New Stock Preview | Managing 63 brands, "Perfume Overlord" Ying Tong Holdings prepares for IPO with "future considerations"

After the rise of the beauty economy and the trend economy, the "perfume effect" is gradually replacing the "lipstick economy" and is becoming a new economic phenomenon of the Z era. Public data shows that from 2017 to 2020, the scale of perfume consumption in China soared from 6.16 billion yuan to 12.527 billion yuan. At the same time, a large number of domestic perfume brands have emerged, such as Odor Library, RE Perfume Room, Guanxia, Ice Seaweed Li, and Scentooze Three Rabbits, all of which have attracted capital. Therefore, the "olfactory economy" is currently hailed by the investment community as the last blue ocean in the "five senses economy". As the market becomes more and more prosperous, Ying Tong Holdings, which specializes in managing perfume brands, has also seized the opportunity to launch an IPO. On July 18th, Ying Tong Holdings Limited (referred to as "Ying Tong Holdings") officially submitted its application for listing to the Hong Kong Stock Exchange, with BNP Paribas and CITIC SEC as its joint sponsors. Based on retail sales in 2023, the company is the largest perfume brand management company in mainland China, Hong Kong, and Macau, with a diverse brand portfolio including not only perfumes but also makeup, skincare products, personal care products, glasses, and home fragrances. Nowadays, with the popularity of the "olfactory economy", can the IPO of Ying Tong Holdings help the company seize the development opportunities? And what is the real strength of the company? Holding 63 brands but with a stagnant growth rate From the business layout and market position of Ying Tong Holdings, it is indeed worthy of the title "perfume overlord". It is reported that the history of Ying Tong Holdings can be traced back to 1987 when one of its subsidiaries, Ying Tong Far East, began importing international perfumes into mainland China, becoming an early "pioneer" in the introduction of imported perfumes in mainland China. At the same time, the company also introduced eyewear products into Hong Kong and Macau, further enriching the company's product portfolio. As of the last practicable date, Ying Tong Holdings manages a total of 63 brands, including many big brands such as Herms, Van Cleef & Arpels, Chopard, Albion, Laura Mercier, and so on. According to Frost & Sullivan, based on retail sales in 2023, the company is the third largest perfume group in mainland China, Hong Kong, and Macau. It is also the only perfume brand management company among the top five perfume groups in mainland China and the comprehensive market of mainland China, Hong Kong, and Macau based on retail sales in 2023. With a rich brand portfolio, Ying Tong Holdings has a considerable revenue and gross profit scale. According to the prospectus data, as of March 31, 2022, March 31, 2023, and March 31, 2024, the company's revenue was 1.675 billion yuan, 1.699 billion yuan, and 1.864 billion yuan respectively, with a compound annual growth rate of 5.50%; gross profit was approximately 861 million yuan, 856 million yuan, and 938 million yuan respectively, with a compound annual growth rate of 4.36%; and net profit was approximately 171 million yuan, 173 million yuan, and 206 million yuan respectively, with a compound annual growth rate of 9.92%. However, it is worth noting that as the business enters a mature stage, the growth rate of Ying Tong Holdings is not significant, particularly in its core financial indicators such as revenue growth. For example, the year-on-year revenue growth on March 31, 2023, and March 31, 2024, was only 1.43% and 9.71% respectively. While the slowing growth rate is a concern, Ying Tong Holdings' financial situation is not as comfortable as one might imagine. As of March 31, 2022, March 31, 2023, and March 31, 2024, the total amount of current liabilities of the company was 581 million yuan, 533 million yuan, and 540 million yuan respectively, while the total amount of current assets was 906 million yuan, 903 million yuan, and 898 million yuan respectively. The net value of current assets is not large. Moreover, as of March 31, 2024, Ying Tong Holdings only held cash and cash equivalents of 151 million yuan. In view of this, the IPO fund-raising amount will be used by Ying Tong Holdings to further develop its own brands (including SantaMonica), as well as to acquire or invest in external brands; it will also be used to develop and expand the company's self-operated retail channels, including expanding online and offline perfume box stores and other self-operated online and offline stores/counters. In addition, there are plans to accelerate the company's digital transformation and expand its business layout from multiple dimensions. Therefore, perhaps due to the slightly tight financial situation, even as the "perfume overlord", Ying Tong Holdings has chosen to "bolster" itself externally. The rise of the "olfactory economy" versus the emergence of "short-term concerns" As the "olfactory economy" approaches, the penetration rate of perfume in China is far lower than that of developed countries, which means that the domestic perfume retail market is a large market with high growth potential and ample room for imagination. According to Frost & Sullivan, the top five countries with the largest perfume market size in 2023 are the United States, Brazil, France, Germany, and the United Kingdom. Compared to other developed countries, the per capita spending on perfumes in China is relatively low, mainly due to the low penetration rate of perfumes in China and the large population size. However, with the continuous stable development of the Chinese economy and its large population size, the growth rate of the domestic perfume retail market far exceeds that of the global perfume retail market. In 2023, the global perfume retail market size was 709.6 billion yuan, with a compound annual growth rate of 3.7% from 2018 to 2023. It is expected to grow to 841.1 billion yuan by 2028, with a compound annual growth rate of 3.5%. In contrast, the total perfume retail market size in mainland China, Hong Kong, and Macau in 2023 was 26.1 billion yuan, with a compound annual growth rate of about 12.3% from 2018 to 2023. It is expected to further increase to 47.7 billion yuan by 2028, with a compound annual growth rate from 2023 to 2028.The growth rate is about 12.8%.(Source of the image: Prospectus of Yingtong Holdings) From the perspective of the industry chain, brand management is in the middle reaches of the Chinese perfume industry. Based on the retail sales in 2023, Yingtong Holdings is the fourth largest perfume group in China, with a market share of approximately 8.1%. Additionally, the company also ranks first among brand management companies. With such a market position, coupled with double-digit growth opportunities, this is undoubtedly a promising path for Yingtong Holdings. However, unexpectedly, there are also some "short-term concerns" in the development process of Yingtong Holdings. For example, the brand agent distribution model hides risks. It is understood that Yingtong Holdings has a wide range of omni-channel sales and distribution networks, with high penetration in both offline and online channels. These sales and distribution networks typically consist of direct sales channels (including retail and self-operated channels) and distribution channels. However, this model relying on brand agent distribution also poses certain hidden risks. The company also mentioned in the risk warning that there may be adverse effects on maintaining and expanding the sales network, and there is also expiration risk in the distribution agreements with major brand owners. It is reported that most of the agreements entered into by the company with brand licensors have initial terms ranging from three to five years and can be terminated by the brand licensors upon prior written notice. Renewal of agreements with brand licensors usually requires mutual agreement. If there are any significant changes in the terms of cooperation with brand licensors, the company's business may be adversely affected. For example, in December 2022, the distribution agreement that Yingtong Holdings signed with a major luxury brand's main brand licensor expired, and the related agreement contributed approximately 424.7 million yuan or about 25.5% of the company's total revenue for the year ending March 31, 2023. This was mainly due to the brand licensor deciding to operate the brand themselves in China. With such a large revenue contribution, it will undoubtedly have an impact on the company's performance for the year. In addition, according to the prospectus, a significant portion of Yingtong Holdings' sales to distributors and retailers account for much of the company's total revenue, indicating a potential reliance on the brand agent distribution model. Furthermore, facing the risk of supplier concentration. According to the prospectus, during the historical period, although the company made purchases from multiple suppliers, some suppliers still accounted for a significant portion of the company's total purchases. As of the years ended March 31, 2022, 2023, and 2024, purchases from the top five suppliers accounted for 85.1%, 84.0%, and 81.6% of our total purchases, respectively. In response to this, the company warns of the risk that, although the company has maintained friendly and mutually beneficial relationships with these brand licensors, it cannot guarantee that it will be able to maintain business relationships with them in the future. If any of these suppliers decide to terminate their business relationship with the company, it will have a significant adverse impact on the company's business operations, financial performance, and competitiveness. In addition, Yingtong Holdings not only needs to compete with external perfume brands (excluding the brands we manage), but also with brand management companies. The competitive environment is fierce, indicating that the company needs to establish long-term competitive advantages. In summary, as a "perfume overlord", Yingtong Holdings' attempt to seek "growth" through a Hong Kong IPO is not as easy as imagined.