20161018-三星证券-Household_Goods_OVERWEIGHT_New_trends_necessitate_change_36页_974kb

Sector Update Summary

Core Content

This document provides an analysis of the Korean cosmetics sector, highlighting key trends, performance expectations, and stock recommendations. It outlines the sector's growth potential and the changing dynamics in the Chinese market, which is a crucial segment for Korean cosmetics firms.

Main Points

1. Sector Outlook

• Rating: OVERWEIGHT
• Growth Forecast: The Korean cosmetics sector is expected to grow at a CAGR of 13% over the next three years.
• Key Drivers:
  • DFS Sales and Exports: Expected to represent over 50% of sales starting next year.
  • Export Growth: Korea's cosmetics exports grew 34% in 1H16 and 70% in 3Q16, indicating strong international demand.
• Chinese Demand: Despite recent challenges, Chinese consumers continue to favor Korean cosmetics, even as they shift from duty-free purchases to local and online channels.

2. Changing Consumer Behavior in China

• Shift from Duty-Free to Local/Online Purchases:
  • Chinese inbound numbers rose 20% CAGR in 1H16, but only 10% y-y in 3Q16.
  • Duty-Free Sales Declined: This decline is attributed to restrictions on Chinese purchases at duty-free shops and lower-than-expected inbound numbers.
• Reasonable Consumption Trend:
  • Growth in cosmetics sales volume in China has slowed from over 10% to 6% in August 2016.
  • This is influenced by tax cuts on makeup products (from 30% to 0-15%) and downward pressure on consumption across the Chinese economy.
• Makeup Market Growth:
  • The makeup cosmetics market has grown faster than the skincare market since 2011.
  • It currently represents 11-12% of China's total cosmetics market, but has high growth potential.
  • The Chinese government's tax cut is expected to further boost this segment.

3. Stock Recommendations

• Amorepacific (090430 KS):
  • Rating: BUY
  • Target Price: KRW430,000 (up 16.2% from current price)
• AmoreG (002790 KS):
  • Rating: BUY
  • Target Price: KRW240,000 (up 52.9% from current price)
• LG Household & Health Care (051900 KS):
  • Rating: BUY
  • Target Price: KRW1,150,000 (up 26.1% from current price)
• Cosmax (192820 KS):
  • Rating: BUY
  • Target Price: KRW200,000 (up 38.4% from current price)
• Able C&C (078520 KS):
  • Rating: BUY
  • Target Price: KRW41,000 (up 85.5% from current price)

Key Information

4. Financial Performance (3Q16E)

• Combined Sales and Operating Profit: Expected to grow 25% and 35% y-y, respectively.
• Earnings Miss: Operating profit likely missed the consensus by 2%, while sales met it.
• Reason for Miss: Weaker-than-expected inbound Chinese demand.

5. Market Trends

• Chinese Inbound Numbers: Grew 20% CAGR in 1H16, but only 10% y-y in 3Q16.
• Cosmetics Exports to China: Rose 70% y-y in 3Q16, showing strong export growth.
• Cross-Border B2C Sales: Showed sustained growth, indicating increased consumer interest in Korean products.

6. Valuation Metrics

• Global Peer Valuation Table:
  • Includes metrics like P/E, P/B, and EV/EBITDA for major Korean and global cosmetics firms.
  • Korean firms like Amorepacific, AmoreG, LG H&H, Cosmax, and Able C&C are rated BUY.
  • Target prices are based on growth expectations and market position.

Conclusion

The Korean cosmetics sector is viewed as OVERWEIGHT due to its long-term growth potential, despite weaker-than-expected 3Q earnings. The shift in Chinese consumer behavior towards local and online purchases, reasonable consumption, and makeup products is reshaping the market landscape. Companies like AmoreG and Cosmax are highlighted as top picks due to their ability to adapt to these changes. Investors are advised to focus on firms with strong distribution networks and growth potential in the evolving market environment.