● 3Q16 review: Consolidated OP of W15.5bn (-1.2% YoY), below expectations

For 3Q16, Korea Kolmar announced preliminary consolidated revenue of W160.2bn (+25.0% YoY) and operating profit of W15.5bn (-1.2% YoY; OP margin of 9.7%). While revenue came in line with expectations, operating profit significantly missed our forecast and the consensus by 26% and 20%, respectively. Operating profit was weaker than expected due to higher short-term costs, driven by increased clinical trial-related expenses at the pharmaceuticals business as well as one-off expenses on the acquisition of US-based cosmetics manufacturer Process Technologies & Packaging (PTP).

The domestic cosmetic business, which continues to see solid demand growth from existing best-selling products and major channels, booked solid revenue growth of 19.9% YoY thanks to new orders related to a large retailer`s cosmetic private brand. Furthermore, the pharmaceuticals business also continued robust growth on the back of generic drug launches coupled with increased customers (revenue of W43bn, +29.4% YoY). Beijing Kolmar`s revenue also expanded to W16.6bn (+29.2% QoQ, +88.7% YoY) on increasing orders from large local customers following the ramp-up of its facilities.

Korea Kolmar continues to improve structural profitability, aided by rising volume of best-selling products at the domestic business and robust export growth. As soft profitability for 3Q is attributable to higher COGS driven by one-off factors, it should not cause too much worry.

●Focus on top-line growth potential

Korea Kolmar is now in a top-line growth phase that is different from the past. Compared to peers, the company has tended to embrace rather conservative strategies throughout its long involvement in the original development manufacturing (ODM) business. This year, however, it has begun to display top-line growth across a variety of business units.

Korea Kolmar is planning to build a second plant (annual capacity of W350bn, to be completed at end-2017) near Shanghai in Wuxi, in order to actively keep up with the growth of the local market. Given the expansion of overall capacity and regional diversification, we believe the China business will continue sharp growth for a long time. On the domestic front, the company is expanding its pharmaceutical business and integrating R&D for cosmetics, pharmaceuticals, and health food in a bid to expand overseas contract manufacturing organization (CMO) orders, maximize synergy among core business units, and improve operational efficiency.

● Maintain Buy but Lower TP by 7.7% to W120,000

We maintain our Buy rating on Korea Kolmar, with our optimism on the company`s long-term prospects remaining intact. However, we lower our target price by 7.7% to W120,000 (from W130,000) given one-off expenses incurred this year and revisions to Beijing Kolmar`s profitability.

By Regina Hahm, Analyst at Mirae Asset Daewoo Securities

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