Yeonwoo, Continued Earnings Uncertainty Inevitable... Target Price Down 13%

KB Securities Report
Operating Profit of 4.7 Billion KRW This Year... 47% Decrease Compared to Last Year

[Asia Economy Reporter Minji Lee] Opinions have emerged that uncertainty in performance may continue as consumption worsens due to the spread of the novel coronavirus infection (COVID-19) and cosmetics consumption shrinks due to mask-wearing. On the 29th, KB Securities maintained a neutral investment opinion and set a target price of 20,000 won, down 13% from the previous level.

In the second quarter, Yeonwoo's consolidated sales amounted to 59 billion won, and operating profit was 4.7 billion won, down 26% and 47% respectively compared to the same period last year. The operating profit margin recorded 7.9%, down 3.1 percentage points from a year ago. On a separate basis, domestic sales were 57.9 billion won, down 28% year-on-year, and operating profit was 4.9 billion won, down 49%.

The cost ratio also rose by 3.6% compared to a year ago. Despite efforts to reduce outsourcing processing costs, factory productivity declined due to decreased sales, and the burden of fixed costs increased. Shin-ae Park, a researcher at KB Securities, explained, “Due to the continued impact of COVID-19, domestic and export sales fell by 26% and 32%, respectively,” and “Sales to major domestic clients are estimated to have dropped by 48%.”

The Chinese subsidiary’s performance recorded sales of 3.3 billion won, an increase of 46% compared to the same period last year. Compared to the first quarter, when factory operations were suspended due to COVID-19, sales increased by about 135%.

Yeonwoo is expected to continue its sales decline until the fourth quarter. This is because the COVID-19 pandemic has lasted longer than expected, severely worsening both domestic and overseas front markets.

This year, consolidated sales are expected to be 248.1 billion won, and operating profit 14 billion won, down 16% and 38% respectively compared to the same period last year. Domestic sales are expected to continue declining in the fourth quarter, but the rate of decline is estimated to narrow compared to the second quarter (-26%). Chinese sales are expected to show improvement from the first quarter low point.

Researcher Shin-ae Park analyzed, “Yeonwoo has been flexibly managing outsourcing processing costs since the beginning of this year and has been steadily working on labor cost efficiency since last year,” adding, “It has a cost structure that can quickly normalize profitability when the business conditions improve.”

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