20170116-三星证券-Weaknesses_remain,_but_turnaround_expected_in_2Q_39页_999kb

Sector Update Summary: Household Goods (Overweight)

Core Content

The document outlines the outlook for Korea's cosmetics industry in 2017, highlighting that while growth is expected to slow from 20% in 2016 to 11% in 2017, it will still maintain double-digit growth. The analysis suggests that the sector is poised for a turnaround in the second quarter of 2017, with shares likely to rebound due to base effects and eased risks.

Main Points

• Industry Growth Outlook: Korea's cosmetics industry is expected to grow 11% year-over-year in 2017, reaching KRW27.9 trillion. This growth is anticipated to be sustained, despite a slowdown compared to 2016.
• Sales Breakdown:
  • DFS Sales: Expected to grow 14% in 2017, down from 27% in 2016, but will be offset by growth in overseas sales.
  • Exports: Projected to rise 25% in 2017, up from 63% in 2016, with non-China markets showing potential for over 30% growth.
  • Domestic Sales: Anticipated to grow 3% in 2017, down from 4% in 2016, due to a decline in consumer sentiment and visibility.
• China Impact:
  • Slowing inbound Chinese demand has contributed to a slowdown in growth, but this is attributed more to overall outbound demand reduction than political tensions.
  • China's new import regulations, effective May 2017, will affect Korean cosmetics companies, particularly those relying on cross-border e-commerce, which accounts for 25% of Korean cosmetics exports to China.
• Share Performance:
  • Shares of domestic cosmetics players have dropped 30% since their peak in July 2016, primarily due to political tensions related to THAAD, but this decline is seen as largely priced in.
  • The current valuations are considered attractive compared to global peers, even with weak momentum in the short term.
• Rebound Expectations:
  • The document suggests that the sector will likely experience a rebound in the second half of 2017, with improved stock performances.
  • Companies that can weather the slowdown and demonstrate resilience are expected to be the first to recover.

Key Information

• Target Prices:
  • Amorepacific: KRW380,000 (25.8% upside)
  • AmoreG: KRW180,000 (41.7% upside)
  • LG Household & Health Care: KRW980,000 (16% upside)
  • Cosmax: KRW180,000 (56.5% upside)
  • Able C&C: KRW27,000 (38.5% upside)
• Valuation Trends:
  • Korean cosmetics companies have been trading at historic lows, with P/E ratios around 21.6x since 2005.
  • Global cosmetics firms are expected to have slower growth, with CAGRs of 5.5% for sales and 8.6% for operating profit over 2017-2018, compared to 15.9% and 23.3% for Korean firms.
• Strategic Focus:
  • The report recommends a selective approach, favoring companies with significant exposure to low-end makeup products and local operations in China.
  • Cosmax is highlighted as the top pick due to its strong position in the mass-market segment and its exposure to China.

Recommendations

• Investor Focus: Investors are advised to focus on firms with high local China exposure and those offering mass-market makeup products.
• Market Conditions: The report suggests that the sector's valuations are attractive, and further derating is unlikely.
• Performance Outlook: The combined sales and operating profit of the five major domestic firms are expected to increase by 13.5% and 18% year-over-year in 4Q16, respectively, although this will miss the consensus by some margin.
• Competitiveness: Korean firms are expected to show reduced volatility compared to global peers due to strategic business model changes, particularly a shift towards exports.

Conclusion

The cosmetics sector in Korea is expected to experience a slowdown in growth due to both slowing domestic demand and China-related import regulations, but the document suggests that the market is now at a fair value and a rebound is anticipated in the second half of 2017. Companies with strong export performance and a focus on mass-market products are recommended for investment, with Cosmax being the top choice.