Beauty products have both efficacy and spiritual consumption attributes, and the triple values of time, research and development and scale support the valuation premium of international beauty leading groups. The history of China’s beauty industry is still short, and it is in the stage of gaining momentum from marketing/channel-driven to R&D-driven, improving comprehensive strength and transforming into a real consumer brand, with a broad market and rich opportunities; The multi-brand and collectivization trend of local high-quality beauty cosmetics leaders has begun to appear, and the growth supports high valuation.
▍ The valuation premium of the beauty industry is due to the value of spirit and efficacy, and the triple value of time, technology and scale breeds the valuation premium.
The historical P/E center range of the international beauty industry leader is 20x-35x, which generally enjoys a valuation premium compared with its index. The P/E multiple generally exceeds 1.4, and the P/S multiple generally exceeds 1.3. We believe that the valuation premium enjoyed by international beauty leaders is due to:
1) The value of time: the precipitation of time creates brand value. International beauty leading companies have a long history of more than 70 years, and their brands are well-known, rich in connotation and enjoy a premium.
2) The value of science and technology: The international beauty leading group has invested heavily in basic research (skin texture/raw materials, etc.), applied research, safety testing and other aspects for a long time to build tangible technical barriers and intangible consumer trust barriers.
3) Value of scale: collectivization exerts brand synergy, globalization captures dividends in various markets, leading the scale and stabilizing the position of the industry.
▍ China’s beauty industry enjoys a valuation premium, with a broad market and abundant opportunities.
The valuation premium of China’s beauty industry has existed for a long time, with the P/E multiple center of 2.3 and the P/S multiple center of 3.1. Main reasons:
1) Early stage of development: low permeability and leading growth rate. In terms of penetration rate, the per capita consumption of beauty care in China is only about 403 yuan, far lower than that in Europe, America, Japan and South Korea. In terms of growth rate, CAGR+10.1％% in China’s beauty care market from 2008 to 2021 is higher than CAGR+2.6％% in the world.
2) Continuous iteration, full of vitality, driven by channel to technology/R&D.. China’s beauty industry has a fast iteration: consumers are becoming more rational, supervision is becoming stricter, channels are more dispersed, traffic costs are constantly high, and marketing focuses on value recognition.
▍ China’s beauty industry has a short history and is full of vitality.
The development of local beauty listed companies started relatively late, and most of their brands were launched after 2000. The market concentration of beauty personal care in China is still low. In 2021, the proportion of CR3/5 is 26.8%/33.5% and there are no local companies in CR5, which is lower than that in Europe, America, Japan and South Korea. There is still room for improvement in the market share of high-quality local leading companies. At present, the industry is poised for stage adjustment, from channel and marketing-driven to technology-driven, and companies with strong comprehensive capabilities are expected to further increase their market share.
▍ The pattern is scattered, high-quality leading players enjoy industry growth and share increase, and leading players in sub-sectors rise.
▍ Risk factors:
Overseas historical development is not fully applicable to China beauty listed companies; The weak consumption of optional consumption, especially in the field of beauty, affects the company’s performance: the industry updates quickly, and the company, brand or product may have a certain life cycle; Industry competition or intensification, affecting the company’s performance; The sales volume of new products may not meet expectations, and the construction of brand matrix still has a long way to go.
▍ Investment strategy:
After the valuation adjustment since the second half of 2021, the PE of the leading A-share beauty companies in 2023 is concentrated in 45x~55x, which has fully reflected the factors such as the slowdown of industry growth, the ready research and development, and the shift of driving force. In short, in 2023, with the gradual recovery of consumption, the efficiency improvement of various companies’ operations/the promotion of large single product strategy/the listing of new products, there is still room for improvement in the valuation of leading companies; From 2023 to 2025, with the improvement of R&D and comprehensive strength of local brands, as well as the improvement of consumers’ recognition of local brands, the beauty industry is expected to change from marketing-driven and channel-driven to R&D-driven, and high-quality bibcock is expected to become a real consumer brand with both product power/marketing power/channel power, thus maintaining a high valuation.
This article comes from a selection of brokerage research reports.