In a notice to the stock market after close of trading today, the parent company of Korean cosmetics company Amorepacific Corporation announced a rights issue of new preference shares that would raise KRW200 billion (US$168 million), writes The Moodie Davitt Report Senior Retail and Commercial Analyst Min Yong Jung.
Amorepacific Group announced that the proceeds would be used to acquire additional ownership of Amorepacific Corporation – a subsidiary handling most of the company’s core cosmetics business, including Sulwhasoo and Laneige.
This would see the Group’s stake in its subsidiary rise by two percentage points from 35.4% to 37.68%.
The move appears a clear signal by the Korean beauty-to-personal care giant that its trading difficulties of recent times, mainly driven by the China-Korea political crisis, are over.
The improved earnings are due to better Q3 sales in duty free (we estimate +22% year-on-year) – a channel which contributes far more to the bottom line than other markets inside and outside Korea
Investors holding Amorepacific Group stock on 11 November will be given the option of participating in the rights issue and the allotment ratio will be 0.0686641685. So, an investor holding 100 Amorepacific Group shares will be able to purchase six of the newly issued preference shares that will be listed on 26 December 2019.
Holders of the preference shares will have no voting rights from their new shares, but dividends given will be at a premium to those dividends issued to existing common shares.
Amorepacific Group intends to begin purchasing Amorepacific Corp shares on the stock exchange from 7 December (the next day after subscription for rights issue ends) to 11 December.
The announcement doesn’t outline the exact timing of when and how much Amorepacific Group will buy from the market. However, the timing of the rights issue and the decision to purchase additional shares of Amorepacific Corp suggests the worst days of China’s retaliation over the THAAD crisis are over.
While that crisis resulted in a slump in Chinese group and FIT tourism to Korea, it also prompted a surge in daigou sales, in turn leading to Amorepacific restricting available volumes and SKU in Korean duty free. Unlike Amorepacific, close competitor LG Household & Health Care actively utilized resellers to sell their products in China, resulting in both better financial and stock price performance.
The stock prices of Amorepacific Group and Amorepacific Corporation have declined by -67% and -68%, respectively since their record-breaking highs in July 2015 and by -50% and -52% from the start of 2018.
The timing of Amorepacific Group’s rights issue combined with the decision by the owners to raise the stakes in the company and subsidiary, has market participants believing that the worst of times are over for the company. Internally, sharp improvements in company performance are expected.
Amorepacific Corporation’s Q3 earnings are expected to see positive operating profit growth, after undergoing five quarters of negative growth. The improved earnings are due to better sales in duty free (we estimate +22% year-on-year) – a channel which contributes far more to the bottom line than other markets inside and outside Korea.
Consensus expectation for Q3 is for the company to grow topline by +7% and operating profit by +16% year-on-year; a result that market participants are confident is achievable. The stock price has rebounded from the recent low of KRW123,000 on 6 August 2019 to KRW145,000 on 10 October.
