China's Operational Challenges Overshadow US Growth

Amorepacific's growth in the US and Southeast Asia may not be enough to counterbalance the significant cost issues arising from its ongoing operational reshuffle in China. The operating losses in China have surpassed expectations, necessitating a downward revision of earnings consensus. This could lead to a temporary lull in the company's share performance. Investors are advised to adopt a long-term perspective on Amorepacific.

Second Quarter 2024 Review

For the second quarter of 2024, Amorepacific reported a consolidated operating profit of KRW4.2bn, a 30% year-over-year decrease, on sales of KRW904.8bn, a 4% year-over-year decrease. These figures fell short of market consensus and our projections. The China unit contributed additional losses of KRW50bn in the second quarter, primarily due to the reshuffle of online and offline operations. Sales in China dropped 44% year-over-year as the company adjusted inventories at the e-commerce channel and improved the operational efficiency of offline stores. The main challenge for Amorepacific is that China losses are not expected to narrow in the third quarter of 2024.

Positive Impact from COSRX Acquisition

The recently acquired subsidiary COSRX contributed an estimated KRW34bn in operating profit. The inclusion of COSRX has helped improve operating margins in the US and Southeast Asia. With COSRX, Laneige, and Innisfree boosting sales, top-line growth in the US reached 65% year-over-year in the second quarter of 2024. Continued growth in US sales further supports the positive outlook for Amorepacific.

Revised Target Price

Our earnings forecasts for 2024 and 2025 have been adjusted to reflect increased losses at the China unit. With EPS falling more than 10% when excluding one-off valuation gains from the stake in COSRX, we have lowered our target price for Amorepacific to KRW192,000.