[Into the Stocks] LG Saenghwal Geongang Lowers Outlook... Signal of Slowing Growth in the Chinese Market?

LG Household & Health Care down 16% this month
Annual earnings estimates 13% lower than last month

[Asia Economy Reporter Minji Lee] LG Household & Health Care's stock price decline is accelerating as the company posted disappointing earnings. Amid growing concerns over slowing growth in the local Chinese cosmetics market, the securities industry is lowering expectations, citing worries about ongoing COVID-19 impacts and increased cost burdens due to intensified competition within China.

◆ Stock Price Drops 16% This Month Alone... What Were the Q2 Earnings Like?

According to the Korea Exchange on the 29th, LG Household & Health Care's stock price has fallen about 16% since the beginning of this month. This sharp decline in investor sentiment is due to Q2 earnings falling short of expectations. LG Household & Health Care's business segments include cosmetics, household goods, and beverages.

In Q2, LG Household & Health Care reported consolidated sales of KRW 2.0214 trillion and operating profit of KRW 335.8 billion, marking increases of 13% and 11% year-on-year, respectively. Although the company has sustained profit growth for 65 consecutive quarters, the Q2 results fell short of market expectations by 3% in sales and 5% in operating profit, as the market had set high forecasts.

Cosmetics sales reached KRW 1.12 trillion, with operating profit at KRW 218.7 billion, up 21% and 23% year-on-year, respectively. By channel, duty-free sales increased by 89% compared to a year ago, while sales in China and direct selling rose by 10% and 2%, respectively. Department store sales declined by 3%. Growth in the duty-free channel, led by the brand ‘Whoo’, was effective, but the local Chinese channels, a major sales source, showed growth rates below market expectations due to COVID-19 impacts and sluggish offline channels.

In the household goods segment, sales and operating profit were KRW 469.2 billion and KRW 58.8 billion, respectively. While sales increased by 13% year-on-year, profits declined by 7%. Sales were supported by the inclusion of ‘Physiogel’ in consolidated sales since July last year, but profitability slightly decreased due to continued declines in hygiene product sales. In the beverage segment, sales rose 3% to KRW 409.4 billion, but operating profit fell 6.5% to KRW 57.9 billion. Although the sales mix improved with a higher proportion of high-margin products like carbonated drinks, profitability slightly declined due to rising raw material and other costs.

◆ Growing Concerns Over Slowing K-Beauty Growth in the Chinese Market

Investors focused on the underperformance of local Chinese sales in this earnings report. Initially, expectations for high growth were raised when it was reported that sales of the flagship brand ‘Whoo’ increased by 70% during China's 618 shopping festival compared to last year. However, higher-than-expected cost increases led to local growth rates and profitability falling short of market expectations. Researcher Heo Jena from KakaoPay Securities analyzed, “The number of live broadcasts in China surged significantly during the 618 event, and offline consumption shifted to online channels, which now account for over 50%, creating a negative environment for profitability.”

Looking at Chinese cosmetics sales (combined duty-free and local sales), growth continued with an increase of about 54% year-on-year, but the local growth rate of 10% failed to meet the market expectation of over 15%. By major brands in China, ‘Whoo’ grew 17% compared to a year ago, ‘O Hui’ increased by 123%, while ‘Sooryehan’ is estimated to have declined by 7%. Although ‘Whoo’ maintained growth, considering that retail sales of cosmetics in China increased by 18.3% year-on-year in Q2, the brand underperformed the market growth. Researcher Park Sinae from KB Securities explained, “The ‘Whoo’ brand in China has shown a steep average annual growth rate of 50% from 2016 to last year, so concerns about growth slowdown have always existed. It is necessary to confirm whether the slowdown trend is continuing.”

However, some opinions suggest that such concerns are premature. ‘Whoo’, which accounts for 89% of sales in the duty-free segment, showed 100% growth, and the second brands ‘Sooryehan’ (50%) and ‘O Hui’ (280%) also showed remarkable growth. Researcher Park Eunkyung from Samsung Securities stated, “Considering that sales in duty-free stores driven by Chinese wholesalers exceeded the market growth rate of 60%, interpreting this as a sign that brand popularity is wavering in China is premature.”

◆ Securities Firms Lower Expectations... Some Suggest a Fair Stock Price of KRW 1.75 Million

As LG Household & Health Care's earnings failed to meet expectations, securities firms have taken a negative view of the short-term stock price trend. Annual earnings estimates have also been slightly revised downward. According to financial information provider FnGuide, the annual sales consensus is KRW 8.445 trillion, down about 13% from last month's estimate of KRW 8.6103 trillion. The Q3 sales forecast is KRW 2.1713 trillion, lower than the previous KRW 2.2305 trillion.

Target prices and investment opinions have also been adjusted. Hana Financial Investment revised its investment opinion to neutral and lowered the target price by 12.5% from KRW 2 million to KRW 1.75 million. Researcher Park Jongdae from Hana Financial Investment said, “In the cosmetics business, logistics are delayed due to the resurgence of COVID-19 in China. In the household goods and beverage businesses, the burden of global raw material prices has increased, and uncertainties in performance have grown due to incidents such as a fire at a can factory, making it difficult to expect stock price momentum in the near term.”

However, mid- to long-term investment is still considered favorable. Researcher Shin Suyeon from Shin Young Securities said, “Although sales of Physiogel in the household goods segment dropped to about 48% compared to Q1 due to the off-season effect, operating profit margins remain quite solid. Since the luxury brand position in the Chinese market is expected to remain unchanged, the mid- to long-term investment attractiveness is likely to be high.”

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