OT - WSJ Heard In Asia: Add Pacific Corp. To Revive Portfolio
11:56, 2001-03-30
By Sarah McBride
Staff Reporter Is your portfolio looking drab, sallow and lifeless? A dab of Pacific Corp.,
South Korea's leading cosmetics maker, could help restore some of its rosy
glow.
The company's $575 million in cosmetics sales make it the 32nd-largest
beauty-products concern in the world. While that's certainly far behind giants
L'Oreal, at $11.2 billion, and Shiseido, at $4.9 billion, the company is still
comfortably ahead of marquee names Body Shop, Borghese, Kiehl's and Molton
Brown. In Korea, population 47 million, Pacific is the market leader, with a
28% share.
Currently trading at around 41,600 won ($32), the stock has already doubled
in price over the past year. But fans say it's not too late to get in. Pacific
has a trailing price-earnings ratio of about 4.6, compared with an average of
about twice that for component stocks in the benchmark Kospi index.
""Investors think of this stock as a quality defensive play,"" says Fung Kwok
On, manager of the Indocam Asset Management Korea fund, who started buying
Pacific a few months ago at 35,000 won a share. ""One of the good things about
this stock is it doesn't surge all of a sudden -- it just consistently goes
up."" He figures it has another 20% or 25% to go before it's fully valued.
Pacific has been doing what so many other Asian companies have only talked
about: restructuring. And it started in 1996, long before the economic wrinkles
of 1997 appeared. It's also fended off foreign and domestic competition, and
expanded its market share in top-end products. The results of this regimen: an
improvement in return on equity to 16% from 6% three years ago.
Pacific is also benefiting from some demographic trends. As is typical of
many rapidly developing economies, Korea is experiencing a population bulge of
those aged 20-45. That's also the group that tends to spend the most on
cosmetics. Although wages fell 6% over the past year, according to the Ministry
of Labor, with a per capita income of $13,300, Korean women can certainly still
afford beauty products.
Pacific covers all the bases, with brands aimed both at younger, less
affluent customers as well as the higher end of the market.
It is Pacific's performance at the top end that most impresses investors. The
more-expensive lines, such as Hera and Sulwhasoo, are seeing the fastest sales
growth; most of those products' sales are made door-to-door. For this pricier
category, a slowing economy could actually boost sales.
""When times are not so good, people tend to travel out a lot less,"" says Choo
Yoon Lai, an analyst at fund-management house Comgest (Far East) Ltd. The
captive audience has helped raise door-to-door sales by 40% over the past year.
Competitors are trying to muscle in, but Pacific has 70% of the home-sales
market for makeup. ""For others to catch up won't be easy,"" says Sang Hee Park,
an analyst at CLSA.
To stay ahead, Pacific has been beefing up its advertising, and boosting
sales commissions. It has also stepped up its focus on cosmetics, which make up
70% of its business, and household goods, which make up 30%. That's a far cry
from a few years ago when Pacific's interests -- many of them unprofitable --
ranged from life insurance to devices that measure humidity.
Closing down and selling those businesses freed up cash that Pacific has used
to help pay off its loans, bringing down its debt-to-equity ratio to 5.7% from
156% five years ago. Another big savings came from reducing its work force to
3,200 from 5,000 three years ago.
Certainly, the company has its blemishes. Foreign competitors, which have a
combined 20% market share, aren't yet a serious threat but could become one if
they decided to beef up door-to-door sales. And as the 300 other players in the
Korean cosmetics market consolidate, they, too, could strengthen.
Other potential problems: For someone who wants to make a large investment in
Pacific, buying shares on the open market could prove tricky as just over half
of the company's 10.2 million shares are freely traded. The company is starting
to generate a great deal of cash, but has yet to announce its spending plans.
And expansion is an issue. While the Korean cosmetics market is fairly large,
and growing, any company that wants big success must expand overseas. But
foreign markets are saturated, so it's hard to see how another player could
carve out much of a niche. Pacific is trying, but with mixed success.
One of its biggest coups, says Jardine Fleming Securities analyst Stacey
Park, is making Lolita Lempika one of the top-10-selling fragrances in France.
Pacific also sells its products in most Asian markets, and its brand has
a store in Los Angeles.
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