[Edaily Reporter Kim Hyung-il ] SANGSANGINVESTMENT&SECURITIES forecast that LG H&H(051900)’s third-quarter operating profit this year will more than double year-over-year but will fall short of market expectations. The analysis suggests that factors such as sluggish performance in the Chinese cosmetics business and deteriorating profitability in the beverage division will act as headwinds. However, judging that the recent decline in the stock price has created significant upside potential, the firm upgraded its investment rating from “Hold” to “Buy” and raised the target price from 330,000 won to 350,000 won.

On the 27th, Song Ji-yeon, an analyst at SANGSANGINVESTMENT&SECURITIES, estimated that LG H&H’s third-quarter consolidated revenue would reach 1.6284 trillion won, a 3.1% increase year-over-year. She projected operating profit to rise 101.5% to 93.1 billion won. However, she anticipated that this figure would fall short of the consensus estimate of 103.4 billion won.

Revenue in the cosmetics division is estimated at 718.5 billion won, an 8.5% increase year-over-year, while operating profit is projected to return to the black at 21.6 billion won. Duty-free sales are expected to remain at approximately 90 billion won, similar to the previous quarter. In contrast, in China, the decline in sales is expected to widen and losses are projected to continue due to the reduction in live-streaming activities and the impact of the off-season.

In the North American business, analysts estimated that the exclusion of Avon from consolidated results starting in September would result in a monthly revenue decrease of approximately 20 billion won. While the hair care brand Dr. Groot continues to see robust demand, its growth rate is projected to slow due to a high base caused by its entry into Costco during the same period last year.

In the Home & Daily Goods (HDB) segment, revenue is estimated at 402.9 billion won, a 0.2% decrease year-over-year, while operating profit is projected to decline by 6.5% to 29.9 billion won. Analysts predict that the revenue decline resulting from Homeplus store closures will be offset by sales of Chuseok gift sets and promotional campaigns in collaboration with YouTubers.

In the Beverages segment, revenue is projected to decline by 1.1% year-over-year to 507 billion won, while operating profit is expected to fall by 33.5% to 41.6 billion won. Profitability is expected to deteriorate as sluggish domestic beverage consumption is compounded by rising raw material prices and the burden of promotional expenses.

SANGSANGINVESTMENT&SECURITIES viewed the prospects for short-term earnings improvement as limited. While the strong second-quarter performance of the North American business was driven by favorable factors—such as the expansion of SKUs available at Costco and the inclusion of part of the initial shipment to Sephora—the firm expects operating profit in the cosmetics segment to decline quarter-over-quarter in the third quarter due to the burden of marketing expenses. The firm also predicted that the improvement in company-wide profits would be modest in the fourth quarter due to the seasonal slowdown in the beverage business.

Nevertheless, the firm upgraded its investment rating because the gap between the target price and the current stock price widened due to the decline in the stock price. SANGSANGININVESTMENT&SECURITIES adjusted the price-to-earnings ratio (PER) used to calculate the target price from 16.6x to 17.5x to reflect the rising valuations of global peers. However, since the overseas growth of its own brands is concentrated on Dr. Groot, the firm maintained a 30% discount relative to global peers until the overseas performance of other brands is confirmed.

SANGSANGINVESTMENT&SECURITIES estimated LG H&H’s annual revenue for this year at 6.347 trillion won and operating profit at 363 billion won. It projected next year’s revenue and operating profit at 6.721 trillion won and 425 billion won, respectively. The firm believes that even if this year’s earnings recovery is limited, the stock has become more attractive for investors at its current price level.