Amorepacific: Beginning of a Turnaround

The authors are analysts of Shinhan Securities. They can be reached at hpark@shinhan.com and jieun.ju@shinhan.com. – Ed.

4Q earnings exceed market consensus, in line with SHS estimates

Amorepacific delivered an earnings surprise for 4Q22 at a consolidated operating profit of KRW57bn (+122.7% YoY) on sales of KRW1.09tr (-17.9% YoY). Operating profit was largely in line with our previous forecast of KRW61bn while beating the market consensus by 32%. As previously projected, reopening demand in domestic and overseas markets helped to slow down the decline in overall sales compared with 3Q22. China earnings returned to positive territory in 4Q22 after remaining in the red during the past two quarters. The low YoY base created from massive one-off expenses (KRW40bn) in 4Q21 helped to drive earnings gains, but greater contribution came from efforts to remove inefficient costs at home and abroad (30% YoY decrease in labor costs, 50% YoY drop in depreciation expenses from the reshuffle of stores, and cutbacks on marketing spend), which consequently lowered the company’s breakeven point.

The company saw duty-free sales jump by 30% QoQ to KRW190.1bn (-45% YoY), delivering better performance than sector peers. No visible growth was seen in domestic e-commerce sales as the recovery in daily beauty product sales and reverse overseas direct purchases fell short, but China earnings swung to profit on a slower decline in sales and earnings contribution from North America continued to expand. At this rate, overseas operating profit secured from regions outside of China should reach 50% of the total in 2023, allowing the company to spread out risks as planned.

Improvement in fundamentals amid upturn in market conditions

China’s reopening has yet to have notable impact amid a surge in COVID-19 cases in the country. However, a faster-than-expected upturn in reopening demand is possible with the number of confirmed cases seen to have reached a peak after the Spring Festival holiday.

Efforts to rebuild the Sulwhasoo brand should begin to contribute to earnings from March. The Innisfree brand will likely focus on increasing e-commerce sales in China beyond current 80% levels with most of its stores in the country set to be closed down by 1H23. In North America, Laneige and Innisfree brands are enjoying stronger-than-expected growth following efforts to expand customer reach. Margin contribution from ASEAN countries is also on the rise, adding to the positives for the company.

Beginning of an earnings turnaround for sector top pick

We believe the reduced fixed cost burden from the reshuffle of stores as well as efforts made to rebuild brands and renew product lines will add a further boost to earnings on top of reopening demand. With earnings beginning to turn around and larger profit expected from the lowered breakeven point, Amorepacific remains our sector top pick along with Amore Group.