[This Week's Industry Insight] Cosmax, Unaffected by COVID-19, Prepares for Rapid Growth Leveraging Chinese Tourists

Growth During COVID-19 Through Global and Product Line Diversification
Stable Growth Expected with Returning Youke; Increased Short-Term Borrowing Poses Burden

Editor's NoteDear individual investors dreaming of successful investments. How well do you know the stocks you invest in with your own money? In the unrefined and chaotic online environment filled with all kinds of information, Asia Economy aims to be your hands and feet, eyes and ears, delivering accurate information about companies. We provide basic information as well as analysis of related companies such as partners, clients, and investors, focusing on companies that ranked high in stock inquiries from the financial information provider FnGuide over the past week. We will explain the financial status, performance, and future value of companies in an easy-to-understand manner. We visit you every week under the name of "This Week's Focus Stocks," or "This Week's Gwan-Jong." This week, we analyzed Cosmax, a leading domestic cosmetics original design manufacturer (ODM) and original equipment manufacturer (OEM) company, which has attracted attention due to the recent return of Yukeo (Chinese group tourists).

Group tourists from China arriving at Incheon Airport

Cosmax is a company specializing in cosmetics manufacturing and packaging. Founded in 1992 by Chairman Lee Kyung-soo, who has led the group for 32 years. The product lineup has expanded to include skincare, makeup, hair care, body care, and perfumes, growing into a comprehensive cosmetics manufacturer. Riding the growth of the K-beauty industry, it has established branches in the United States, China, Indonesia, Vietnam, and France, firmly establishing itself as a global cosmetics company.

The Cosmax Group operates as a holding company through Cosmax BT&I, which oversees Cosmax and its affiliates. Underneath, there is Cosmax, newly established through a spin-off, along with Cosmax NBT (health supplements), Cosmax Bio (health supplements), Cosmax Pharma (pharmaceuticals), Cosmax Biotech (cosmetics and pharmaceuticals), Three Apples Cosmetics (cosmetics), and overseas subsidiaries. Recently, the stock price has surged in anticipation of a large influx of Yukeo visiting Korea for travel and shopping.

Diversification of Sales Channels... Growth Despite COVID-19

Cosmax continued its external growth even amid the COVID-19 pandemic. Sales grew from 1.3307 trillion KRW in 2019 to 1.6001 trillion KRW in 2022. While other cosmetics companies suffered from deteriorating performance and financial conditions during the pandemic, Cosmax's sales grew by more than 20%.

Experts attribute Cosmax's continued growth to its sales channel diversification strategy. Although offline-centered cosmetics sales channels sharply declined due to the pandemic, sales to online-centered clients significantly increased through existing business partners. Cosmax has secured online brands such as Atomy, Carver Korea, GP Club, Dongkook Pharmaceutical, and Gounsaesang Cosmetics as clients. Domestic sales in the ODM business, which manufactures and packages products for online-centered clients, steadily increased.

Global market expansion also played a key role. Cosmax has consistently made large-scale investments to strengthen its competitiveness in the global market. After entering the Chinese market with the establishment of its Shanghai branch in 2004, it expanded sales in China by establishing a Guangzhou branch in 2013. It also expanded its production base in the Americas through the establishment of a U.S. branch and acquisition of local companies. In 2014, it established a branch in Indonesia, followed by Thailand in 2017 and Japan in 2021.

During the period when Yukeo visits sharply declined due to COVID-19, Cosmax formed a joint venture with the E-Sen Group to build Asia's largest eco-friendly and smart cosmetics factory in Guangzhou. Using this factory, it supplied local brands such as Manyo Factory and Clio to the Chinese market. As a result, Cosmax was able to increase its sales in China. In the U.S., it established new subsidiaries and factories, producing for global brands such as Est?e Lauder, L'Or?al, Johnson & Johnson, and Maybelline. Thanks to its global strategy, last year’s sales distribution by region was diversified with 59% domestic, 40% Asia, and 10% U.S.

The hand sanitizer business also compensated for the decline in cosmetics sales. With the outbreak of COVID-19, Cosmax expanded its sanitizer business production not only in domestic factories but also in the U.S. Thanks to this strategy, Cosmax achieved record-high sales and operating profit in Q2 2021, during the height of the pandemic. Q2 2021 sales reached 479.3 billion KRW, an 18% increase compared to the same period the previous year. Operating profit soared 167% to 46 billion KRW, and net profit surged 415% to 27.4 billion KRW.

The diversification strategy by region and product also proved effective when China’s zero-COVID policy and economic slowdown peaked last year. Despite sluggish demand from China, which accounts for over 30% of Cosmax’s sales, and reduced orders from the domestic branch to China, strong sales in the U.S., Japan, and Southeast Asia helped defend against sales contraction.

Increased Financial Burden... Growth Trajectory Maintained by ‘Yukeo’ Effect

While the diversification strategy brought external growth during difficult times, successive capital expenditures (CAPEX) investments significantly increased borrowings, leading to an expanded financial burden. Cosmax’s borrowings surged due to the establishment of a Chinese color cosmetics factory, expansion of the Pyeongtaek logistics center, and acquisition of U.S. cosmetics manufacturer Nu World. As investments continued, net borrowings?total borrowings minus cash equivalents?increased to 507.7 billion KRW by the end of 2020.

After raising 132.2 billion KRW through a rights offering the following year, net borrowings decreased to 459.6 billion KRW but then rose again due to continued investments such as the construction of the Pyeongtaek second factory and a new office building in China. Borrowings increased from 563.3 billion KRW at the end of 2021 to 607.9 billion KRW at the end of last year. Borrowings rose to 4.7 times EBITDA, indicating a somewhat increased financial burden.

In particular, the burden of short-term borrowings due within one year has increased, acting as a financial risk factor. As of the end of last year, short-term borrowings accounted for nearly 85% of total borrowings. This means about 600 billion KRW of borrowings must be repaid or refinanced within the year. There are concerns that the burden of investments will continue this year, making it difficult to reduce borrowings.

However, with China abandoning its zero-COVID policy and allowing group tourists to visit Korea, a significant opportunity is expected for Cosmax. The increase in domestic consumption by Yukeo is likely to greatly improve Cosmax’s cash flow. Considering the lifting of China’s COVID-19 restrictions, the full removal of indoor mask mandates in Korea, the planned start of operations at the joint venture factory in Guangzhou, and sales growth in Southeast Asia, external growth is expected to continue.

A credit rating agency official said, "Although short-term financial burdens have increased, there is a high possibility of cash inflow through the listing of the Chinese subsidiary, and EBITDA cash flow is expected to improve due to increased consumption by Chinese tourists," adding, "The borrowing situation is unlikely to worsen and is expected to gradually improve."

Accordingly, securities analysts have been revising Cosmax’s earnings forecasts upward. Korea Investment & Securities raised its net profit forecasts for Cosmax by 27.6% for 2023 and 17.2% for 2024. Researcher Kim Myung-joo of Korea Investment & Securities said, "The popularity of Korean indie cosmetics brands is rising worldwide, including Japan, leading to strong sales at Cosmax’s Korean branch," and "As Chinese distributors and cosmetics companies gradually reduce inventory, the pace of sales recovery at the Chinese subsidiary is expected to accelerate in the second half compared to the first half."

Analyst Lee Seung-eun of Yuanta Securities said, "With the increase in Yukeo, orders from domestic brand clients are expected to rise," and "As domestic cosmetics brand sales increase, Cosmax’s domestic sales could grow significantly." The analyst added, "Orders from clients in Japan and Southeast Asia are also expected to grow double digits in the second half of this year, and orders from the Chinese subsidiary will show double-digit growth due to the COVID-19 base effect," concluding, "Even if the pace is slower than expected, the external growth trend will continue."

This content was produced with the assistance of AI translation services.