[Click eStock] "LG Saenghwal Geongang, Momentum Shortage and Cost Increase Burden... Target Price Down"

[Asia Economy Reporter Kwon Jaehee] Shinhan Investment Corp. maintained its 'Buy' rating on LG Household & Health Care on the 28th but lowered the target price from 870,000 KRW to 770,000 KRW.

LG Household & Health Care's consolidated Q3 sales amounted to 1.8703 trillion KRW, and operating profit was 190.1 billion KRW, down 7% and 44.4% respectively compared to the same period last year. Sales met both the company's estimates and consensus, but operating profit fell short by more than 40 billion KRW, resulting in an earnings shock.

By segment, cosmetics sales decreased by 23% year-on-year, maintaining the previous quarter's trend, while household goods and beverages grew by 8.8% and 11.3%, respectively, meeting expectations. The cost ratio rose significantly across all business divisions, largely due to increased raw material costs caused by the strong dollar. Q3 sales in China dropped 31% year-on-year, but the decline improved compared to the previous quarter (Q2). Duty-free sales decreased by 12% compared to the previous quarter, indicating a seasonal off-peak effect.

The strong dollar phenomenon is expected to continue to pressure cost increases in Q4. Given the raw material procurement structure heavily reliant on imports, an upward revision of the cost ratio assumption seems inevitable due to the strong dollar. In Q4, sales growth will focus more on mix improvement through price increases rather than volume expansion. For duty-free, the low base of Q4 last year’s performance and a slight seasonal peak effect domestically and internationally may cause the overall sales and profit decline to moderate compared to Q3.

Hyunjin Park, a researcher at Shinhan Investment Corp., stated, "Due to the need to lower profit assumptions caused by rising cost ratios, we are revising down our estimates and further lowering the target price to 770,000 KRW. The easing of China’s quarantine policy is an important signal for improvement in the cosmetics sector, and we believe the stock price is still in the phase of confirming its bottom."

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