[This Week's Controversy] Even Chinese Avoid Sulwhasoo... When Will AmorePacific Revive?

Deterioration of Korea-China Relations Hits Chinese Sales... Stock Price Plummets About 25% Since Early Year
Positive Prospects for North American and European Market Expansion... Expected Effect of Sulwhasoo Rebranding

Editor's NoteDear individual investors dreaming of successful investments. How well do you know the stocks you invest in with your own money? In the unrefined and chaotic online environment filled with all kinds of information, Asia Economy aims to be your hands, feet, eyes, and ears to deliver accurate information about companies. Each week, we focus on companies that rank high in stock inquiries by the financial information provider FnGuide, delivering everything from basic information to analyses of related companies such as partners, clients, and investors. We will explain the financial status, performance, and future value of companies in an easy-to-understand manner. We visit you every week under the name of “This Week’s Watchlist,” highlighting stocks of interest. This week, we analyzed Amorepacific, a leading domestic cosmetics company.

The tangled Korea-China relationship has deepened Amorepacific’s woes. Anti-Korean sentiment in China has grown, shifting Chinese consumers’ attention from K-beauty to overseas luxury cosmetics. Amorepacific, whose sales in China account for more than half of its total revenue, is facing yet another crisis in the Chinese market following the THAAD deployment and COVID-19 lockdowns.

Amid severe sales slumps, the company recently rebranded its premium brand “Sulwhasoo” and is expanding into the U.S. and European markets. However, since China remains the company’s core growth engine, it is expected to take more time to demonstrate these changes in performance and convince investors.

According to the Korea Exchange, Amorepacific’s stock price has fallen about 25% this year through the 26th. Starting at 135,000 KRW at the beginning of the year and briefly surpassing 150,000 KRW, it has since trended downward, falling below 100,000 KRW on the 26th.

The main sellers dragging down the stock price are foreigners and institutions. As demand from China, which has reopened its economy, fell short of expectations, analyses suggest Amorepacific will record poor performance again this year. Since the start of the year, foreigners and institutions have sold 62 billion KRW and 170 billion KRW worth of the company’s shares, respectively. Meanwhile, individual investors have net purchased 228.2 billion KRW, reflecting greater optimism that Amorepacific’s performance will improve if China’s economy recovers.

Performance Declined After THAAD in 2016... Another Blow After COVID-19

Although the COVID-19 situation has ended, Amorepacific’s sales have not recovered to pre-pandemic levels. The company’s growth was already stunted after the THAAD retaliation in 2016, and the cosmetics industry’s slump due to COVID-19 has prevented a full recovery. The company recorded sales of 5.58 trillion KRW and operating profit of 428 billion KRW in 2019, but sales dropped to 4.432 trillion KRW and operating profit to 143 billion KRW in 2020, and in 2021, sales were 4.863 trillion KRW with operating profit of 343 billion KRW. In 2022, sales were 4.135 trillion KRW and operating profit 214 billion KRW, with operating profit halving compared to 2019.

This year, performance recovery remains elusive. It was expected that reopening China would solve everything, but reality proved otherwise. After the first quarter earnings announcement, optimism about the Chinese market turned to disappointment. The company posted sales of 1.0091 trillion KRW and operating profit of 81.6 billion KRW in Q1, down more than 20% and 52% year-over-year, respectively. Subsidiaries such as Innisfree, Etude, and Espoir showed solid results, but Amorepacific itself posted weak performance in both domestic and Chinese markets. Domestic cosmetics market sales fell 25% to 552.2 billion KRW. Operating profit shrank by over 60% due to declining duty-free sales. Overseas sales, despite China’s reopening, dropped 16% year-over-year to 349.4 billion KRW. Operating profit of the Chinese subsidiary plunged over 90%, falling into single digits.

There are earnings shock forecasts for Q2. Market expectations for Q2 sales and operating profit are 995.1 billion KRW and 54.3 billion KRW, respectively, predicting 5% growth and a return to profitability year-over-year. However, Hana Securities recently published a report forecasting Q2 sales of 927.6 billion KRW and operating profit of 34.4 billion KRW, missing market expectations. Since China still accounts for a large portion, performance improvement is unlikely without recovery there. The Chinese market is expected to see reduced performance due to one-off factors such as sales deductions and inventory write-offs related to Sulwhasoo stock clearance. As a result, Sulwhasoo’s sales growth rate in China is estimated to be in the 10% range. Hanwha Investment & Securities projects sales of 949 billion KRW and operating profit of 27.5 billion KRW, below market forecasts.

Brand Has Become Younger, but Costs Rise and Chinese Consumers Turn to Luxury

Increased marketing costs for Sulwhasoo’s rebranding also weigh down Q2 earnings forecasts. Amorepacific changed its packaging and redesigned containers of key products to fit the concept of a global brand. The rebranding aims to shift the image from herbal cosmetics for middle-aged women to products used by women in their 20s and 30s. The brand ambassador is Ros? from BLACKPINK. Researcher Baesong from Mirae Asset Securities said, “Since China is in the early stages of renewal marketing, funds will be concentrated in Q2. The burden will ease in the second half, but sales results are expected around Q4 due to the timing of the renewal marketing.”

Even Chinese consumers who once favored Sulwhasoo are decreasing. Consumption has shifted from Korean cosmetics to overseas luxury brands such as MAC, Yves Saint Laurent, Est?e Lauder, and Lanc?me, as well as domestic Chinese brands. Chinese consumers’ cosmetics consumption has not increased since COVID-19, and Korea-China tensions have diminished the appeal of Korean cosmetics. Additionally, preference for Chinese brands, which are cheaper and have improved quality, has risen. At the pre-sale of the 6.18 shopping festival hosted by Tmall, a dominant e-commerce platform for cosmetics sales, French cosmetics brand NARS ranked first in the cosmetics category. MAC, Yves Saint Laurent, Est?e Lauder, and Lanc?me also made the list. LG Household & Health Care (Whoo) and Amorepacific (Sulwhasoo) did not rank. Proya’s Chaiting, a mid-to-low-priced Chinese cosmetics manufacturer, ranked sixth.

Improvement in domestic sales is also expected to take more time. The domestic business is divided into duty-free sales, department stores, direct sales, and e-commerce. Due to reduced sales from daigou (Chinese personal shoppers), it will take longer for duty-free cosmetics sales to improve. Han Yujeong, a researcher at Hanwha Investment & Securities, said, “Due to the reduced proportion of daigou, duty-free sales will continue to underperform in the second half following the first half.”

Performing Well in Europe and North America... But Investment Advice is "Conservative"

Reducing dependence on China and nurturing non-China segments is positive. Currently, sales proportions in Europe and North America are much smaller compared to China. China is the core sales region, with Asia accounting for about 30% of total sales, while Europe and North America account for only about 1.9% and 6.9%, respectively. However, securities experts say the growth in these regions should be closely watched. According to Hana Securities, overseas sales in Europe and North America accounted for 20 billion KRW (6%) of operating profit in 2021, but this is expected to rise to 34% (84 billion KRW) this year. The company completed the acquisition of U.S. luxury clean beauty brand Tata Harper to target the North American market and is expanding Sulwhasoo’s distribution channels and increasing Laneige sales.

Lee Seung-eun, a researcher at Yuanta Securities, said, “A notable point in Amorepacific’s performance is how growth rates develop through strengthened marketing of major brands targeting Europe and North America. Growth rates this year are expected to be 89% in Europe and 73% in North America, showing significant growth.”

Domestic securities firms recommend a conservative approach to Amorepacific. Although sales in the U.S. and Europe are increasing, the Chinese market still largely determines performance. Target stock prices suggested by securities firms range from 140,000 to 180,000 KRW. DB Financial Investment, which gave the lowest target price and a “neutral” rating, said, “Since the profitability of the Chinese subsidiary, which mainly influences the stock price, is expected to decline again in Q2, the relative attractiveness of the stock within the sector is not high. It is advisable to approach after confirming the Q2 earnings bottom and the effect of Sulwhasoo’s rebranding.”

However, some believe the stock price will not fall much below the current level. Researcher Baesong explained, “Key stock price variables such as performance, investment sentiment, and absolute stock price levels are near their lows. The possibility of further price declines seems low, and after confirming the Q2 earnings bottom, expectations for Sulwhasoo’s growth expansion in the second half may be reflected.”

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