strong demand for ODMs
The author is an analyst for Shinhan Securities. He can be reached at hpark@shinhan.com -- Ed.
Investment point 1: Domestic earnings driven by inbound tourists
Inbound visitors to Korea rose to 960,000 in July, reaching 66% of the 1.45mn level seen in July 2019 with triple-digit growth continuing every month this year. Chinese visitors topped the list, followed by Japanese and Taiwanese tourists. Flights between Korea and China have recovered to an estimated 55-60% of pre-pandemic levels as of August. We expect to see a steeper increase in Chinese inbound traffic from October on China’s lifting of its ban on group tours to Korea.
Cosmetics are one of the most popular shopping items purchased by inbound visitors to Korea. As a result, domestic offline channels including duty-free shops and health & beauty (H&B) retailers selling budget cosmetics products, notably CJ Olive Young, stand to benefit from inbound traffic growth. Small/mid-cap cosmetics companies such as Clio Cosmetics, iFamilySC, Manyo Factory and VT Cosmetics are already seeing visible growth in domestic sales through the H&B channel. CJ Olive Young and other H&B retailers are filling the void created from the withdrawal of beauty road shops and emerging as main beneficiaries of the growing inflow of tourists into the country. CJ Olive Young saw sales jump 41.7% YoY in 1H23 and is expected to raise its sales guidance for 2H23.
Investment point 2: Ex-China demand strong for lower-priced brands
Small/mid-size brand companies are reporting strong earnings on brisk sales in major markets outside of China such as Korea, Japan, and North America. Having little presence in China, these companies are less exposed to concerns over slowing consumption in the country. Lower-end Korean cosmetics brands have performed particularly well in Japan, accounting for a large portion of the top-selling brands on Qoo10 Japan. Clio Cosmetics, Amorepacific (Innisfree), and VT Cosmetics stand out among listed companies.
2H23 outlook upbeat for small/mid-size brand companies and ODMs
Based on the two investment points mentioned above, upbeat expectations are likely to continue for the earnings growth of small/mid-size cosmetics brands in 2H23. We believe sales growth in Japan was priced into shares in 1H23, while improving demand from Chinese inbound tourists has yet to be reflected in earnings consensus. Budget brands also have the added advantage of being less affected by a slowdown in consumption amid rising concerns over domestic and overseas market conditions.
Brisk sales of lower-end cosmetics translate to strong demand for domestic ODM companies. With operating leverage effect likely to raise the 2H23 earnings expectations for domestic ODMs even further, we maintain our buy-and-hold strategy for small/mid- cap brand companies and cosmetics ODMs.