remain weak."

The analyst noted that while low-priced buying is valid, a long-term investment perspective is necessary. Jung stated, "The solid performance of overseas subsidiaries in the Philippines, Pakistan, and Myanmar, as well as export expansion, enhance the company's long-term investment appeal. Given the low valuation and the potential for long-term overseas performance, low-priced buying is valid, but we recommend a long-term investment approach."