Lotte Chilsung Beverage: NDR Takeaways: Likely to Meet High Expectations - BusinessKorea

The authors are analysts of Shinhan Securities. They can be reached at sanghoonpure.cho@shinhan.com and yk.cho@shinhan.com, respectively. -- Ed.

Investor focus: Zero sugar products, beer recovery & interest burden

Investor focus at Lotte Chilsung Beverage's NDR centered on four topics: sales of zero-sugar soft drinks and soju, recovery of the beer business, and rising interest burden.

1) Sales of zero-calorie carbonated drinks are expected to double from KRW90bn in 2021 to KRW180bn in 2022. Over-50% YoY top-line growth should continue through 2023, driven by penetration into entertainment establishments such as bars and clubs as well as product diversification. Lotte Chilsung Beverage has been expanding its market share in zero-sugar soft drinks from lows of 5% in 2020 to 43% in 2021 and 50% in 3Q22, and now stands at an advantage in price competitiveness with its prices remaining unchanged amid price hikes carried out by rivals.

2) Saero, the company’s new zero-sugar soju product launched on September 14, is seeing strong market response. Sales of Saero reached KRW2.4bn in September and KRW2.6bn in October, and is expected to grow to KRW5bn in November and KRW7bn in December. The new Chum Churum soju product is now sold through most of the sales channels targeting households, and penetration into entertainment establishments is on the rise. Backed by growing market penetration, Saero sales are likely to reach KRW100bn in 2023. The company’s share in the soju market is fully expected to reach 18% even after accounting for Saero’s cannibalization of the company’s original Chum Churum products.

3) The beer business is on a gradual recovery track on brisk sales of Kloud Draft and minimal consumer resistance to price hikes carried out for Kloud Original. Capacity utilization rate is expected to improve in earnest from early-2023 upon completion of the hybrid production system.

4) However, the interest cost burden poses a risk to the company. Out of its net debt of KRW900bn, KRW300-400bn is near due and expected to add at least KRW10bn to the company's total interest burden given recent rate hikes. Overall debt management capabilities are seen crucial at this point.

2023 earnings to meet heightened market expectations

The beverage business is enjoying both top-line growth and margin gains thanks to price hikes and strong sales of high-margin carbonated drinks, and aims to continue on the winning streak in 2023 through the launch of new functional beverages, increase in zero-sugar offerings for its soft drinks, and expansion of distribution channels. The liquor division returned to profit in 2021 after remaining in the red since 2017, and the beer business is also expected to turn profitable from 2023 on the back of strong sales of Kloud Draft, OEM expansion, and utilization rate improvement from hybrid production (21% in 2020→31% in 2021→35% in 2022F→45% in 2023F).

Retain BUY for a target price of KRW240,000

We retain our BUY rating on Lotte Chilsung Beverage. Market concerns remain over the liquor business, but the company continues to maintain strict control over costs. Going forward, share performance should hinge on the early success of new products and market share improvement.

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