With consumers staying at home for months and social gatherings banned across the world, the global cosmetics industry has been dealt a major blow by the coronavirus pandemic.
Yet low-cost, online-savvy local beauty brands in China have seen their shares rally as investors spy an opportunity for the home-grown outfits to take market share amid the crisis.
Hangzhou-based Proya Cosmetics Co has soared 88% this year, reaching a record high in May and is now trading at 68 times forward earnings, the highest among listed beauty companies worldwide and surpassing giants like Shiseido Co and Estee Lauder Cos.
Another local make-up brand, Guangdong Marubi Biotechnology Co has surged 42% this year against a 3.9% decline in the Shanghai Composite Index and is now trading at 58.7 times forward earnings.
The local brands’ cheaper products and online-focused sales and marketing platforms seemingly suit a Covid-19 world in which consumers have less purchasing power and avoid going to public places to shop.
“Domestic brands like Proya have a very fast online growth rate,” said Dai Ming, fund manager with Shanghai-based Hengsheng Asset Management.
“International high-end brands hold more market share offline, which makes their business suffer more during the pandemic,” Ming said.
In the first three months of the year, Shiseido witnessed a net income decline of 96% to 1.4 billion yen (S$17.8 million) while Estee Lauder made a net loss of US$6 million compared to net earnings of US$555 million in the same period a year ago.
In contrast, Proya’s net income for the same period fell just 15% to 77.7 million yuan (S$15.33 million), while Guangdong Marubi fell only 1% to 118.8 million yuan.
Estimates show that Proya’s full-year profit is expected to rise 25% and Marubi 14%, while Shiseido and Estee Lauder are expected to post declines and L’Oreal to show a slight gain.
“The industry, already massive in China, is set to grow in a post-pandemic future where more people shop from home given fears of becoming infected in public places. Market size is projected to double this year from US$60 billion last year”, according to iiMedia Research.
Some analysts say that Proya and Marubi’s gains have been excessive due to investors’ desire for bright spots during the global crisis that’s sickened more than 6.5 million people and killed over 390,000. Both companies are still minnows in market value compared to global beauty brands.
“Chinese consumer stocks are now extremely over-valued and a company trading at a value like Proya should be avoided,” said Yang Ruyi, executive director of Chunshi Capital.
It’s also unclear if their short-term success will translate into long-term share gain in the 478 billion yuan Chinese beauty and personal care market.
According to 2019 data from Euromonitor International, L’Oreal leads in both skincare and color cosmetics in China, while Proya ranks only 15th and 38th respectively. And as consumers regain confidence and see incomes grow again after the pandemic passes, the pre-crisis trend of consumers upgrading to premium, higher-quality products sold by foreign brands may return.