[This Week's Focus] Cosmax Leads K-Beauty Globalization, Performance Becomes Even More Attractive

Cosmetics ODM No.1
Accelerating Expansion in Southeast Asian Markets such as Thailand and Indonesia
US Subsidiary Turns Operating Profit Positive... Recovery of China Business

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Last week (15th?19th), Cosmax rose by 9.01%, ranking first in stock price growth among KOSPI 200 index constituent stocks. This was thanks to a buying spree driven by the securities industry's judgment that the stock's valuation appeal is high. Recently, securities firms have focused on Cosmax's performance growth this year, recommending it as a buy or raising its target price.

Leading Cosmetics ODM Company, Significant Improvement in Last Year's Performance

The securities industry expected Cosmax's performance to improve significantly last year. This is due to steady demand growth for mid-priced indie brands influenced by the strength of online shopping and the rise of value consumption. Cosmax's consolidated sales and operating profit last year were estimated at KRW 1.8103 trillion and KRW 127 billion, respectively, representing increases of 13.1% and 139% compared to the previous year. Fourth-quarter sales were also estimated at KRW 469.5 billion, up 17.2% year-on-year, and operating profit surged 1325% to KRW 34.2 billion.

Researcher Park Eun-kyung of Samsung Securities analyzed, "Domestic ODM (Original Design Manufacturer) companies recorded high sales growth last year. This is the result of domestic small and medium-sized brands relying on outsourcing manufacturing standing out not only domestically but also overseas."

Cosmax is the world's largest cosmetics ODM specialist company by sales. In March 2014, the cosmetics manufacturing division of Cosmax BTI Co., Ltd. was spun off to establish the current company. It supplies cosmetics to over 600 brand companies domestically and internationally, including the world's largest cosmetics group, L Group, and many global companies. Representative products include gel-type eyeliners and cushion foundations, with the gel-type eyeliner producing over 40 million units as a single item for the first time. About 25% of the company's workforce is engaged in research and development (R&D), operating the Pangyo R&I Center, showcasing industry-leading R&D capabilities. Last year, Cosmax secured 199 new indie brand clients, bringing the total number of clients to around 1,300.

This year, Cosmax plans to diversify its export countries, which is why the company's performance growth is highly anticipated. Last year, Cosmax established task forces (TFs) focusing on major emerging countries and plans to actively expand its customer base starting this year. Although emerging markets currently account for a small portion of total overseas sales, the company believes market preemption is crucial due to high growth potential. In fact, KOTRA identified cosmetics as the promising export product for the Middle East, Latin America, South Asia, and Africa in its "2023 Regional Export Strategy." Notably, K-beauty's exports to the Middle East surpassed USD 100 million in 2021, achieving a high growth rate of 31.6% compared to the previous year.

Observing this market growth, Cosmax operated emerging market TFs targeting four regions?Middle East, South America, India, and Africa?last year. Cosmax also aims to expand its South American market while operating a factory in New Jersey, USA. The South America TF secured new clients in Mexico last year and expects over 100% growth this year.

Researcher Jung Ji-yoon of NH Investment & Securities stated, "Cosmax has production plants in Shanghai and Guangzhou, China, and New Jersey, USA, and is diversifying its overseas market portfolio through the establishment of subsidiaries in Indonesia and Thailand."

Unstoppable Growth... The Most Preferred Cosmetics Stock to Watch This Year

The securities industry unanimously agrees that Cosmax deserves attention this year. They recommend increasing exposure or raising target prices due to not only performance growth but also attractive stock prices.

Despite excellent performance last year with separate sales exceeding KRW 1 trillion, Cosmax's stock price retreated. The stock price fell about 26% from its peak on September 1 last year, continuing a bearish trend. Surprisingly, the strong performance acted as a negative factor for the stock price. Market concerns that last year's performance might be a one-off sales event led to weakened demand and dragged down the stock price.

Researcher Park Eun-jung of Hana Securities explained, "The current stock price already reflects these concerns, so attention should be paid to 2024 when positive factors are expected to expand. Domestic sales are expected to grow over 20% through direct and indirect export increases, global project expansion, and indie customer base growth. China is expected to recover orders, and the US is anticipated to improve its financial structure due to increased operating rates."

Based on these factors, Hana Securities forecasts Cosmax's consolidated sales to exceed KRW 2 trillion and operating profit to surpass KRW 170 billion this year. Considering Cosmax's valuation appeal, it is rated as the top preferred ODM company.

Other securities firms also present positive outlooks for Cosmax. Samsung Securities named Cosmax its top pick in the sector, expecting a significant improvement in US performance and the best year since 2010 without major weaknesses. Researcher Park Eun-kyung said, "The reason for selecting Cosmax as the sector top pick is the potential turnaround in the US subsidiary's performance, which differentiates it from other ODM companies."

Researcher Heo Je-na of DB Financial Investment said it is time to increase exposure to Cosmax, noting, "Although the stock price fell to a 12-month forward P/E ratio of 9 due to concerns about the fourth-quarter performance, sales recovery has begun in the Chinese subsidiary, which was a concern. The US subsidiary is also strengthening its operations, and consolidated sales are expected to grow over 20% this year."

Mirae Asset Securities raised Cosmax's target price recently to KRW 180,000, citing expected solid performance.

Expectations for Recovery in China, a Business Risk... US Sales Growth Over 20%

The securities industry expects the situation in China, previously considered a risk for Cosmax, to improve, while optimism for the US market will grow this year. The Chinese subsidiary's fourth-quarter sales last year fell 7.5% from the third quarter to KRW 152.2 billion, raising market concerns. Although sluggish cosmetics consumption in China is well known, Cosmax's sales growth lagging behind the market growth rate of 2?3% increased investor worries. Long-term risks such as intensified industry competition and weakened local competitiveness also emerged as concerns.

Cosmax responded swiftly to these concerns. The company shifted its sales strategy from waiting for order recovery from existing clients to acquiring new clients. Researcher Park Eun-kyung said, "This proved the market's concerns to be unfounded. Considering that the volume from the top Guangzhou sales company began to be recognized as equity-method investments rather than consolidated from the third quarter last year, Cosmax's actual total sales growth rate is estimated to be much higher than 11%."

Especially, a significant improvement in US segment performance is expected this year. Cosmax set a 20% sales growth target for the US market this year. The company targets 20% growth domestically, 30% in China, and 20% in the US. As demand from local indie brands in the US is expected to increase, the 20% growth target is considered achievable if production barriers are not encountered. With an expected increase in the proportion of sales from highly profitable clients, annual operating profit is also anticipated to turn positive this year. Furthermore, this year is expected to mark the first year of a performance turnaround since entering the US market in 2013, after 12 years.

Researcher Baek Song of Mirae Asset Securities said, "Cosmax aims for over 20% growth. As the number one ODM company, it fully benefits from market expansion, so although the target is aggressive, the visibility of achieving it is sufficient."