South Korea: HiteJinro posts 5.5% sales increase in Q4 2021

One of Korea’s leading brewers, HiteJinro posted sales of KRW544.9 bln (+5.5% YoY) and operating profit of KRW33.7 bln (+41.2% YoY) for 4Q21, meeting the market consensus, the Business Korea reported on February 14.

Although detailed results by business were not disclosed, beer earnings should have missed expectations vs. in-line earnings from the soju business, the Shinhan Investment Corp. analysts believe. The on-trade market had showed signs of recovery upon the government’s shift to a “living with COVID-19” approach in November, only to weaken again due to strengthened social distancing rules in December amid the spread of the new Omicron variant. Despite the low comparison base, beer sales likely declined 5% YoY due to weak on-trade demand and intensifying competition. In contrast, soju sales should have increased 8% YoY thanks to favorable base effect and benefits from eased restrictions, the analysts said.

Shinhan Investment Corp. believe economic reopening will unleash pent-up demand for outdoor activities and eating out. An increase in eating out should greatly benefit alcoholic beverage companies given that a large portion of liquor consumption occurs in food service channels. HiteJinro is poised to benefit the most from the easing of restrictions, considering that alcoholic beverage consumption went up sharply in October 2020 as well as in February and November 2021 on relaxed social distancing measures. The company appears to have a strong presence in key downtown areas of Seoul. But market shares remain low for Terra and Jinro is Back in the outer suburbs of the metropolitan area and other regions. The analysts expect HiteJinro to focus on expanding its penetration in non-metropolitan areas via pop-up stores to accelerate growth in overall market presence. Meanwhile, the possibility of alcoholic beverage price hikes should increase toward 2H22. The company’s operating profit sensitivity to price hikes is estimated at 12% for beer and 18% for soju. Shinhan Investment Corp. assumed that the prices will be raised by 6.33% for beer (as in December 2016) and 6.45% for soju (May 2019) and market shares are unaffected by price hikes.

Shinhan Investment Corp. earnings forecasts for HiteJinro remain largely unchanged from previous projections, with rising expectations for price hikes yet to be reflected and social distancing restrictions likely to be lifted gradually from end-2Q22. The analysts revise up their target price by 10% to KRW44,000 to reflect the rise in global peer valuations (11.5x →12x), backed by an upturn in market conditions with the shift to “living with COVID-19.” They believe that competition in the beer market will ease in 2022, given: 1) rivals at a disadvantage in terms of financial structure and dividend payments; and 2) excise tax on beer set to be raised by 2.5% per liter from April 1. Investors need to focus on expectations for imminent recovery rather than concerns over past earnings.

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