[This Week's Industry Insight] Cosmax: Will It Soar with China's Consumer Recovery?

Cosmetics Market Thrives on Boosted Chinese Domestic Demand
U.S. Subsidiary Also Expected to Gain Value in the Mid to Long Term

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Cosmax, a cosmetics ODM (Original Design Manufacturer) company, is attracting attention from multiple securities firms ahead of its Q1 earnings announcement this year. Although the overall sluggishness of its U.S. subsidiary has been a drag, the growth of its domestic and Southeast Asian subsidiaries has been remarkable. There is a growing consensus that the recovery of Chinese consumption in the second half of this year will serve as a catalyst for a rebound in performance. Furthermore, the potential for value appreciation of the U.S. subsidiary in the long term is also highly anticipated, leading many to view the current stock price correction phase as an opportunity for 'buying at the bottom.'

According to financial information provider FnGuide, securities firms estimate Cosmax's Q1 sales this year to be 581.6 billion KRW, a 10.4% increase compared to the same period last year. Operating profit is also expected to rise by about 7.5% to 48.9 billion KRW.

In Q1, the domestic subsidiary is expected to show the most stable growth. Securities firms estimate that the domestic subsidiary's sales and operating profit will increase by more than 14-16% respectively. This is because strong orders from clients centered on indie brands continued, and profitability improved as the proportion of high-margin products expanded. Additionally, increased demand for sun care products was analyzed as a factor driving performance.

The Southeast Asian market is also expected to record notable growth. The Thai subsidiary is expected to show a sales growth rate of over 100% year-on-year in Q1 due to a surge in sunscreen product orders. For the full year, sales are estimated to reach 77 billion KRW, a 77% increase compared to the previous year. The Indonesian subsidiary experienced a slight slowdown in Q1 due to the Ramadan period, but sales recovery is expected to accelerate from Q2 onward.

While all securities firms agree that performance will increase in Q1 compared to the same period last year, there are differing opinions on whether the expected performance targets can actually be achieved due to differences by country. In particular, the sluggishness of the U.S. subsidiary is cited as a concern. Structural issues such as cutthroat competition, low operating rates, and fixed cost burdens continue to be obstacles to short-term performance.

Researcher Lee Seung-eun of Yuanta Securities said, "The proportion of low-margin color cosmetics has expanded, increasing cost burdens and lowering profitability," and forecasted, "Especially, the U.S. West subsidiary's sales will plummet by 30% due to decreased orders, weak demand for new products, and intensified competition." He added, "Operating profit will fall short of the market expectation of 50 billion KRW."

On the other hand, there is also analysis that the growth in the domestic and Southeast Asian markets is clear, and performance will exceed market expectations. Researcher Park Hyun-jin of Shinhan Investment Corp. analyzed, "Sales of domestic, Chinese, Indonesian, and Thai subsidiaries all showed growth," and "Exports to the U.S. also increased by 37% compared to the previous quarter, indicating a solid foundation."

Researcher Lee Ji-won of Heungkuk Securities predicted, "As the domestic subsidiary's client base diversifies and strong orders for indie brands continue, the operating profit margin (OPM) will rise to 10.2%," and "Q1 performance is expected to be in line with consensus."

The market is paying attention to the potential benefits for Cosmax from the rebound in Chinese consumer spending in the second half of this year. Recently, despite unfavorable external conditions, the Chinese government is pushing to achieve an economic growth rate of 5% this year by raising personal consumption loan limits and expanding the budget for the 'replacement of old with new' (iguhwanshin) policy.

Researcher Lee Ji-won analyzed, "Cosmax has secured about 1,000 client companies in China, making it a company that would benefit the most when consumption recovers," and "If signals of Chinese consumption recovery are detected, Cosmax's performance estimates can be significantly revised upward."

Additionally, from a long-term perspective, there is an opinion that the U.S. subsidiary could be the key to Cosmax's performance growth. It is analyzed that Cosmax may actually benefit amid the U.S.-China trade war, including the imposition of tariffs by the U.S. on China.

Recently, former U.S. President Donald Trump imposed a total tariff of 145% on Chinese products. In response, China raised tariffs on U.S. imports up to 125%. To avoid these high tariffs, Cosmax's clients have been observed moving production volumes from China to Korea or countries less affected by tariffs. This is analyzed to potentially impact Cosmax's profitability recovery.

Also, the fact that Cosmax's U.S. subsidiary is not yet fully activated is considered potential. The U.S. subsidiary currently has 15 client companies but has not received significant orders. In the mid to long term, if the client base expands and large orders come in, it could positively affect performance.

Researcher Park Hyun-jin said, "Due to the U.S. tariff increase issue, the value of the U.S. production subsidiary is expected to increase in the mid to long term," and "If profit contributions from the U.S. subsidiary become full-fledged, Cosmax's valuation could again receive a premium."