Seohung, Growing Expectations for Dietary Supplement Sector Growth Amid COVID-19 Impact

[Asia Economy Reporter Minji Lee] Ebest Investment & Securities maintained a buy rating on Seohung on the 6th, expecting increased demand for health functional foods (health supplements), and set a target price of 50,000 won.

Seohung is expected to achieve its highest quarterly performance in the first quarter of 2020. This outlook is based on the anticipation that the health supplement segment's performance will improve due to growing interest in immunity against the novel coronavirus disease (COVID-19). The sales proportion of this business segment is estimated to be around 37%, similar to that of the core business, hard capsules.

Jung Hongsik, a researcher at Ebest Investment & Securities, explained, “Since the large-scale production facility expansion and relocation from Bucheon to the Osong factory, the profitability of the health supplement segment was not favorable during the formulation expansion process. However, this year, the surge in demand is expected to simultaneously bring about both top-line growth and profitability improvement.”

In the fourth quarter, the company recorded sales of 114.8 billion won, a 20% increase compared to the same period last year. However, operating profit decreased by 2% during the same period to 8.8 billion won. The sales growth appears to be due to the effect of newly introduced hard capsule equipment in Vietnam. The operating profit decline is expected to reflect increased costs from the new models in Vietnam and one-time expenses.

Researcher Jung added, “In the hard capsule segment, when new facilities are introduced, after 1 to 2 years of losses from a production efficiency perspective, profitability with high margins exceeding 15% has been recorded. The profitability improvement effect of the eight new facilities introduced last year is expected to fully materialize next year.”

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