[Click eStock] "Lotte Chilsung, Q2 Falls Short of Expectations but Performance Improvement Continues"

[Asia Economy Reporter Song Hwajeong] Daishin Securities maintained its 'Buy' rating and target price of 200,000 KRW for Lotte Chilsung on the 17th, stating that although the company's Q2 earnings this year may fall short of expectations, the momentum for earnings improvement is expected to continue.

Lotte Chilsung's Q2 earnings are expected to fall short of market expectations. Daishin Securities estimated Lotte Chilsung's Q2 consolidated sales to increase by 11% year-on-year to 661.3 billion KRW, and operating profit to rise by 48% to 43.2 billion KRW. These figures are below Daishin Securities' previous operating profit estimate of 45.6 billion KRW and the market consensus of 47.1 billion KRW.

In the beverage segment, carbonated beverage sales are expected to grow by 14% year-on-year due to strong sales of the new Zero product. Sales of juice, coffee, and bottled water are expected to grow by 2%, 14%, and 11%, respectively, due to the base effect from the previous year. However, operating profit is projected to increase by only 10% due to expanded advertising and promotional expenses for strengthening existing product brands and launching multiple new products.

In the liquor segment, sales of Original Cloud and soju are expected to decline by 11% each due to the stagnation of the commercial liquor market caused by restrictions on restaurant operations and limits on private gatherings of five or more people. Han Yujeong, a researcher at Daishin Securities, said, "However, quarterly sales of Cloud Draft reached 15 billion KRW, continuing growth from the previous quarter, leading to an estimated 10% increase in liquor sales and a turnaround to an operating profit of 500 million KRW."

With the implementation of revised social distancing measures in the second half of the year, the liquor market is expected to show a pattern of lower sales in the first half and higher sales in the second half. The beverage turnaround is expected to continue each quarter, sustaining Lotte Chilsung's momentum for earnings improvement. The researcher added, "Lotte Chilsung's standalone operating profit is estimated at 162 billion KRW this year and 183.9 billion KRW next year. Although we conservatively estimated the 2022 liquor operating profit at 14 billion KRW due to market uncertainties, the possibility of a beer profit turnaround is high with increased factory utilization rates, suggesting potential upward revisions to profit estimates in the future."

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