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From beauty products to bicycles: the promisinglandscape of Asian small companies
Why they warrant the attention of global investors

By Grace Yan, Asian Equity Senior Portfolio Manager
9 July 2024

South Korea’s “indie1” cosmetics brands: vibrant alternative to large
conglomerates
the global beauty industry has come to be dominated by smaller South Korean players. T
wave, also known as the Korean wave, started in the 1990s and ignited the global popularity of South Korean culture
and entertainment. Today, this includes beauty trends,
and cosmetic products. T
established globally among the beauty-conscious, alongwith the 10-step skincare routine prescribed to achieve the hydrated, glowy look.
South Korea may be known for its large conglomerates dominating global industries such as automobiles andcompanies are punching
above their weight and making an impact both domestically and globally. An example is iFamilySC Company Limited,which has seen much success through its leading brand Rom&nd. Rom&nd stems from the name of one of
top beauty creator Sae Rom Min who founded the brand together with iFamilySC. Launched in 2016, the brandsuccess can be attributed to its ability to quickly react to trends, grabbing the attention of the MZ (Millennials andGeneration Z) consumers with their catchy marketing as well as strong product portfolio. Rom&nd is ranked among
the top brands in Olive Young, South Korea
for cosmetics as well. The
company also actively uses pop-up stores as a marketing channel, something that resonates well with the youth
today. Its pop-up store in South Korea, set up in April this year, was estimated to have attracted 40,000 visitors over
12 days, serving as a good marketing tool. The company is also making waves abroad. According to the media,
300,000 of its cosmetics items stocked at Lawson convenience stores sold out in three days in Japan when Lawson
had initially expected the stock to last two months2.
Any reference to a particular security is purely for illustrative purpose only and does not constitute a recommendation to buy, sell or hold any security.
Nor should it be relied upon as financial advice in any way.

1 A small company, a small shop or business not affiliated or owned by a larger company
2 Source: IT Media Business Online, 10 April 2023, Toyo Keizai Online, 2 September 2023

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FROM BEAUTY PRODUCTS TO BICYCLES: THE PROMISING LANDSCAPE OF ASIAN SMALL CAPSSouth Korea
cosmetics companies have shown an ability to react quickly and capitalise on changing trends.
These small-cap companies have established a presence in South Korean and global cosmetics markets (Chart 1).
Chart 1have seen increasing market share

10

10

10

5

5

5

5

5

5

0

0

0

0

0

0

Sun care: market share of non-major
South Korean brands

35

40

2022

2021

2020

2019

2018

2017

2016

2015

2014

30

Global beauty market (LHS)

Global beauty market (LHS)

Global beauty market (LHS)South Korea (RHS)

South Korea (RHS)

South Korea (RHS)

Source: Euromonitor, CLSA, 2024

The main reason for their rapid growth can be attributed to their quick response to market trends and ability toeffectively leverage online marketing channels. Silicon 2 Company Limited is one such company that has been
facilitating this growth. It operates an online-based K-beauty platform, stylekorean.com . It has grown into a leading
B2B wholesaler, focusing on distributing independent Korean (K-indie) cosmetics products in the global market,
offering more than 300 brands to over 150 countries3.

Smaller companies have demonstrated swift response to trends
Successful Asian small companies* can be found across the entire region. These companies have shown strong
innovation as well as ability to respond quickly to trends. Giant Manufacturing Company Limited in Taiwan, forexample, has exhibited adaptability and agility, allowing them to swiftly respond to emerging trends andtechnological advancements.
Giant: global leader in a low-growth industry
Giant Manufacturing Company Limited is a leading bicycle manufacturer which has made its mark by becoming a
global leader in a low-growth industry. Since 2011, its median sales have been more than twice that of the industry;
with a median Return on Equity (ROE)4 of 20%5, it has demonstrated sustainable returns (Chart 2
adoption of technology it was a pioneer in using carbon fibre and aluminium for bicycles and its commitment toquality and affordability has made the Taiwanese company one of the largest bicycle manufacturers in the world.
* Companies with market capitalisations of over US dollar (USD) 100 million but less than USD 2 billion
Any reference to a particular security is purely for illustrative purpose only and does not constitute a recommendation to buy, sell or hold any security.
Nor should it be relied upon as financial advice in any way.

3 Source: Company, June 2024
4 Return on Equity (ROE) is a financial ratio that measures how efficiently a company is managing the capital thatshareholders have invested in it. A higher ROE indicates better management in generating income and growthfrom equity financing.
5 Source: HSBC, May 2024

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(%)

35

2013

2022

10 10

2021

15

10

2020

15

2019

15

2018

15 15

2017

20

15

2016

20

2015

20

2014

20 20

2013

25

20

2022

25

2021

25

2020

25 25

2019

25

2018

30

2017

30

2016

30 30

2015

30

2014

(%)
40

2013

(%)
(%) (%)(%)
Colour cosmetics: market share of
Skin care: market share of non-major
40
40 40
40
non-major South Korean brands
South Korean brands
35
35 35
35

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FROM BEAUTY PRODUCTS TO BICYCLES: THE PROMISING LANDSCAPE OF ASIAN SMALL CAPS

Chart 2: Giant has consistently outperformed the broader industry
25%

Median since 2011

20%
20%

15%
10%
5%

7%
3%

0%
Giant sales growth

Giant ROE

Global bicycle
market sales growth

Source: Bloomberg, HSBC calculations, Median from 2011-2023

Small companies: avenue for sustainable returns and diversification
opportunities
In the ever-evolving investment landscape, small-cap 6 stocks in Asia have emerged as a promising avenue forinvestors seeking sustainable returns and diversification opportunities. These companies operate in markets withhuge potential and economic development. In the following paragraphs, we provide other reasons why Asian smallcap stocks warrant the attention of global investors.
Provide access to a large, expanding universe
With over 9,500 small companies, Asia (excluding Japan, Australia and New Zealand) boasts five times more smallcap stocks than the US7. In our view, small companies
more than 90% of the companies listed in South Korea and Taiwan are small companies, compared to 55% in the US8.
Furthermore, the universe of listed Asian small companies is experiencing dynamic growth. The number of small
companies in Asia has grown by 17% since 2021; in comparison, the US and Japan have seen their small cap numbers
each shrink by 7%9.
Compared to other global regions, Asia has a bigger universe of small-cap stocks, with these companies often
operating in markets rich with untapped potential. These entities provide exposure to regions undergoing substantial
economic growth and development.
Best placed to capture fundamental change
Asian small companies offer more than just short-term gains; they strategically position a portfolio for future growthpotential by capturing fundamental change, in our view. As these companies evolve and prosper, they stand a chance
to become tomorrow's industry leaders. For instance, 15% of the small-cap companies from 2015 have graduatedinto medium or large-cap status. Moreover, small companies have demonstrated a capacity to generate strong
returns, as evidenced by the NIFTY small-cap index in India, which has provided an annualised return of approximately
50% since 202010. India displays a high amount of fundamental change, such as structural reforms in the form ofdigitisation, as well as growth in infrastructure, which has led to reducing logistics costs (please see "India'stransformational trends").
Any reference to a particular security is purely for illustrative purpose only and does not constitute a recommendation to buy, sell or hold any security.
Nor should it be relied upon as financial advice in any way.

6 Companies with market capitalisations of over US dollar (USD) 100 million but less than USD 2 billion
7 Source: HSBC, May 2024
8 Source: HSBC, May 2024
9 Source: HSBC, May 2024
10 Source: HSBC, May 2024

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FROM BEAUTY PRODUCTS TO BICYCLES: THE PROMISING LANDSCAPE OF ASIAN SMALL CAPS

Using MSCI Asia ex Japan small cap as a base, we can see that small companies offer higher exposure to attractive
growth areas such as India at 31% compared to MSCI Asia ex Japan cap index at 20%11. By sector, we see small
companies having higher exposure to industrials, with 18% compared to only 7% in the large cap index.12 Industrial
sectors often experience significant growth during economic expansions and offers exposure to sectors involved ininnovation and infrastructure.
Present high growth potential
Asian small-cap companies typically possess significant growth potential. With the rise of emerging markets andeconomies, these companies are well-positioned to capitalise on expanding consumer bases and increasing demandfor products and services.
Earnings growth among Asian small companies13 has been stronger than that of medium and large companies14.
Small companies have seen an annualised Earnings per share (EPS)15 growth of 10% since 2012, compared to 6% formedium and large companies. India provides an example of small cap outperformance. The country accounts for only
a quarter of the small companies
companies
profitable small companies with Return on Equity (ROEs) greater than 20%16.
It is worth remembering that 20 years ago Nvidia was a small cap company; today, it has a larger market capitalisation
than entire stock markets such as those of South Korea and Taiwan. Within Asian small companies, there are many
companies displaying high growth and profitability. South Korean semiconductor equipment manufacturer Hanmi
Semiconductor is an example of a company that saw its market capitalisation increase from USD 890 million to USD
12.1 billion within 18 months (from January 2023) thanks to robust sales growth17. Looking at the universe, 60% of
Asian small companies have beaten the FTSE Asia Index excluding Japan, Australia and New Zealand in the last five
years18.
Give access to simpler corporate structures
Small companies often maintain a simpler corporate structure, focusing on niche markets rather than spanning
multiple business units like conglomerates. This simplicity can be more appealing to investors who prefer to invest
directly in specific segments and would be willing to pay higher valuation multiples due to the undiluted, stronger
growth profile. Domestic investors also tend to invest in small companies within their home markets, as they possessa better understanding of these entities.
Allow for a balanced risk profile
In our view, having Asian small-cap stocks in the portfolio does not increase the overall portfolio risk and offers higher
returns. In the past five years ending May 2024, MSCI Asia ex Japan small companies index has delivered 54.9% returns
in USD terms compared to 12.8% for MSCI Asia ex Japan index in USD terms19. From Chart 3, we can see that the FTSE
Small cap Asia excluding Japan index does not demonstrate significant volatility compared to the FTSE Asia excluding
Japan index. By investing in smaller companies, investors can effectively spread their risk and yet retain upside.
Any reference to a particular security is purely for illustrative purpose only and does not constitute a recommendation to buy, sell or hold any security.
Nor should it be relied upon as financial advice in any way.

11 Source: MSCI as of May 2024
12 Source: MSCI as of May 2024
13 Small caps here refer to FTSE Asia ex Japan small cap Index
14 Medium and large caps here refer to the FTSE Asia ex Japan (standard index, includes mid and large caps)
15 Earnings per share (EPS) is a widely used metric for estimating corporate value. It is calculated by dividing acompany's net profit by the number of common shares it has outstanding. EPS indicates how much money acompany makes for each share of its stock.
16 Source: HSBC, May 2024
17 Source: HSBC, May 2024
18 Source: HSBC, May 2024
19 Source: Bloomberg, MSCI, May 2024

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FROM BEAUTY PRODUCTS TO BICYCLES: THE PROMISING LANDSCAPE OF ASIAN SMALL CAPS

Chart 3: Rolling volatility of Asian small companies vs large companies

50%

1-year rolling volatility - weekly return

45%
40%
35%
30%
25%
20%

15%
10%
5%
0%
Jan-2007

Jan-2009

Jan-2011

Jan-2013

Jan-2015

Jan-2017

FTSE small cap Asia excluding Japan

Jan-2019

Jan-2021

Jan-2023

FTSE Asia excluding Japan

Source: FTSE Russell, Factset, HSBC Calculations, Jan 2007-Jan 2023

Show ability to outperform under varied conditions
It is a commonly held belief that small-cap stocks tend to outperform only when interest rates are low, and liquidity
is ample. Historical data from the US and EU markets seem to corroborate this view, especially during periods when
the Federal Reserve and the European Central Bank have raised interest rates, often leading to a less favourable
environment for small-cap stocks given the assumption that they carry more debt compared to their larger
counterparts.
However, the performance of small companies in Asia challenges this assumption. Despite rising interest rates since2022, Asian small companies have shown strong outperformance, with the MSCI Asia ex Japan small companies
showing 1.93% in USD terms (until May 2024) compared to -9.76% for the MSCI Asia ex Japan in USD terms20. We thinkthat this could be attributable to Asian smaller companies having several factors which mitigate the negative impact,
such as strong domestic growth, as well as exposure to areas of growth. Key among these are advances in artificial
intelligence, shifts in global manufacturing dynamics, and the evolution of consumer habits in the region. In addition,
within the small cap universe, we do see companies with strong balance sheets, which reduces the need for financing
when rates are high. These factors provide a robust foundation for growth, enabling Asian small companies to thriveeven when traditional economic indicators might suggest otherwise.
Investors should be aware of key risks and considerations associated with investing into Asian small companies.
Market volatility can cause significant price fluctuations in equities. And investing into these equities are subject tosector-specific or economic downturns which can still impact performance.

Summary
Small companies in Asia offer, in our view, an array of opportunities for those seeking high growth potential without
significantly changing portfolio risk. These companies, found among emerging markets, present a chance to invest
in the future economic powerhouses of the world. The strategic positioning, high growth potential, adaptability, andinnovation of Asian small companies make them a compelling choice. Moreover, their simpler corporate structuresand balanced risk profiles further enhance their appeal. Despite common misconceptions, Asian small companies
have demonstrated consistent outperformance, even under varying market conditions. This underscores theirresilience, ability to harness fundamental change and potential for sustainable returns. Despite these opportunities,
several risks should be acknowledged such as liquidity risks, price volatility as well as stock specific risks. As thecompanies are smaller in nature, they tend to be less liquid that their larger counterparts. In addition, due to their

20 Source: Bloomberg, MSCI, May 2024

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FROM BEAUTY PRODUCTS TO BICYCLES: THE PROMISING LANDSCAPE OF ASIAN SMALL CAPS

higher risk in nature, they would be more volatile as well. All in all, we feel that there are more opportunities in smaller
companies and should be seriously considered by investors worldwide in our view.

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