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Is heyday gone for AmorePacific?

Amorepacific bets on Europe

AmorePacific seems to be in a quandary, with the country’s fair trade watchdog investigating the cosmetics giant amid declining performance.

According to AmorePacific’s auditory filing, the company logged 731.5 billion won (US$685.2 million) in operating profit last year, down 32.4 percent from a year earlier. Its sales also declined to 6.29 trillion won, down 10 percent during the same period.

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Its share price also nearly halved from two years earlier.

In the first half of 2016, AmorePacific hovered over 400,000 won per share, but started to decline, falling as low as 236,500 won last Sept. 29, and did not rise above 350,000 won. It ended at 278,000 won on Tuesday.

The situation is quite similar for AmorePacific Group (Amore G), which is the holding firm of AmorePacific. It has been on a downturn for the past two years, falling from 215,000 won on July 3, 2015, to 127,000 won on Tuesday.

On the fall of the titan, analysts and other observers cited the diplomatic friction between Korea and China, due to the former’s decision to deploy a U.S. Terminal High Altitude Area Defense (THAAD) battery here.

They said China’s cap on the number of items purchased at duty free shops directly affected the revenues of domestic cosmetics firms, whose sales to Chinese tourists account for a significant portion of their entire sales.

However, some others say blaming the THAAD issue as the sole cause of AmorePacific’s fall may be unfair, given LG Household & Health Care’s (LG H&H) surge last year.

In January, LG H&H said it posted 6.3 trillion won in sales and 930 billion won in operating profit last year, up 2.9 percent and 5.6 percent from 2016, respectively.

LG H&H explained it has overcome the harsh market environment, in which overall market growth faced headwinds due to a sharp decline in inbound Chinese traffic, due to its luxury brand strategy and robust sales in the onshore Chinese market.

With the handsome numbers, LG H&H overtook AmorePacific to become Korea’s top cosmetics company.

As the two companies show stark differences while suffering the same THAAD issue, analysts interpreted the performances of their luxury brands as the decider.

According to LG H&H, its Whoo brand logged 1.4 trillion won in sales last year, up 200 billion won from a year earlier. Though AmorePacific did not disclose its luxury brand Sulwhasoo’s sales, Kiwoom Securities analyst Lee Hee-jae assumed Sulwhasoo posted 1.15 trillion won in sales last year, down 245 billion won from 2016.

AmorePacific denied the assumption, saying it cannot disclose the amount but Sulhwasoo outperformed Whoo in sales last year.

Further data showing AmorePacific products’ popularity is the market share in duty free shops. According to a Daishin Securities report, AmorePacific’s duty free market share declined from 12 percent in the first half of last year to 5 percent in the fourth quarter.

Amid doubts on the competitiveness of AmorePacific products, with its fairness in business also questioned, the Fair Trade Commission (FTC) investigated Amore G and its subsidiaries.

During the five-day investigation that started Feb. 21, the watchdog looked into internal trading between Amore G’s affiliates on suspicion the group unfairly helped affiliates in which Suh Min-jung, the eldest daughter of AmorePacific Chairman Suh Kyung-bae, owns stakes.

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Despite the negative issues, Amore G and AmorePacific decided to pay dividends worth more than 40 billion won to the Suh family. Of them, Chairman Suh will take approximately 39 billion won thanks to his more than 70 percent stake in Amore G and 11 percent stake in AmorePacific.

Unlike the owner family, AmorePacific employees did not receive incentives, which they normally receive every six months, throughout last year.

(Source: Korean Times )