South Korea: Major brewer Hite Jinro sees shares slide 23% this year as profitability worsens

Despite the much-anticipated debut of its latest beer, Kelly, South Korea’s major liquor producer, Hite Jinro Co., finds itself ensnared in a consistent downward spiral of stock prices this year. The root cause lies in the company’s diminishing profitability, a consequence of amplified marketing outlays and the escalating expenses tied to raw materials, the Pulse News Korea reported on August 29.

As of Monday, August 28, the company’s stock price maintained a semblance of stability at 19,550 won ($14.78). However, the price reflects a daunting 23.48 percent descent from the year’s start, positioning it well below the average returns of the benchmark Kospi, which stood at 13.6 percent.

Hite Jinro’s stock value dipped below the critical threshold of 20,000 won per share on August 14, a stark contrast to the 25,600 won it boasted at the year’s outset. The trough was finally reached on August 24, plummeting to 18,920 won.

The drag on the company’s fortunes can be attributed to escalated marketing expenditures, a factor that has chipped away at Hite Jinro’s profitability. The brewery embarked on an assertive marketing campaign, even enlisting Son Suk-ku, one of the country’s expensive actors, for a commercial promoting its latest creation, Kelly. Despite the remarkable feat of selling 100 million Kelly bottles within a mere 99 days of its launch, the exuberant marketing expansion has eroded the company’s overall profitability.

In addition, rising prices of raw materials and weaker consumption have forced the beer company to suffer sluggish earnings performance during the second quarter. The company’s operating profit during the period of April-June stood at 11.9 billion won, down 80.9 percent from a year earlier.

The beer brand’s forecast for the third quarter remains bleak. As per financial data tracker FnGuide Inc., Hite Jinro’s projected operating profit for the third quarter is 38.7 billion won, reflecting a 32.11 percent decrease compared to the previous year.

In response to the worse-than-expected earnings forecast, 3 domestic brokerage firms revised down their target price for the local beer maker. Hyundai Motor Securities Co. lowered the target to 25,000 won per share from 27,000 won, while Shinhan Securities Co. to 25,000 won from 28,000 won per share.

“Although Kelly’s sales are showing positive signs, the potential challenge can be the raw material cost for soju, which represents the most significant downside risk to the second-half earnings,” Choi Ji-ho, an analyst at Samsung Securities Co., who highlighted the need of strategies to improve earnings to the beer maker.

“Hite Jinro is expected to continue its marketing expansion strategies at the expense of weak earnings prospects,” said Kim Tae-hyun, an analyst at IBK Securities Co.

31 August, 2023