Nov 16, 2023

[Youngone] Feeling bittersweet The logo of NH Investment & Securities The author is an analyst for NH Investment & Securities. He can be reached at jiyoony@nhqv.com -- Ed. In 3Q23, Youngone’s OEM division sales slowed down first time in 10 quarters. Given the industry-outpacing OEM sales clip over the past 2 years, short-term negative effects are inevitable. But, given the valuation gap with the Taiwanese peers, we advise focusing on downstream recovery expectations rather than near-term earnings growth concerns. Share price facing headwinds despite still sound earnings Although sticking to a Buy rating, we lower our TP on Youngone by 8% to W70,000. We have downwardly adjusted our OEM sales estimates, in turn leading to cuts in our 2023 and 2024 OP forecasts of 6% and 5%, respectively. Dollar-denominated revenue growth rate (y-y) broke down as: -6% for Makalot > 12% for Hansae (non-consolidated) -12% > -18% for Youngone (OEM) > -29% for Eclat. Due to the record-breaking sales of the OEM division within the industry over the past 3 years, high-base effects are inevitable over 2H23~1Q24. However, absolute sales volume and margins are still superior to those at rivals. And, considering the valuation gap with the Taiwan peers, we view a recent order slowdown as being sufficiently reflected in the share price. Now is time to focus on downstream recovery expectations. 3Q23 review: OEM shows negative growth for first time in 10 quarters Youngone posted consolidated 3Q23 sales of W9,988bn (-14% y-y) and OP of W1,799bn (-35% y-y), with OP coming in 17% below consensus of W2,185bn. OEM: The OEM division booked sales of W5,973bn (-20% y-y) and OP of W1,607bn (-28% y-y). At end-2Q23, OEM inventory decreased 15% y-y, resulting in an 18% y-y fall in dollar-denominated sales growth rate. It seems that the most of volume from customers, excluding Lululemon and Arc'teryx (which have consistently shown order increases) have dropped down as of late. As of end-3Q23, OEM inventory had lessened to W428.7bn (-18% y-y), a development which requires consideration toward likely high-base effects in 4Q23. Brand: The brand division showed sales of W4,014bn (-4% y-y) and OP of W193bn (-64% y-y). SCOTT saw a sharp rise of 98% y-y in inventory as of end-3Q23, and a downward trend in margin levels continued in response to both European inflation and a decline in demand for mountain bikes (MTBs).