20220621-招银国际-China_cosmetics__The_crown_jewel_of_the_consumption_spectrum_initiate_Botanee__Proya__Jahwa_with_Buy_62页_3mb

Summary of China Cosmetics Market and Investment Analysis

Core Content

The China cosmetics market is experiencing robust growth, outperforming the broader retail sector with a 34% sales growth over two years, compared to a 7% growth in China retail sales. This growth is driven by a shift in consumer behavior from offline to online and further to live-streaming (LS) e-commerce. The hero product strategy has emerged as a key factor in this transformation, helping to align brand messaging with consumer preferences and enabling the market to reach an estimated cRMB650bn by 2024.

Main Points

• Channel Trends:

  • LS e-commerce is growing rapidly, with a projected 25.5% CAGR from 2021 to 2025.
  • The market is expected to reach RMB6.3tn in 2025, with 25% penetration of the overall e-commerce market.
  • LS e-commerce user penetration is forecasted to increase to 79% by 2025, with 805mn active users.
  • ARPU (Average Revenue Per User) is rising, contributing to market growth.
  • Short video platforms like Douyin and Kuaishou are gaining significant market share due to their vibrant content, effective algorithms, and high user engagement.

• Product Trends:

  • Dermocosmetics are a fast-growing subsector, expected to double in size over five years.
  • The hero product strategy is pivotal for success, as it targets ingredient-obsessive consumers and enhances brand recognition.
  • Chinese brands are leveraging this strategy to create unique product offerings and better market positioning.

• Customer Trends:

  • Generation Z (Gen Z) is a major force in the cosmetics market, characterized by being young, affluent, internet-native, and ingredient-conscious.
  • Gen Z spends an average of 5+ hours online per day and is more inclined to purchase from domestic brands.
  • Their preference for local brands supports the "Guochao" (patriotic consumption) trend, which is a positive tailwind for domestic cosmetics companies.

• Stock Picks:

  • Botanee (300957 CH):
    • A niche player in the sensitive skin market with a strong R&D focus.
    • 93% of revenue comes from sensitive skin products.
    • High brand loyalty (30%+ repeated online purchase) and strong gross margins (75%+ GPM).
    • 12-month target price (TP) of RMB251, with a 17.8% upside.
  • Proya (603605 CH):
    • A successful first-mover in online distribution with a strong hero product strategy.
    • 85% of sales are from e-commerce platforms.
    • TP of RMB184, with a 17.5% upside.
  • Jahwa (600315 CH):
    • Undergoing a business turnaround with a focus on product cycles and channel restructuring.
    • TP of RMB46.2, with a 19.6% upside.
    • The company is expected to recover in 2H22 with improved sales mix and e-commerce growth.

Key Information

• Market Growth:

  • China's cosmetics market is expected to grow at a 37% CAGR from 2021 to 2025, reaching RMB157.4bn in 2025.
  • This growth is fueled by rising LS e-commerce user base and ARPU.

• Valuation:

  • Botanee: TP based on 2.0x PEG, with a 72.7x P/E (FY22E) and 15.8x P/B (FY22E).
  • Proya: TP based on +1sd above average valuation, with a 43.5x P/E (FY22E) and 9.2x P/B (FY22E).
  • Jahwa: TP based on average valuation, with a 36.3x P/E (FY22E) and 3.5x P/B (FY22E).

• Performance Drivers:

  • Botanee: High growth in skincare and online sales, with expanding brand portfolios.
  • Proya: Synergy of hero product strategy, online distribution, and R&D.
  • Jahwa: Channel restructuring and product mix upgrades are expected to improve gross margins.

Investment Summary

The report highlights the growing importance of live-streaming e-commerce in the cosmetics market and the role of the hero product strategy in driving brand success. Domestic brands like Botanee, Proya, and Jahwa are expected to benefit from these trends, with strong growth prospects and favorable valuations. The report recommends buying all three companies, with Botanee and Proya as preferred picks due to their strong online presence and growth potential.

• Botanee: 41%/42% revenue/net profit CAGR (2021-24E).
• Proya: 26% revenue CAGR (2021-24E), with 1.3pp GPM expansion annually.
• Jahwa: 8% revenue CAGR (2022-24E), with 1pp GPM expansion annually.

Conclusion

The China cosmetics market is poised for significant growth, supported by the rise of LS e-commerce and the hero product strategy. Domestic brands are well-positioned to capitalize on these trends, with Gen Z as a key driver of demand. The report identifies Botanee and Proya as top picks, with Jahwa also showing promise despite current challenges. Valuation metrics reflect the potential of these companies, with premiums justified by their growth and market positioning.