Europe Sales Soar 728%, Yet Valuation 'Plunges'... Strong-Dollar Tailwind Turns Boomerang for APR

Operating margin down 3.9 percentage points due to exchange-rate impact
Brokerages slash target prices across the board

APR, which has continued to grow rapidly on the back of a strong U.S. dollar, has encountered a new challenge: a stronger Korean won. As the exchange rate that had worked in its favor while it rapidly expanded overseas sales, particularly in the United States and Europe, turned against it with the won’s appreciation, it began to erode profitability instead. Analysts say earnings are becoming more volatile in response to exchange-rate movements, given that overseas sales account for 94% of APR’s total revenue.

According to the Financial Supervisory Service’s electronic disclosure system on November 3, APR posted consolidated third-quarter revenue of 773.1 billion won, up 100.3% year over year, while operating profit rose 68.9% to 160.6 billion won. However, its operating margin fell 3.9 percentage points, from 24.6% to 20.8%. In other words, operating profit did not grow as much as revenue, which doubled.

Analysts attribute the limited improvement in profitability to the stronger won. In the third quarter of this year, the impact of the won’s appreciation on APR’s operating profit was estimated at approximately 27.8 billion won. From July last year through roughly the following year, the dollar and euro rose 14.8% and 11.3%, respectively, against the won. But in the third quarter of this year, they plunged 12.6% and 13.2%, respectively, increasing exchange-rate volatility. In just one quarter, the exchange rate shifted from a tailwind that had supported overseas sales growth during the strong-dollar period to a factor weighing on profitability.

APR’s overseas sales actually reached 722.9 billion won in the third quarter, accounting for about 94% of its total revenue. Sales in North America rose 91.9% year over year to 212.9 billion won, while sales in Europe increased 728.4% to 177.8 billion won.

As the currency headwind began to affect earnings, securities firms successively lowered their earnings forecasts and target prices for APR. Samsung Securities cut its operating profit forecasts for this year and next year by 14% and 4%, respectively, and lowered its target price from 550,000 won to 400,000 won, a decrease of 27.3%. KB Securities also cut its target price from 530,000 won to 450,000 won, while Yuanta Securities lowered its target from 540,000 won to 435,000 won.

Oh Rina, an analyst at LS Securities, said, "The won’s strength has continued into the fourth quarter, so the impact of translating overseas sales into won, along with foreign currency-related gains and losses, is expected to increase short-term earnings volatility."

APR has long been considered a major export company benefiting from a weaker won. This is because it has expanded foreign-currency sales in the United States, Europe and other markets with products such as Medicube cosmetics and Age-R beauty devices. When the won weakens, sales earned in dollars or euros translate into a larger amount in won, supporting earnings. When the won appreciates, however, revenue in won declines even if the company sells the same volume of products. As overseas sales grow, exchange-rate movements have a greater impact on earnings.

There are concerns that the currency headwind could continue into the fourth quarter. Lee Seungeun, an analyst at Yuanta Securities, said, "APR’s third-quarter operating profit was 160.6 billion won, below the market consensus of 181.4 billion won, with exchange rates being the main reason. The dollar and euro fell 13% against the won during the third quarter, and the cumulative average exchange rate in the fourth quarter is lower than in the third quarter, so the currency headwind is expected to persist for the time being." KB Securities also lowered its operating profit estimates for this year and next year by 1.9% and 6.9%, respectively, taking into account the exchange rate and the working capital burden associated with expanding its global business.

APR plans to reduce its exposure to exchange-rate fluctuations, including by shortening the time it takes to collect accounts receivable, in order to minimize their impact. An APR representative said, "As a consumer goods company, a large share of our sales is made directly to overseas consumers (B2C), which makes hedging difficult. However, we aim to reduce the impact of exchange-rate movements by shortening the collection period for foreign-currency accounts receivable. Major shopping events such as Boxing Day and Black Friday are expected in the fourth quarter, and we expect increased sales to offset the impact of exchange rates."

Some analysts say that despite the likelihood of continued exchange-rate volatility for the time being, growth remains strong. Jung Jiyoon, an analyst at NH Investment & Securities, said, "If exchange rates decline in the second half of the year, the impact of lower revenue in won when translating sales in the third and fourth quarters will remain. Even so, the company will continue to grow its top line enough to offset that impact." She added, "Rather than a deterioration in growth prospects, this is a process of adjusting profitability expectations for an exporter in response to exchange-rate fluctuations. A recovery in margins and a subsequent rebound in the share price are expected."

This content was produced with the assistance of AI translation services.