20170622-三星证券-Japan__Complementary,_not_in_competition_45页_2mb

Summary of Sector Update: Household Goods (Overweight)

Core Content

This document provides an analysis of the impact of the Sino-Korea THAAD dispute on the Korean and Japanese cosmetics markets, with a focus on the performance and prospects of Korean cosmetics firms in the Chinese market. It also discusses the current state of the industry and provides investment recommendations.

Main Points

• Political Impact on Sales: The deployment of the THAAD system in 2016 led to a significant decline in Korean cosmetics sales in China, particularly through duty-free shops (DFS) and online direct purchases. However, the market has since shown signs of recovery.

• Japanese Firms as Complementary, Not Rivals: Japanese cosmetics firms are not direct competitors to Korean firms but rather complementary due to their geographical proximity and perceived quality. Korean firms have strengths in distribution and business strategy that Japanese firms lack.

• Market Share Dynamics: While Japanese firms have seen increased market share in China, this is attributed to the shift in Chinese consumers to Japanese products as a replacement for Korean ones. Korean firms, on the other hand, are still dominant in the premium segment.

• U-shaped Demand Recovery: The analysis suggests a U-shaped recovery in Chinese demand for cosmetics, where the decline in sales is expected to reverse once political tensions ease. However, the pace of recovery remains uncertain.

• Investment Recommendations: The report recommends focusing on Korean cosmetics firms with less exposure to China or those with attractive valuations. LG Household & Health Care is the top pick, followed by Able C&C and then Cosmax.

Key Information

• Target Prices:

  • LG Household & Health Care: KRW1,170,000 (+19.9%)
  • Able C&C: KRW36,000 (+40.1%)
  • Cosmax: KRW170,000 (+45.9%)
  • Amorepacific: KRW290,000 (-9.1%)
  • AmoreG: KRW140,000 (-0.4%)

• Sales Performance in China:

  • Korean cosmetics exports to Greater China (including Hong Kong and Taiwan) grew 50% pa from 2014-2016, but have slowed significantly in recent months, with a -20% y-y decline in April 2017.
  • Chinese visitors to Korea declined sharply, while Japanese cosmetics imports to China increased by 40% pa since 2014, with a notable surge in April 2017.

• DFS Sales Trends:

  • Korean DFS saw a significant drop in sales of Korean cosmetics, while Japanese cosmetics remained strong.
  • Chinese consumers are increasingly purchasing Japanese cosmetics through DFS and other channels, especially due to anti-Korean sentiment and stricter customs regulations.

• Price Comparison:

  • Japanese cosmetics are generally more expensive than Korean ones, but this is offset by their perceived quality and brand reputation.
  • Korean DFS offers competitive pricing and a one-stop shopping experience, which is beneficial for both Korean and foreign brands.

• Strategic Advantages of Korean Firms:

  • Korean cosmetics firms have a stronger distribution network and more effective business strategies.
  • They are gaining traction in the lower-end market, while Japanese firms focus on the premium segment.

• Market Structure:

  • Korean DFS and Japanese tax-free shops have distinct structures and advantages. Korean DFS is more consumer-friendly, while Japanese tax-free shops cater more to local shoppers.

Investment Outlook

• China Risk: The China-related risk appears to have peaked, but the pace of recovery is uncertain.
• Recommendations: Investors should focus on firms with less exposure to China or those with attractive valuations.
• Top Picks: LG Household & Health Care is the preferred choice, followed by Able C&C and Cosmax.
• Caution: Despite the recovery in the market, Chinese demand is still weak, and Korean firms must work to regain consumer trust and market share.

Conclusion

The report emphasizes that while the THAAD dispute has impacted Korean cosmetics sales in China, the long-term recovery is expected. Japanese firms are capitalizing on the situation but are not direct substitutes for Korean firms. Korean cosmetics companies are advised to maintain a strategic focus and invest in rebuilding their presence in the Chinese market.