China's Cosmetics Industry is Entering Its Peak Season
[Asia Economy Reporter Kum Boryeong] Divergent views emerged on investments in cosmetics stocks by individual companies.
According to Daishin Securities on the 21st, the cosmetics sector continues to see a rapid normalization trend in local Chinese consumption, with retail sales of cosmetics in China increasing by 19% year-on-year in August.
The Chinese cosmetics industry is entering its peak season with major events such as the Mid-Autumn Festival in early October and Singles' Day (November 11). Typically, sales in November, which includes Singles' Day, exceed regular months by more than 20%, marking the peak season. Following that are the Lunar New Year and Mid-Autumn Festival. Na Eunchae, a researcher at Korea Investment & Securities, explained, "Although the cosmetics sector experienced an excessive decline compared to the market during the off-season after peaking in August, attention should be heightened toward cosmetics companies expected to perform well ahead of the peak season."
Stocks expected to show favorable performance include Cosmax, LG Household & Health Care, and Kolmar Korea. Particularly, the operating environment for Original Design Manufacturing (ODM) appeared positive. For Cosmax, hand sanitizer accounted for 6% in the first half of the year, but with the securing of major clients in Southeast Asia and the Americas in the second quarter, the proportion of hand sanitizers is expected to increase further in the second half. Kolmar Korea is projected to drive overall sales growth as sales to Atomy increased compared to the second quarter. Researcher Na emphasized, "Atomy-related sales were about 30 billion KRW in the second quarter, exceeding 20% of domestic cosmetics sales, and are expected to reach about 50 billion KRW in the third quarter, accounting for approximately 30% of sales."
However, due to the impact of the novel coronavirus disease (COVID-19), there are still uncertainties regarding the earnings outlook for Aekyung Industrial and Clio, whose demand for color cosmetics has significantly declined. Park Jongdae, a researcher at Hana Financial Investment, said, "Because the change in consumption patterns was too sudden, it is difficult to immediately improve business structure, production lines, and product mix this year. The same applies to Aekyung Industrial and Clio," adding, "This year, they have no choice but to continue with the current lineup. It is judged that neither company is likely to see meaningful earnings changes this year."
Amorepacific is also not in a bright situation. Although demand in China is good, it has not yet entered a performance improvement cycle. Researcher Na said, "Amorepacific is still affected by sluggish mass and offline channels," adding, "There is no clear hit brand in pure domestic sales, and although Sulwhasoo is in a growth phase in the Chinese business, it is insufficient to lead overall performance improvement. Recovery of duty-free shops will be the primary factor for profit and loss improvement, followed by the recovery of growth potential and profitability in China and the restoration of competitiveness in the domestic business, which will be key points to watch."
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