K-beauty stocks stumble as strong won squeezes profits

Market jitters send APR shares down 39% despite surging revenue and industry growth

While K-beauty’s overseas sales have never been stronger, markets seem hesitant to reward its soaring figures, fearing a surging won will eat into its earnings.

Cosmetics exports reached $11.1 billion in the first nine months of the year, up 31.1 percent and a record for the period, according to Korea’s Ministry of Food and Drug Safety, though shares of major K-beauty companies have lagged behind, weighed down by an earnings risk analysts say is already priced in.

APR, the sector’s bellwether with a market capitalization of 11.6 trillion won ($8.8 billion), feels the squeeze most. Its shares fell into the 270,000 won range on Oct. 14 and traded around 290,000 won as of press time, about 39 percent below their 52-week high of 475,000 won on Sept. 1.

"The recent share-price decline reflects concerns over slower top-line growth due to the strong won, set against heightened market expectations," IBK Securities said in a report. The dollar has slid from an average of 1,528 won in June to the low 1,320s on Thursday.

The slide reflects the company’s heavy tilt toward overseas markets, which accounted for 90.5 percent of its first-half revenue and 92 percent in the second quarter, when North America generated nearly half of its sales.

A stronger won shrinks overseas sales once converted into won, and cosmetics makers have little to cushion the blow since they import few raw materials that a stronger won would cheapen. Higher air freight and local logistics costs from APR’s European expansion are adding further strain.

APR’s third-quarter operating profit consensus fell 5.6 percent to 185 billion won from 196 billion won a month earlier, according to market tracker FnGuide, still roughly twice the year-earlier level.

Similar pressure extends across the sector, leaving Amorepacific, LG Household & Health Care, Silicon2 and d’Alba Global poised to miss consensus estimates. Hardest hit among them was d’Alba, whose shares slid to around 167,000 won on Thursday from a 52-week high of 283,000 won.

Some analysts see the selloff as overdone, with some calling APR and d’Alba a buying opportunity as a falling exchange rate cannot change the industry’s direction.

"Unless the won strengthens further, APR’s foreign-exchange losses in the fourth quarter should remain limited," said an analyst at NH Investment & Securities. "The currency-driven decline in third-quarter operating profit should be distinguished from any genuine weakening of the cosmetics business."

Despite the dented earnings forecasts, demand shows no sign of fading.

IBK Securities expects APR’s third-quarter revenue to more than double from a year earlier to 801.4 billion won, up 107.6 percent. Amorepacific’s is forecast to climb 12.1 percent to 1.14 trillion won, while d’Alba Global’s is projected to rise 46.8 percent to 167.6 billion won.

Meanwhile, contract manufacturers look sturdier still. Cosmax and Kolmar Korea, which bill largely in won, are expected to post third-quarter operating profit jumps of roughly 60 percent on-year, with analysts predicting results above market expectations.