Chicmax finds timeless profit formula in anti-aging skincare

Calculations using new company data show its revenue rose 77% in the second half of last year, while its profit quadrupled

Key Takeaways:

• Chicmax said it expects to report its revenue rose about 53% last year and its profit tripled on strong sales for its Kans line of anti-aging skincare products
• The company increasingly looks like an e-commerce play, with online sales rising to 81% of its total revenue in the first half of last year from 74% a year earlier

By Doug Young

Even in difficult times, it’s important to keep looking young. Conversely, having children is apparently less important during such periods of economic uncertainty.

Those are two key takeaways in the latest profit alert from skincare products maker Shanghai Chicmax Cosmetic Co. Ltd. (2145.HK), which last Friday disclosed that its revenue and profit both soared in the second half of last year on booming sales for its core Kans line of anti-aging skincare products.

The company didn’t comment on Baby Elephant, one of its other major product lines targeting mothers and their babies. But its interim report last year showed that sales from that business plunged in the first half of last year in lockstep with China’s sinking fertility rates and also due to stiff competition.

Luckily for Chicmax, Kans represents the lion’s share of the company’s sales, and that figure is growing.

Chicmax said it expects to report revenue of 4 billion yuan ($555 million) to 4.2 billion yuan last year, which would be up about 53% at the midpoint from its 2.68 billion yuan in 2022. Some simple calculations using first-half data show the company’s revenue growth accelerated from 26% in the first half of the year to 77% in the second half.

The trends were even stronger for the company’s profit, which is expected to come in between 420 million yuan and 460 million yuan for all 2023, roughly triple the 147 million yuan profit in 2022. Similar to the revenue trend, the company’s profit growth accelerated from 61% in the first half of the year to around 300%, or quadrupling, in the second half.

Here, we need to point out the differences between the second half of 2022 and 2023 were really a case of night-and-day, since the former was one of the darkest times in China as the country made a last-ditch effort to contain Covid before finally giving up. By comparison, the second half of 2023 was largely a business-as-usual environment, though it was also somewhat subdued as consumers became more cautious after an initial wave of enthusiasm at the start of the year.

While reading consumer behavior is always a nuanced art, investors are a bit more straightforward, at least in their reaction to Chicmax’s latest report. The stock shot up 15.3% on Monday, the first trading day after the announcement, to close at an all-time high of HK$46.85. The stock is now about 80% higher than the HK$25.20 price for its IPO shares in December 2022, and has more than doubled since touching a post-IPO low just three months ago.

Following the surge, Chicmax stock trades at a current price-to-earnings (P/E) ratio of 34, which looks more like something you might expect from a tech company. But truth be told, the company is increasingly looking more like an e-commerce company than a traditional retailer, with online sales rising to 81% of its total revenue in the first half of last year from 74% a year earlier.

Recession proof?

Chicmax’s P/E may look high, and in fact it’s way ahead of the forward ratio of 9 for Yatsen (YSG.US), which operates a more traditional chain of brick-and-mortar cosmetic stores and was expected to post a loss for all of 2023. But Chicmax is behind the current P/E of 47 for Proya Cosmetics (603605.SH), and the even higher 56 for Guangdong Marubi Biotechnology (603983.SH).

So, why are investors so excited about what otherwise look like relatively common retail companies? The answer appears to lie in their combination of e-commerce, together with their relatively recession-proof nature. How else do you explain the soaring sales for Chicmax’s core Kans brand, even as consumers rein in their spending on more discretionary big-ticket items like smartphones and cars?

As its oldest brand, launched in 2003 just a year after the company’s founding, Kans was the only one of Chicmax’s three major brands to report gains in the first half of last year. But those gains were quite large, with the anti-aging skincare brand’s sales rising 70% in the first half to about 1 billion yuan. It credited the increase to its new sales channels on Douyin, the Chinese version of TikTok, further underscoring how it is increasingly looking more like an e-commerce company than a traditional retailer. The big jump consolidated Kans’ position as Chicmax’s top brand, as its share of total revenue rose to 65% from just 48% a year earlier.

By comparison, sales for the company’s Our Leaf brand, which targets 18- to 35-year-old women with products using natural ingredients, fell 23% in the first half of last year, dropping its share of total revenue to about 13% from 21% a year earlier. Baby Elephant sales plunged the most, falling 38% in the first half of last year to account for 12% of total sales, down from 24% a year earlier. The company blamed that drop on “intense competition,” though China’s falling birth rates certainly can’t be helping either.

The move to greater online focus, combined with cost controls, helped Chicmax improve its gross profit margin to 69.0% in the first half of last year from 64.9% a year earlier. The company also looks quite prudent in using its cash to reduce debt in the current climate, rather than pursuing aggressive expansion. As that happened, its cash dropped sharply to 581 million yuan in June last year from 1.15 billion yuan at the end of 2022. But its debt-to-asset ratio also fell sharply to 38.4% last June from 61.6% a year earlier.

At the end of the day, Chicmax’s big revenue and profit increases last year – especially in the second half – are at least partly due to a post-Covid rebound. But the strong gains for its anti-aging Kans skincare line also seems to reflect a certain amount of resilience for this type of product, even in the face of growing consumer caution, which may explain why investors are suddenly embracing the company’s stock.

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