Korea Investment & Securities said on the 21st that if cocoa prices fall, profitability will improve for LOTTE Wellfood, the No. 1 company in Korea's chocolate market. It maintained a Buy rating and a target price of 170,000 won, recommending the stock as a second-preference pick within the food and beverage sector. LOTTE Wellfood's previous closing price was 123,700 won.
As of last year, LOTTE Wellfood is the No. 1 player in Korea with a 37.2% share of the domestic chocolate market. Based on the domestic business, about 30% of confectionery revenue comes from chocolate products.
It is expected to benefit if cocoa prices fall. As of the close on the 19th, cocoa prices fell 6.1% from the previous day to $4,943. This was the first time since Feb. last year that the price fell below $5,000 per ton.
Kang Eun-ji, an analyst at Korea Investment & Securities, described LOTTE Wellfood as "the corporations with the largest margin spread (price differential) among domestic confectionery companies."
LOTTE Wellfood has raised prices of chocolate products at home and abroad to offset the burden of cocoa prices. This effect has been reflected since the third quarter of this year.
Kang said, "Considering cocoa inventory conditions and the effect of price hikes, profitability will begin to improve gradually from the fourth quarter, starting with a narrower decline in operating profit in the third quarter."
It was also forecast that the upward pressure on cocoa prices would be weak. Kang analyzed, "If cocoa prices surge in the future, the option of using cocoa butter substitutes could reemerge, so the upward pressure on cocoa prices will not be strong."
Earnings growth at the India confectionery and ice cream subsidiary is also expected. The Pune ice cream plant, which began operations early this year, is expected to contribute meaningfully to earnings growth starting next peak season after a stabilization period in production this year.
Also, the first overseas production line for Pepero began production in July this year, and Choco Pie has maintained an operating rate above 90% even after the third line started up, making earnings growth through additional line expansions likely.