20160119-三星证券-4Q15_preview___December_exports_31页_1mb

Sector Update Summary: Household Goods (OVERWEIGHT)

Core Content

This report provides an analysis of the Korean cosmetics sector, focusing on the performance of major firms in 4Q15 and their outlook for 2016. It highlights the growth in exports, particularly to Greater China and the US, and evaluates the financial performance of key companies, including Amorepacific, AmoreG, LG Household & Health Care, Cosmax, and Able C&C.

Key Highlights

• Export Growth: Beauty product exports in December 2015 increased by 30% y-y, reaching USD300m. This was impressive, especially given the unusually strong performance in December 2014 (up 90% y-y). Exports to Greater China rose 31% y-y to USD195m, with mainland China contributing 49% y-y growth. The US, Korea's second-largest market, saw a 64% y-y increase in exports.
• Market Recovery: After a slowdown in Q2 2015 due to MERS and stricter import regulations in China, the sector has shown recovery since September 2015.
• Sector Outlook: The report recommends maintaining interest in the sector, as Korea's cosmetic market is expected to grow 16.5% y-y in 2016. The analysis suggests a return to pre-MERS growth trends for the five major cosmetics firms.
• Company Performance in 4Q15:
  • Combined Sales & Operating Profit: Rose by 15% and 43% y-y respectively, meeting consensus.
  • Operating Profit Growth: Steepest at Cosmax, followed by AmoreG, Amore Pacific, LG H&H, and Able C&C.
  • Earnings Volatility: Some firms had weaker-than-expected earnings in 4Q14 due to production issues, restructuring, and bonus payments, but reported stronger results in 4Q15.

Sector Top Picks

• Cosmax: Target price of KRW240,000 (30.4% upside)
• AmoreG: Target price of KRW200,000 (43.4% upside)
• Amorepacific: Target price of KRW420,000 (10.2% upside)
• LG Household & Health Care: Target price of KRW1,080,000 (10.8% upside)
• Able C&C: Target price of KRW30,000 (36.4% upside)

Financial Metrics Overview

Valuation Matrix

Key Changes

• Recommendation: Remains BUY for all companies.
• Target Price Adjustments:
  • Amorepacific: Reduced to KRW420,000 from KRW430,000 (-2.3%)
  • 2015E EPS: Increased to 8,794 from 8,644 (+1.7%)
  • 2016E EPS: Reduced to 10,821 from 11,149 (-2.9%)

One-Year Performance

• Amorepacific: -6.4% (1M), -5.2% (6M), +61.2% (12M)
• Vs Kospi: -1.6% (1M), +4.8% (6M), +62.1% (12M)

Analyst Notes

• Amorepacific: 4Q15 sales and operating profit increased by 19% and 50% y-y, slightly missing consensus but beating forecasts. The firm is expected to see a 22% sales growth and 27% operating profit growth in 2016, adjusted for economic uncertainty in China.
• Domestic Sales: Slowed since Q2 2015 due to MERS and China regulations, but normalized in 4Q15.
• Overseas Sales: Grew by 38% y-y in 4Q15, driven by increased inbound Chinese travelers and robust duty-free sales.
• Strategic Adjustments: Amorepacific restructured its digital channel in Q2 2015, which may continue in 2016, potentially affecting profitability.

Conclusion

The Korean cosmetics sector shows signs of recovery in 4Q15, with notable export growth and improved financial performance. Despite concerns over China's economic slowdown, the report remains optimistic about the sector's structural growth potential. Cosmax and AmoreG are highlighted as top picks due to their strong performance and growth prospects.