Brokerage firms are lowering their target price for Lotte Chilsung as Korea’s major beverage and liquor maker is unlikely to meet market expectations in profitability due to sluggish domestic demand.
NH Investment & Securities said Tuesday that it had decided to cut its target price for the beverage unit of Lotte Group to 1.45 million won ($1,280) a share from 1.8 million won, saying that the company’s bottom line will decline on falling margins.
“We slashed sales and profit estimates for Lotte Chilsung this year on rising operating costs amid the prolonged consumption slump,” NH analyst Han Kook-hee said.
The company would have earned 557.5 billion won in sales with a 36.1 billion won operating profit in the first quarter of 2017, according to Han. “But this is lower than market expectations. Even though its beverage and liquor sales have increased at a single-digit rate, its operating profit dropped on rising raw material costs and higher marketing expenses.”
The analyst projected Lotte Chilsung will grapple with declining soju and beer sales for the remainder of this year as consumers drink less alcohol amid the increasing wellbeing trend.
The company is Korea’s third-largest beer maker with its Kloud brand and the second-largest soju maker, owning the Chumchurum brand.
Its beer business lost money in 2016 amid intensifying competition with its larger rivals, Oriental Brewery (OB) and Hite-Jinro, Han said.
“With its second beer plant opening in June, Lotte Chilsung will have to spend more marketing expenditures to enlarge its sales channel and run sales promotion events. This will further expand the beer unit’s operating losses,” he said.
Lotte Chilsung said it would be able to increase its market share, which now stands at a mere 4.8 percent, after its second beer plant goes into operation.
But many industry analysts have remained skeptical, saying the company could be saddled with huge inventories if it cannot steal consumers from OB and Hite when the market is shrinking.