[Click eStock] "Lotte Chilsung Expected to Exceed Market Expectations in Second Half"

Hana Financial Investment Report

[Asia Economy Reporter Minji Lee] Hana Financial Investment maintained a buy rating and a target price of 200,000 KRW for Lotte Chilsung on the 29th. Although the second-quarter earnings fell short of market expectations, it is expected to deliver better-than-anticipated results in the second half of the year.

In the second quarter, Lotte Chilsung's consolidated sales and operating profit were 668.9 billion KRW and 45.6 billion KRW, respectively, representing increases of 12% and 55.6% compared to the same period last year. The beverage segment grew by 8% year-on-year, supported by last year's base effect and strong sales of new products. The ‘Zero Cider’ and ‘Zero Cola’ launched in February recorded sales of 34 billion KRW in the first half of the year.

Alcohol sales increased by 11% compared to a year ago. Despite sluggish B2B alcohol market conditions due to social distancing, growth was driven by strong sales of the new product ‘Cloud Draft’ and wine. Eunju Shim, a researcher at Hana Financial Investment, explained, “Beer OEM-related sales are estimated to be around 7 billion KRW in the first half. Due to cost burdens related to the relocation of soju facilities and expenses for alcohol advertising and promotions, alcohol profit and loss slightly underperformed market expectations.”

Lotte Chilsung expects consolidated sales and operating profit in the third quarter to increase by 5.5% and 30%, respectively. Favorable weather and recovery in convenience store traffic are expected to drive beverage sales growth of over 6% year-on-year. Although the negative impact of social distancing on alcohol sales will continue, growth of about 4% is expected due to last year's base effect and product renewals. Researcher Shim said, “Although raw material costs such as sugar and cans will inevitably rise in the second half, the annual profit and loss is maintained at 175 billion KRW due to price increases in beverages, integration of soju production lines, and logistics hub consolidation leading to cost efficiency.”

The expansion of beer OEM is expected to have a positive impact on performance from this year through the mid-to-long term. In the third quarter, two additional companies will join Jeju Beer and GomPyo Wheat Beer, with related sales estimated to be around 35 billion KRW this year. Researcher Shim stated, “The stock price fell about 19% from its peak as second-quarter earnings underperformed initial expectations, but the annual guidance remains unchanged, which is positive in the mid-to-long term. The beer operation rate is estimated to rise from 20% last year to 37% this year, and it is expected to break even next year.”

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