Coway:Another nickel scandal?

Nickel found again: New reports yesterday said nickel compounds have been found inthe ice tank of a Coway ice-making water purifier. The model in question, the CHPI-280L,was sold over 2015-2016, was the last with nickel-coated parts, and is used byapproximately 65,000 rental accounts (1.3% of the firm’s total). When the Jul 2016 nickelscandal broke, Coway recalled three of its four ice-making water purifiers (CHPCI-430N,CHPI-380N, and CPSI-370N), affecting about 106,000 accounts. The CHPI-280L wasnot included as it was not found to have structural defects, and a consumeragency/government inspection confirmed this.

    Short-term costs likely limited: We do not expect Coway to incur substantial one-offcosts because of this news. The company is saying the issue is related only to a fewindividual purifiers and it will only replace faulty products. The firm sold the CHPI-280Lto 100,000 accounts over 2015-2016, but only 36 accounts have thus far registered acomplaint. Health-related compensation costs also should not be a factor, as agovernment fact-finding committee last year concluded that Coway was not responsiblefor any health problems of individuals who had drank nickel-tainted water, and thehighest nickel concentrations were safe for children as young as seven drinking the waterdaily for seven years (the purifiers were sold for only two). This should be the last suchscandal—since 2H16, Coway has used only stainless steel parts in ice-making purifiers.

    Too early to measure impact: We are not worried about one-off costs but ratherissues of brand value and market share. While the news could be the result of false claimsor an overzealous media, the fact that the scandal is the second in a year could hurt thelonger-term value of Coway’s brand. The market for ice-making water purifier marketscould also shrink, as there are only two players in the segment (ie, Coway and Chungho,which also used nickel parts in products made before 2016). Such purifiers are used byless than 10% of Coway’s water purifier rental accounts. Still, after the Jul 2016 scandal,80% of accounts affected applied for purifier replacements—rather than terminatingaccounts—and most wanted ice-making ones. We maintain our forecasts, target price,and BUY rating on the stock and will review them after gauging consumer responses.