China’s medical beauty industry is booming, which domestic brand will stand out?
Tags: Beauty, Investing, China, Makeup, Branding

In the past few years, the investment of pharmaceutical investors went smoothly. But this year has encountered many difficulties. The market situation is ups and downs, investors have a high percentage of overall losses, and their shareholding experience is very poor. One of the logic is that changes in centralized procurement and regulatory policies have led to significant changes in the prospects of some sub-sectors, such as the areas where “Changchun High and New Technology Industries” and “HENG RUI Medicine” are located.

The field of non-collective procurement and direct connection with C-end consumers has become one of the few options that may be possible in the future, and medical cosmetics is one of them. But even so, individual stocks in these industries still underperformed.

If we count the gains this year, excluding the new stock Botanee, Shanghai Jahwa rose 21%, and BLOOMAGE and PROYA both rose more than 10%. If the latest higher price retracement is calculated, Fujian Green Pine, MARUBI, BLOOMAGE, S’YOUNG, lili&beauty are all over 40%.

But it is undeniable that China’s medical and cosmetics industry market is rapidly rising with the new consumer trend. How can these domestic companies enjoy this wave of dividends, and who will eventually stand out?

1、Investment thinking

In 1964, Ms. Estee Lauder founded a company with the same name as herself. She was born in a poor family, first worked in a hardware store, and eventually built a global cosmetics empire.

In the 25 years since its listing, the K-line of Estee Lauder’s stock has been on the rise. From 2009 to the present, the stock price has risen by more than 40 times in the past 12 years, which has been envied by thousands of stockholders.

Cosmetics address the needs of consumers for beauty. And this demand is almost sustainable, national consumption, and once the identification of this brand, develop consumption habits, under normal circumstances will be life-long repurchase. Such a business model is the most fascinating and irresistible to investors.

In China, so far, there has not really been a domestic cosmetics leader with outstanding competitive advantages. In this year’s double 11, est é e Lauder, L’Or é al, Lancome, Whoo and Shiseido ranked among the top 5 in sales, coming from the United States, France, France, South Korea and Japan, respectively.

While domestic cosmetics companies ranked relatively low, Winona, owned by Botanee, ranked sixth, with total sales of 1.088 billion, more than 50 per cent behind the top three, L’Or é al ranked 13th, and QuadHA, owned by BLOOMAGE, ranked 25th.

.

Now, under the trend of national tide and domestic products, China’s cosmetics market, which has a large scale, has a great opportunity to replace domestic products.

By 2025, China’s cosmetics market will reach nearly 900 billion yuan, with an annual compound growth rate of 11.13%.

From the perspective of China’s cosmetics market segment, in 2019, the market shares of skin care products, hair care and make-up are 51.16%, 11.91% and 11.51% respectively, and the three are as high as 75%. Skin care products account for half of the country, while the overall growth rate of makeup is relatively fast, with a compound growth rate of 15.95% from 2014 to 2019, much higher than the growth rate of the industry as a whole.

For a long time, the industry concentration of Chinese cosmetics market is relatively high, especially high-end brands, which have been controlled by L’Oreal, Procter & Gamble, Estee Lauder, Shiseido and other international brands for a long time, accounting for more than 30% of the total share.

But in recent years, domestic cosmetics enterprises are also quietly rising. From 2012 to 2019, the number of local cosmetics companies in the top 20 increased from 6 to 8, and the total market share increased from 7.6% to 14.1%. Under the general trend of the national tide, China’s local cosmetics companies will also enjoy the great logic of domestic substitution in the future.

If you look at the large field of skin care products alone, by 2020, the size of China’s skin care market has reached 263 billion yuan, growing from 6.6% in 2015 to 15.2% in 2019. Hit by the epidemic in 2020, it still maintained a growth rate of 7.6%.

In the field of skin care products, the size of the functional skin care market in 2019 is 33.2 billion yuan, accounting for 13.6% of China’s overall skin care market. It is estimated that China’s functional skin care market will reach 101 billion yuan by 2024, accounting for 22.9% of the overall skin care market. The penetration rate for this segment was only 5.5 per cent in 2019, lower than 43 per cent in France, 14.7 per cent in the US and 10.28 per cent on the global average. You know, the proportion of sensitive muscles in Chinese women is as high as 36%.

Let’s talk a little bit about skin care products. In 2020, the market share of skin care products was as high as 16.1 billion yuan, and the average compound growth rate in the past five years was as high as 24%, which is much higher than the overall growth rate of skin care products and cosmetics.

In this field, it has changed from international brand leadership to domestic brand leadership. Winona’s market share reached 20.54% in 2019, up 13.78% from 2015, while the share of all three French brands fell sharply.

Summing up the above analysis, China’s cosmetics market is huge, with more than 20% of the high-growth subdivided tracks, and enjoys the great logic of domestic substitution and increased concentration. Under the general trend of the national tide, I believe that the Chinese version of EST EST E LAUDER will be born, but it will be very difficult along the way, and we have to go through the torture of climbing out of the pile of dead people.

2、Who will be the leader of China’s cosmetics industry?

Beauty makeup and skin care market, according to the mainstream price to bring distinction, BLOOMAGE’s QuadHA,Shanghai Jahwa’s VIVE ranks in the high-end market of 500–1500 yuan, competing with international brands. In the middle and high-end market, domestic products include MARUBI, BIOHYALUX of BLOOMAGE, Herborist of Shanghai Jahwa and other brands. In the field of popularization, domestic products are PROYA, Botanee’s Winona, SPDC, CHANDO and so on.

Among the A-share listed companies, the following mainly analyzes the four potential small leaders of BLOOMAGE, Botanee, PROYA, and MARUBI.

In terms of revenue, in the first three quarters of 2021, the four were 3.01 billion, 2.11 billion, 3.01 billion, and 1.14 billion, respectively, with year-on-year growth rates of 88.7%, 49%, 31.5%, and 0.04%. The net profits attributable to the parent were 560 million, 360 million, 360 million, and 140 million, respectively, with year-on-year growth rates of 26.9%, 65%, 27.8%, and -58%.

BLOOMAGE’s revenue and profit margins have a significant difference. The main logic is that the skin care brand is in its infancy, omni-channel layout and continuous research and development of new products, especially the sharp increase in sales expense ratio, which drags down profit. MARUBI has clearly fallen behind. The main logic is that competition in the eye cream market is fierce, offline channels are under pressure, and the effect of online transformation is not good.

In a long-term perspective, in the last 4 years (2018Q3–2021Q3), the revenue GAGR of BLOOMAGE, Botanee, PROYA, and MARUBI shares is 51.6%, 49%, 24.5%, 2.5% (Botanee is a secondary new stock, replaced by data in the last 2 years), The net profit GAGR attributable to the parent was 20.2%, 65%, 26%, and -15.6% respectively.

As of the end of the third quarter, the gross profit margins of the four companies were 77.8%, 76.9%, 64.6%, and 62.5%, respectively. Among them, Botanee and PROYA remain relatively stable, while the other two have declined this year, but the magnitude is not large.

The net profit margins were 18.38%, 16.8%, 11.5%, and 12%, respectively. Among them, BLOOMAGE declined significantly, down 17.5% compared to the same period in 2018, which is related to the transformation of the business in cosmetics in recent years. While Botanee rose slightly, PROYA fell slightly. But overall, the net profit margin of cosmetics companies has declined rapidly in recent years, which is all related to the transformation of online and live e-commerce.

In recent years, the traffic of traditional offline channels such as merchandise and department stores has declined rapidly. In 2020, the channel share will only account for 18%, while online channels have increased year by year, from 31% in 2015 to 44% in 2020, and there is a further increase. space.

On the other hand, online e-commerce platforms are showing a cross-head monopoly, mainly concentrated in the hands of Tmall, JD and Pinduoduo, and the cost of online promotion and customer acquisition is increasing. And under the current tide of live broadcast e-commerce, leading anchors such as jiaqi li/viya have substantially achieved the monopoly of live broadcast channels, which has led to the weakening of the brand’s right to speak and the sharp increase in sales expense ratios.

Currently, the sales expense ratios of the four companies all exceed 40%. Equivalent to 100 yuan sales income, 40 yuan invested in marketing, mainly online spending. In online live broadcast, the head monopoly effect is more obvious, which has an impact on the profitability of cosmetics companies.

As of the third quarter, the four ROEs were 10.52%, 10.98%, 14.5%, and 4.71% respectively. Among them, PROYA performed outstandingly, up 2.56% from Q3 2018.

In terms of channels, as of 2021H1, the online channels of BLOOMAGE, PROYA, Botanee, and MARUBI accounted for 90%+, 80.8%, 78.46%, and 59.22%, respectively. In terms of offline channels, PROYA’s sales in 2018 and before accounted for more than 50%. With the transformation of channels and the help of the epidemic, it has accelerated and successfully transformed online. In the first three quarters, PROYA online direct sales accounted for 68% of online channel revenue, far exceeding the other three. MARUBI shares have a relatively large offline share, performance is under pressure, and the transition line is not smooth, which affects performance.

Compared with offline channels, cosmetic companies are more monopolistic and more competitive. Botanee’s main cosmeceuticals, which is different from other brands, benefited from the distribution of Watsons and OTC pharmacies. In the first half of this year, offline channels achieved sales revenue of 302 million yuan, a year-on-year increase of 91.53%. But the future direction is still online.

In terms of brand layout, Botanee, PROYA, and MARUBI have expanded their multi-brand matrix with “Winona”, “PROYA” and “MARUBI” as their main brands respectively; BLOOMAGE directly chooses a multi-brand layout.

Among them, Botanee’s Winona accounted for more than 98% of the company’s sales revenue. The PROYA main brand accounted for 77.81% of the company’s revenue in the first half of this year, down 10.96% from 2018. However, it has opened a multi-brand layout. Recently, brands such as “TIMAGE” and “UZERO” have been created, and their products cover the fields of cosmetics, cleaning and care, and aromatherapy.

BLOOMAGE’s transformation of cosmetics was based on a multi-brand strategy from the beginning. BIOHYALUX, QuadHA, and MedRepair were built to include hyaluronic acid skin care products, anti-ageing products, sensitive skin products, and products with active ingredients. This strategy has achieved good results. In the first three quarters of this year, revenues were 780 million, 480 million, 250 million, and 190 million respectively, an increase of 163%, 160%, 119%, and 143% year-on-year.

Comprehensive profitability, growth potential, channels, brand and other dimensions, I think that the probability of becoming the king of domestic cosmetics in the future will come from PROYA, Botanee, and BLOOMAGE. As a classic of domestic products, PROYA has strong profitability, certainty and strategic adjustment capabilities, and is most likely to become the king of cosmetics. Botanee and BLOOMAGE, as new domestic brands, also have the opportunity to become kings. The above analysis is my personal opinion and is for reference only.

3、End

How does the institution have the right to speak in the market and how do they view domestic cosmetics companies?

As of 2021Q2, funds, Northbound Funds, QFII and other institutions have accumulated 22.71% of PROYA, 6.24% of Botanee, 6.24% of BLOOMAGE, and 3.08% of MARUBI shares. Among them, the increase of Northbound funds in PROYA is more obvious, from 8.33% at the end of 2020 to the current 19.37%.

But no matter who will be the king, local cosmetics companies will face greater growth difficulties and risks in the future. Such as the single product dominance, once the operation strategy fails or encounters a serious public relations incident, it will cause a devastating blow to the company; secondly, the cosmetics companies are all moving to the battle line, there is a risk of relatively concentrated sales platforms, or live e-commerce Risk of hitting profitability.

In addition, the competition of cosmetics companies is to a certain extent the competition of marketing models. The company’s sensitivity to fashion and the ability to grasp hot spots may not be able to adapt to market changes. Of course, with the rise of online sales channels, there is a risk that other emerging brands will rapidly rise by virtue of online gameplay.

In addition, the prosperity of cosmetics sales is also closely related to macroeconomic performance. Due to weak consumer spending, cosmetics fell by 32% year-on-year in October this year, and continued to decline by 5% compared to September. This is also one of the important factors for the recent weakness in the share prices of medical and cosmetics companies.