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Amorepacific & AmoreG Sector Update Summary

Core Content

This document provides an update on the performance and future outlook of Amorepacific and AmoreG, focusing on their operations in China and broader global strategies. It outlines the company's 2020 vision, current market share, and the challenges and opportunities presented by the evolving Chinese cosmetics market.

Main Points

• Amorepacific's 2020 Vision:
  The company aims to achieve consolidated sales of KRW12t by 2020, with a target operating profit of KRW1,800b. It plans to increase its overseas sales proportion from 21.5% in 2014 to 51% by 2020, while reducing the domestic portion from 78.5% to 49%.

• China Operations:
  Amorepacific is gaining market share in China, despite economic slowdowns. The company has invested heavily in the Beauty Campus Shanghai, which significantly increased production capacity from KRW200b to KRW1t in 2014, with potential to reach KRW2.8t by 2020.

• Market Changes in China:
  The Chinese cosmetics market is shifting from traditional department stores to digital channels. Consumers in their 20s are driving growth, favoring online shopping, word-of-mouth, and reviews from opinion leaders, and are more price-sensitive and brand-conscious.

• Brand Strategy in China:
  Amorepacific has a diverse portfolio of six cosmetics and one hair care brand in China. It has launched Iope and Ryo in 2015, focusing on premium and luxury segments. The company plans to continue expanding its brand lineup, including body care products.

• Key Brands and Their Performance:

  • Laneige: A premium brand with 37% of sales, growing at over 20% annually.
  • Mamonde: A high-end mass brand with 25% of sales, undergoing restructuring to boost performance.
  • Sulwhasoo Luxury: A luxury brand with 7% of sales, experiencing strong SSS growth.
  • Innisfree: A mass brand with 29% of sales, focusing on local tastes and having a high proportion of locally made products.
  • Etude House: A mass brand with 3% of sales, showing strong growth in China despite limited store openings.
  • Iope and Ryo: New luxury brands launched in 2015, with Ryo already achieving notable sales.

• Strategic Adjustments:
  The company is expanding its logistics network in China to cut delivery times and is using digital channels to maintain pricing in overseas direct purchases. It also aims to enhance brand identity through unique concepts such as oriental medicine and Jeju Island.

• Challenges and Opportunities:
  Local Chinese competitors are active, but they struggle to match Amorepacific's brand power and technological capabilities. Amorepacific plans to focus on organic growth rather than M&A with local players.

• Financial Performance:
  Amorepacific is expected to achieve a 2015-2017 EPS CAGR of 28%, while AmoreG is projected to grow profits at a 37% clip. The target prices are KRW430,000 for Amorepacific and KRW210,000 for AmoreG.

• Investor Sentiment:
  While the firm has met its sales and profit goals, investors are looking for more details on post-2020 growth strategies beyond earnings.

Key Information

• Amorepacific's China Operations:

  • The Beauty Campus Shanghai, completed in 2014, is a key hub for production and distribution.
  • The company has a strong presence in first- and second-tier cities with a growing focus on specialty shops.

• Market Share and Growth:
  Amorepacific has achieved significant growth in China, outpacing many local players and meeting its long-term goals.

• Investment and Expansion:
  Amorepacific has invested KRW130b in the Beauty Campus Shanghai, with plans to expand its production and logistics network.

• Valuation and Forecasts:

  • Amorepacific's target price is KRW430,000, with a 2015-2017 EPS CAGR of 28%.
  • AmoreG's target price is KRW210,000, with a projected profit growth of 37%.
  • The company is expected to maintain a steady operating margin and achieve a higher net profit in the coming years.

• Comparisons with Peers:
  Amorepacific and AmoreG are rated as BUY by Samsung Securities, with target prices that reflect their growth potential.

Conclusion

Amorepacific and AmoreG are well-positioned to achieve their 2020 goals, driven by strong performance in China, strategic investments, and a focus on brand differentiation and innovation. Despite challenges such as economic slowdown and competition, the company's long-term vision and market strategies suggest continued growth. Investors are advised to look for additional catalysts beyond earnings to push the stock prices beyond the target levels.