Korea Biomedical Review is publishing a series of articles to analyze the top 10 Korean pharmaceutical and biopharma companies with the largest market capitalizations listed on the main bourse, Kospi, and the tech-heavy Kosdaq. The series aims to reflect key industrial issues and the flow of the capital market in the Korean pharmaceutical and biopharma industry. This is the tenth installment. -- Ed.

Cosmax, a Korean cosmetic manufacturer, posted an earnings shock in the fourth quarter but the company's stock will continue rallying this year thanks to a recovery in demand in China and the U.S., analysts said.

Cosmax closed the market at 81,000 won ($62.28) on Friday, down 200 won (0.25 percent) from the previous trading day.

Despite the loss on Friday, Cosmax shares have been on the rise since hitting a 52-week low of 42,200 won during intraday trading on Oct. 13 last year. The stock is now up 91.9 percent from its 52-week low and is up 9.9 percent so far this year.

The company's shares have surged a great deal from its 52-week low and securities firms are raising their price targets for Cosmax even more.

From February to March, seven brokerages - Hanwha, Samsung, Shinhan, Kiwoom, Merrill Lynch, Daol, and DB Financial - raised their target price for Cosmax.

Samsung Securities raised its price target to 100,000 won on Jan. 11 from 65,000 won on Nov. 15 last year and then adjusted it once more to 113,000 won on March 10.

Brokerages are expecting a full-blown turnaround in the second quarter of this year, despite the company’s earnings missing market consensus by a wide margin in the fourth quarter.

In the fourth quarter of 2022, Cosmax's revenue fell 5 percent compared to the same period in 2021 to 405 billion won, while operating profit plunged 92 percent to 2.3 billion won. The company also posted a net loss of 120.7 billion won.

"The performance of Cosmax's Korean and Chinese subsidiaries was affected by the Covid-19 pandemic in China, and the performance of its U.S. subsidiary was sluggish due to restructuring," said Park Eun-kyung, an analyst at Samsung Securities. "The company incurred 52.7 billion won in non-operating expenses amid poor operating performance, resulting in a net loss."

However, Park stressed that her brokerage is raising its 2023 earnings per share (EPS) forecast by 5 percent from its previous forecast as it expects strong demand for low- to mid-priced local brands in China this year, Park added.

Han Yu-jung, an analyst at Hanwha Investment & Securities, agreed.

"Weak demand from Greater China and one-time expenses resulted in a lackluster performance, with both revenue and profit falling short of expectations," Han said. "However, I expect a turnaround in 2023 thanks to the recovery in productivity efficiencies and demand."

China and the U.S. will be the key drivers of improved earnings and share price appreciation for the company in 2023, Han added.

Han stressed that the Chinese cosmetics market, which remained lukewarm throughout 2022, is expected to recover modestly from a low in January 2023, enabling Cosmax's Chinese subsidiary to increase earnings from the second quarter.

"In addition, my brokerage estimates that the net loss of the U.S. subsidiary, which completed the factory and corporate consolidation on Jan. 1, will shrink from 82.7 billion won in 2022 to 32.5 billion won in 2023 and 9.7 billion won in 2024," Han said. While the stock is up significantly from its 52-week low, it is still attractively priced.

One analyst expected Cosmax to double its operating profit this year as it begins a full-fledged turnaround.

"After the pandemic, the direction of cosmetics demand recovery in Korea and Chinese markets is clear, and the large-scale cost of intense restructuring in the U.S and the direction of profitability improvement is also clear," said Heo Je-na, an analyst at DB Financial Investment. "The turnaround is progressing smoothly, and the company will see demand recovery, which will help increase annual operating profit by more than double this year."