[Click eStock] "Hanssem, Cost and Expense Control Needed... Investment Rating Downgraded to Neutral"

Korea Investment & Securities Report

[Asia Economy Reporter Minji Lee] Korea Investment & Securities downgraded its investment opinion on Hanssem to neutral on the 10th, based on the judgment that the recovery of operating profit margin will proceed slowly due to increased costs.

In the second quarter, Hanssem's consolidated sales amounted to 500.2 billion KRW, and operating profit was 2.2 billion KRW, down 12% and 92% respectively compared to the same period last year. Operating profit fell short of market expectations by as much as 75%. The decline in sales was due to sluggish sales volume in the company's core B2C segment. Apartment transactions in the second quarter totaled 198,463 units, down more than 39% compared to a year earlier. The B2B segment increased by 3.2% during the same period. Although sales of materials sold to the OEM business linked to remodeling packages and furniture sales decreased, special sales furniture sales to construction companies compensated for this.

The cost of goods sold ratio in the second quarter was 78%, up 4.6 percentage points year-on-year and 2.6 percentage points compared to the first quarter. This was because the company transferred its A/S organization to its subsidiary Hanssem Development, changing the labor costs previously allocated as selling and administrative expenses to cost of goods sold. Kang Kyung-tae, a researcher at Korea Investment & Securities, said, "Mechanically, cost of goods sold increased while selling and administrative expenses should have decreased, but operating profit fell significantly short of market expectations due to increased rent and advertising expenses for newly opened stores."

Hanssem is unlikely to show noticeable performance improvement in the third quarter either. Considering the increased number of rainy days and the Chuseok holiday, it will be difficult for apartment transaction volume to recover immediately in the third quarter, and given the cumulative transaction volume in the first half of less than 390,000 units, achieving 800,000 units is also expected to be challenging.

Increased advertising expenses and new product promotion costs are also burdensome. Researcher Kang Kyung-tae said, "Although the cost of goods sold ratio will stabilize quarter by quarter as the burden of raw material purchases decreases due to falling wood prices, operating profit margin will recover slowly due to cost burdens," adding, "Rather than waiting for apartment transaction volume to recover, efforts to control costs and expenses are necessary."

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