[Click eStock] "LG Saenghwal Geongang, Cosmetics Division Hit Hard... 2Q Cost Burden Eases"

[Asia Economy Reporter Kwon Jaehee] IBK Investment & Securities maintained a 'Buy' rating on LG Household & Health Care on the 12th but lowered the target price from 1.5 million KRW to 1.1 million KRW.

LG Household & Health Care's consolidated sales for the first quarter of this year amounted to 1.645 trillion KRW, down 19.2% compared to the same period last year. Operating profit recorded 175.6 billion KRW, a decrease of 52.6%.

By segment, the cosmetics division was hit the hardest. The cosmetics division saw sales drop by 39.6% and operating profit by 72.9% during the same period, with the sharp decline in cosmetics sales cited as the main cause of the shock. The duty-free sector fell 68% and China sales dropped 32% in Q1, directly impacting results. Additionally, department stores (-7.1%) and door-to-door sales (-8.1%) also showed weakness. This is attributed to the global economic downturn and China’s zero-COVID policy, which effectively halted logistics movement in duty-free shops and within China.

Household & Daily Beauty (HDB) and beverages also faced profitability pressures due to rising raw material costs. However, beverages overcame cost pressures through price increases implemented in August last year and increased demand. On the other hand, while HDB expects overall brand price increases to take effect in Q2, profitability was inevitably damaged in Q1 due to the sharp rise in raw material prices.

Looking at LG Household & Health Care’s sales by region, overseas markets were generally stable except for China. Overseas sales were 509 billion KRW (down 15% year-on-year), with China at 218.2 billion KRW (down 30%). Japan recorded 103 billion KRW, declining only 1% during the same period. The U.S. market grew by 4% to 96 billion KRW.

Researcher An Jiyoung of IBK Investment & Securities analyzed, "Brands such as Physiogel (estimated 26 billion KRW), New Avon (estimated 96 billion KRW), and Boinka (estimated 8 billion KRW) are showing positive trends compared to the market despite digital transformation and off-season periods. However, China’s online sales maintained a 37% share in Q1, but logistics hubs located in Shanghai and Shenzhen caused nearly a 30% contraction."

However, cost burdens are expected to ease in Q2 compared to Q1. Although HDB faces increased pressure from rising raw material and logistics costs despite high growth in premium brands, the price increase effects will become visible in Q2, easing the burden compared to Q1. Beverages are also expected to see rising cost burdens as offline demand recovery becomes more apparent in Q2.

Researcher An interpreted, "If China normalizes in the second half of the year, fundamentals and stock price sentiment are expected to recover rapidly."

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