[Korea] Cosmetics December 17, 2020 AmorePacific Trading Buy (090430 KS ) (Maintain) Moving more nimbly TP: W230,000 ▲ Upside: 10.0% Mirae Asset Daewoo Co., Ltd. Junghan Yoon [email protected] Direction is set Focusing on China and online channel s We expect AmorePacific’s China revenue exposure to exceed 50% for the first time in 2020. For online sales in China, management has set a 2021 growth target of 30% (vs. +20% YoY in 2020). The company will close 170 Innisfree stores in China next year (up from 141 closures in 2020). Both Sulwhasoo and Laneige enjoy strong brand recognition in China, making them suitable targets for online expansion strategies. Responding more flexibly Going wherever demand exists During China’s Singles’ Day event, AmorePacific held eight live commerce sessions with internet celebrity Li Jiaqi (comparable to the marketing campaigns of leading brands). The company plans to conduct more than 100 live commerce sessions every month domestically and overseas. The company will also launch its Aestura brand online to target China’s growing “dermacosmetics” market (the brand is already available in Chinese clinics). The company is generating revenue from corporate-type daigou , having signed deals in October. Valuation and recommendation Raise TP by 24% to W 230,000 and maintain Trading Buy AmorePacific is currently trading at 27x our 12-month forward operating profit estimate. The stock has traded at an 18.5% discount to global peers on average since 2019 (due to its relative weakness in the luxury category). Sulwhasoo’s growth in China has recovered to 20% YoY. China’s cosmetics market conditions in 2021 are likely to prove favorable to AmorePacific. We raise our target price on the stock to W230,000, applying an 8% discount to the multiple of global peers. With expectations fully priced in, we believe the company needs to show more than just a recovery; it needs to deliver growth. We maintain our Trading Buy rating. Key data Current price (12/17/20, W) 209,000 Market cap (Wbn) 12,218 140 AmorePacific KOSPI OP (20F, Wbn) 150 Shares outstanding (mn) 69 120 Consensus OP (20F, Wbn) 189 Free float (%) 49.8 100 EPS growth (20F, %) -77.1 Foreign ownership (%) 32.2 80 P/E (20F, x) 263.5 Beta (12M) 0.74 60 Market P/E (20F, x) 18.9 52-week low (W) 147,500 12.19 4.20 8.20 12.20 KOSPI 2,770.43 52-week high (W) 236,500 Share performance Earnings and valuation metrics (%) 1M 6M 12M (Dec.) 2017 2018 2019 2020F 2021F 2022F Absolute 13.0 29.4 7.7 Revenue (Wbn) 5,124 5,278 5,580 4,367 4,855 6,192 Relative 3.5 0.0 -14.6 OP (Wbn) 596 482 428 150 461 594 OP margin (%) 11.6 9.1 7.7 3.4 9.5 9.6 NP (Wbn) 394 332 239 55 315 403 EPS (W) 5,709 4,813 3,460 793 4,565 5,837 ROE (%) 9.8 7.7 5.4 1.2 6.8 8.2 P/E (x) 53.3 43.5 57.8 263.5 45.8 35.8 P/B (x) 5.1 3.3 3.0 3.2 3.0 2.8 Div. yield (%) 0.4 0.6 0.5 0.1 0.5 0.7 Notes: Under consolidated K-IFRS; NP is attributable to owners of the parent Source: Company data, Mirae Asset Daewoo Research estimat es Analysts who prepared this report are registered as research analysts in Korea but not in any other jurisdiction, including t he US. PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES AND DISCLAIMERS IN APPENDIX 1 AT THE END OF REPORT. December 17, 2020 AmorePacific An enhanced selection and concentration strategy We expect AmorePacific’s China revenue exposure to exceed 50% for the first time in 2020. The company’s board recently announced an organizational shakeup. As part of this, a regional headquarters was established in China, with Vice President Hwang Young-min (who had been in charge of managing overseas subsidiaries) serving as its head. The changes should lead to more coherent and consistent pricing policies and brand positioning strategies between China and Korea, as well as help the company concentrate on growth in China. We believe e-commerce will become a major channel for the company’s onshore China sales. In 3Q20, we estimate online accounted for 45% of China revenue, up from 25% at end-2018, suggesting the company is rapidly shifting to the online channel. Figure 1. AmorePacific’s expected China exposure Figure 2. AmorePacific’s share of online sales in China Offshore (L) Cross-border (L) Onshore (L) China revenue exposure (R) 60% 100% 60% 90% 54.7% 56.1% 50% 50% 45% 80% 52.6% 49.8% 70% 40% 44.4% 40% 60% 40.3% 39.3% 50% 30% 30% 40% 20% 20% 30% 20% 10% 10% 10% 0% 0% 0% 2016 2017 2018 2019 2020F 2021F 2022F 1Q19 2Q19 3Q19 4Q19 1Q20 2Q20 3Q20 Note: Assuming 95% of 2020 duty-free revenue is from China Source: Company data, Mirae Asset Daewoo Research Source : Company data, Mirae Asset Daewoo Research During a strategy sharing event on Dec. 9, AmorePacific presented a 2021 online sales growth target of 30% for China—an ambitious figure considering the level in 2020 (+20% YoY). The online revenue contributions for market leaders L'Oréal and Estee Lauder in China are currently 56% and 52%, respectively. In 2021, we expect AmorePacific to become a leading cosmetics company in the online space. The company also revealed that it will close 170 directly operated Innisfree stores in China next year, after shuttering 141 stores in 2020. The number of Innisfree stores still remaining at the end of 2021 will likely be around 300. While the store closures mean that top-line growth is unlikely for the brand in China, profit margins per store should improve. Online sales (which have higher margins) should also increase. As such, we expect worries about margin contraction due to fixed costs to ease. Figure 3. Contribution of online sales in China by brand (2020) Figure 4. No. of directly operated Innisfree stores in China 70% 700 60% 600 50% 500 40% 400 30% 300 20% 200 10% 100 0% 0 Proya L'Oreal Estee Lauder AmorePacific LG H&H 1Q18 4Q18 3Q19 2Q20 1Q21F 4Q21F 3Q22F Source: Company data, Mirae Asset Daewoo Research Source: Company data, Mirae Asset Daewoo Research Mirae Asset Daewoo Research 2 December 17, 2020 AmorePacific In its recent organizational shakeup, AmorePacific expanded its online operations in China and tapped Calvin Wang, who has experience working for global cosmetics brands, as head of the China e-commerce division. Relative to its revenue size, AmorePacific enjoys strong brand recognition in China. In several surveys, six to seven out of every 10 respondents said they were aware of the brands Sulwhasoo and Laneige, indicating a level of brand recognition not too far behind that of top global names. Brand awareness is probably the most crucial factor in online channels, which allow access to a much wider range of consumers than offline channels. Although it may be too early to tell, we think cross-border movements will remain restricted in 2021. As such, we expect demand to gradually shift away from the duty-free channel (which has acted as an unofficial distributor of global cosmetics in China) to online channels like Tmall and JD.com. AmorePacific plans to conduct more than 100 live commerce sessions every month domestically and overseas. The company is devoting its resources to major Chinese retail events, such as Singles’ Day, 618, and Women’s Day, and is currently spending 50-60% of its total marketing budget on the online channel. During its strategy sharing event, management revealed that it may increase that share further. Figure 5. Brand recognition survey (% of respondents aware of the brand) 85% 80% 75% 70% 67% 66% 65% 60% 55% 50% Shiseido Lancome Estee Lauder Dior Chanel Sulwhasoo Laneige Source: Press reports, Mirae Asset Daewoo Research During this year’s Singles’ Day event, the company’s luxury brand Sulwhasoo recorded a 174% YoY increase in GMV. A key driver behind the strong growth was the move to change the brand’s core product from the Yoon Jo serum to the Jaumseng set, which is US$50 more expensive. Around 1.1mn Jaumseng sets were sold during the event, representing an increase of 200%. In November, Sulwhasoo’s GMV on the online site Tmall reached CNY840mn, up 107% YoY, representing the second-highest growth rate among top-tier brands (behind Shiseido). Mirae Asset Daewoo Research 3 December 17, 2020 AmorePacific Figure 6. November Tmall GMV data (CNYmn) GMV (L) YoY (R) 3,000 140% 120% 2,500 107% 100% 80% 2,000 60% 1,500 40% 20% 1,000 0% -20% 500 -40% 0 -60% L'Oreal Estee Lancome Whoo Olay SK-II Winona Shiseido Sulwhasoo Chando Lauder Source: Tmall, Mirae Asset Daewoo Research We believe the company’s marketing tactics have proven effective. For this year’s Singles’ Day event, AmorePacific held marketing campaigns comparable to those of rivals, including eight live commerce sessions with Chinese internet celebrity Li Jiaqi. These live commerce sessions led to 455,000 sales with GMV totaling CNY410mn. In addition, we think the enlistment of mid/low-tier internet celebrities across different products and brands resulted in more cost- efficient marketing. Table 1. Live streaming sessions with Li Jiaqi and transaction value (‘000 sales, CNY’000) Brand No. of live streaming sessions No. of sales Transaction value L'Oréal 17 2,407 925,000 Estee Lauder 13 712 491,550 SK-II 11 146 324,050 Sulwhasoo 8 455 411,970 Lancôme 6 3,561 472,260 Whoo 3 435 683,000 Source : Taobao, Mirae Asset Daewoo Research We believe AmorePacific will strengthen its competitiveness in the dermacosmetics space, where it is perceived to have a relatively weak presence.