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Plagued by Declining Performance, LG Household & Health Care Effectively Abandons Cheonan Future Industrial Complex Project

[비즈한국] As the poor performance of LG Household & Health Care051900 continues, the likelihood of the Future General Industrial Complex project, originally planned for construction in Cheonan, being scrapped has increased. It has been confirmed that LG H&H recently communicated to the city of Cheonan that it is difficult to move into the complex due to financial difficulties. The large-scale beauty theme park project, which LG H&H had ambitiously pursued, now faces a crisis of being aborted after 10 years.

Planned a beauty theme park for Chinese tourists, but hit hard by COVID-19

It has been confirmed that LG Household & Health Care has effectively given up on moving into the Future General Industrial Complex in Cheonan. Regarding the prolonged delays in the industrial complex project, Cheonan City had demanded that LG H&H prepare countermeasures and requested a response by the end of last June (Related article: LG H&H's Cheonan Industrial Complex construction delayed for 10 years). According to BizHankook's coverage, LG H&H recently indicated that proceeding with the move to the industrial complex is practically impossible due to worsening management conditions.

A Cheonan City official stated, "We received a response from LG Household & Health Care stating, 'Due to the rapid changes in the Chinese market since 2021 and the contraction in demand caused by COVID-19, the management environment has deteriorated faster than expected. Currently, with sluggish operating profits, we are facing the worst business situation. For this reason, pursuing new investments is realistically very difficult.'"

The Cheonan Future General Industrial Complex was a 'Beauty Theme Park' project that LG H&H had pursued targeting Chinese tourists. LG H&H planned to build the complex by modeling it after Hungary's 'Sopron Wabi Beauty Center.' The Sopron Wabi Beauty Center is known to attract over 40,000 visitors annually by combining beauty services such as hair, skincare, and cosmetics with medical services like dentistry and plastic surgery.

LG H&H signed an MOU with Cheonan City in December 2014 and purchased a site (388,000㎡) in the Guryong-dong area of Dongnam-gu. While they presented a blueprint to build production facilities and an R&D center by 2017, the project was delayed due to environmental regulations and other issues. Afterward, as the Chinese market shrank, LG H&H showed a passive attitude toward the project. Recently, as the company’s profitability slowed, concerns were raised about whether the move to the Future General Industrial Complex would be aborted altogether.

In preparation for the possibility that LG H&H would not move in, Cheonan City had requested they examine whether other LG Group affiliates could take their place. However, even this seems unlikely to materialize. A Cheonan City official said, "LG H&H is sounding out other group affiliates' willingness to move in, but the atmosphere suggests the chances of success are low."

The official continued, "LG sent a response stating they are seriously considering attracting non-group companies or selling the developed land and facilities according to the Industrial Sites and Development Act. However, selling is not the top priority; they are currently looking for other alternatives first. Since economic conditions are unpredictable, there is a possibility they could return to the plan if some unexpected demand arises, but unless there is a dramatic change, it seems they will maintain their current stance."

An LG H&H official explained, "We established the industrial complex plan in 2013 and received approval in June 2015, but Luxe Industrial Development, the expropriated party, filed a lawsuit to cancel the expropriation ruling (factory establishment restriction zone), and following a Supreme Court ruling in November 2020, we were in a situation where we could not establish a factory." They added, "Although factory establishment became possible after relevant regulations were changed in August last year, the business environment has changed rapidly in the meantime, and our management situation has worsened."

This official explained, "LG Household & Health Care is keeping the potential for the Future Industrial Complex open and reviewing it. However, as a result of checking with other affiliates, there is not much demand at this time." Regarding the possibility of selling the complex site, they stated, "It is difficult to comment on that at this point."

Market cap dropped from 20 trillion to 4 trillion won, considering sale of subsidiaries

LG H&H's management situation is getting worse. In 2021, its market capitalization soared to the high 20 trillion won range, ranking it as a leading Korean beauty company, but the current market cap has shrunk to the 4 trillion won range. Its industry ranking has also slipped to third place, behind APR278470 and Amorepacific090430.

The starting point of the decline in performance was the sharp drop in sales in the Chinese market in 2021. After COVID-19, China implemented intense lockdown policies (Zero-COVID), leading to a plummet in department store and duty-free shop sales. At the same time, the spread of the 'Guochao' craze, which emphasizes a preference for domestic brands, shook the position of K-beauty, which also affected performance. LG Household & Health Care, where China accounted for about 50% of overseas sales at the time, was bound to take a direct hit.

Sales decreased from 8.0915 trillion won in 2021 to 7.1857 trillion won in 2022, and further declined to 6.8048 trillion won in 2023. Operating profit also plunged from 1.2896 trillion won to 711.1 billion won and 486.9 billion won during the same period. Last year, sales increased by 0.1% year-on-year to 6.8119 trillion won, but operating profit fell by 5.7% to 459 billion won.

Under the pressure of poor performance, LG Household & Health Care appears to be attempting to improve its structure by streamlining non-core businesses. Recently, rumors have been circulating that LG H&H is considering selling its beverage division. According to industry sources, LG H&H recently selected Samjong KPMG as the lead manager and began restructuring the beverage division, and in this process, it is strongly considering selling its subsidiary, Haitai htb. Coca-Cola Beverage, which has stable sales, is reportedly excluded from the sale consideration list.

Haitai htb has seen stagnant growth for several years. Sales were flat, at 414.9 billion won in 2022, 419.5 billion won in 2023, and 414 billion won last year, and operating profit plummeted from 13.5 billion won in 2023 to 3.5 billion won last year. The net loss last year amounted to 484 million won.

An LG H&H official explained, "We are reviewing various management efficiency measures, including sales, but nothing has been decided in detail yet," adding, "In the cosmetics division, we have significantly reduced duty-free supplies for China and plan to cut them even further in the third quarter."