LG H&H: poor external environment

The author is an analyst with NH Investment & Securities. She can be reached at [email protected] – Ed.

LG H & H’s 4Q21 PO was likely down 9.2% year-on-year due to temporary disruptions in sales on the DFS channel. While the immediate external environment looks challenging, investors should look for signs of a possible turnaround in stock prices when concerns subside.

Impacted by an unfavorable outdoor environment, but still inexpensive

We maintain a buy rating but lower our TP on LG H&H from 1,650,000 to 1,450,000 W, in line with our revised estimate of cosmetics division profitability and target multiple (20% reduction applied to P / E global peer average 2022). Our profit estimates for the cosmetics division are revised downwards given the Covid-19 and marketing conditions. Our multiple target reflects unfavorable internal and external circumstances, such as concerns about slowing growth of domestic DFS channels, intensifying competition in China and the lack of a second brand.

Nonetheless, it is estimated that the Whoo brand is still enjoying strong demand in China, as evidenced by its top spot in Alibaba’s beauty category on Singles Day last year. We are adjusting our earnings guidance downward due to a 4Q21 tax exemption issue, noting that further share price corrections are possible. However, with its stocks currently trading at a P / E 2022F below 20x, a rapid rebound in the stock price is possible when concerns subside.

4Q21 Snapshot: Missing Consensus on One-Time DFS Problems

We estimate LG H&H consolidated sales in 4Q21 at 2.89 billion won (-0.3% yoy) and the PO at 232.7 billion won (-9.2% yoy). We are downgrading our estimates for the cosmetics division.

Cosmetics Division: estimated turnover in 4Q21 of 1.285.2tn (-3.0% yy) and PO of 198.9bn (-11.7% yy). Although sales in the Chinese local market (+ 4% year-on-year) continued to increase, sales growth on the DFS channel (-20% year-on-year) has likely turned downward. In China, the OPM was probably just under 10%, given the increased marketing competition. On the national DFS channel, sales were temporarily halted in December due to reseller issues.

Household Goods Division: expected 4Q21 sales of 443 billion won (+ 4.7% yy) and OPs of 11.1 billion won (+ 11.4% yy). As the benefits of the base effect derived from the incorporation of Physiogel are now fading, growth in 4Q21 has probably slowed down.

Beverages Division: We estimate revenue of 360.7 billion won (+ 4.0% yoy) and PO of 22.6 billion won (+ 8.3% yoy). Profitability would have remained intact thanks to the increase in sales resulting from the increases in ASP and the easing of the problems of supply and demand of products.

Shirlene J. Manley