Youngone: 4Q21 exceeds expectations, but equities disappoint

The author is an analyst at Shinhan Investment Corp. She can be contacted at [email protected] — Ed.

4Q21 results beat expectations on surprisingly strong OEM sales

Youngone reported consolidated operating profit of KRW 122.7 billion (+153.8% YoY) on sales of KRW 751.5 billion (+28.6% YoY) for 4Q21, far exceeding our estimate of KRW 70 billion and the market consensus of KRW 74.7 billion. Consistent with expectations of weak revenue growth at SCOTT given the strong 4Q20 earnings base, the subsidiary reported a 14% year-over-year decline in sales for 4Q21. OEM sales, however, jumped more than 60% year-on-year, beating expectations and helping to maximize operating leverage. We believe that some orders received in 3Q21 were transferred to 4Q21, contributing to the earnings surprise in addition to favorable exchange rates and solid customer demand.

Strong growth momentum expected through 1Q22

We believe OEM businesses in general are currently feeling the pressure of rising costs, with prices for key materials on a strong upward trend amid the 1T rush to secure fabric ahead of peak apparel season. However, compared to knitwear OEMs, Youngone can pass on increased costs to its customers with relative ease, as functional fabrics make up a larger portion of its raw materials. In 1Q22, we expect SCOTT sales to continue to decline 6% YoY from the prior year’s high base, but expect OEM sales to increase 30% YoY on strong demand customers and at favorable exchange rates. As rivals suffer from lower profits due to rising costs, Youngone should be able to protect margins with strong OEM profits.

The recent correction in the share price is considered excessive; TO BUY

We find the recent stock price correction of OEM companies excessive, especially for Youngone given its strong earnings and confirmation of more than solid customer demand. Even assuming a slowdown in earnings growth from the prior quarter, current valuations look excessively cheap, with stocks now trading at a P/E of 2022F below all-time lows. With equity valuations seen as attractive relative to their global counterparts, we are maintaining our BUY rating on Youngone.

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