Chinese Consumer Stocks Show Divergent Performance Depending on Dependence on Korean Visitors

"If You Have Strong Brand Power, You Can Diversify Sales Channels"
LG Household & Health Care Records Earnings Surprise While Hotel Shilla Faces Earnings Shock
Hana Financial Investment: "Results Reveal Limitations of Duty-Free and Retail Industries and Strengths of Brand Business"

[Asia Economy Reporter Oh Joo-yeon] Chinese-related stocks hit hard by the novel coronavirus infection (COVID-19) showed mixed first-quarter earnings depending on their reliance on Chinese inbound and outbound travel. Companies with strong brand power locally recorded earnings surprises, but duty-free shops, which become meaningless when travel is blocked, experienced earnings shocks, resulting in a split outcome.

According to the Financial Supervisory Service's electronic disclosure system on the 27th, LG Household & Health Care's consolidated sales for the first quarter of this year were 1,898.64 billion KRW, and operating profit was 333.7 billion KRW, increasing by 3.6% and 1.2% respectively compared to the same period last year, achieving the highest first-quarter performance ever despite the COVID-19 adversity. In terms of operating profit, this marks 60 consecutive quarters of growth since the first quarter of 2005.

Initially, the market expected a significant hit due to the 50% of LG Household & Health Care's cosmetics business operating profit coming from duty-free channel sales, which would be affected by the decrease in Chinese inbound travelers. However, it is analyzed that LG Household & Health Care's cosmetic brands have high loyalty in the Chinese local market, enabling solid performance.

Park Jong-dae, a researcher at Hana Financial Investment, said, "In March, Chinese inbound travel decreased by 97% compared to the same period last year, making it difficult to predict how this would translate into earnings." He added, "Although sales of luxury cosmetics through duty-free shops had been the main growth driver, the fact that solid earnings improvement was achieved even when duty-free sales were blocked confirms once again the strength of brand business?that with strong brand power, sales can continue flexibly by adjusting business strategies." Accordingly, the stock price surged. The stock price, which was 1,071,000 KRW on the 1st, rose to 1,434,000 KRW on the 24th, increasing by 33.9% just this month.

In contrast, the duty-free industry, which had been the biggest beneficiary in the global consumer market due to the expansion of Chinese inbound travel, recorded an earnings shock, creating a stark contrast.

Hotel Shilla, which announced its first-quarter earnings, fell significantly short of market expectations and posted its first quarterly loss in 20 years. Sales for the first quarter were 944 billion KRW, down 30% from the same period last year, and operating profit turned from 82 billion KRW in the first quarter of last year to a loss of 66.8 billion KRW. Most of this operating loss reportedly came from the Incheon Airport branch. According to Korea Investment & Securities, downtown duty-free sales decreased by 23% year-on-year, but domestic airport sales dropped by 43%, resulting in an operating loss of 48 billion KRW.

There is also analysis that overcoming the burden of rent exceeding 100 billion KRW per quarter was difficult amid a more than 40% year-on-year decrease in Incheon Airport sales.

The hotel division also suffered an operating loss of about 20 billion KRW due to a significant drop in occupancy rates.

Na Eun-chae, a researcher at Korea Investment & Securities, predicted, "Since physical entry is currently difficult, overseas duty-free shops are also expected to perform poorly."

Losses are expected to continue into the second quarter. KB Securities forecasts a consolidated operating loss of around 87 billion KRW for the second quarter, while NH Investment & Securities expects about 67 billion KRW. Hana Financial Investment anticipates that although the loss will narrow compared to the first quarter, losses will persist, recording around 49 billion KRW.

Accordingly, the momentum of stock price increases has also slowed. The stock price, which was 67,600 KRW on the 1st, rose to 76,900 KRW on the 24th. Although it rebounded after the COVID-19 impact-induced decline, the increase was limited to 13.8%.

This content was produced with the assistance of AI translation services.