CITIC SEC: China's cosmetics industry entering a stage of healthy growth, focusing on the group and global development of domestic brands.

CITIC SEC released a research report stating that the current Chinese cosmetics industry is embarking on a new journey of healthy growth, with professional cosmetic brands/base makeup research brands/Oriental aesthetic cosmetic brands each having their own strengths. In the short term, local beauty companies are using cosmetics to depict a new growth curve, in the medium term, the penetration rate of cosmetic products and the scale of single brands will help local brands enter the leading position, and in the long term, the accumulation of brand value and the maturity of mergers and acquisitions system will push local brands towards a new journey of groupization and globalization. The main points of CITIC SEC are as follows: Chinese cosmetics are rapidly iterating, entering a more healthy growth stage, and brands each have their own strengths According to Euromonitor data, the Chinese cosmetics industry experienced rapid growth from 2017 to 2019 (CAGR 27.7%, emerging domestic brands, rising to the top), and a period of adjustment from 2020 to 2022 (CAGR -2.1%), and since 2023 has entered a relatively healthy new development stage (in 2023, the scale is 61.76 billion yuan, a year-on-year increase of +11.2%). Due to factors such as changing fashion cycles and increased industry competition, cosmetic products generally have low user stickiness. Domestic cosmetic brands are breaking out in different ways to attract new customers and increase user stickiness, such as professional cosmetic brands, base makeup research brands, and Oriental aesthetic cosmetic brands. Professional cosmetic brands: high ceilings, market share increase, often acquired Founders of professional cosmetic brands usually have extensive experience in makeup artistry/photography, with years of experience in makeup aesthetics, techniques, and on-camera effects, making their products professional and practical. 1) In terms of scale, according to Euromonitor data, in 2023, among the top 100 cosmetic brands in terms of global/China retail sales, brands backgrounded by makeup artists achieved sales exceeding $7.5 billion/10 billion yuan, with MAC being the largest professional cosmetic brand in the world and China, with retail sales exceeding $2.7 billion/$1.7 billion respectively. 2) In terms of market share, according to Euromonitor data, in 2023, among the top 100 cosmetic brands in terms of global/China retail sales, makeup artist backgrounded brands increased their market share from 9.1% in 2014 to 10.2% in 2023 globally, and from 6.7% in 2014 to 17.0% in 2023 in China. 3) In terms of heritage, makeup artist brands are often acquired by international beauty conglomerates, and founders have a lasting influence on the brand's style after acquisition. Base makeup research brands: high proportion of base makeup products, skincare base makeup emerging According to Euromonitor data, from 2008 to 2023, the retail sales of base makeup products in the Chinese cosmetics market increased from 5.77 billion yuan to 31.25 billion yuan, with a CAGR of 11.9%, and the proportion increased from 44.9% to 50.6%. In 2023, the retail sales of a single brand's base makeup category reached $1.65 billion globally (Maybelline brand) and nearly 2 billion yuan in China (Dior brand). Base makeup is considered to be the "closest makeup to skincare," and as makeup products introduce pigments into the formula, creating more stable, longer-lasting, and better-feeling formulas presents challenges. For example, using common emulsified base makeup products (such as liquid foundation, cushion foundation), the products need to meet the four main points of coverage, adhesion, gloss, and long-lasting effect, and in the selection of raw materials, titanium dioxide, silicon powder, and other materials are used to achieve coverage and scattering effects, while hydrophobic treatment of powdered raw materials and oil-absorbing ingredients improve adhesion, and adding film-forming materials enhances long-lasting effect. While domestic cosmetic brands maintain their advantages in product color and packaging design, they are integrating more skincare elements into their products to enhance product quality, combining makeup products with skincare and efficacy. Oriental aesthetic cosmetic brands: embodying Eastern aesthetics, creating exquisite products Chinese cosmetic brands that focus on Eastern aesthetics are rooted in Chinese cultural heritage and traditional crafts of various ethnic groups, starting from various aspects such as cosmetic packaging design, content form, color numbers, and craftsmanship, to create unique Oriental aesthetic cosmetic products, such as MAO GEPING's Eastern aesthetic elements inspired by the Forbidden City, Huaxi's Eastern aesthetic elements are derived from national characteristics and intangible cultural heritage, and Caitang's Eastern elements are derived from classic Chinese crafts such as blue-and-white porcelain peonies/Qingqing/Suzhou embroidery series, among others. Looking ahead, moving towards a new journey of groupization and globalization, from Eastern beauty to world beauty 1) There is room for improvement in the scale of single brands, per capita consumption amount, and the leading position of local brands. According to Euromonitor data, in 2023, the retail sales of the world's largest cosmetic brand Maybelline reached 38.4 billion yuan, while the global retail sales of the top 3 Chinese cosmetic brands Huaxi, Kazilan, and Jueduo totaled 2.64/1.82/1.51 billion yuan, indicating a large room for growth. In terms of per capita consumption amount, according to Frost & Sullivan data (quoted from MAO GEPING's Hong Kong IPO prospectus), the annual per capita consumption amount in the Chinese cosmetics industry is only 79 yuan, still lower than the penetration rate in countries such as Europe, the United States, Japan, and South Korea. 2) Integrated makeup and skincare, groupization is the trend. International beauty brands usually cover multiple categories such as skincare, makeup, perfumes, and different brands focus on different categories, depending on the brand's tone and strengths. From makeup expanding into skincare: For domestic brands, some makeup brands are expanding into skincare, such as MAO GEPING brand expanding into skincare and skincare revenue accounting for over 40%; Yixian e-commerce acquisition of Galenic, DR.WU, Eve Lom brands, with skincare revenue accounting for 40%. From skincare expanding into makeup: Under domestic beauty companies, makeup brands focus on base makeup, extending skincare concepts to makeup. High-quality makeup brands have become the second growth curve for domestic beauty companies, with the 2023 revenue of Caitang under Proya Cosmetics reaching 1 billion yuan/11%; Lianhuo under Wanmei with revenue of 640 million yuan/28.9%. 3) Mergers and acquisitions are becoming more active, speeding up brand matrix layout.Cosmetics companies such as Cosmetics(603605.SH), Guangdong Marubi Biotechnology(603983.SH), and Yunnan Botanee Bio-Technology Group(300957.SZ) are expanding their makeup business through mergers and acquisitions and foreign investments.East Asian beauty trends towards global beauty, with a combination of quality and culture going overseas. Confident and bold Chinese makeup and East Asian aesthetics have become popular overseas, with Japan and Southeast Asia being the first stops for Chinese makeup brands to go international. Chinese makeup brands are still in the early stages of their internationalization journey from Chinese beauty to global beauty. In the long term, Chinese makeup going overseas is expected to expand its influence in the international market along with Chinese culture and fashion trends. Risk factors include decreasing consumer spending power and willingness, intensified industry competition, lower-than-expected sales of new products, uncertainties in the early stages of going overseas, and increased management difficulties from incubating new brands and post-investment empowerment through mergers and acquisitions.