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On Friday, an HSBC analyst adjusted the outlook for LG Household & Health Care Ltd (051900:KS) (OTC: LGHHF) shares, shifting the rating from Buy to Hold. The new price target set for the company stands at KRW400,000. This change comes amid observations of fleeting sales improvements in duty-free stores and a lack of sustained business growth from China.
The analyst noted that earlier expectations for a sales uptick in duty-free stores and a sequential business recovery in China have not been met. Despite a preference for original design manufacturers (ODMs) over brand owners, the analyst projected that upcoming third-quarter results would likely reinforce this view. ODMs are anticipated to report a solid quarter, contrasting with brand owners who may not surpass the already diminished market expectations.
For the third quarter, the analyst forecasts that Amorepacific's losses in China may increase compared to previous quarters, and COSRX's third-quarter sales growth is expected to decelerate to 20% year-over-year from a prior estimate of 35%. This slowdown is attributed to heightened competition in the market.
Specifically for LG Household & Health Care, it's predicted that the company will experience a loss in China for the third quarter, a downturn from profits in the first half of the year. The loss is believed to be driven by an uptick in marketing expenses and a persistent decline in sales from duty-free stores. According to the analyst, a more positive outlook for LG H&H would require greater confidence in China's market recovery and an increased contribution from other countries.
Meanwhile, ODMs are expected to maintain double-digit top-line growth, with continued margin expansion supported by robust domestic growth. The analyst's insights suggest a shifting landscape in the cosmetics sector, with ODMs gaining an edge over traditional brand owners.
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