Dongxing: International beauty group's performance is relatively weak, high-quality domestic brands embrace development opportunities.

Dongxing released a research report pointing out that the cosmetics consumption in China is still relatively weak, but with internal strength cultivation and external environment optimization, it is the right time for high-quality domestic cosmetics brands to rise. It focuses on recommending targets that have strong product and brand power, such as Proya Cosmetics (603605.SH); Lushang Freda Pharmaceutical (600223.SH) and Guangdong Marubi Biotechnology (603983.SH) that are in an improving upward channel are also expected to benefit. Key points from Dongxing are as follows: Events: Several international cosmetics groups disclosed their financial reports, with companies such as L'Oreal, Unilever, Shiseido disclosing their 2024 semi-annual reports, and Estee Lauder, P&G disclosing their 2024 annual reports (from June 1, 2023, to June 30, 2024), LG Household & Health Care, and Amorepacific The Pacific announcing their Q2 2024 performance. Performance of international cosmetics groups is mixed, with some companies under pressure. The overall performance of international cosmetics groups in the past year has been relatively average, with most companies showing only low single-digit growth, and growth rates generally slowing down, with some companies experiencing significant declines. By category, companies that have a higher proportion of mass cosmetics or are also involved in the daily chemical industry tend to have relatively strong performance, such as L'Oreal, P&G, Unilever; while high-end cosmetics are more affected, with companies like Estee Lauder, Shiseido, Coty experiencing pressure on their performance. By region, companies from Japan and South Korea are positioned relatively behind in terms of sales volume and year-on-year growth, while European and American companies have larger overall volumes and stronger growth resilience, but with significant internal divergences and some companies experiencing serious performance damage. The advantage of high-efficiency brands persists, while high-end brands are more affected. According to detailed data from major groups' financial reports, there is differentiation in the performance of different business departments and brands. High-efficiency brands show strong resilience, with L'Oreal's skincare science beauty department sales in the first half of 2024 up by 16.4% year-on-year, and La Roche-Posay and Aquaphor up by 8.3% year-on-year; while high-end brands are under more pressure, with Shiseido brand in the first half of 2024 down by 6% year-on-year, CPB brand up by 1% year-on-year, La Mer brand down by 7% year-on-year, and Estee Lauder's financial report stating that the decline in performance is due to the continuous weakness of high-end cosmetics sales in mainland China, with Amorepacific The Pacific luxury beauty brand sector revenue down by 7% year-on-year, etc. Demand in the Asia-Pacific beauty and skincare market is weak, which is dragging down the performance. Based on the sales or performance data disclosed by major cosmetics groups in the Asia-Pacific and Chinese regions: Shiseido's sales in the Chinese market were up by 0.8% year-on-year, but core operating profit was down by 10.1% year-on-year, and store sales in China were down by 10%-15% year-on-year. Estee Lauder's sales in the Asia-Pacific region were down by 3% year-on-year, with the weak sales of high-end cosmetics in mainland China causing a drag. L'Oreal's sales in North Asia were down by 1.7% year-on-year, the only market to decline globally for L'Oreal. Procter & Gamble's organic sales in Greater China were down by 8% year-on-year in the 2024 financial year. Overall, the sales performance of various groups in the Asia-Pacific region, including the Chinese market, was weak, mostly showing negative growth, which dragged down overall performance. The weaker performance reflects the soft demand in the Asia-Pacific beauty and skincare market, with the slump in the tourist retail market being particularly evident, and to some extent, also reflects the decline in the competitiveness and attractiveness of brands in the respective markets. The competitiveness of international cosmetics brands in the domestic market has weakened, while some high-quality domestic brands have surpassed them. The poor performance of international cosmetics groups in China is partly due to the overall weak domestic cosmetics consumption demand environment and also due to the grabbing market share by domestic cosmetics brands. Changes in brand rankings during the annual Singles' Day and 618 big promotions in recent years also reflect the weakened competitiveness of international cosmetics brands in the domestic market. While the weaker consumer environment has also had an impact on the performance of domestic brands, there are still some brands that have achieved high growth, such as Proya Cosmetics, KFM, Guangdong Marubi Biotechnology, etc. The trend of consumers pursuing value-for-money consumption provides good development opportunities for domestic brands, and with the strengthening of domestic brands' research and development capabilities, continuous enhancement of brand and product power, as well as having a competitive edge in operating new channels, some high-quality domestic brands have succeeded in surpassing international big brands. Looking ahead, the beauty and skincare industry may still maintain low-single-digit growth, with the trend of value-for-money consumerism providing continuous development opportunities for high-quality domestic cosmetics brands. It is expected that the demand for cosmetics consumption in China will remain relatively weak, with the industry as a whole showing low single-digit growth, but the growth of domestic brands will be better than that of international brands, with some high-quality domestic brands continuing to capture market share from some international big brands in the context of consumer downgrading. In the backdrop of weak consumer demand, competition in the industry will continue to intensify, with the degree of differentiation among various industry chain links and companies continuously increasing. Some high-quality brands are expected to benefit from the optimization of industry structure to focus on increasing market share and may achieve good performance. Investment strategy: Cosmetics consumption in China is still relatively weak, but with internal strength cultivation and external environment optimization, it is the right time for high-quality domestic cosmetics brands to rise. It focuses on recommending targets that have strong product and brand power, such as Proya Cosmetics; Lushang Freda Pharmaceutical and Guangdong Marubi Biotechnology, which are in an improving upward channel, are also expected to benefit. Risk factors: Cosmetics consumption demand falls short of expectations, increased market competition, and new brand incubation falls short of expectations.