[Click e-Stock] "Hwaseung Enterprise Faces Inevitable Sharp Earnings Decline Due to Tariff Impact"

On October 1, Daishin Securities stated regarding Hwaseung Enterprise, "A sharp and inevitable decline in profits is unavoidable due to tariff policies," and lowered its target price from 11,000 won to 9,000 won. The firm maintained its buy recommendation.

On this day, Daishin Securities analyst Yoo Junghyun commented, "It will take time for earnings to recover, so the stock price is likely to remain sluggish for the time being."

The main reason for the poor performance is a decrease in orders from client companies due to the impact of tariffs. Analyst Yoo explained, "Recently, Adidas, a major client, significantly reduced its order volume compared to previous expectations during meetings with key vendors regarding third and fourth quarter orders. As a result, profit is expected to decrease sharply due to a decline in sales and increased cost burden from tariffs."

For the third quarter, Hwaseung Enterprise's sales and operating profit are projected to reach 324.8 billion won and 4.9 billion won, respectively, representing declines of 16% and 75% year-on-year. Analyst Yoo analyzed, "Contrary to previous expectations that deferred orders from the second quarter would be reflected in third-quarter sales, the conservative inventory policy of client companies due to tariffs will lead to a much larger-than-expected decline in third-quarter sales growth."

He also noted, "Tariff imposition began in earnest from the third quarter, and as client companies passed on the cost burden to vendors, margin declines became inevitable. Dollar-based sales growth in the contract manufacturing division is expected to decrease by 18%, and the operating margin is projected to drop significantly to 1.5%, compared to 5% in the same period last year."

Sales are also expected to decline in the fourth quarter. Analyst Yoo stated, "If consumers feel the price burden from tariffs, it is highly likely that sales will continue to decrease in the first half of next year as well." He added, "However, once client companies complete their preemptive inventory reduction and full-scale marketing begins with the opening of the North and Central American World Cup in June next year, order growth and a subsequent recovery in margins are highly likely to begin from the second quarter of next year."