Shopping China’s Beauty Aisle; The country’s Internet and gaming stocks have lost their momentum, but cosmetics remains a growth business. Some of the most popular beauty aids are from Korea.

Shopping China’s Beauty Aisle

The country’s Internet and gaming stocks have lost their momentum, but cosmetics remains a growth business. Some of the most popular beauty aids are from Korea.


May 24, 2014 1:20 a.m. ET

China’s economy is in an undeniable slowdown, and last year’s highflying Internet and gaming stocks have lost momentum. So where can investors turn?

Beauty. The country’s cosmetics market is now the second-largest in the world, with $25 billion in sales last year. The market has grown at an annualized 11% rate since 2009, and yet there’s room for more. Consumption per capita was only $32 last year, just 15% of what China’s North Asian peers spent. Morgan Stanley forecasts the market will expand at an annualized 8.5% over the next five years, outpacing the country’s GDP growth.

It’s a fickle business for outsiders. Shiseido (ticker: 4911.Japan), the best-established foreign brand, gets 15% of its total sales from China, but has seen its revenues falter since an anti-Japanese campaign in 2012. In its place, Korea’s largest cosmetics company Amorepacific (090430.Korea) is getting more of the love.

Of course, China is riding a “Korea wave” that’s helped make the fantasy romance TV show You Who Came From the Stars extremely popular. But cosmetics from Korea have also been innovative. Amorepacific’s mid-tier Laneige line sells mask-like sleeping packs that can be put on overnight instead of a night cream. Korea’s “BB cream,” or baby cream, is similar to a scented moisturizer in the U.S. but evens out the skin tone better. A Morgan Stanley consumer survey conducted last month shows that younger women (16-24) and those in the mid-income group ($1,000-$2,000 monthly) prefer Korean products.

Though a relative newcomer to China, Amorepacific counted on Chinese consumers for about 20% of its earnings in the first quarter of this year, estimates Morgan Stanley. China region sales grew 35% from a year ago. Amorepacific’s biggest hit is the more profitable premium Sulwhasoo brand, which boasts oriental herbal ingredients and sells only at high-end department stores and duty-free shops. Amorepacific’s duty-free and Hong Kong sales grew 77% and 50% year-on-year last quarter, driven by strong demand from Chinese tourists.

In Morgan Stanley’s survey, both Laneige and Sulwhasoo ranked well in brand image among Chinese consumers. Their primary weakness is availability, meaning a lack of stores in China, which bodes well. Morgan Stanley expects China to contribute 39% of Amorepacific’s earnings by 2017 and projects 18% annualized long-term earnings growth.

Amorepacific shares have already advanced 45.9%, prompting Morgan Stanley to raise its target price twice in the last two months. Morgan Stanley’s base case target price is 1.55 million won ($1,512), which translates to just 6.2% upside. But the bank’s bull case target is KRW1.79 million, implying 22.6% upside.

In the more competitive, low-margin mass market, the best plays are likely Korean ODMs (original design manufacturing), where the Korean company manufactures and even designs the products while the Chinese firms do the sales and marketing. A good example would be small-cap Cosmax (192820.Korea), which gets one-third of its business from China. Nomura Securities has a target price of KRW102,000, meaning the stock could rise 30%.

On the distribution side, beauty companies that sell directly have lost their shine. Avon Products (AVP), in particular, has lost 2.9 percentage points in market share from 2004 to almost nil in 2013, data from Euromonitor show.

Meanwhile, the online beauty market grew exponentially, reaching over 15% of overall market share in 2013. In mid-May, China’s largest online beauty retailer Jumei (JMEI), with 22% market share, went public in the U.S., raising $245 million. Flash sales apparel discounter Vipshop (VIPS) gained control over, another online platform, earlier this year, and equity analysts widely expect the discount beauty business to become a key revenue driver for Vipshop.


About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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