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Amorepacific (090430) Company Update Summary

Core Content

Amorepacific's recent performance and forecast have been impacted significantly by the decline in Chinese visitors, which has affected both its domestic and overseas sales. The firm's financial outlook has been revised downward, with updated expectations for 2017 and 2018 earnings. The company has also adjusted its target price and maintains a HOLD rating due to the ongoing risks associated with the Chinese market.

Main Points

• 2Q 2017 Performance:

  • Sales are expected to decline by 16% year-over-year to KRW1.2t.
  • Operating profit is projected to fall by 52% to KRW114.5b, more sharply than previously forecasted.
  • The firm's earnings model has not fully reflected the impact of Chinese demand on domestic non-DFS sales.

• China Risk Impact:

  • Chinese visitor numbers dropped by 60% year-over-year, directly affecting DFS sales, which declined by 50%.
  • The impact extends beyond DFS, affecting standalone stores, especially those popular with Chinese consumers (e.g., Aritaum).
  • The firm is cautious about cutting costs, which could harm long-term growth, despite declining sales.

• Domestic Sales Decline:

  • Domestic non-DFS sales fell by 7% in 2Q17, compared to a 5% decline in 1Q17.
  • Despite a rise in domestic consumer sentiment, the decline in Chinese visitors has led to a significant drop in sales.
  • The company is focusing on product launches to revitalize aging brands, with results expected to be visible in early 2018.

• Overseas Sales:

  • Overseas sales growth in 2Q17 is expected to be only 3%, the lowest since 2013.
  • China remains the largest market for overseas sales, with a 10% year-over-year increase.
  • Sales in ASEAN and other regions have grown more slowly, but demand is still strong.
  • Sales in the US, France, and Japan fell by 10%, 70%, and 40% respectively, attributed to inventory clearance, brand restructuring, and a high base.

• Earnings Forecast Adjustments:

  • 2017 EPS forecast cut by 20.1% to KRW7,326, with China risk expected to dissipate in 4Q17 (originally 3Q17).
  • 2018 EPS forecast also cut by 20% to KRW10,125, reflecting uncertainty and a gradual recovery.
  • Sales are expected to grow by 2% to KRW5.52t in 2017 and 23% to KRW6.79t in 2018.

• Valuation Adjustments:

  • Target price cut from KRW290,000 to KRW270,000, based on 26.5x 2018 P/E.
  • The target price is also derived from a DCF model with a 9.3% WACC and 3% terminal growth.
  • The stock currently trades at KRW295,500, with a -9.8% discount to the new target price.

• Market Outlook:

  • The firm is still exposed to China, which has reduced its growth premium compared to global peers.
  • The stock is expected to regain attention once efforts to diversify risk through regional expansion begin to show results.
  • Non-China overseas businesses are anticipated to turn profitable in 2018.

Key Information

• Current Price: KRW295,500
• Target Price: KRW270,000 (down 9.8%)
• Market Cap: KRW17.5b / USD15.2b
• Shares (float): 58,458,490 (52.4%)
• 52-Week High/Low: KRW441,000 / KRW251,500
• Avg Daily Trading Value (60-day): KRW60.6b / USD52.7m

Financial Highlights

Summary of Earnings and Forecasts

Valuation Summary

Analyst Recommendation

• Rating: HOLD
• Target Price: KRW270,000
• Reason: The firm is heavily exposed to China, and the growth premium over global peers has diminished. The stock is expected to regain attention once regional diversification efforts yield results.

DCF Valuation Summary