[Click eStock] "Yeonwoo, Undervalued Small to Mid-Sized Cosmetics Company... Target Price Up 26%"

Shinyoung Securities Report
Positive Signs from Lightened Cost Structure and Order Recovery

[Asia Economy Reporter Minji Lee] Shin Young Securities on the 12th issued a buy rating and raised the target price for Yeonwoo by 26% to 29,000 won. This is based on the expectation of an operating profit leverage effect due to a lighter cost structure and sales recovery of the Chinese subsidiary.

Yeonwoo recorded sales and operating profit of 68.9 billion won and 5.1 billion won respectively in the fourth quarter of last year, estimated to have decreased by 4.7% and 17.3% compared to the same period last year. The market consensus was sales of 66.8 billion won and operating profit of 3.2 billion won.

Shin Su-yeon, a researcher at Shin Young Securities, said, “Last year, the impact of COVID-19 negatively affected the overall domestic cosmetics industry, but in the fourth quarter, the company’s major clients’ orders showed a clear recovery trend,” adding, “They are preparing and responding to new product orders centered on reorders of existing products, so an increase in order volume is expected until the first half of this year.”

In the Asia region, China and Japan account for most of the sales, with Japan maintaining steady sales despite the COVID-19 situation. China continues operations focusing on new online clients, so performance contribution is expected. This year, the goal is to increase sales to 20 billion won, the maximum production capacity of the Chinese subsidiary. If achieved, the company’s Chinese production subsidiary is expected to turn profitable. In 2019, the Chinese production subsidiary recorded an operating loss of 1.32 billion won, and as of the third quarter of last year, the total was about 570 million won.

The reduced cost burden is also positive. The company lowered cost burdens and succeeded in improving operating profit through automation facility expansion and workforce efficiency improvements in 2019. Although profitability inevitably declined last year due to decreased sales from COVID-19, the third quarter results suggest that the operating profit margin has recovered to the 2019 level. Researcher Shin said, “If we exclude 2.6 billion won used for summer vacation and bonuses in the third quarter of last year and a one-time payment fee of 2 billion won related to client complaints, the operating profit margin recovered to 10.4%,” adding, “This year, operating leverage is worth expecting due to profitability improvement and sales recovery.”

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