[Click e-Stock] "Cosmax Needs Profitability Improvement... Target Price Lowered"

Target Price Lowered from 280,000 Won to 220,000 Won

On November 11, Daishin Securities stated that profitability improvement is necessary for Cosmax’s stock price to rebound, and accordingly lowered its target price from 280,000 won to 220,000 won. The investment opinion was maintained as 'Buy'.

Jung Hansol, a researcher at Daishin Securities, explained, "We lowered the target price by 21% compared to the previous figure, as we revised down our operating profit estimates for both the domestic and Chinese markets," adding, "For a full-fledged stock price rebound, either profitability in Korea and China must improve, or a turnaround in the United States must occur first."

In the third quarter of this year, Cosmax recorded sales of 585.6 billion won, up 11% year-on-year, and operating profit of 42.7 billion won, down 2%. Researcher Jung noted, "Sales were in line with the consensus (average securities firm forecast), but operating profit fell short due to declining profitability at the standalone entity," and added, "In Korea, sales increased by 10% to 383.5 billion won, but operating profit decreased by 13% to 34.3 billion won. Only certain items grew, while most basic categories saw a sales slowdown, worsening the product mix. In addition, the number of new indie brand clients surged from 1,700 at the end of last year to 2,200 in the third quarter of this year, leading to a decline in initial production efficiency and increased costs related to development and sampling support. As a result, profitability dropped by 1.0 percentage point compared to the same period last year."

For overseas subsidiaries, China showed a moderate recovery with sales rising 22% to 140 billion won, but due to low factory utilization rates and an increased proportion of color cosmetics, profitability is estimated to have grown only in the mid-single-digit range. Researcher Jung stated, "Thailand continues to grow, but Indonesia saw sales decline by 33% due to increased macroeconomic uncertainty and the influx of low-priced Chinese products," and added, "In the United States, sales turned to growth with a 14% increase, thanks to the recovery of existing clients and contributions from new clients in the western region. As a result of this sales growth, the operating loss is estimated to have narrowed to 2 billion won."

Although the number of new clients has increased, it is expected to take time before this is reflected in actual results. Researcher Jung explained, "The global spread of K-beauty and the growth of indie brands continue to provide a favorable order environment for Cosmax, and the standalone entity is showing stable sales growth. However, due to the increase in new clients and changes in the product mix, operating leverage remains limited," and added, "In the long term, acquiring a diverse range of new clients is a factor that increases the possibility of discovering next-hero client companies and enhancing operating leverage, but it will take time before this is reflected in performance."