[Click eStock] "Lotte Chilsung, Buying Opportunity Considering Next Year's Performance Improvement"

Hana Financial Investment Report

[Asia Economy Reporter Minji Lee] Hana Financial Investment maintained its buy rating on Lotte Chilsung and kept the target price at 200,000 KRW on the 3rd. This is based on the expectation of stock price appreciation considering the improvement in next year's earnings.

Lotte Chilsung's consolidated sales and operating profit for the third quarter were 698.8 billion KRW and 85.4 billion KRW, respectively, representing growth of 8.3% and 46.3% compared to the same period last year. Despite slightly exceeding market expectations, the stock price showed a downward trend, which is interpreted as being influenced by the company's downward guidance trend and the slow recovery of beer sales. Eunju Shim, a researcher at Hana Financial Investment, explained, "Looking at the company's annual guidance, consolidated operating profit has been revised downward by about 10% compared to the previous guidance, but this is due to one-time expenses in the fourth quarter and is not a cause for major concern."

Regarding beer sales, third-quarter sales were 28 billion KRW, down 1.1% year-on-year. Despite the previous year's base effect and new product launches, sales slightly decreased. Beer OEM sales also slightly missed Hana Financial Investment's expectations. The third quarter of this year is estimated to have seen a double-digit decline in total market demand compared to a year ago due to stringent social distancing measures. Researcher Shim said, "Considering issues such as strikes at raw material suppliers that caused some production disruptions, it is still too early to discuss whether beer sales will recover."

Next year, Lotte Chilsung's sales and operating profit are expected to increase by 8.8% and 22.7%, respectively. The key point for next year's performance improvement is the liquor division. This year, total liquor demand is estimated to have decreased by more than 10% compared to a year ago due to the implementation of stringent social distancing measures throughout the year.

With the start of the With Corona policy from next month, a recovery trend is expected, and attention should also be paid to the expansion of beer OEM sales. Considering the recent encouraging increase in recognition of craft beer and the growing number of clients, related sales are predicted to increase to 80 billion KRW in 2022. Lotte Chilsung's combined sales of beer brands and OEM are expected to rise from 140 billion KRW this year to 200 billion KRW next year. Researcher Eunju Shim said, "Next year's beer operating rate is estimated to approach 50%," adding, "Next year's operating profit margin for the liquor division is expected to improve by 1.9 percentage points compared to a year ago due to the beer turnaround."

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