Top-tier ODM Plays to Strengthen Market Dominance

The author is an analyst of NH Investment & Securities. She can be reached at mj27@nhqv.com. -- Ed.

 

Expand weighting on ODM plays

Investor sentiment over the cosmetics sector has worsened on the prolonging of the Covid-19 crisis, a slump in China’s economy and consumption, and the stricter Chinese government regulations. But, recent share-price corrections look excessive in our view. We recommend loading up on OEM/ODM shares that are forecast to display earnings uptrends going forward.

ODM players to benefit from shifts in cosmetics market

Now is the time when domestic OEM and ODM players are to benefit from the market growth in terms of production. In the case of China where outside activities have been resumed earlier, pent-up demand is growing exponentially and competition among sellers is heating up again amid strives to lead the market. Cosmetics sellers are likely to move quickly to gain more market share by selling their current inventories and launching new products, with such a development serving to the benefit of OEM and ODM players.

Top-tier ODM plays to strengthen market dominance

Moving forward, we expect to see a steady market share expansion by global top-tier players in the OEM/ODM cosmetics market. The cosmetics OEM/ODM segment represents around 15% of the global cosmetics market, reaching an estimated value of W70tn in 2020. According to a global research firm, the OEM/ODM market is to expand at a CAGR of 5.7% over 2021~2027, driven by steadily expanding demand. The global cosmetics market as a whole was hit hard by the Covid-19 pandemic in 2020. However, the OEM/ODM segment remained relatively spared from the crisis, with the combined market share of the top-10 global players upping by 3%pt compared to the 2016 level. We believe that the trend of concentration on leading companies will further deepen in line with the industry expansion, an absence of new major entrants, pre-emptive capacity expansion, and superior technological edge and product quality.

Maintain Cosmax as sector top pick

We maintain Cosmax as our top pick for the domestic ODM industry. In its core Korean and Chinese markets, the firm is expected to post above-average growth going forward. Cosmax has been enjoying steady growth based on close relations with leading cosmetics players in China and Korea, and its other regional subsidiaries have been booking stronger margins. Meanwhile, operating losses at its US subsidiary should gradually decline over time thanks to a long-term contract signing with a global client.

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