[Click eStock] Orion, China Disappoints... Maintains Top Pick in Sector

[Asia Economy Reporter Lee Seon-ae] Shinhan Financial Investment announced on the 23rd that it maintains a 'Buy' rating, a target price of 125,000 KRW, and the top pick status within the sector for Orion. Despite the disappointing performance in China, the company showed strong results in all regions except China, and the positive outlook remains unchanged. Although domestic consumption in China has been sluggish for a prolonged period and market dominance is stagnating, earnings improvement could quickly materialize when consumer sentiment rebounds. The current valuation is an excessively undervalued phase with a 12-month forward price-to-earnings ratio (PER) of 13 times.

Researcher Cho Young-kwon of Shinhan Financial Investment emphasized, "If future new product launches and channel expansions lead to increased market share, category expansion (nut bars, mass-produced bread, bottled water, etc.), and regional expansion (India & US subsidiaries, Russia's second factory, etc.) become visible, we believe Orion will enter a premium valuation range similar to the past."

The year-on-year sales growth rates by country in July were 14.5% in Korea, 4.6% in China, 41.0% in Vietnam, and 119.5% in Russia, showing sales increases in all regions. However, operating profit showed regional differences (no change in Korea, -34.4% in China, 65.7% in Vietnam, 262.5% in Russia). Particularly disappointing was the renewed weakness in China's operating profit in July after increases since February. Due to sluggish domestic consumption in China, sales in yuan terms decreased by 5%, and rising raw material and utility costs led to an increase in cost ratio (manufacturing cost ratio up by 3 percentage points). Additionally, one-time promotional expenses were incurred to expand the distribution of snacks and biscuits.

Due to the zero-COVID policy, sluggish domestic consumption in China is lasting longer than expected. In 2016, when domestic consumption in China was sluggish, Orion's sales growth in yuan terms was only 4%. However, the current situation is judged to be different from 2016. At that time, structural factors such as holiday overstock, consumption slump, and restructuring of distributors were involved, whereas the current consumption slump is a short-term factor caused by the zero-COVID policy.

Researcher Cho stated, "We expect the consumption market, which was sluggish due to lockdowns in the first half, to gradually recover from the second half. Although the growth rate of the Chinese confectionery market will not be as high as in the past, efforts to gain an advantage in market share competition through aggressive new product launches from the second quarter are ongoing."

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