The Price of Beauty: Chicmax Cosmetics Eyes Hong Kong IPO

The Chinese skincare manufacturer has filed to list in Hong Kong for the second time, aiming to be the exchange’s first mainland skincare stock

Key Takeaways:

• Shanghai Chicmax has made a second attempt to list on the Hong Kong Stock Exchange, but its financial performance is burdened by sales and marketing costs that amount to nearly half its overall revenue
• The company has branched out into multiple brands in recent years, but around half of its revenue still comes from a single cosmetics range

By Emily Chan

A Chinese skincare company that promotes its products on reality shows and live streams is aiming to bring the business of beauty to the Hong Kong stock market. But could the firm’s eye-popping marketing costs take some of the shine off its IPO?

Shanghai Chicmax Cosmetics Co. Ltd. had initially targeted the A-share market but switched its fundraising focus to the Hong Kong Stock Exchange, with an IPO filing in January that lapsed in July. Three months later, it filed again on Oct. 5 with the latest financial data for the first half of this year. If the company can pass the hearing, it is expected to become the first mainland cosmetics stock to be listed in Hong Kong.

Chicmax Cosmetics develops, manufactures and sells skincare, maternity and baby care products. Its three best-known brands are the Kans cosmetics range, the botanically inspired skincare label One Leaf, and Baby Elephant products for mother and child. Since it was founded in 2002, the company has been mainly operating in third- and fourth-tier Chinese cities, focusing on the mass cosmetics market.

China’s cosmetics market, although huge, is highly fragmented and intensely competitive. Chicmax Cosmetics had a mere 1.6% share of the mass market by retail sales in 2021 but it was among the top five domestic cosmetics companies for seven straight years from 2015 to 2021, according to market research cited in the preliminary prospectus.

Of the three well-known brands produced by Chicmax Cosmetics, Kans was the first to be launched, in 2003. The brand scored a hit with a multi-functional “bb cream”, a combined moisturizer and foundation, which enjoyed a record run of 40 days of 100 million yuan ($14 million) sales. One Leaf, launched in 2014, focuses on herbal skin care, while the Baby Elephant range introduced the following year offers products for mother and baby, a fast-growing cosmetics industry category. Together, the three brands have accounted for around 92% of company revenue in the past two years.

Chicmax Cosmetics may be one of China’s leading players in the skincare sector, but it was beaten to the IPO finishing line by some of its peers. Shanghai was the listing venue for Proya Cosmetics (603605.SH) and for Guangdong Marubi Biotechnology (603983.SH), the parent company of online cosmetics hit Perfect Diary, while Yatsen Holding (YSG.US) listed in New York, and Yunnan Botanee Bio-Technology (300957.SZ), the parent company of sensitive skin brand Winona, chose Shenzhen’s ChiNext board. Chicmax Cosmetics is the relative IPO latecomer with its bid to land on the Hong Kong Stock Exchange.

Whopping advertising expenses

The preliminary prospectus shows that revenue growth at Chicmax Cosmetics has slowed over the past two years, with year-on-year increases of nearly 18% in 2020 and 7% in 2021. But the renewed Covid outbreak this year took a heavy toll, sending revenues plunging 31% to 1.26 billion yuan in the first half of the year, as the pandemic hit production, supply chains and consumer demand.

The biggest strength of Chicmax Cosmetics has been its ability to sell through e-commerce platforms and live-streaming channels, generating revenues in the past three financial years of 1.51 billion yuan, 2.54 billion yuan and 2.7 billion yuan. Even in the challenging first half of this year, online channels still brought in 930 million yuan, nearly 74% of total revenues.

In profit terms, though, the picture is less glowing. Its net profit jumped nearly 67% to 339 million yuan last year but plunged almost 63% to around 65 million yuan in the first half of this year. Marketing and sales costs actually fell nearly 23% from the year-earlier period to 608 million yuan, but their share of revenue – at just over 48% – was the highest level in three and a half years.

The skincare industry is notorious for burning through cash for branding purposes, and Chicmax Cosmetics is a poster child for expensive marketing. The company featured famous South Korean actress Choi Ji-woo as a celebrity supporter of its core brand, Kans, soon after the cosmetics line was launched. In 2015, it even sponsored the TV dating show “If You Are the One” to the tune of 500 million yuan, setting a record for Chinese TV advertising. The company has also placed advertisements in many popular TV series and variety shows in recent years. No wonder marketing costs are straining the balance sheet.

But Chicmax Cosmetics is not alone in spending heavily on marketing, as skincare companies compete fiercely for the same price-conscious consumers in the low- and middle-income bracket. Some of the company’s peers are not far behind in the spending stakes. For example, marketing expenses at Botanee Bio-Technology were just over 45% of overall revenue in the first half of the year, compared with a figure of around 48% at Chicmax, while the marketing share at ProyaCosmetics was nearly 43%.

Seeking a competitive edge, Chicmax Cosmetics has also turned to science. It ramped up its R&D investment from 2016 and set up a research facility in Kobe, Japan, becoming the first Chinese cosmetics company to operate dual research centers in Shanghai and Japan. Faced with a domestic shortage of R&D talents, the company forked out large sums to headhunt professionals with advanced skills from international brands such as P&G and Shiseido.

Hard going for new brands

However, the industry is still more focused on marketing than on R&D. Figures in the preliminary prospectus show that Chicmax Cosmetics spent only 317 million yuan on R&D in the past three and a half years, equivalent to around 2% to 4% of revenue in the reporting period. Botanee Bio-Technology and ProyaCosmetics made similar-scale investments.

Responding to shifting consumer tastes, Chicmax Cosmetics has also tried to enter the high-end skincare market. In 2019 it launched “Bio-G” for sensitive skin, as well as a skincare product for pregnant women called “Asnami”, and hair-care brand “Kyoca”, in the hope of widening its consumer reach.

But the strategy has reaped limited rewards so far. The combined revenue from several new brands only accounted for around 13% of total revenue in 2019, and the proportion has been decreasing since then, falling to 7% in the first half of this year.

Meanwhile, the core cosmetics brand, Kans, remains the main money spinner, bringing in 604 million yuan in the first half of this year, around 48% of total revenue. The maternity and childcare brand Baby Elephant, which has grown steadily in recent years, has surpassed One Leaf, increasing its revenue contribution from 18% in 2019 to just over 24%. In addition, the gross profit margins of the three main brands have always topped 60%, higher than the 40% to 50% of the newer brands. Clearly, it is no easy task to navigate the path to business transformation.   

To estimate the market value of the Chicmax IPO, we can refer to the forward price-to-earnings (P/E) ratios of its peers Botanee Bio-Technology and ProyaCosmetics, at about 43.7 times and 39.2 times respectively. Applying the average 41.5 times to Chicmax Cosmetics and extrapolating the company’s first-half net profit of around 65 million yuan to the whole year, the valuation could reach 5.4 billion yuan.

However, sharp falls on global stock exchanges and a slowdown in Chinese consumer confidence mean the company may face markedly different conditions when it gets the formal go-ahead for the listing.

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