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Company Note
April 11, 2014
LG Household & Healthcare (051900)
12M rating
BUY (Maintain)
12M TP
W630,000 from W700,000
Slowdown as expected
Lower earnings expectations, but still attractive over long term,
rebound likely after 1Q14 earnings
Up/downside +39%
Stock Data
KOSPI (Apr 10, pt)
2,009
Stock price (Apr 10, KRW)
453,500
Market cap (USD mn)
6,809
Shares outstanding (mn)
16
52-Week high/low (KRW)
648,000/430,500
6M avg. daily turnover (USD mn)
21.0
Free float / Foreign ownership (%)
59.7/44.5
Major shareholders (%)
LG Corp and 1 others
T. Rowe Price Hong Kong Li and 42
others
34.2
5.0
Performance
We lower our TP by 10% from W700,000 to W630,000. While sluggish 1Q14
results were already expected, we cut our 2014 OP forecast by 3% and our target
PE from 31x to 28x (23% discount to historical peak) as the effects of a weak JPY
persist and a recovery in the household business has lagged expectations. An
earnings shock compared to guidance has already been reflected in shares, but
near-term upside should be limited as concerns linger over the full-year growth
outlook. If 2Q14-4Q14 earnings concerns fade after 1Q14 results are released,
shares may rebound sharply. As such, we maintain BUY on a 12-month
perspective. Shares should gain substantially by yearend given solid long-term
fundamentals and robust overseas business outlook, especially as the parent’s
China business normalizes.
1M
6M
12M
Absolute (%)
(5.1)
(12.8)
(21.8)
OP to contract in 1Q14
Relative to KOSPI (%p)
(7.9)
(13.1)
(25.6)
LG Household & Healthcare (LG H&H) should post 1Q14F sales of W1.15tn
(+7.4% YoY) and OP of W132.3bn (-9.3% YoY). Sluggish OP has been expected
on a sales dip at TheFaceshop’s China business as part of the business shift to
direct operations. A weak JPY should also undermine Japanese operations, and
investments in new businesses (e.g., stores expansion for VDL) should further
undermine OP. The beverages division has the biggest growth potential of the
three business units, and the household goods division has the least growth
potential.
12MF PE trend
35.0
(X)
12MF PE (L)
Price (R)
(W'000)
700
30.0
600
25.0
500
20.0
400
15.0
300
10.0
200
5.0
100
0.0
May-09
0
May-10
May-11
May-12
Source: WISEfn consensus
May-13
Strong beverages, household goods still weak, cosmetics
outperforming, excluding masstige brands
The beverage business (sales +11% YoY) should post favorable earnings backed
by channel expansion and a higher ASP since last December. Household goods
(ex-Japan business), which was sluggish in 2013, has not shown any signs of
recovery yet. Top-line growth reached only 5% YoY as a weak economy and
intensifying competition in fabric softeners weighed on the market. Premium and
low-end (TheFaceshop) channels at cosmetics are outperforming following
favorable earnings in 2013. However, the masstige channel, which posted a drastic
contraction in 4Q13, needs more time for improvement. The business acquired in
Japan is posting solid margin improvements on less advertisement costs, but the
weak JYP should undermine earnings and KRW-based sales should stagnate.
Yr to
Jung-In Lee
Dec
OP
EBT
NP
EPS
% chg
EBITDA
PE
EV/EBITDA
(W bn) (W bn)
Sales
(W bn)
(W bn)
(won)
(YoY)
(W bn)
(x)
(x)
PB ROE
18,126
14.8
554 36.2
20.4
9.1 27.6
(x)
(%)
2012A
3,896
446
430
304
2013A
4,326
496
473
357
21,311
17.6
607 25.7
16.5
6.6 27.4
2014F
4,703
532
496
371
22,267
4.5
651 20.7
12.9
4.6 24.2
Sangeun Lee
2015F
5,161
609
576
431
25,857
16.1
734 17.2
11.2
3.9 23.9
822-3276-6196
[email protected]
2016F
5,698
711
683
511
30,691
18.7
842 14.5
9.5
3.3 23.8
822-3276-6239
[email protected]
Note: Net profit and EPS are based on figures attributed to controlling interest
LG Household & Healthcare (051900)
Bright China outlook: Normalization of TheFaceshop after 2Q14,
profit generation in parent’s cosmetics business
While the domestic business still has uncertainty, the China business has a bright
outlook. We believe LG H&H should post positive earnings in 2014 despite
concerns over weak spending in China. The business shift, which lasted for a year,
should wind down from 1Q14. Though the overall Chinese cosmetics market is
slowing, TheFaceshop has solid growth momentum given a reasonable price
range and differentiated edge with herbal concepts that Chinese consumers favor.
2014 top-line growth should reach 40% YoY on stores additions in 2H14 and a
change in sales recognition standard (from supply price to retail price).
Meanwhile, the parent’s China cosmetics business should stabilize going forward.
After long restructuring (2009-2012) due to a lack of brand positioning strategy and
distribution management after launching in China, the parent’s China cosmetics
business should generate profit from 2014 (sales W45,9bn, 20.7% YoY, OPM 3%).
The premium brand Whoo is fueling the growth. We confirmed the progress of
Whoo in China (ranks twenty-seventh in weekly sales volume as of March 26)
based on Taobao.com search rankings of cosmetics brands. Of note, Whoo ranked
269 in 2012 and 172 in 2013 (Table 4). There are limits in the comparison as the
aggregation method was different in 2012-2013 (rankings based on search
frequency), but we believe this still shows Whoo’s dramatic progress.
Figure 1. Parent’s cosmetics business in China: Generating profit after restructuring
(W bn)
Sales (L)
60
5.1
(%)
OPM (R)
3.9
0.0
50
10
1.0
3.0
0
(2.7)
40
(10.0)
(10)
30
(20)
20
(30)
(31.4)
10
(37.6)
0
2006
2007
2008
2009
(40)
2010
2011
2012
2013
2014F
Source: Company data, Korea Investment & Securities
2
LG Household & Healthcare (051900)
Table 1.1Q14 earnings preview
Household Sales
goods
2Q12
3Q12
4Q12
1Q13
2Q13
3Q13
4Q13
1Q14F
% YoY
% Diff.
KIS est.
338
287
373
269
376
331
414
321
394
4.8
Operating profit
46
21
54
24
51
26
56
25
49
(4.2)
OP margin (%)
13.5
7.3
14.5
8.8
13.6
7.8
13.6
7.8
12.4
%of total sales
34.7
29.2
35.4
30.2
35.1
30.8
35.9
31.3
34.2
391
378
343
368
433
415
392
422
465
7.4
Operating profit
70
51
45
46
79
61
51
42
64
(19.6)
OP margin (%)
18.0
13.5
13.1
12.5
18.3
14.6
13.1
10.0
13.7
%of total sales
40.2
38.5
32.5
41.4
40.4
38.6
34.0
41.1
40.4
244
317
338
253
264
329
346
283
293
11.0
14
33
32
10
16
34
38
17
20
25.2
OP margin (%)
5.8
10.5
9.5
3.8
6.0
10.3
10.9
6.1
6.8
%of total sales
25.1
32.3
32.1
28.4
24.6
30.6
30.1
27.6
25.4
Sales
972
981
1,054
890
1,072
1,076
1,152
1,027
1,152
7.4
(2.2)
1,178
Operating profit
130
105
131
79
146
120
146
85
132
(9.3)
(4.8)
139
OP margin (%)
13.4
10.7
12.5
8.9
13.6
11.2
12.6
8.3
11.5
Cosmetics Sales
Beverage Sales
Operating profit
Total
(W bn,%)
1Q12
Source: Company data, Korea Investment & Securities
Table 2. Annual earnings forecast by division
Household Sales
goods
Total
2010
2011
2012
2013
Earnings
2014F
2014F
(Revised) (Previous)
1,518
1,556
% YoY
2014F
2014F
(Revised) (Previous)
5.2
7.9
2011
2012
2013
8.5
7.2
13.9
9.0
6.4
9.6
1.1
6.7
1,089
1,182
1,266
1,442
Operating profit
124
136
144
158
160
169
OP margin (%)
11.4
11.5
11.4
11.0
10.5
10.8
%of total sales
38.5
1,021
34.2
1,227
32.5
1,479
33.3
1,662
32.3
1,820
32.8
1,822
20.2
20.5
12.3
9.5
9.6
Operating profit
149
179
212
233
248
251
20.3
18.5
9.8
6.3
7.6
OP margin (%)
14.6
14.6
14.4
14.0
13.6
13.8
%of total sales
36.1
716
35.6
1,043
38.0
1,151
38.4
1,222
38.7
1,365
38.4
1,365
45.7
10.3
6.2
11.7
11.7
Operating profit
74
86
89
105
124
127
16.8
3.7
18.2
18.1
20.7
OP margin (%)
10.3
8.2
7.7
8.6
9.1
9.3
%of total sales
25.3
2,826
30.2
3,452
29.5
3,896
28.3
4,326
29.0
4,703
28.8
4,742
22.1
12.9
11.0
8.7
9.6
Operating profit
347
401
446
497
532
547
15.5
11.2
11.4
7.2
10.1
OP margin (%)
12.3
11.6
11.4
11.5
11.3
11.5
Cosmetics Sales
Beverage
(W bn,%)
Sales
Sales
Source: Company data, Korea Investment & Securities
Table 3. Earnings revisions
(W bn,%)
Previous
Revised
% Difference
2014F
2015F
2016F
2014F
2015F
2016F
2014F
2015F
2016F
4,753
5,245
5,800
4,703
5,161
5,698
(1.1)
(1.6)
(1.8)
Operating profit
548
632
769
532
609
711
(3.0)
(3.6)
(7.6)
EBT
519
608
752
496
576
683
(4.4)
(5.2)
(9.2)
NP
395
462
572
380
441
523
(3.8)
(4.6)
(8.6)
NP of controlling interest
384
450
557
371
431
511
(3.5)
(4.3)
(8.3)
OP margin (%)
11.5
12.1
13.3
11.3
11.8
12.5
23,070
27,020
33,468
22,267
25,857
30,691
(3.5)
(4.3)
(8.3)
Sales
EPS
Source: Korea Investment & Securities
3
LG Household & Healthcare (051900)
Table 4. Taobao.com search ranking of cosmetics brands: Rapid progress of LG H&H’s Whoo
1
EsteeLauder
2012
(Search
ranking)
2
1
Chanel
2013
(Search
ranking
1
2
Lancome (L’Oréal)
5
6
+4
2
Dior (LVMH)
3
+1
3
Laneige (AmorePacific)
10
17
+14
3
Carslan
4
Pehchaolin (China local)
11
27
+23
4
Etude (AmoreG)
5
+1
5
Shiseido
16
11
+6
5
Laneige (AmorePacific) 23
6
Kiehl (L’Oréal)
30
15
+9
6
Iope (AmorePacific)
NA
New Entry
7
Mary Kay
9
5
-2
7
Maybelline (L’oreal)
2
-5
8
L’Oréal
3
8
-
8
HOLA
NA
9
Meifubao (China local)
18
18
+9
9
Missha (Able C&C)
13
Shiseido
28
+15
17
MAC (EsteeLauder)
6
-11
TheFaceShop
(LG H&H)
Innisfree (AmoreG)
44
+22
NA
New Entry
Shuemra (L’oreal)
18
2014
Skin care brands
(sales volume)
2013
(Search
ranking
2
Ranking
changes
(2012-2014)
-
2014
Color brands
(sales volume)
10
SK-II (P&G)
113
72
+62
12
Avene
8
3
-9
14
Clinique (EsteeLauder)
6
19
+5
16
Olay (P&G)
7
13
-3
·
21
Innisfree (AmoreG)
50
95
+74
22
23
La Mer(EsteeLauder)
59
106
+83
26
Whoo (LG H&H)
Seolhawsu
(AmorePacific)
269
172
+145
30
32
56
+28
·
·
∙
·
27
28
·
·
31
Ranking
changes
(2013-2014)
-
+18
·
-12
·
36
Bobbi Brown
(EsteeLauder)
20
-16
52
Skinfood
32
-20
TheFaceShop (LG H&H)
38
+7
41
Mamonde (AmorePacific) 17
35
-6
44
Biootherm (L’oreal)
66
+22
65
Whoo (LG H&H)
NA
New Entry
90
Mamonde
(AmorePacific)
22
-68
·
47
∙
·
64
Etude (AmoreG)
6
118
+54
L‘occitane
70
90
+20
Dior (LVMH)
81
73
+1
The body shop (L’oreal)
70
45
-28
·
70
·
72
·
73
Note 1: 2014 rankings based on sales volume for the past one week as of March 26, 2014; 2012-2013 rankings based on search frequency list (554 skin care brands and 352 color
cosmetics brands) in February 2012 and February 2013
Note 2: Ranking setback of Mamonde is due to downsizing at department stores and specialty stores; Stagnation of TheFaceshop is due to slow marketing amid the transition to
direct operation system
Source: Taobao,com, Korea Investment & Securities
Company overview & Glossary
LG Household & Healthcare (LG H&H) was spun off from LG Chemical in 2001. Since CEO Cha Suk-yong took
the helm in 2005, LG H&H grew rapidly based on M&As and business innovation and is now one of the leading
companies ranking no. 1 in household goods and no. 2 in cosmetics and beverages. Coca-cola Beverage and
TheFaceShop are the major subsidiaries.
4
LG Household & Healthcare (051900)
Balance sheet
FY-ending Dec. (W bn)
Current assets
Cash & cash equivalent
Accounts & other receivables
Inventory
Income statement
2012A 2013A 2014F 2015F 2016F
792
981
1,132
1,320
1,628
65
143
165
258
456
387
424
517
568
627
FY-ending Dec. (W bn)
2012A 2013A 2014F 2015F 2016F
Sales
3,896
4,326
4,703 5,161 5,698
COGS
1,903
2,032
2,209 2,409 2,637
Gross profit
1,993
2,294
2,493 2,752 3,061
1,961 2,143 2,351
317
376
408
448
495
1,972
2,454
2,653
2,875
3,118
SG&A expense
1,547
1,798
40
52
57
62
69
Operating profit
446
496
532
609
711
1,007
1,022
1,096
1,166
1,232
841
1,286
1,398
1,534
1,694
17
15
8
9
13
2,764
3,435
3,785
4,195
4,746
Interest income
3
3
4
6
10
940
982
1,056
1,178
1,357
Financial expense
35
37
46
45
43
Accounts & other payables
445
487
529
581
641
33
37
45
45
43
ST debt & bond
116
318
318
318
318
Current portion of LT debt
300
80
80
80
80
(3)
(4)
(2)
(2)
(3)
553
978
1,002
980
962
Gains (Losses) in associates,
subsidiaries and JV
5
4
4
5
5
229
648
648
598
548
Earnings before tax
430
473
496
576
683
Income taxes
118
108
117
135
161
Non-current assets
Investment assets
Tangible assets
Intangible assets
Total assets
Current liabilities
Non-current liabilities
Debentures
82
86
88
90
92
Total liabilities
LT debt & financial liabilities
1,493
1,960
2,058
2,157
2,319
Controlling interest
1,202
1,409
1,653
1,955
2,334
Capital stock
89
89
89
89
89
Capital surplus
97
97
97
97
97
(73)
(73)
(73)
(73)
(73)
1,120
1,415
1,722
2,086
2,528
70
67
74
82
93
1,272
1,475
1,727
2,037
2,427
Capital adjustments
Retained earnings
Minority interest
Shareholders' equity
Cash flow
FY-ending Dec. (W bn)
C/F from operating
2012A 2013A 2014F 2015F 2016F
238
390
463
616
751
312
366
380
441
523
Depreciation
100
97
101
105
109
Amortization
8
14
18
20
22
(220)
(92)
(44)
40
84
Others
C/F from investing
CAPEX
Interest expense
Other non-operating profit
Net profit
312
366
380
441
523
304
357
371
431
511
Other comprehensive profit
(41)
(87)
(64)
(64)
(64)
Total comprehensive profit
271
279
315
376
459
263
270
308
368
448
554
607
651
734
842
Net profit of controlling interest
Total comprehensive profit of
controlling interest
EBITDA
Key financial data
Net profit
Net incr. in W/C
Financial income
38
(370)
(168)
5
(493)
(134)
8
(371)
(180)
10
(399)
(180)
13
(425)
(180)
FY-ending Dec.
2012A
2013A
2014F
2015F
2016F
25,857
30,691
per share data (KRW)
EPS
18,126
21,311
22,267
BPS
71,816
83,516
97,309 114,330 135,748
DPS
3,750
3,750
3,800
Sales growth
12.7
11.0
OP growth
20.4
11.4
NP growth
14.8
EPS growth
EBITDA growth
3,950
4,100
8.7
9.8
10.4
7.2
14.5
16.7
17.6
3.8
16.1
18.6
14.8
17.6
4.5
16.1
18.7
19.6
9.5
7.3
12.8
14.7
OP margin
11.4
11.5
11.3
11.8
12.5
NP margin
7.8
8.3
7.9
8.3
9.0
EBITDA margin
14.2
14.0
13.8
14.2
14.8
ROA
12.2
11.8
10.5
11.0
11.7
ROE
27.6
27.4
24.2
23.9
23.8
0.6
0.7
0.9
0.9
0.9
Growth (%)
Profitability (%)
Decr. in fixed assets
Incr. in investment
3
5
5
5
5
(193)
(342)
(63)
(64)
(64)
Net incr. in intangible assets
(5)
(7)
(130)
(156)
(181)
Others
(7)
(15)
(3)
(4)
(5)
C/F from financing
109
185
(70)
(124)
(128)
Incr. in equity
0
5
0
0
0
Incr. in debts
168
260
2
(48)
(48)
Dividends
(59)
(63)
(63)
(64)
(66)
Valuation (X)
0
(17)
(9)
(12)
(14)
Others
C/F from others
(4)
(4)
0
0
0
Increase in cash
(27)
78
22
93
198
Dividend yield
Stability
Net debt (W bn)
650
976
956
813
566
Debt/equity ratio (%)
57.2
76.7
65.7
53.3
42.8
PE
36.2
25.7
20.2
17.2
14.5
PB
9.1
6.6
4.6
3.9
3.3
PS
3.0
2.2
1.7
1.5
1.4
20.4
16.5
12.9
11.2
9.5
EV/EBITDA
Note: Based on K-IFRS (consolidated)
5
LG Household & Healthcare (051900)
Changes to recommendation and price target
Company (Code)
LG Household & Healthcare (051900)
Date
Recommendation
Price target
04-24-12
BUY
W630,000
11-20-12
BUY
W790,000
09-24-13
BUY
W700,000
04-10-14
BUY
W630,000
900,000
800,000
700,000
600,000
500,000
400,000
300,000
200,000
100,000
0
Apr-12
Aug-12
Dec-12
Apr-13
Aug-13
Dec-13
6
LG Household & Healthcare (051900)
■
Guide to Korea Investment & Securities Co., Ltd. stock ratings based on absolute 12-month forward share price performance
BUY: Expected to give a return of +15% or more
Hold: Expected to give a return between -15% and 15%
Underweight: Expected to give a return of -15% or less
Korea Investment & Securities does not offer target prices for stocks with Hold or Underweight ratings.
■
Guide to Korea Investment & Securities Co., Ltd. sector ratings for the next 12 months
Overweight: Recommend increasing the sector’s weighting in the portfolio compared to its respective weighting in the Kospi (Kosdaq) based on market
capitalization.
Neutral: Recommend maintaining the sector’s weighting in the portfolio in line with its respective weighting in the Kospi (Kosdaq) based on market capitalization.
Underweight: Recommend reducing the sector’s weighting in the portfolio compared to its respective weighting in the Kospi (Kosdaq) based on market
capitalization.
■
Analyst Certification
I/We, as the research analyst/analysts who prepared this report, do hereby certify that the views expressed in this research report accurately reflect my/our personal
views about the subject securities and issuers discussed in this report. I/We do hereby also certify that no part of my/our compensation was, is, or will be directly or
indirectly related to the specific recommendations or views contained in this research report.
■ Important Disclosures
As of the end of the month immediately preceding the date of publication of the research report or the public appearance (or the end of the second most recent
month if the publication date is less than 10 calendar days after the end of the most recent month), Korea Investment & Securities Co., Ltd., or its affiliates does
not own 1% or more of any class of common equity securities of LG Household & Healthcare.
There is no actual, material conflict of interest of the research analyst or Korea Investment & Securities Co., Ltd., or its affiliates known at the time of publication
of the research report or at the time of the public appearance.
Korea Investment & Securities Co., Ltd., or its affiliates has not managed or co-managed a public offering of securities for LG Household & Healthcare in the
past 12 months;
Korea Investment & Securities Co., Ltd., or its affiliates has not received compensation for investment banking services from LG Household & Healthcare in the
past 12 months; Korea Investment & Securities Co., Ltd., or its affiliates does not expect to receive or intend to seek compensation for investment banking
services from LG Household & Healthcare in the next 3 months.
Korea Investment & Securities Co., Ltd., or its affiliates was not making a market in LG Household & Healthcare’s securities at the time that the research report was
published.
Korea Investment & Securities Co., Ltd. does not own over 1% of LG Household & Healthcare shares as of April 11, 2014.
Korea Investment & Securities Co., Ltd. has not provided this report to various third parties.
Neither the analyst/analysts who prepared this report nor their associates own any shares of the company/companies covered in this report as of April 11, 2014.
Korea Investment & Securities Co., Ltd. has issued ELW with underlying stocks of LG Household & Healthcare and is the liquidity provider.
Prepared by: Jung-In Lee
This report was written by Korea Investment & Securities Co., Ltd. to help its clients invest in securities. This material is copyrighted and may not be copied,
redistributed, forwarded or altered in any way without the consent of Korea Investment & Securities Co., Ltd. This report has been prepared by Korea Investment &
Securities Co., Ltd. and is provided for information purposes only. Under no circumstances is it to be used or considered as an offer to sell, or a solicitation of any offer to
buy. We make no representation as to its accuracy or completeness and it should not be relied upon as such. The company accepts no liability whatsoever for any direct
or consequential loss arising from any use of this report or its contents. The final investment decision is based on the client’s judgment, and this report cannot be used
as evidence in any legal dispute related to investment decisions.
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