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Amorepacific poised for rebound on channel restructuring

Nov 01, 2020 (Gmt+09:00)

From the early 2010s until the first half of 2016, China's consumption behavior was the driving force behind South Korea's stock market. In those years, cosmetics, duty-free stores, casinos and entertainment-related companies all saw a sharp rise in share prices. At the forefront was Amorepacific Corp., a Korean cosmetics giant and trailblazer in the Chinese market.

The company's share price hovered around 400,000 won ($352) for about a year from June 2015, pushing Amorepacific to become one of Korea's 10 companies by market capitalization, alongside Samsung Electronics Co., SK Hynix and Hyundai Motor Co. 

But the company's share price momentum began to sour in 2016 and 2017 when China imposed a ban against Korean content, cosmetics and home appliances, among other products, in response to Korea's decision to deploy the US anti-missile defense system (THAAD) in 2016.

Since then, the company’s share price has gone downhill. Last year the company appeared on the road to recovery as it ramped up its Chinese operations, but its efforts were hindered by the global coronavirus crisis.

Yet, Amorepacific's latest earnings project signs of a rebound from its four-year slump. Many securities firms have released reports that forecast a positive outlook for the company. 

COMPANY'S OPERATING MARGINS LOOK PROMISING

In the third quarter, Amorepacific posted 1.08 trillion won ($950.2 million) in revenue and 56 billion won in operating profit, down 22% and 48%, respectively, from the same period last year. 

Still, Amorepacific's operating profit was 30% higher than the market consensus and the company's increased operating margin stood out, as it climbed from 3.34% in the second quarter to 5.1% in the third quarter, pointing to enhanced profitability.

According to financial data provider FnGuide, Amorepacific is expected to see its operating margin drop from last year’s 7.67% to 4.06% this year, but make a strong rebound to 7.57% next year and rise to 9.22% in 2022.

Thanks to the promising rise of Amorepacific's operating margins, 13 out of 14 securities firms have either maintained or raised their price targets for Amorepacific. Daishin Securities lifted its price target from 200,000 won to 240,000 won.

Amorepacific closed at 158,000 won ($139), down 4.24% on Oct. 30.

CHINESE CONSUMERS' PREFERENCE FOR PREMIUM BRANDS

The company's restructuring of sales channels to improve efficiency has helped profitability to recover. Amorepacific has focused on bolstering its online sales channels while reducing its number of offline stores abroad. 

Amorepacific's premium brand Sulwhasoo

Online-centered consumption has increased drastically in the wake of the coronavirus, nudging Amorepacific to use more than half of its marketing budget for digitalization. As a result, its online sales in China for the company's premium brands rose more than 80% compared to last year, and the portion of online sales revenue increased to 45%.

Also, Amorepacific's premium brand Sulwhasoo’s market share has seen substantial growth in China.“In an event held ahead of China's Singles Day (a larger version of Black Friday in the US), Sulwhasoo came in sixth in terms of customer transactions on e-commerce platforms Alibaba and Taobao, which shows a rise in the number of customers compared to last year,” said Ahn Ji-young, an analyst at IBK Investment & Securities. 

Amorepacific's promising rebound can be attributed to Chinese consumers' growing preference for premium skincare brands alongside Amorepacific's aggressive digitalization efforts, according to Lina Oh, an analyst at eBest Investment & Securities.

The company's performance is expected to improve further once its offline store restructuring is completed as it will help reduce expenses.

CAPE Investment & Securities was the only firm to downgrade the company to Hold in its report on grounds that a speedy recovery may be difficult even with improved profitability, given the prolonged coronavirus crisis that has slowed operations for profitable duty-free stores.


Write to Kyeong-je Han at hankyung@hankyung.com

Danbee Lee edited this article.

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