Fashion/Cosmetics Industry
The author is an analyst of NH Investment & Securities. She can be reached at jiyoony@nhqv.com -- Ed.
China’s consumer discretionary retail sales growth rebounded in March. We draw investor attention to F&F, which is strengthening its brand power in China, noting that the intensity of apparel consumption is especially strong in the early stage of reopening by country (US and Korea). We believe that cosmetics industry earnings hit their bottom point in 1Q23, considering both base effects and likely restocking in the run up to Singles Day in June. In this regard, we advise paying attention to Kolmar Korea and AmorePacific.
March data for China: Retail sales for clothing stand out
In March, China’s total retail sales grew 10.6% y-y. Among consumer discretionary goods, apparel recorded 17.7% y-y and cosmetics 9.6% y-y. Looking at consumption behavior before and after economic reopening in the US and Korea, the strength of recovery in the apparel category was the most prominent. Considering such, apparel plays with low-base effects in China should maintain positive consumption momentum in 2Q23 in light of the aftermath of the April~May lockdowns in 2Q22.
In relation to F&F’s MLB, Chinese retail SSSG (y-y) reached nearly 30% in Mar 2023. It is one of the brands that outperformed the market (17.7% y-y), and wholesale shipments are expected from April after inventory was exhausted in 4Q22. In addition, with the National Geographic brand to be available in Beijing’s Hopson One shopping mall from late April~early May, The Nature Holdings should enjoy consumption momentum in China. Since 4Q22, apparel stocks have fallen excessively due to deteriorating investor sentiment, with consumption slowing amid an economic downturn. While the apparel sector’s 1H23 domestic earnings were lackluster, we adhere to a Buy rating for the sector, given that valuations look attractive at 7.5x.
Retail sales of cosmetics following
Although sales growth for cosmetics was not high compared to the overall retail sector in March, for 2Q23 we foresee: 1) low-base effects in China (stemming from April~May lockdowns last year); 2) inventory buildup for Daigous (Chinese personal shoppers) ahead of the Singles Day in Jun 18; and 3) an inbound traveler recovery following the resumption of Korea-China flights, we believe that 1Q23 earnings represent the bottom point for the cosmetics sector.
Kolmar Korea is enjoying orders growth from local brands such as PROYA and FLORASIS, whose Chinese market shares based on Tmall (online) increased during the Covid-19 period. As such, its Wuxi subsidiary is likely to turn around in 1Q23, reporting sales of W35bn and reaching BEP. Sluggish duty-free channel and Chinese sales were unavoidable for AmorePacific in 1Q23, but in 2Q23, given low-base effects (operating losses of W19.5bn), the firm’s duty-free and domestic channels should directly benefit upon an inbound travel recovery.