China Cosmetics Launch

30 March 2021
30 March 2021
Coverage Initiation
China Consumer
China Cosmetics Launch: C-beauty - The new Roaring Twenties…
initiating with a positive stance
Melinda Hu We initiate coverage on the China cosmetics sector. We are bullish on the sector prospects,
+852-2918-5727 underpinned by a rapidly expanding market (discussed in this report link), solid long-term
melinda.hu@bernstein.com
growth, and the unwavering rise of Chinese cosmetic companies (C-beauty). The best of
Ran Yang these domestic brands serve a younger generation of consumers, predominantly in low tier
+1-212-823-8321 cities, and benefit from e-commerce and digitization. We rate Proya (SHA: 603605)
ran.yang@bernstein.com Outperform, Guangdong Marubi (SHA:603983) Market-Perform. The sweet spot in the
competitive landscape is C-beauty mass brands focused on skincare.
We expect China's cosmetic sector to reach RMB 500bn by 2025, growing at 9% CAGR.
China captures ~20% of the global cosmetics market, with the largest TAM and highest
growth globally. The annual cosmetic spending per capita in China was US$31 in 2019,
which was 6X lower compared with Asian peers like Japan. We expect this to reach US$51
by 2025 (~65% growth) and continue forward, rising with disposable income as well as
growing demand from younger generation, lower tier cities and rising national pride.
We prefer companies with established foundation in the core segment – Skincare, despite
higher growth in the Color Cosmetics segment. Skincare accounts for 82% of the cosmetic
market and should remain dominant for the foreseeable future. Building credibility and scale
in skincare (through "explosive" and hero products) allows a company to establish cash cow
brands and prepare for brand extensions and multi-brand portfolios in the long term.
C-beauty has risen to dominate the mass skincare market and taken share from foreign
companies. Among the top 25 skincare companies in China, C-beauty grew from 26% to
~60% share in less than a decade. Despite the high fragmentation of 4,000+ brands in
China, top 25 companies (including Proya and Marubi) consolidated the market to ~70%.
We believe C-beauty companies focused on scale are the potential winners. Based on our
proprietary cosmetic S-curve., most C-beauty companies are still in the early growth stages.
Therefore, topline growth is imperative in determining the company's ability to build a
cosmetics empire in the long term through brand equity, expansion and leverage.
We believe these key strategies can support scaling up 1) Target the mass skincare market
2) Master distribution channel and marketing: more efficient returns through social media
marketing and digital content management 3) Capitalize on consumer trends.
We are above consensus for Proya and below consensus for Marubi. Both companies have
established credibility in the skincare market and cultivated well-established brands to
generate stable cash flows. We are constructive on Proya, given its compelling proposition
to young and aspiring consumers - Affordability, Access and Assortment are its key
differentiators. We expect earnings to grow at 27% CAGR between 2020-2025 and ROIC
to reach ~20% by 2025. As for Marubi, the company's dependence on the Eye Treatment
category is a concern. Its low-tier premium positioning serves as a double-edged sword,
and the verdict is out regarding its new pivot towards online and young consumers.
Analyst Page Bernstein Events Industry Page Financials Comp Valuation
See Disclosure Appendix of this report for important disclosures and analyst certifications www.bernsteinresearch.com
Melinda Hu +852-2918-5727 melinda.hu@bernstein.com 30 March 2021
BERNSTEIN TICKER TABLE

29 Mar 2021 TTM EPS Reported P/E Reported
Closing Target Rel.
Ticker Rating Price Price Perf. 2019A 2020E 2021E 2019A 2020E 2021E
603605.CH O CNY 159.99 223.00 (13.8)% CNY 1.96 2.44 3.24 81.63 65.63 49.37
603983.CH M CNY 55.10 61.00 (76.5)% CNY 1.35 1.27 1.49 40.72 43.49 37.09
MXAPJ 676.46 31.63 30.91 40.07 21.39 21.89 16.88
COVERAGE INITIATION O - Outperform, M - Market-Perform, U - Underperform, N – Not Rated
INVESTMENT IMPLICATIONS
China cosmetics is a fast-growing sector with TAM growing at 9% until 2025. C-beauty companies have risen and carry a lot of
potential for high growth. Given the extreme market fragmentation and competition from foreign players, clear market
positioning, distribution channels choices, and effective marketing are key determinants of success.
Both Proya and Marubi have established credibility in the skincare market and cultivated one well-established local brand that
generates stable cash flow to support scaling up. Between the two, we prefer Proya and rate it Outperform given its clear mass
positioning, proven ability to successfully launch new products, earlier mover in e-commerce, and effective digital marketing
strategies.
Proya (603605.CH): Outperform, target price of RMB 223 (+39% potential upside) based on 52x NTM P/E. We are constructive
on Proya's growth prospects in China given its compelling proposition to young and aspiring consumers - Affordability, Access
and Assortment are its key differentiators. We believe Proya's company strategy in premiumization, color cosmetics and online
should support solid, long-term growth. Proya is the fastest growing listed beauty company globally (highest revenue CAGR
between 2013-19), the fastest growing domestic skincare brand in China (2017-19), and one of the most prominent skincare
brands in China. We expect 26% revenue CAGR between 2020-2025. Proya's revenue and margin growth should be driven by
premium skincare product extensions, color cosmetics growth, and strong online development. Product premiumization
supported by new product launches, ingredient innovation and packaged sets. We are above consensus for 2021-22 EPS for
Proya. We expect earnings to grow at 27% CAGR between 2020-2025 and ROIC to increase from ~15% to ~19% by 2025.
Valuation is rich but justified given sector growth potential, quality returns (EPS, CAGR and ROE) and earnings growth.
Moreover, Proya's PSG is lowest among peers.
Guangdong Marubi (603983.CH): Market-Perform, Target Price RMB 61 (+11%) potential upside) based on 33.7x 1BF P/E. Our
key concerns are: 1) The company is famous for its eye treatment products which account for over 30% of its revenue. Despite
the expected high CAGR for this segment, eye treatment only captures a small portion of cosmetic spending, and its lower
growth ceiling. 2) Its low-tier premium positioning serves as a double-edged sword – on one hand, we believe Marubi is
avoiding direct competition with true premium foreign brands; On the other hand, they have less growth levers to pull. If they go
more premium, they are likely to face more fierce competition with foreign brands; if they go mass, brand equity and margin are
likely to take a hit. 3) Marubi is working to pivot towards e-commerce and cater towards the demand from the younger
generation which can bring greater growth potential. If that starts to materialize, we would likely become more constructive on
the name. However, Valuation is at all time low due to limited growth catalysts and upward pressure on its SG&A spending as it
shifts focus to online distribution, and shareholding concentration. We are below consensus for 2021-22 EPS for Marubi. We
expect earnings to grow at 17% CAGR between 2020-2025.
CHINA CONSUMER BERNSTEIN 2

VALUATION COMPS TABLE
EXHIBIT 1: Valuation Table

Cosmetic Company Ticker Mkt Cap Trading Share P/E EPS Growth PEG EV/EBITDA P/B ROIC Div Yield
(USD bn) CCY price 20E 21E 22E 1BF 21E 22E 21E 1BF Current 2019 2019
China
Proya Cosmetics Co Ltd 603605 CH 4.9 CNY 160.0 67x 52x 42x 49x 28% 25% 1.9 36x 14.6x 16% 0.5%
Guangdong Marubi Biotechnology 603983 CH 3.4 CNY 55.1 42x 35x 30x 34x 19% 18% 1.9 27x 8.3x 23% NA
Shanghai Jahwa United Co Ltd 600315 CH 5.0 CNY 48.5 83x 63x 43x 57x 33% 45% 1.9 39x 5.0x 7% 0.8%
Yujiahui Co Ltd 300740 CH 1.5 CNY 23.7 77x 44x 30x 40x 72% 50% 0.6 28x 7.0x 2% 1.7%
Yatsen Holding Ltd YSG US 7.4 USD 11.8 NA NA NA NA 56% 77% NA NA NA 9% NA
Japan
Shiseido Co Ltd 4911 JP 26.7 JPY 7,333.0 NA 94x 49x 77x 238% 93% 0.4 25x 6.0x 12% 0.8%
Kao Corp 4452 JP 32.6 JPY 7,430.0 28x 27x 24x 26x 0% 11% 107.8 13x 3.9x 13% 1.4%
Kose Corp 4922 JP 9.0 JPY 16,230.0 32x 86x 47x 47x -66% 82% NA 23x 4.2x 17% 1.2%
Fancl Corp 4921 JP 4.5 JPY 3,785.0 45x 54x 43x 44x -24% 25% NA 25x 6.6x 13% 1.1%
Pola Orbis Holdings Inc 4927 JP 5.6 JPY 2,678.0 275x 48x 38x 45x 454% 28% 0.1 18x 3.5x 11% 4.4%
Noevir Holdings Co Ltd 4928 JP 1.6 JPY 5,250.0 30x 28x 27x 27x -3% 6% NA NA 3.9x 15% 3.4%
Korea
Amorepacific Corp 090430 KS 13.5 KRW 262,500.0 192x 53x 41x 50x 255% 30% 0.2 17x 3.4x 5% 0.5%
LG Household & Health Care Ltd 051900 KS 21.1 KRW 1,530,000.0 31x 26x 24x 26x 14% 12% 1.9 14x 4.7x 18% 0.9%
US
Estee Lauder Cos Inc/The EL US 106.8 USD 294.4 65x 50x 42x 44x 24% 17% 2.1 27x 19.7x 23% 0.9%
Europe
L'Oreal SA OR FP 215.6 EUR 327.0 46x 40x 37x 39x 13% 9% 3.2 24x 6.3x 12% 1.5%
China: Avg. 67x 49x 36x 45x 42% 1.6x 33x 9x 11% 1%
Overseas: Avg. 83x 51x 37x 43x 91% 16.5x 21x 6.2x 14% 2%
Source: Bloomberg, Bernstein analysis, L'Oréal covered by Bernstein analyst Bruno Monteyne, Estee Lauder by Callum Elliot, market data as of March 29,2021
DETAILS
TABLE OF CONTENTS
Bernstein Ticker Table......................................................................................................................................................................................................... 2
Investment Implications ...................................................................................................................................................................................................... 2
Valuation Comps Table ....................................................................................................................................................................................................... 3
Details ....................................................................................................................................................................................................................................... 3
Table of contents................................................................................................................................................................................................................... 3
Portfolio Manager's Summary ........................................................................................................................................................................................... 7
We prefer companies with established foundation in the core segment – Skincare ....................................................................................17
Skincare adoption is faster in China; Asian consumers demonstrate a preference towards skincare. ..............................................17
Skincare is sticky and allows brands to build loyalty through repeat purchase and skincare routine extensions...........................19
Skincare builds stronger brand credibility, lifecycle is longer, and the barrier to entry is higher ..........................................................20
The C-beauty evolution: Milestones that propelled the growth of C-beauty ...................................................................................................22
C-beauty brands: how to win? Strategic positioning and portfolio management ..........................................................................................27
C-beauty has risen to dominate the mass skincare market and took share from foreign companies ................................................27
China cosmetics S-Curve: C-beauty companies should invest in scaling up ..............................................................................................29
C-brands can differentiate through distribution and marketing ..........................................................................................................................36
E-commerce is the obvious growth driver, and new marketing methods can mean more efficient returns.....................................38

C-beauty social media marketing edge is reflected in the effectiveness of SG&A spend ......................................................................41
The Cosmetic Store (CS) is less likely to be disrupted ........................................................................................................................................47
Three key consumer trends that drive C-beauty growth ........................................................................................................................................49
Increasing cosmetics demand from the young generation...............................................................................................................................49
Rising national pride ......................................................................................................................................................................................................50
Increasing cosmetics demands from low-tier cities ...........................................................................................................................................52
ESG ..........................................................................................................................................................................................................................................54
Materiality matrix ............................................................................................................................................................................................................54
Sector valuation ...................................................................................................................................................................................................................58
Proya – Outperform (TP: RMB 223) .........................................................................................................................................................................61
Marubi: Market-Perform (TP: RMB 61) ....................................................................................................................................................................71
APPENDIX .............................................................................................................................................................................................................................79
China cosmetics sector has largest TAM and highest growth globally .........................................................................................................79
Enormous growth potential, supported by rising wealth and culture ............................................................................................................80
Top & Bottom 25 brands ..............................................................................................................................................................................................83
Distribution channel comparisons ............................................................................................................................................................................85
E-commerce platforms and content management .............................................................................................................................................86
Millennial and Generation Z are the key cosmetic consumers .........................................................................................................................87
Proya equity structure ...................................................................................................................................................................................................88
Appendix - Financial Forecasts ......................................................................................................................................................................................89
Valuation Methodology......................................................................................................................................................................................................93
Risks ........................................................................................................................................................................................................................................93

EXHIBIT 2: Six key convictions that impact our investment thesis

Proya Marubi
 Market size will reach ~RMB500 billion by 2025 from 300B today, growing at 9% CAGR
1. Long-term
growth  China is biggest and the fastest growing cosmetics market globally, yet cosmetic spending
per capita is lowest compared to developed markets
2. Skincare is  Skincare captures 82% of cosmetic market and will remain dominant (expected 76% in 2025)
the bread and
butter  Color cosmetics enjoyed higher growth, and can provide additional growth for some brands.
3. C-beauty  Chinese brands have risen to dominate the mass market from 26% to ~60% share in skincare
dominates  Domestic brands are gradually tapping into higher pricing ladders. We see ample ASP growth
mass market opportunities for C-beauty brands
4. Focus on  Most C-beauty companies are at the early stage of the S-curve so scaling up is important as it
creates leverage
scaling up  Early awareness through explosive products, long term sustainable growth through hero
products, product series extension, multi-brand portfolio.
5. Master  E-commerce and cosmetic stores channels should drive 65% of total cosmetic sales by 2025
distribution  Strong brands are building awareness and engagement through brand communication and
and marketing marketing, Social media marketing seems to be generating more effective returns
6. Capitalize on  Rising cosmetic demand from younger generation (millennials and gen z), lower tier cities and
rising national pride
consumer
trends  Lower-tier cities account for ~50% of China's online cosmetics consumption
Source: Bernstein estimates and analysis
EXHIBIT 3: China Cosmetics: Bernstein stock recommendations
OUTPERFORM, TP = CNY 223 (~39% potential upside)

Proya • Main brand Proya targets the mass sector and young consumers
(603605 CH) • Proya had highest revenue CAGR between 2013-19 compared to global traded peers, even
stronger between 2017-2019 with 32% revenue CAGR.
• Successfully rolled out new products. Proya's skincare lines supported its robust growth. Its
skincare market share ranking improved from 27th to 14th place between 2010-2019.
• High investments in E-commerce and strong digital marketing strategies
• We’re 6% ahead of cons for 2021/2022 (both topline and EPS), TP =CNY 223 at 52x
NTM+1 EPS, upside =39%
MARKET-PERFORM, TP = CNY 61 (~11% potential upside)

Marubi • Lower growth ceiling of Eye Treatment category niche will be an issue if the company fails to
(603983 CH) address ex-Eye Treatment market
• Lower-tier premium positioning helps to avoid direct competition with premium Western
brands, but also limits growth potential
• Pivot towards young consumers and E-commerce may work, but it puts forward pressure on
margins
• We’re 6% below cons for 2021/2022, TP CNY61 at 33.7x our NTM+1 EPS, upside =11%
Source: Company, Bloomberg, Bernstein estimates and analysis.

EXHIBIT 4: Bernstein vs Consensus
As of date: Proya Marubi

29-Mar-21 603605 CH 603983 CH
Rating
Bernstein rating Outperform Market-Perform
Consensus rating
0xU 3xM 31xO 0xU 1xM 26xO
Market cap (USD bn) 5 3

Daily liquidity (USD mn, 3mth avg) 52 16
2020 YTD total return -11.1% 3.5%
Target Price (TP)

Bernstein TP CNY 223 CNY 61
Current price CNY 160 CNY 55
potential upside (downside) vs current 39% 11%
EPS (RMB)
Bernstein 2020E 2.44 1.27
Consensus 2020E 2.38 1.33
upside (downside) vs consensus 2.4% -4.6%
EPS forecast CAGR (2019-2022E)
Bernstein 27% 9%
Consensus 25% 11%
Bernstein P/E ratio
P/E ratio used for valuation 52x 34x
Revenue (RMB mn)
Bernstein 2020E 3,830 1,774
Consensus 2020E 3,760 1,853
Bernstein 2021E 5,004 2,089
Consensus 2021E 4,748 2,226
Bernstein 2022E 6,205 2,442
Consensus 2022E 5,867 2,640
Bernstein revenue CAGR
2019E-2022E 26% 11%
Source: Bloomberg, Bernstein estimates and analysis

PORTFOLIO MANAGER'S SUMMARY

The following key themes of China's cosmetics sector are premised upon enormous sector TAM potential, driven by rising
wealth and cultural factors. Detailed analysis and global comparisons are included in the appendix and in an earlier TAM report
(link). We focus on two key sub-segments: Skincare and Color Cosmetics as they contribute ~75% of beauty industry revenue
and are the only categories gaining in market share (Exhibit 134).
Long -term growth

China is the largest cosmetics market globally and also displays the highest growth (13% CAGR from 2004-2019, when global
average was 5%), We conservatively forecast the China cosmetics market to grow at 9% CAGR and reach ~RMB 500B by 2025
– there could be further upside given the CAGR between 2016-19 was 15% and 2020 growth was brought down to 8% due to
COVID. Annual cosmetic spending per capita in China is only USD$31 in China, 6x lower compared with $193 in Japan. We
expect this to increase to US$51 by 2025, still significantly below peers.
2021 and beyond, domestic brands should maintain their dominance in the mass cosmetics segment - despite the high
fragmentation - market leaders should continue to consolidate the market (there are 4000+ cosmetic brands in China, yet top
25 skincare companies increased market share to ~70%). Notably, among the top 25 skincare companies, C-beauty companies
grew faster and took share from foreign players over the past decade. Foreign brands play it safe in the premium market, but
domestic brands are gradually tapping into higher pricing ladders. Given the wide price gaps, we see ample ASP growth
opportunities for domestic players – and without having to directly compete with foreign giants.
Domestic brands are building scale. Tables have also turned in the M&A market, as C-beauty companies are now acquiring
foreign brands to expand categories, product lines, and into overseas markets. Recent examples range from Yatsen's (Perfect
Diary's parent company, NYSE: YSG, not covered) acquisition of luxury skincare brand Eve Lom, and French premium skincare
brand Galénic, to Florasis' expansion overseas while building brand equity through western social media like Tiktok, Instagram
and Facebook. These developments are consistent with our expectation described in our proprietary China Cosmetics S-curve.
EXHIBIT 5: We expect China's cosmetics market to grow at 9% CAGR and reach RMB 500B by 2025
Source: Euromonitor, Bernstein analysis and estimates

We prefer companies with established foundation in the core segment – Skincare

Skincare is still main driver of growth and color cosmetics provides additional growth for some brands. We believe companies
with established scale in skincare are more likely to win in the long run. Most C-beauty companies are in the early growth stage,
therefore scaling up is important. Skincare accounts for the majority of the China cosmetics market with ~81% share, based on
our cosmetics universe. Considering the lower loyalty in color cosmetics, we prefer companies with a backbone in the core
market - Skincare. It allows the company to establish more credibility and build the groundwork for brand extensions for future
growth. Focusing on the skincare category allows companies to build more stable cash flow, and scale from a solid foundation
(no pun intended). C-beauty growth will continue to be driven by skincare, with additional potential from color cosmetics. We
like companies that invest in Skincare for the following reasons:
 Skincare builds stronger brand credibility, lifecycle is longer, and the barrier to entry is higher. It's more difficult to build
Skincare knowhow. Skincare requires R&D capital, cultivation of product lines, and branding to differentiate.
Consumers are more cautious and have more loyalty towards specific brands. When a brand's skincare becomes well
perceived by the consumers, it can have a longer life cycle (compared to Color Cosmetics), which in turn can provide a
more stable and consistent cash flow for the company. Hence, in Skincare brands need to have key product line (hero
product) the brand is known for, then extend from there.
 Skincare is sticky and allows brands to build loyalty through repeat purchase and skincare routine extensions. Japan and
Korea are using an average of 21 different products in their skincare routine. Chinese consumers are also adding more
steps in their daily skincare routines to an average of 7-9 steps.
 Skincare adoption is faster in China, and Asian consumers demonstrate a preference towards skincare. Looking at
different regions around the globe, Korea and Japan allocate more than ~70% of cosmetic spending is allocated to
Skincare, much higher than other markets. We think China's spending allocation towards skincare will follow Korea and
Japan.
China color cosmetics segment saw accelerated growth at 21.5% CAGR vs. 11% CAGR in skincare between 2015-19.
Currently, less than 20% of Chinese use color cosmetics daily compared to 95% of Western women and we see growth
opportunities. By contrast to skincare, Color cosmetics requires less R&D capital and has a shorter life cycle. That implies the
color cosmetic segment will continue to grow faster than skincare (14% vs 8% CAGR).
EXHIBIT 6: Skincare is still bread and butter while and color cosmetics provides additional growth
China Cosmetic Market Growth by Segment

30% Color Cosmetics: 2019- 600
Color Cosmetics 2015-19
25E CAGR:14%
CAGR: 21.5%
25% Skincare: 2019-25E 500
Skincare 2015-19 CAGR:8%
CAGR: 11%
20% 400
RMB bn
15% 300
10% 200
5% 100
- --
China skincare China color cosmetics Skincare CAGR Color cosmetics CAGR
Source: Euromonitor, Bernstein estimates and analysis

C-beauty evolution – C-beauty is winning in the mass skincare segment

China's cosmetics industry dates to the 19th century. In 1898, Kwong Sang Kong opened up in Hong Kong and started to sell
Shanghai Vive skincare (Two Girls Brand). The company later evolved to Shanghai Jahwa (SHA: 600315, not covered). Fast
forward to early 2000, foreign brands dominated the market though aggressive M&A. Online cosmetics was still nascent in
China, department stores were the major distribution channel. The synergies and scale through M&A allowed foreign brands to
build competitive moats in department stores and control the main distribution channel. After 2008-09 GFC, domestic brands
began to emerge, and their rapid growth was aided by the development of multiband CS (cosmetic store) channel in lower tier
cities and e-commerce (Exhibit 24). Foreign brands had less competitive advantage across these new retail channels.
Through the CS and e-commerce channels, domestic brands such as Pechoin, Chando, Proya and Marubi quickly rose to the
top. The price differential between domestic and overseas-sold foreign brands became more notable, and China consumers
turned to "Daigou", which dampened premium demand in China. As a result, between 2012-2016, domestic brands began to
dominate the mass market; premium demand grew at a slower pace. However, premium sector resumed growth as "Daigou"
began to fade out in 2017 – 2018 due to government actions.
EXHIBIT 7: China brands emerge post-GFC, rapid growth aided by CS (cosmetic store) expansion and E-commerce
“Daigou” diverged Ecommerce

Foreign brands local premium became the largest
dominated; Key demand; domestic channel; rising
distribution through brands begun to nationalism trend of
department stores expand in mass “buy-Chinese”
consumer category (Guohuo)
Prior to 2008 2012-2016 2018-19
2008-2012 2017
2021 and beyond
Domestic brands
begun to emerge, “Daigou” faded out,
supported by CS local premium Domestic brands
(cosmetic shop) growth started to dominate mass;
stores and online accelerate leaders take share
distribution and potentially tap
into premium
Source: Bernstein analysis
Over the past decade, we observed an interesting divergence - top market share gainers in Skincare were Chinese mass
brands; while top market share losses came from foreign mass brands. Specifically, among the top 25 skin care brands that
gained market share, 12 were Chinese mass brands; 7 were premium foreign brands. Of the 25 skincare brands that lost the
most market share, 22 were foreign brands.

EXHIBIT 8: In the past decade, top market share gainers in Skincare were Chinese mass brands; while top market
share losses came from foreign mass brands
Top & bottom 25 brands in market share growth

Foreign vs. Domestic skincare brands
5.0%
4.5%
Gaining share/
Stronger postion
4.0%
Market share (2019)
3.5%
3.0%
2.5%
2.0% Proya
1.5% Domestic brands
1.0%
Forei gn brands
0.5%
0.0%
-4% -3% -2% -1% 0% 1% 2% 3% 4% 5%
Market share growth (2010 to 2019)
Source: Euromonitor, Bernstein analysis

Note: brand list in appendix
EXHIBIT 9: C-beauty companies had higher growth CAGR in Skincare; the top 3 CAGR were achieved by C-beauty
companies

C-beauty brands: how to win? Scale is key

Legacy brands like L'Oréal (OR, covered by Bruno Monteyne) built its empire over more than100 years, and the company also
began in the mass segment. L'Oréal's major acquisitions started in the 1960’s (60 years after the company was founded). We
illustrate the Chinese cosmetic S-curve in Exhibit 38 and believe most Chinese companies in the early stages of the maturity
cycle. We believe the S-curve for successful Chinese cosmetic companies should follow the below phases:
 Early phase, first 10-20 years: focus on developing a stable brand and product reputation. Establish market awareness
and build brand equity, reputation and loyalty through the mass market. Focus on one brand, expand presence and
market share through that one focus brand. The growth in online cosmetics penetration and virality in China makes it
easier to cultivate "explosive/viral" products (SKU's that become hit product over short period of time).
 Growth phase, next 10-20 years: focus on scaling up, scale can lead to higher investments in R&D, cost leverage, and
marketing and distribution synergies. Develop and extend product series, build Hero product (e.g. SKII's Pitera™
Essence, La Mer's Moisturizing Cream, Lancôme's Generic) that the brand can depend on as the key revenue driver.
Establish core cash cow brand which allows the company to extend and experiment with new brands.
 Mature phase, next 10-20 years: With CF generated from cash cow brands and hero products, build a multi-brand
portfolio and amortize costs across brands. The fastest way to expand brand portfolio is through M&A, particularly in
specialty areas that the brand is less familiar with (e.g. skincare brand shifting into color cosmetics, or fragrances). At
this stage, it is key to maintain agility to respond to disruptors.
C-beauty companies are still in early growth stages and have just started to build competitive moats; the top domestic players
are in the growth phase. Therefore, companies should focus on scaling up – scale determines the brand's ability to invest in
expansion either organically or through M&A. Over the next decade, we expect leading C-beauty companies to continue taking
market share through scaling up in the mass segment.
EXHIBIT 10: C-beauty companies are still in early growth stages and have just started to build competitive moats

Which companies and brands are scaling up?

Since scale is one of the key contributors of success, which C-beauty companies are on the right track? We examined the
development of top 20 skincare companies and brands through the BCG Matrix. It's clear that among the top 20, the number of
Chinese companies and brands does not fall behind foreign peers, despite smaller market share.
The company bubble chart shows a divergence in trend – foreign companies with more premium exposure are wining e.g. Estee
Lauder (EL, covered by Callum Elliott), while foreign companies with more mass exposure are losing (P&G, Mary Kay, Amway).
The brand bubble chart further demonstrates that foreign giants' growth was supported by premium brands and mass brands
are losing. For example, L'Oréal's premium brand Lancôme has performed significantly better than its mass brand L'Oréal Paris.
Foreign brands dominate premium, but Chinese brands are defining a path. China is seeing rapid growth in premium penetration
in cosmetics, currently at 36% (Exhibit 70), we forecast it to reach similar levels of Japan and Korea, and plateau at around 50%.
Therefore, premiumization will continue but at a slower pace. Meanwhile, mass market should grow at a steady level, and
Chinese brands will contribute most of the growth, local brands already dominate the mass market with ~60% share (Exhibit
32). In markets like Japan and south Korea, local brands have 80-90% market share in the mass segment. In China, younger
customers are more likely to try domestic products and more importantly, C-brands have the ability to respond to fast changing
market dynamics, channel shifts and marketing methods.
Having said that, the rising journey of C-beauty growth seems to be non-linear. In this fragmented and competitive market,
growth isn't a given for C-beauty brands. C-brands still need to have strong brand and distribution strategy to maintain growth.
Other than Pechoin, the only two cosmetic brands that maintained double digit growth in recent years are Proya and Marubi.
Proya for example grew faster in recent years due to 1). Faster development in e-commerce and earlier social media marketing
vs. peers 2). Focus on mass market and young generation 3) Continuous innovation. In preparation for the 2017 IPO, Proya
terminated all related party transactions of relatives that supported offline distribution and had equity ownership in Proya. The
company took this opportunity to reorganize its channel strategies and accelerated its online penetration.
EXHIBIT 11: Premium foreign brands and mass domestic brands tend to be winners

Scaling up through pricing and positioning strategy

Brand positioning needs to be deliberate and strategic to win. Pricing is an important component of positioning. We segmented
the China market into mass, low-tier premium, high-tier premium and ultra-premium based on average ASP sold on T-mall. Our
analysis shows that while C-brands are mainly in the mass market, some of them are on the lower edge of the premium sector
but still far below the foreign premium brands. We see ASP expansion opportunities arising from:
ASP growth without directly competing with premium foreign brands. China is seeing rapid growth in premium penetration in
cosmetics; however, this trend won't impair C-brand's ability to expand ASP. First, given the wide pricing gaps, it shows there is
plenty of room to increase ASP while not directly competing with premium foreign brands (Exhibit 45). Some Chinese brands
like Marubi and Herborist are on the lower edge of the premium sector. They are perceived as the low-tier premium brands
among consumers base and do not compete directly with the foreign premium brands in the high pricing ladders. Chinese mass
brands to increase ASP and shift into low-tier premium segment. Not to mention, Price gap within color cosmetics is narrower,
and the most premium brands are relatively affordable. Considering customers have lower loyalty for color cosmetics, there are
opportunities for Chinese brands to tackle into this sector as well. In fact, we are seeing consistent ASP increases (Exhibit 48).
Second, it won't be long before C-beauty brands establish themselves in the premium, whether through M&A or R&D. We believe
moving into premium is inevitable for C-beauty in the long run. Japan and Korean markets developed J-beauty and K-beauty
over time and local brand dominate ~60% overall skincare market. It is an obvious challenge to compete with premium foreign
brand equity and R&D, but C-beauty companies can learn from them and collaborate. Shiseido has been working alongside
Chinese startup brands and offers its technical expertise and supply chain experience to C-beauty companies. Proya is
partnering with Spanish anti-aging brand SingulaDerm. Perfect Diary has partnered with the Korean OEM Cosmax to build the
largest cosmetics production site in Asia.
Domestic brands are still in the early stage of brand building and tend to offer larger discounts to boost sales. We expect this gap
to narrow as domestic brands scale up and build brand equity. At this stage the brand image C-beauty brand image is weaker,
therefore brands are using price concessions and livestreaming promotions to gain traction. As C-beauty build up brand equity
over time, discounting tactics should reduce which means greater ASP growth.
EXHIBIT 12: In skincare, Chinese brands dominate the mass market; There are plenty of opportunities for Chinese
mass brands to shift from Mass to low-tier premium.
Retail market share vs. ASP (2020)
Pechoin, Market share 4.5% Top skincare brands by retail value
Mass Low-tier premium High-tier Premium Ultra premium

L'Oreal Paris Lancome
3.6% Estee Lauder
Olay
Chando 3.3%
3.0%
2.7%
retail m arket share
2.4%
KanS 2.1%
One Leaf 1.8%

SK-II
Aupres
Innisfree Herborist 1.5% La Mer, ASP 1833
Perfect Proya
HomeFacialPro 1.2% Dior
Inoherb Hanhoo
Marubi The history of w hoo
Winona Shiseido 0.9%
Yunifang L'occitane Kiehl's Guerlain
Wetcode Avene Laneige IPSA
Laroche Posay 0.6% Clarins Sulw hasoo Cle de Peau
Bioderma
Vichy Elizabeth Arden Fresh
Fancl DHC Origins 0.3% SkinCeuticals
Avon Neutrogena Clinique Biotherm Givenchy
Pond's Caudalie Dr Jart+ Jurlique Elixir
NUXE 0.0%
0 100 200 300 400 500 600 700 800 900 1000 1100 1200
ASP on Tm all (RMB)
Source: Euromonitor, Moojing, Bernstein analysis

Differentiate through distribution and marketing

Beauty products are mostly sold through 5 channels in China: Key accounts (hypermarkets, supermarkets and convenience
stores), Department stores, Cosmetic store, E-commerce and others (direct sales). Over the past decade, department stores
and KAs saw continuous decline in market share. On the other hand, E-commerce grew to become the most important channel
pre-COVID and captures ~30% of total cosmetic sales. Cosmetic stores (CS), despite its offline nature, expanded its presence
with market share increasing from 14% to 21% between 2005 and 2019. In the recent years domestic CS operators such as
The Colorist, Harmay and Wow color saw more rapid growth.
We expect C-beauty brands to continue to expand through Cosmetic Stores. Multi-brand CS rapidly grew in tier 3 cities and
below, supporting domestic brands growth. Domestic brands dominate multi-brand CS with 85% of SKU sold in this channel.
Under Marubi's CS channel, 64% are tier 3 and below. The high fragmentation of this channel, low tier penetration and low cost
provides cosmetic companies with bargaining power and makes this channel harder to disrupt by ecommerce compared to
department stores. Moreover, new formats of CS stores have emerged to attract young consumers with innovative designs and
trendy products.
EXHIBIT 13: E-commerce and Cosmetic shops are forecasted to be the two major channels for China cosmetics
We expect online cosmetics growth to remain double digit to 2025. We estimate China's online sales in cosmetics to reach ~220
RMB bn by 2025 with 43% share (Exhibit 50 and Exhibit 51). The growth is driven by both higher cosmetic spending as well as
growing online penetration.
C-beauty brands are dominating search and content interest. Generation Z spend 50-70% more online vs. their older cohorts. C-
beauty brands were able to build strength and interest among this generation through their approach to digital management
which includes: first and foremost, social media marketing mix. Secondly, balance platform mix based on target audience and
thirdly, refining digital and content management.
 C-beauty has faster growth on social media platforms, Exhibit 54 shows that domestic brands achieved higher growth
CAGR between 2014-18 on content marketing, brand influence and advertisements
 C-beauty brands reads growth outpaced Foreign brands, Exhibit 55 shows that C-beauty brands YoY content reads
grew faster at 66% vs. U.S and European brands ~13% growth, and Japanese/Korean brands saw 10% growth.
 C-beauty is more agile to trends on social media, Perfect Diary has 10x more followers on Xiaohongshu platform than
foreign cosmetics brands (Exhibit 56). Domestic is more capable of leveraging Tiktok to promote sales (Exhibit 57).

Social medial marketing is reflected in the effectiveness of SG&A spend

Most big brands implement a mix of celebrity and influencer marketing. Often celebrities are used as brand ambassadors for
awareness building, and influencers/KOL for social engagement. Brands in China often use KOL's to engage through product
education, lifestyle tips, games and gifts etc. Foreign brands tend to focus more on mainstream media rather than influencer
marketing or new digital channels such as livestreaming, their reaction to the market is slower given headquarters limitations
and the need to comply with the brand image and "global identity". It will take even longer for ultra-premium brands due to need
to manage prestige brand image. Although the walls are coming down, C-brands will take market share when they can.
Social medial marketing is reflected in the effectiveness of SG&A spend. We observe that C-beauty brands, which tend to spend
more on social media marketing are generating more efficient returns (Exhibit 62), i.e. higher revenue growth with lower
advertising spend. This is even before we consider the absolute value, since companies with greater scale spend significantly
more in absolute value.
Companies have migrated towards non-celebrity figures to promote their products, including Key Opinion Leader (KOL), Key
Opinion Consumer (KOC), vloggers, bloggers and internet-celebrities (Wanghong). These KOL's uses multiple channels in
China, including traditional E-commerce platforms such as Tmall and Taobao (BABA, Alibaba, covered by Robin Zhu),
livestreaming through these E-commerce sites, or short video platforms such as Douyin (Chinese TikTok), Kuaishou (1024.HK,
Kuaishou, covered by Robin Zhu) , and long video platforms such as Bilibili, discussion forums like Xiaohongshu (Red) and
microblogging sites such as Weibo, photos and video sharing and promotions through social platform such as WeChat
Moments (0700.HK Tencent, covered by Robin Zhu). The management of KOL has become professionalized and sophisticated,
professional management and content generation are often done by MCN (multi-channel networks).
Driven by the impressive growth potential, 71% of advertisers in China intend to increase social media marketing budget in 2020
(Exhibit 65), across four key areas: KOL, short video/livestreaming, WeChat and CRM (Exhibit 66). Given constraint in marketing
budgets, companies usually choose one or two social media platforms as their focus and consider the type of KOL and level of
KOL most suitable to their campaign. Local brands such as Proya and Perfect Diary are leaders here (see case examples later in
the chapter). Multinationals like L’Oreal and Estee Lauder also catching up. L’Oréal launched Meipai the event that drew uploads
60 million views. Estee lauder signed celebrity Xiao Zhan and launched” Lipstick Micro Movie” on Weibo which generated
120mn views. However, companies like Proya and Perfect Diary tend to rely less on mass media and celebrities. Proya for
example: In July 2019, Proya's Black bubble mask went viral on Douyin (Tiktok), and generated in total RMB ~330m on one
single SKU. Proya's social media marketing includes: the use of variety of platforms and content Management through MNC's
and KOL's.
EXHIBIT 14: C-beauty brands spend more on social media marketing, and are generating more efficient returns
SG&A spending vs Revenue growth 2015-2019

25%
Prefered area Yujiahui Co Ltd
20%
Proya Cosmetics Co Ltd
Shanghai Jahw a United
Guangdong Marubi Co Ltd
2015-2019 CAGR
15%
Biotechnology
Fancl Corp
Kose Corp
10% Shiseido Co Ltd
L'Oreal SA
L'Occitane International
5% SA
Estee Lauder
Kao Corp Noevir Holdings Co Ltd
0%
20% 30% 40% 50% 60% 70% 80%
SG&A as a % of Revenue (average of 2015-2019)
Source: Bloomberg, Bernstein analysis

Capitalize on consumer trends

To the consumer, C-beauty is culturally relevant, C-beauty brands can challenge foreign players in areas they still can't quite
grasp. For example, some foreign celebrity brands believe overseas celebrity status carries over into China automatically. In
China’s insular media arena, millennials are increasingly influenced by Chinese/Asian celebrities. Kim Kardashian’s KKW
fragrance had 1.1 million followers on Instagram but only 104k on Weibo and engagement in China was low. Whereas Rihanna’s
Fenty Beauty achieved success as it was launched with Chinese new celebrity Wang Ju and HEYTEA collaboration.
The China cosmetics market is dynamic and fast-changing, understanding the key trends explains the above anecdote:
 Increasing cosmetics demand from the young generation. Millennials and Gen-Z account for 60% of online cosmetics
consumption in China. Gen Z is starting skincare earlier than the previous generation, for example, the bestselling
cream of Guerlain "imperial orchid" is mainly purchased by women between 50-80 years old in Europe, but in China, by
women between 20-351. These two generations are not shy about being Chinese and have a high appreciation for the
strong Chinese cultural identity. Which leads us to the next trend...
 Rising national pride. With rising national pride, “Buy-Chinese” (Guohuo) has been an undeniable trend China's
cosmetics sector. Millennials and Generation Z are C-beauty’s biggest advocate, because they identify with the brand's
core values. These consumers want to connect with their own cultural heritage and are willing to view local brands as
high-quality, trendy and desirable. More successful C-beauty brands have succeeded in communicating their brand
ethos, examples include Chando focusing on ingredients from the Himalayas and addressing China's social stigma
"beauty at any age and size"; Marie Dalgar advocates for social diversity in China with ads featuring “social outcasts”;
Hedon's self-expression rather than self-perfection, its daring and defiant stance is reflected in product names like its
“bitch girl” lipstick; Florasis (Huaxizi) oriental aesthetics and Chinese heritage design. More examples in our Friday
blast (link).
 Increasing cosmetics demands from low-tier cities: over the past 20 years, domestic cosmetics companies grew
through cosmetics stores in lower-tier cities, where foreign brands are reluctant to penetrate. Consumers from lower
tier cities already accounts for ~50% of China's online cosmetic consumption and is growing faster than tier 1 and tier
2 cities. The development of e-commerce allowed cosmetics brands increased exposure to lower-tier city consumers.
The emergence of multiple new social media marketing strategies, cosmetics consumptions from lower-tier cities has
quickly grew beyond basic skincare needs to emulate the cosmetics routine in 1st and 2nd tier cities consumers – they
are already extending the number of products in their beauty regime.
Final words and conclusion: Chinese brands understand their competitive advantages and limitations in appealing
to domestic consumers
The growth strategy for Chinese consumer brands in many ways, has become less apparent than ever before. Chinese brands'
primary focus continues to be China, establishing themselves to compete with foreign brands domestically and developing
unique business models that don't exist anywhere else in the world. Clearly, there are areas where ten or even twenty years are
insufficient to build a brand and the institutional, technical capability to genuinely compete with best-in-class consumer brands
globally. Premium autos and luxury goods top the list of categories where the moats remain too wide even after two or three
decades. However, what is increasingly clear is that Chinese brands understand their competitive moats and limitations in
appealing to domestic consumers and are moving to exploit that opportunity.
Chinese cosmetic brands will continue to take share over the next decade. We see a common trend that C-brands are more
likely to succeed in sectors with high growth and high market fragmentation. C-beauty brands are very attuned to consumer
demand in both product development and marketing strategies. C-beauty has the advantage of a more agile supply chain that
allows for nimble responses and adaptation to local trends. These companies will continue to experiment with innovative new
products, marketing and technologies.
For C-brand to build competitive moats, the companies should invest in the long term to and to tell the brand story. Many C-
brands have succeeded with sales driven tactics through “explosive products” (viral product of the month) through Tmall and
Xiaohongshu. However, in the long term, Chinese consumers will want to understand the value of a long-lasting brand. It takes
time and consistency to grow the core of a brand’s value proposition. Consumers want to understand the brand ethos, identity
and core values. Some C-beauty brands have succeeded in doing so, examples discussed above and in our Friday blast (link).
1 Jing Daily

WE PREFER COMPANIES WITH ESTABLISHED FOUNDATION IN THE CORE SEGMENT – SKINCARE

We believe companies with established scale in skincare are more likely to win in the long run. Most C-beauty companies are in
the early growth stage, therefore scaling up is important. Skincare accounts for majority of the China cosmetic market with
~81% share, based on our cosmetics universe. Considering the lower loyalty in color cosmetics, we prefer companies with a
backbone in the core market - Skincare. It allows the company to establish more credibility and build the groundwork for brand
extensions for future growth. Focusing on the skincare category allows companies to build more stable cash flow, and scale
from a solid foundation (no pun intended). C-beauty growth will continue to be driven by skincare, with additional potential from
color cosmetics. We like companies that invest in Skincare for the following reasons:
 Skincare builds stronger brand credibility, lifecycle is longer, and the barrier to entry is higher
 Skincare is sticky and allows brands to build loyalty through repeat purchase and skincare routine extensions
 Skincare adoption is faster in China, and Asian consumers demonstrate a preference towards skincare
EXHIBIT 15: Skincare is still bread and butter while and color cosmetics provides additional growth
China Cosmetic Market Growth by Segment

30% Color Cosmetics: 2019- 600
Color Cosmetics 2015-19
25E CAGR:14%
CAGR: 21.5%
25% Skincare: 2019-25E 500
Skincare 2015-19 CAGR:8%
CAGR: 11%
20% 400
RMB bn
15% 300
10% 200
5% 100
- --
China skincare China color cosmetics Skincare CAGR Color cosmetics CAGR
SKINCARE ADOPTION IS FASTER IN CHINA; ASIAN CONSUMERS DEMONSTRATE A PREFERENCE TOWARDS

SKINCARE.
Skincare adoption is faster in China, skincare accounts for majority of the China cosmetic market with ~81% share and Color
Cosmetics account for ~19% (Exhibit 17), based on our cosmetics universe. Looking at different regions around the globe, in
Korea and Japan more than ~70% of cosmetic spending is allocated to Skincare whereas consumers in Italy and Canada (with
similar disposable income levels) allocated ~55% of cosmetic spending to Skincare (Exhibit 23). We think China's spending
allocation towards skincare will remain in the high 70's. China’s disposable income per capita is expected to grow to about
$10K by 2030. That's half of where Korea is now.

EXHIBIT 16: Skincare accounts for the majority (82%) of the China cosmetic market
EXHIBIT 17: Asian consumers demonstrate a preference to skincare, with higher allocation of spending towards Skincare
Disposable income per capita vs % of cosmetic spending allocated to

skincare
85% China, 82%
% of cosmetic consumption allocated to skincare
HK, 79%
80% China 2025E , 76%
Korea, 73%
75% France, 70%
70%
Germany, 68%
65% Japan, 71%
60% Canada, 56% UK, 55%

Italy, 58% US, 54%
55%
50%
45%
40%
$0 $5,000 $10,000 $15,000 $20,000 $25,000 $30,000 $35,000 $40,000 $45,000 $50,000
Disposable income per capita

SKINCARE IS STICKY AND ALLOWS BRANDS TO BUILD LOYALTY THROUGH REPEAT PURCHASE AND SKINCARE
ROUTINE EXTENSIONS.
Skincare is a well-established daily routine for the majority of female consumers. The consumption frequency is high, with
multiple product categories/treatment types/ingredient formulations, consumers tend to stay loyal to brands that works for
their skin type. Brands can build loyalty through category extensions and skincare routine expansion. Japan and Korea are using
an average of 21 different products in their skincare routine, according to Jing Daily. Chinese consumers are becoming aware of
the complete skin care process, classifying products into categories based on ingredients and efficacy. As a result, Chinese
consumers are also adding more steps in their daily skincare routines to an average of 7-9 steps. Exhibit 20 shows Chinese
consumers are buying more cosmetics products and more frequently each year.
EXHIBIT 18: Skincare is sticky and allows brands to build loyalty through repeat purchase through category
extensions and skincare routine expansion
EXHIBIT 19: Number of brands grew more than 20% in EXHIBIT 20: Chinese consumers are buying more
both skincare and color cosmetics during 2016-2018 cosmetics products and more frequently each year
Source: Youzan, Bernstein analysis Source: Youzan, Bernstein analysis

SKINCARE BUILDS STRONGER BRAND CREDIBILITY, LIFECYCLE IS LONGER, AND THE BARRIER TO ENTRY IS
HIGHER
It's more difficult to build Skincare knowhow. Skincare requires R&D capital, cultivation of product lines, and branding to
differentiate. Consumers are more cautious and have more loyalty towards specific brands. When a brand's skincare becomes
well perceived by the consumers, it can have a longer life cycle (compared to Color Cosmetics), which in turn can provide a more
stable and consistent cash flow for the company. Hence, skincare brands need to have a key product line (hero product) the
brand is known for, then extend from there.
EXHIBIT 21: Yatsen (YSG, not covered) mainly offers color cosmetics through Perfect Diary spent less R&D
compared to other cosmetic companies
Source: Bloomberg, Bernstein analysis, 2010-2019 average
EXHIBIT 22: In absolute terms, C-beauty brands spend less vs. mature companies in R&D

Skincare is still the main driver of growth and color cosmetics provides additional growth for some brands.
According to Daxue Consulting, in 2018, less than 20% of Chinese use color cosmetics daily compared to 95% of Western
women. East Asia tend to spend less on color cosmetics. In Korea and Japan less than ~28% of cosmetic spending are allocated
to color cosmetics whereas consumers in Italy and Canada (with similar disposable income levels) allocated more than 40% of
cosmetic spending to color cosmetics (Exhibit 23). However, we see growth opportunities in China.
China color cosmetics segment saw accelerated growth at 21.5% CAGR vs. 11% CAGR in skincare between 2015-19 (Exhibit
15). Going forward, we think color cosmetics will gradually close the gap with Japan/Korea and captures 24% of total cosmetic
spending by 2025. That implies the color cosmetic segment will continue to grow faster than skincare (14% vs 8% CAGR).
By contrast to skincare, Color cosmetics products requires less R&D capital and tends to have shorter life cycle. Companies can
enter into the segment more quickly once they have established a base on Color Cosmetics. We believe the growth acceleration
add additional growth driver for Chinese cosmetic companies.
EXHIBIT 23: Wealthier consumers tend to spend more on color cosmetics

THE C-BEAUTY EVOLUTION: MILESTONES THAT PROPELLED THE GROWTH OF C-BEAUTY

China cosmetic industry dates back to 19th century. In 1898, Kwong Sang Kong opened up in Hong Kong and started to sell
Shanghai Vive skincare (Two Girls Brand). The company later evolved to Shanghai Jahwa (SHA: 600315, not covered). Fast
forward to early 2000, foreign brands dominated the market though aggressive M&A. Department stores were the major
distribution channel and captured almost half of the distribution. After 2008-09 GFC, domestic brands begun to emerge, and its
rapid growth was aided by the development of CS (cosmetic store) channel in lower tier cities and e-commerce (Exhibit 24).
EXHIBIT 24: China brands emerge post-GFC, rapid growth aided by CS (cosmetic store) expansion and E-commerce
“Daigou” diverged Ecommerce

Foreign brands local premium became the largest
dominated; Key demand; domestic channel; rising
distribution through brands begun to nationalism trend of
department stores expand in mass “buy-Chinese”
consumer category (Guohuo)
Prior to 2008 2012-2016 2018-19
2008-2012 2017
2021 and beyond
Domestic brands
begun to emerge, “Daigou” faded out,
supported by CS local premium Domestic brands
(cosmetic shop) growth started to dominate mass;
stores and online accelerate leaders take share
distribution and potentially tap
into premium
Early 2000, foreign brands dominated the market, and acquired many domestic brands
Prior to 2008, foreign brands dominated the market. In early 2000s, foreign brands dominated the market and tapered
competitive threat through aggressive M&A. Major foreign companies entered the China market with deep pockets and well-
established product line. Acquiring high performing domestic brands emerged as a natural business choice as it allowed them
to penetrate into fragmented local distribution network and reduce competitive threat. Exhibit 25 provides some examples of
domestic brands acquired by foreign companies. Back in the early 2000s, online cosmetics was still nascent in China,
department stores were the main channels consumers. Foreign companies were able to provide department stores with more
premium image and higher rental income. The synergies and scale through M&A allowed foreign brands to be build competitive
moats in department stores and control the main distribution channel.

EXHIBIT 25: In the late 90's and early 2000's, many Chinese domestic brands were acquired by foreign companies
Source: Maidi, Bernstein analysis,
2008 to 2012, Chinese cosmetic brands began to emerge

2008 to 2012, Chinese cosmetic brands started to emerge and grew rapidly aided by the development of Cosmetic Stores (CS)
and E-commerce. As China economy grew, cosmetics demand grew from lower tier cities, where availability of foreign brands
was low. Chinese cosmetics brands began to emerge and grow sales through CS stores and E-commerce – foreign brands had
less competitive advantage across these new retail channels.
2012 to 2016, C-beauty dominate the mass market, premium acceleration

China domestic brands started to dominate the mass market in China. CS (Cosmetic store) operators such as Watsons, Gialen
and T3C began huge expansions and penetrated into lower tier cities. Through the CS and e-commerce channels, domestic
brands such as Pechoin, Chando, Proya and Marubi quickly rose to the top. The price differential between domestic and
overseas sold foreign brands became more notable, and China consumers turned to "Daigou", which dampened premium
demand in China. As a result, between 2012-2016, domestic brands began to dominate the mass market; premium demand
grew at a slower pace.
2017 - 2019, premium sector resumed growth as "Daigou" begun to fade out and E-commerce became the most
important sales channel.
2021 and beyond, tables turned: strategic acquisitions of foreign brands could support C-beauty growth
2019 and beyond, domestic brands should maintain their dominance in the mass cosmetics segment - despite the high
fragmentation - market leaders should continue to consolidate the market (of the 4000 Chinese cosmetic brands, top 25
account for ~70% share). Foreign brands play it safe in the premium market, but domestic are gradually tapping into higher
pricing ladders. Given the wide price gaps, we see ample ASP growth opportunities for domestic players, without directly
competing with foreign giants. Moreover, we see that tables have turned in the M&A market, C-beauty companies are now
acquiring foreign brands to expand categories, product lines, and into overseas markets. We believe strategic investments &
acquisitions of foreign brands could support growth for Chinese brands. Some recently examples include:
EXHIBIT 26: Strategic acquisitions and partnerships of foreign brands could support C-beauty growth
Chinese Brand/Company Acquisation of foriegn brands/Partnership with foriegn brands/Overseas expansion
Hangzhou Chunyuan 50% shares of MCC in 2012, an emerging Korean cosmetics brand
Proya Partnered with Spain anti-aging brand SigulaDerm
Marubi introduced Shiseido's luxury R&D team, manufacturing, and quality director to work with the
Marubi company. They also launched “Marubi Tokyo” which is a brand based on Japanese raw materials,
formulation and production.
68% stake in US herbal cosmetic brand Wei Beauty in 2020; Acquired Dead Sea mineral skincare brand
Fosun
Ahava in 2016
Yatsen Acquired luxury skincare brand Eve Lom in 2020; acquired French premium brand Galenic
Herborist A premium brand under Shanghai Jahwa has three floor glagship store and spa in Paris

China cosmetic market has become more concentrated over the past decade and Chinese brands are growing faster. Top 25
skincare companies account for ~70% of the market in 2019, which grew from 50% a decade ago. We expect this trend to
continue (Exhibit 27), we expect these market leaders to continue to consolidate the market. Notably, among the top 25
skincare companies, C-beauty companies had higher growth and the top CAGR's were achieved by C-beauty companies.
Companies like Shanghai Pehchaolin, Huanan Yujiahui, Shanghai Chicmax, Danzi Group and Proya, have had enormous
success. For more detailed Chinese brand introduction, please refer to the published blast (link).
EXHIBIT 27: Market consolidation: Top 25 skincare companies in China account for ~70% of the market
EXHIBIT 28: C-beauty companies had higher growth CAGR in Skincare; the top 3 CAGR were achieved by C-beauty
companies

C-beauty companies grew faster and took market share from foreign companies, particularly in mass market
If we look at the total skincare market, C-beauty also grew at a faster pace vs. foreign companies and took market share. This
was driven by the C-beauty growth in mass categories. We note that between 2018-2019, foreign companies' growth
exceeded C-beauty, which we believe is likely due to the premiumization as a result of the government actions to reduce
Daigou.
EXHIBIT 29: C-beauty grew faster vs. foreign peers in EXHIBIT 30: C-beauty grew even faster vs. foreign peers
total skincare in mass skincare
Foreign vs. Domestic retail sales Foreign vs. Domestic retail sales
Top 25 skincare companies Top 25 mass skincare companies
180000
Foreign 2010-2019 CAGR:12% 30%
Foreign 2010-2019 CAGR : 5%
120000 50%
160000 Domestic 2010-2019 CAGR: 16% Domestic 2010-2019 CAGR: 22%
25% 100000 40%
140000
120000 20%
RMb m n
80000 30%
RMB m n
100000
15%
80000 60000 20%
60000 10%
40000 40000 10%
5%
20000
0 0% 20000 0%
0 -10%
2010 2012 2014 2016 2018
Foreign companies in top 25
Mass Foreign companies in top 25
Domestic companies in top 25
Mass Domestic companies in top 25
Foreign companies CAGR
Mass Foreign CAGR
Domestic companies CAGR
Mass Domestic CAGR
Source: Euromonitor, Bernstein analysis Source: Euromonitor, Bernstein analysis
EXHIBIT 31: C-beauty took market share from foreign EXHIBIT 32: C-beauty took more market share from
companies in total skincare foreign companies in mass skincare
Foreign vs. Domestic sales market

share 2010-2019
Top 25 mass skincare companies
120%
100%
80% 41% 42%

50% 46% 42%
60% 57%
69% 63%
60% 74%
40%
59% 58%
50% 54% 58%
20% 37% 40% 43%
26% 31%
0%
2010201120122013201420152016201720182019
Mass Foreign companies in top 25

Mass Domestic companies in top 25

We observed similar trends across both Skincare and Color Cosmetics

Skincare: over the past decade, top market share gainers in Skincare were Chinese mass brands; while top market share losses
came from foreign mass brands. Specifically, among the top 25 skincare brands that gained market share, 12 were Chinese
mass brands; 7 were premium foreign brands. Of the 25 skincare brands that lost most market share, 22 were foreign brands.
EXHIBIT 33: In the past decade, top market share gainers in Skincare were Chinese mass brands; while top market
share losses came from foreign mass brands
Top & bottom 25 brands in market share growth

Foreign vs. Domestic skincare brands
5.0%
4.5%
Gaining share/
Stronger postion
4.0%
Market share (2019)
3.5%
3.0%
2.5%
2.0% Proya
1.5% Domestic brands
1.0%
Forei gn brands
0.5%
0.0%
-4% -3% -2% -1% 0% 1% 2% 3% 4% 5%

Color Cosmetics: Chinese brands have less presence in color cosmetics. In the past decade, top market share gainers in Color
Cosmetics were foreign premium brands; while top market share losses came from foreign mass brands. Specifically, 18 out of
25 color cosmetics brands that gained the most share were foreign brands and 9 of them are premium brands.
EXHIBIT 34: In the past decade, top market share gainers in Color Cosmetics were foreign premium brands; while
top market share losses came from foreign mass brands
Top&bottom 25 brands in market share growth

Foreign vs. Domestic color cosmetics brands
Gaining share/
2.5% Stronger postion
2.0%
Market share (2019)
1.5%
1.0%
Domestic brands
0.5%
Forei gn brands
0.0%
-1.5% -1.0% -0.5% 0.0% 0.5% 1.0% 1.5%


C-BEAUTY BRANDS: HOW TO WIN? STRATEGIC POSITIONING AND PORTFOLIO MANAGEMENT
C-BEAUTY HAS RISEN TO DOMINATE THE MASS SKINCARE MARKET AND TOOK SHARE FROM FOREIGN
COMPANIES
Trend of premiumization in China: across regions, premium consumption is higher and stable in most mature markets. US, and
UK saw steady increase in premium cosmetics penetration over the past decade. In Asia, Japan and Korea's premium
consumption has stabilized, whereas China is seeing rapid growth in premium penetration. Hong Kong’s high penetration level
is an exception rather than the norm, the sector is supported by tax advantages and tourism. China's Premium cosmetics market
share grew from 23% to 36% between 2004-2018, with greater acceleration in the recent years (Exhibit 35). We believe
China's premium consumption should expand to similar levels of Japan and Korea, and plateau at around 50%.
Note: Euromonitor segments cosmetic products into premium and mass by different brands. Lower ASP brands like L'Oréal are
defined as mass while the higher ASP brand Lancôme under the same company would be defined as premium.
EXHIBIT 35: Premium cosmetics market share: higher and stable in mature markets, China is catching up
Going forward we think the preimmunization trend will continue at a slower pace; the growth in mass market will remain steady.
Specifically:
 Premiumization will continue but will likely slow down. Premium brands will continue to grow at a higher rate than mass,
but we expect growth rates to plateau in 5 years when the market share reaches ~50%, similar to developed markets.
 Mass market will continue growing at a steady level, and Chinese brands will contribute most of the growth, where local
brands dominate in market with ~60% share (Exhibit 32). In markets like Japan and south Korea, local brands amassed
80-90% market share in the mass segment. In China, younger customers are more likely to try domestic products and
more importantly, Chinese brands have the ability to respond to fast changing market dynamics, channel shifts and
marketing methods.

EXHIBIT 36: Premiumization will continue but we expect growth rates to plateau in 5 years, we expect premium
brands market share to plateau at 50% - similar to developed markets
EXHIBIT 37: China market will continue to be the focus for foreign brands given its revenue and growth
contribution, supporting premium growth
Source: Bernstein analysis, company reports

CHINA COSMETICS S-CURVE: C-BEAUTY COMPANIES SHOULD INVEST IN SCALING UP

Legacy brands like L'Oréal (OR.FP by Bruno Monteyne) built its empire over more than100 years, and company also begun in the
mass segment, L'Oréal's major acquisitions started in the 1960’s (60 years after the company was founded). We illustrate the
Chinese cosmetic S-curve in Exhibit 38 and believe most Chinese companies are in the early stages of the maturity cycle. We
believe the S-curve for successful Chinese cosmetic companies should follow that below phases:
 Early phase, first 10-20 years: focus on developing a table brand and product reputation. Establish market awareness
and build brand equity, reputation and loyalty through the mass market. Focus on one brand, expand presence and
market share through that one focus brand. The growth in online cosmetics penetration and virality in China makes it
easier to cultivate "explosive/viral" products (SKU's that become hit product over short period of time).
 Growth phase, next 10-20 years: focus on scaling up, scale can lead to higher investments in R&D, cost leverage, and
marketing and distribution synergies. Develop and extend product series, build Hero product (e.g. SKII's Pitera™
Essence, La Mer's Moisturizing Cream, Lancôme's Generic) that the brand can depend on as the key revenue driver.
Establish core cash cow brand which allows the company to extend and experiment with new brands.
 Mature phase, next 10-20 years: With CF generated from cash cow brands and hero products, build a multi-brand
portfolio and amortize costs across brands. The fastest way to expand brand portfolio is through M&A, particularly in
specialty areas that the brand is less familiar with (e.g. skincare brand shifting into color cosmetics, or fragrances). At
this stage, it is key to maintain agility to respond to disruptors.
C-beauty companies are still in early growth stages and have just started to build competitive moats. The top domestic players
are in the growth phase. Therefore, companies should focus on scaling up – scale determines the brand's ability to invest in
expansion either organically or through M&A. Over the next decade, we expect leading C-beauty companies to continue taking
market share through scaling up in the mass segment.
EXHIBIT 38: C-beauty companies are still in early growth stages and have just started to build competitive moats

EXHIBIT 39: Hero products contribute to higher revenue mix for established foreign brands with longer history,
some Chinese brands are beginning to catch up.
Hero product series contributions to total sales on T-mall

(2018-2020 average)
70% 63%
60% Foreign brands Domestic brands
50%
37%
40% 31% 31% 28%
30% 23%
18%
20% 13% 11%
7%
10%
0%
Source: Bernstein analysis, Moojing
Although Hero products still show relatively low contribution to overall sales for C-brands in the growth phase, brands like Proya
are building “hero products” sales through top 3 items at double eleven events.
EXHIBIT 40: Top 3 items contribution increased EXHIBIT 41: along with ASP increasing
significantly after 2017 during 11.11.
Source: Moojing, Bernstein analysis Source: Moojing, Bernstein analysis

Which companies and brands are scaling up?

Since scale is one of the key contributors of success, which of C-beauty companies are on the right track? We examined the
development of top 20 skincare companies and brands through the BCG Matrix. It's clear that among the top 20, the number of
Chinese companies and brands does not fall behind foreign peers, despite smaller market share.
The company bubble chart shows a divergence in trend – foreign companies with more premium exposure are wining (Estee
Lauder (EL covered by Callum Elliott) while foreign companies with more mass exposure are losing (P&G, Mary Kay, Amway).
The brand bubble chart further demonstrates that foreign giants' growth was supported by premium brands and mass brands
are losing. For example, L'Oréal's premium brand Lancôme has performed significantly better than its mass brand L'Oréal Paris.
Foreign brands dominate premium, but Chinese brands are defining a path. China is seeing rapid growth in premium penetration
in cosmetics, currently at 36% (Exhibit 70), we forecast it to reach similar levels of Japan and Korea, and plateau at around 50%.
Therefore, premiumization will continue but at a slower pace. Meanwhile, mass market should grow at a steady level, and
Chinese brands will contribute most of the growth, local brands already dominate the mass market with ~60% share (Exhibit
32). In markets like Japan and south Korea, local brands have 80-90% market share in the mass segment. In China, younger
customers are more likely to try domestic products and more importantly, C-brands have the ability to respond to fast changing
market dynamics, channel shifts and marketing methods.
Having said that, the uprising journey of C-beauty growth seems to be non-linear. In this fragmented and competitive market,
growth isn't a given for C-beauty brands. C-brands still need to have strong brand and distribution strategic to maintain growth.
Other than Pechoin, the only two cosmetic brands that maintained double digit growth in recent years are Proya and Marubi.
Proya for example grew faster in recent years due to 1). Faster development in e-commerce and earlier social media marketing
vs. peers 2). Focus on mass market and young generation 3) Continuous innovation. In preparation for the 2017 IPO, Proya
terminated all related party transactions of relatives that supported offline distribution and had equity ownership in Proya. The
company took this opportunity to reorganize its channel strategies and accelerated its online penetration.
EXHIBIT 42: Highly fragmented market, some C-beauty companies are rising

EXHIBIT 43: Premium foreign brands and mass domestic brands tend to be winners
EXHIBIT 44: C-brands grow is not linear; Proya and Marubi had higher growth momentum in recent years

Pricing and positioning strategy

Brand positioning needs to be deliberate and strategic to win. Pricing is an important component of positioning. We segmented
the China market into mass, low-tier premium, high-tier premium and ultra-premium based on average ASP sold on T-mall. Our
analysis shows that C-brands are mainly in the mass market, some of them are on the lower edge of the premium sector but still
far below the foreign premium brands. We see ASP expansion opportunities arising from:
ASP growth without directly competing with premium foreign brands. China is seeing rapid growth in premium penetration in
cosmetics; however, this trend won't impair C-brand's ability to expand ASP. First, given the wide pricing gaps, it shows there is
plenty of room to increase ASP while not directly competing with premium foreign brands (Exhibit 45). Some Chinese brands
like Marubi and Herborist are on the lower edge of the premium sector. They are perceived as the low-tier premium brands
among consumers base and do not compete directly with the foreign premium brands in the high pricing ladders. Chinese mass
brands to increase ASP and shift into low-tier premium segment. Not to mention, Price gap within color cosmetics is narrower,
and the most premium brands are relatively affordable. Considering customers have lower loyalty for color cosmetics, there are
opportunities for Chinese brands to tackle into this sector as well. In fact, we are seeing consistent ASP increases (Exhibit 48).
Second, it won't be long before C-beauty brands establish themselves in the premium, whether through M&A or R&D. We believe
moving into premium is inevitable for C-beauty in the long run. Japan and Korean markets developed J-beauty and K-beauty
over time and local brand dominate ~60% overall skincare market. It is an obvious challenge to compete with premium foreign
brand equity and R&D, but C-beauty companies can learn from them and collaborate. Shiseido has been working alongside
Chinese startup brands and offering its technical expertise and supply chain experience to C-beauty companies. Proya is
partnering with Spanish anti-aging brand SingulaDerm. Perfect Diary has partnered with the Korean OEM Cosmax to build the
largest cosmetics production site in Asia.
Domestic brands are still in the early stage of brand building and tend to offer larger discounts to boost sales. We expect this gap
to narrow as domestic brands scale up and build brand equity. At this stage the brand image C-beauty brand image is weaker,
therefore brands are using price concessions and livestreaming promotions to gain traction. As C-beauty build up brand equity
over time, discounting tactics should reduce which means greater ASP growth.
EXHIBIT 45: In skincare, Chinese brands dominate the mass market; There are plenty of opportunities for Chinese
mass brands to shift from Mass to low-tier premium.
Pechoin, Market share 4.5% Top skincare brands by retail value
Mass Low-tier premium High-tier Premium Ultra premium

L'Oreal Paris Lancome
3.6% Estee Lauder
Olay
Chando 3.3%
3.0%
2.7%
retail m arket share
2.4%
KanS 2.1%
One Leaf 1.8%

SK-II
Aupres
Innisfree Herborist 1.5% La Mer, ASP 1833
Perfect Proya
HomeFacialPro 1.2% Dior
Inoherb Hanhoo
Marubi The history of w hoo
Winona Shiseido 0.9%
Yunifang L'occitane Kiehl's Guerlain
Wetcode Avene Laneige IPSA
Laroche Posay 0.6% Clarins Sulw hasoo Cle de Peau
Bioderma
Vichy Elizabeth Arden Fresh
Fancl DHC Origins 0.3% SkinCeuticals
Avon Neutrogena Clinique Biotherm Givenchy
Pond's Caudalie Dr Jart+ Jurlique Elixir
NUXE 0.0%
0 100 200 300 400 500 600 700 800 900 1000 1100 1200
ASP on Tm all (RMB)
Source: Euromonitor, Moojing, Bernstein analysis

EXHIBIT 46: In Color Cosmetics the price range is narrower, and premium brands are relatively affordable
Top color cosmetics brands by retail value
Mass 10.0% Premium Ultra Premium
Maybelline 9.0%
8.0%
7.0%
Dior
L'Oréal Paris
Retail m arket share
6.0%
5.0% Yves Saint Laurent
Perfect Diary 4.0% Mac
Carslan Lancôme Giorgio Armani
3.0%
Givenchy Chanel
Innisfree Max Factor Estée Lauder

Chioture 2.0%
Mamonde
Zeesea
Marie Dalgar Make Up For Ever
KanS Age 20's
Lansur Shu Uemura Guerlain Cle de Peau
Meifubao Wetcode Bobbi Brow n
Franic 1.0% Laneíge Tom Ford
Etude Hanhoo
Flamingo Za Chando Aupres Nars The History of Whoo La Mer, ASP 755
Shiseido Marubi
Pechoin Sulw hasoo
The Face Shop DHC ÍPSA
0.0%
0 Proya 100 200 300 400 500 600
ASP on Tm all (RMB)
Source: Euromonitor, Moojingi, Bernstein analysis
EXHIBIT 47: Korea's skincare market has long been dominated by domestic brands
EXHIBIT 1: Korea's skincare market has long been dominated by domestic brands
Korean skincare market retail sales: domestic vs. foreign brands

120%
100%
80% 41% 40% 39% 37% 36% 35% 38% 39%

42% 42%
60%
40%
59% 60% 61% 63% 64% 65% 62% 61%
58% 58%
20%
0%
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Domestic brands Foreign brands

Exhibit 48: Domestic brands offer larger discounts than foreign skincare brands..
Price comparion and average discount of skincare brands on Tmall (2020)

Foreign vs. Domestic
4%
1200
Foreign brands Di s count
Domestic brands 3%
Average discount 35% Average discount 7% Di s count 1136
1000 1069 1088
1036
800 14%
Di s count
1%
707 4%
600 42% Di s count
628
Di s count 608 0% Di s count
1% 10%
30% 30% Di s count Di s countDi s count 22%
35%
400 Di s count Di s count Di s count 460466 448 Di s count
432
367 374
340344 317 339340
294 295 285
200 269
242
201 207 210
0
Proya Marubi Pechoin Chando L'Oreal Shiseido Origins Vichy Aupres Kiehl's Avene Lancome Estee
Lauder
Post-discount Price Original Price
Source: Moojing, Bernstein analysis
EXHIBIT 49: ..despite this, we still see an increasing ASP trend for domestic skincare brands

C-BRANDS CAN DIFFERENTIATE THROUGH DISTRIBUTION AND MARKETING
The five key cosmetic distribution channels in China

Beauty products are mostly sold through 5 channels in China: Key accounts (hypermarkets, supermarkets and convenience
stores), Department stores, Cosmetic store, E-commerce and others (for example direct sales). Over the past decade,
department stores and KAs saw continuous decline in market share. On the other hand, E-commerce grew to become the most
important channel in 2018 and before COVID captured about 30% of total cosmetic sales. Cosmetic stores (CS), despite its
offline nature, expanded its presence with market share increasing from 14% to 21% between 2005 and 2019. Specifically:
 Key accounts' (KA): Sells cosmetics products with low ASP (e.g. less than RMB 200) are most suited to this channel.
KA's usually charge brands an annual shelf space rental. During promotions, brands must also pay for the cost of
display and additional shelf space. KA channel is also a B2B or wholesale channel.
 Department stores: Cosmetic counters in department stores provide customers with beauty consultant services and
sensory product experiences, which help to build the brand image and relationship with consumers. Due to the high
rental (fixed plus variable) and beauty consultant labor costs, department stores are usually selected by premium
brands.
 Other offline channels include home selling and direct selling. Direct sales refer to selling beauty and personal care
product through personal network, such as Amway. Home selling refers to TV selling networks. This channel has been
the smallest among all and maintained about 11% in the past decade. We expect this channel to remain small in the
future.
 Cosmetic stores' (CS): between 2012-16, CS operators expanded rapidly into lower tier cities, aided domestic
cosmetic brands expansion. Market share for CS channel grew from 14% to 21% between 2005 and 2019 due to the
growing store base and wide assortment. It became particularly popular in lower tier cities where consumers had less
access to certain cosmetic brands. CS's provide consumers with a selection of products from multiple brands.
Watsons, Sephora, and Sasa are typical examples, however in the recent years domestic CS operators such as The
COLORIST, Harmay and Wow color saw more rapid growth. CS channel is B2B or wholesale channel, therefore the
cost for cosmetic companies is lower compared with department store. This channel does not require offline
investments in renovation or operations.
 E-commerce channel: cosmetics online shopping exploded since 2012. Since 2018, the e-commerce channel has
exceeded KA as the largest channel for skincare and cosmetics. The growth has been supported by a rapidly growing
internet-user base and more established logistic infrastructure.
Channel forecast
We forecast total online cosmetics sales to have 15% CAGR between 2019 and 2025, which will result in 43% cosmetics
online penetration in 2025. We are bullish on CS channel and forecast expect it to grow at 10% CAGR (Higher than all other
offline channels) between 2019-2025E. We expect department stores and KA channel to lose channel share, and forecast 6%
and 3% 2019-2025E CAGR respectively. Others include direct sales and home shopping, where we do not foresee a continual
interest from consumers, and hence estimate little to no growth.

EXHIBIT 50: E-commerce and Cosmetic shops are forecasted to be the two major channels for China cosmetics
EXHIBIT 51: Channel growth CAGR's

E-COMMERCE IS THE OBVIOUS GROWTH DRIVER, AND NEW MARKETING METHODS CAN MEAN MORE
EFFICIENT RETURNS
E-Commerce now is the largest distribution channel for China cosmetic market. Before COVID, E-commerce already captured
more than 30% of total cosmetic sales (highest share) with high growth CAGR. We estimate China's online sales in cosmetics
(skincare + color cosmetics) to reach RMB ~220bn bn by 2025 with 43% share (Exhibit 52 and Exhibit 53). We expect online
sales in cosmetics will keep the momentum and remain at double digit growth until 2025. The growth is partially driven by both
higher cosmetic spending as well as higher e-commerce penetration rate.
EXHIBIT 52: We expect China cosmetics online sales to grow at 19% in 2019-2025
EXHIBIT 53: We expect online penetration to reach 43% by 2025

C-beauty brands are dominating search and content interest on social media
Clearly, C-beauty brands have been able to build strength and interest through their approach to digital management: first and
foremost, social media marketing mix. Secondly, balance platform mix based on target audience and thirdly, digital and content
management. We discuss the social media marketing here and provide information about the latter two in the appendix.
 C-beauty has faster growth on social media platforms, Exhibit 54 and Exhibit 55 shows that domestic brands achieved
higher growth CAGR between 2014-18 on content marketing, brand influence, advertisements and content reads
 C-beauty prefers to use KOL's in general for posts and promotions: Foreign brands often use celebrities for promotion
while domestic brands use more non-celebrities (KOLs), foreign brands are starting to adopt KOL on XIaohongshu
 C-beauty is more agile to trends on social media, Perfect Diary has 10x more followers on Xiaohongshu platform than
foreign cosmetics brands (Exhibit 56). Domestic is more capable of leveraging Tiktok to promote sales (Exhibit 57)
EXHIBIT 54: C-beauty has faster growth on social EXHIBIT 55: C-beauty brands reads growth outpaced
media platforms Foreign brands (~66% vs. ~12%)
Domestic vs. Foreign cosmetic
brands 2014-2018 CAGR on 3
dimensions of brand development
100%
88%
90%
80%
70%
59%
60%
50% 43% 46%
40%
30% 21%
20%
7%
10%
0%
Content Brand influences Advertisement
marketing
Source: Tencent, Bernstein analysis Source: Xiaohongshu, Bernstein analysis
EXHIBIT 56: Perfect Diary has 10x more followers on EXHIBIT 57: On Tiktok, domestic brands generated more
Xiaohongshu platform than foreign cosmetics brands color cosmetic sales than foreign brands
Tiktok color cosmetic sales

Top 10 brands market share in
2H2020
120%
100% 4%
80% 37% 38% 38%
60%
96%
40%
63% 62% 62%
20%
0%
Aug Sep Oct Nov
Source: Xiaohongshu, Bernstein analysis Source: Xiaohongshu

EXHIBIT 58: On Weibo: Foreign brands largely use EXHIBIT 59: On Xiaohongshu: Domestic brands prefer
celebrities for promotion while domestic brands like marketing through non-celebrities (KOLs), some
Proya use more non-celebrities (KOLs) foreign brands are also doing the same
Source: Chain of Demand, Bernstein analysis Source: Chain of Demand, Bernstein analysis
EXHIBIT 60: Domestic brands conduct more event/gift EXHIBIT 61: On Xiaohongshu: Both domestic brands and
giving away on Weibo foreign brands focus on product promotions
Source: Chain of Demands, Bernstein analysis Source: Chain of Demands, Bernstein analysis

C-BEAUTY SOCIAL MEDIA MARKETING EDGE IS REFLECTED IN THE EFFECTIVENESS OF SG&A SPEND
Marketing and advertising expense generally contribute to 40-60% of SG&A for cosmetics companies. For Chinese companies
it could be even higher. We observe that C-beauty brands, which tend to spend more on social media marketing are generating
more efficient returns (Exhibit 62), i.e. higher revenue growth with lower advertising spend. This is even before we consider the
absolute value, since companies with greater scale spend significantly more in absolute value.
EXHIBIT 62: C-beauty brands spend more on social media marketing, and are generating more efficient returns
SG&A spending vs Revenue growth 2015-2019

25%
Prefered area Yujiahui Co Ltd
20%
Shanghai Jahw a United
Guangdong Marubi Co Ltd
2015-2019 CAGR
15%
Biotechnology
Fancl Corp
Kose Corp
10% Shiseido Co Ltd
L'Oreal SA
L'Occitane International
5% SA
Estee Lauder
Kao Corp Noevir Holdings Co Ltd
0%
20% 30% 40% 50% 60% 70% 80%
SG&A as a % of Revenue (average of 2015-2019)
EXHIBIT 63: In absolute terms, C-beauty brands spend considerably less vs. mature companies in selling expenses
70 45%
RMB bn
63.6 40%
38% 40%
60
34%
35%
50 30%
30%
40 25%
30 20%
15%
20
10%
10
2.8 5%
0.9 0.5
- 0%
L'Oreal Shanghai Jahwa Proya Marubi
Selling expenses As % of rev.

Social media marketing edge

Most big brands implement a mix of celebrity and influencer marketing. Often celebrities are used as brand ambassadors for
awareness building, and influencers/KOL for social engagement. Brands in China often use KOL's to engage through product
education, lifestyle tips, games and gifts etc. Foreign brands tend to focus more on mainstream media rather than influencer
marketing or new digital channels such as livestreaming, their reaction to the market is slower given headquarters limitations
and the need to comply with the brand image and "global identity". It will take even longer for ultra-premium brands due to need
to manage prestige brand image. Although the walls are coming down and they are starting to embrace it, in the meantime, C-
brands will take market share when can.
Chinese brands understand the importance of social media marketing. Consumers spend on average 5.6 hours per day on the
internet (pre-COVID)2, 38% of the time is on social media. Influencer marketing or KOL marketing has risen in popularity for e-
commerce. Virtual idols like Austin Li (Li Jiaqi) resonates particularly well with China’s digitally native Gen Z. Austin Li is one of
China's most famous beauty influencers or "the King of Lipstick" who rose to fame through livestreaming, he has 40 million
followers on Douyin (China’s TikTok), and once sold 15,000+ lipsticks in just 5 minutes
Companies have migrated towards non-celebrity figures to promote their products, including Key Opinion Leader (KOL), Key
Opinion Consumer (KOC), vloggers, bloggers and internet-influencers (Wanghong). These KOL's uses multiple channels in
China, including traditional E-commerce platforms such as Tmall and Taobao (BABA, Alibaba, covered by Robin Zhu),
livestreaming through these E-commerce sites, or short video platforms such as Douyin (Chinese TikTok), Kuaishou (1024.HK,
Kuaishou, covered by Robin Zhu) , and long video platforms such as Bilibili, discussion forums like Xiaohongshu (Red) and
microblogging sites such as Weibo, photos and video sharing and promotions through social platform such as WeChat
Moments (0700.HK Tencent, covered by Robin Zhu). The management of KOL has become professionalized and sophisticated,
professional management and content generation are often done by MCN (multi-channel networks).
EXHIBIT 64: Social media marketing in China
Source: Admaster, Miaozhen systems, GDMS, company Weibo feeds, Bernstein analysis
Driven by the impressive growth potential, 71% of advertisers in China intend to increase social media marketing budget in 2020
(Exhibit 65), across four key areas: KOL, short video/livestreaming, WeChat and CRM (Exhibit 66). Given constraint in marketing
budgets, companies usually choose one or two social media platforms as their focus and consider the type of KOL and level of
KOL mot suitable to their campaign. Local brands such as Proya and Perfect Diary are leaders here (see case examples later in
the chapter). Multinationals like L’Oreal and Estee Lauder also catching up. L’Oréal launched Meipai the event that drew uploads
2 According to QuestMobile

60 million views. Estee lauder signed celebrity Xiao Zhan and launched” Lipstick Micro Movie” on Weibo which generated
120mn views. However, companies like Proya and Perfect Diary tend to rely less on celebrities.
EXHIBIT 65: 71% advertisers in China intend to increase EXHIBIT 66: Intention to increase advertising budget
social media marketing budget in 2020 across four key areas: KOL, short video/livestreaming,
WeChat and CRM
Social media marketing budget
growth (2020)
71% of advertisers
30%
intend to increase
budget 27%
26%
24%
25%
20%
15%
12%
10%
6%
5%
5%
0%
Growth Growth Growth Growth Same Decline
>50% between between <10% as 2019 from
30-49% 10-29% 2019
Source: Admaster, Miaozhen systems, GDMS, Bernstein analysis Source: Admaster, Miaozhen systems, GDMS, Bernstein analysis
Note: The sample size of advertisers is 221 Note: % refers to the proportion of advertisers choose to increase inputs.
The job of managing KOLs has become professionalized and sophisticated. KOL marketing in China has seen clear trends in
vertical development (types of influencers) and horizontal expansion (across industries), as well as shifts in the management
model. Exhibit 67 describes the KOL ecosystem. The management of KOL has shifted from direct or individuals to agency or
professional management under MCN (multi-channel networks). MCNs can supports multiple marketing functions such as
channels exposure, KOL segmentation, data analytics, strategy and ROI for brands and advertisers.
For more information on KOL, please see our previous published blast KOLs are here to stay - A Fireside chat with Becky Li, top
Chinese influencer and fashion blogger and Asia Consumer Blast: Supermodels vs. KOLs, who could sell more lipsticks for
Perfect Diary, Proya, and Guangdong Marubi?

EXHIBIT 67: KOL Ecosystem
EXHIBIT 68: Multiple ranks of influencers, differing in skills and market reach
Source: Bernstein analysis, Talking data, CCSight
Cosmetic Company KOL Strategies

Driven by the impressive growth potential, 71% of advertisers in China intend to increase social media marketing budget in
2020 (Exhibit 65), across four key areas: KOL, short video/livestreaming, WeChat and CRM (Exhibit 66). Given constraint in

marketing budgets, companies usually choose one or two social media platforms as their focus and consider and consider the
type of KOL and level of KOL mot suitable to their campaign:
 Platforms: Most cosmetic companies advertise on multiple platforms, and usually focus their effort on one or two
depending on the target customers or traffic exposure. Starting in 2017/2018, social media platforms such as Douyin
and Kuaishou and Taobao created livestreaming platforms.
 Types of KOL: Budgets are split across KOL portfolios depending on the target groups customers (e.g. cosmetics KOL,
fashion KOL, comedian KOL, etc.)
 Levels of KOL: After deciding on the target customer groups, companies may further consider which levels of KOL (i.e.
top-tier, mid-tier, or micro/long tail) would optimize their marketing impact or help on brand building.
EXHIBIT 69: Mid-to-low tier KOLs accounts for ~70% of EXHIBIT 70: Proya leveraged multiple types of KOL on
KOLs in Proya's July 2019 campaign Douyin
Source: Weiboyi data, Bernstein analysis Source: Feigua data, Bernstein analysis
Note: the percentage was calculated by dividing the number of KOLs in a certain
level with the total number of KOLs used by Proya
Case example 1: Proya – wide coverage through mass media, short videos, multi-type KOLs
Since 2016, Proya's online growth outpaced industry and peers significantly. Proya's online sales contribution grew from 11%
to 53% between 2014-19. Proya's distributes through 3rd party distributors as well as self-operated online stores. Its online
operations are executed in-house rather than outsourced. The team focuses on data analytics and market trends analysis to
devise promotion tactics. The inhouse operations Proya with advantages in data, speed in new product launches, channel
control and potentially lower cost vs. using T-mall Partners (TPs) or distributors.
Proya deploys a unique social media marketing strategy which targets at the mass consumer cohorts through a combination of:
Short video Douyin (Tiktok) for viral videos and reach the masses. In July 2019, Proya's Black bubble mask went viral on Douyin
(Tiktok), and generated in total RMB ~330m on one single SKU. Proya uses brand building through Douyin (Tiktok), a "mass-
media" short videos social network that has 10x more DAUs than Xiaohongshu. The process of brand building on Douyin is
similar to Xiaohongshu, but with a more diverse user base. The major difference is that the advertisement is delivered in the
form of short video. This form has a major advantage over text and images – as long as the video is interesting, it can spread
extremely fast and reach many unexpected consumer groups.
Long informative/educational videos through video through Bilibili: Bloggers in platforms share user experiences and product
reviews. There were more than 1000 video sharing about the Proya brand (mostly consumer/KOC videos like YouTube).

Livestreaming for promotional sales. Proya often uses T-mall flagship store livestreaming for exclusive promotions. Proya
strategically manage livestreaming online traffics, increase livestreaming intensity during peak times and conduct accurate
targeting of potential customers with high historical GPM.
Microblogging through Weibo, WeChat, Meipai, and Xiaohongshu: for sharing their user experiences. On Weibo, Proya published
more than 10k threads and has 1.2m followers, On Xiaohongshu, Proya has 66k followers, On Wechat, Proya set up online
stores, official accounts and video accounts.
Multi-type KOL's and MNC's:
 Leveraging different types of KOL: To take advantage of Douyin's diverse user base and the short videos' speed of
spread, Proya developed the strategy to cooperate with multiple types of KOLs, including professional cosmetics
KOLs, comedian KOLs, drama KOLs, and lifestyle KOLs. For example, in July 2019 facial masks campaign, Proya
inviting male comedian KOLs to promote the products, and achieved 3m+ views - highest per single video. The multi-
type KOL strategy increase coverage across all consumer groups and raise brand awareness, so instead only
marketing to the conventional groups of young female customers. The result: orders surged after the campaign, and a
significant portion were from male customers.
 Uses more mid-to-low tier KOLs as they are more affordable, and in aggregate, they can achieve significant marketing
impact. Mid-to-low tier KOLs account for ~70% of total number of KOLs in Proya's July 2019 campaign.
 Content creation through MCN investments: In 2019, Proya has made additional investments in MCNs (multi-channel
network), which refers to digital marketing content creation for KOLs through short videos, livestreaming, social media)
with operators such as Hangzhou Wanyan, Ningbo Segu, Xiongke, etc. These are MCNs organization and are part of
Proya's corporate venture capital investment. Proya leverage those companies to create KOL content.

THE COSMETIC STORE (CS) IS LESS LIKELY TO BE DISRUPTED

The digitization trend is inevitable. But Cosmetic stores (CS), in our view, will likely be the last offline channel to be disrupted
given its low cost of running. There are 2 types of CS channels: multi-brand and single brand stores. Multi-brands stores
channel can leverage traffic brought by brands cluster. The single brand store format delivers a unified store design, display,
and professional service. However, the location, stores design, renovations, and labor costs are all borne by the brand. Since
2017 the sector saw decreasing traffic to single brand formats. In 2018, Innisfree reported -7% sales decline mainly from its
single brand stores. L’Occitane also closed a number of single-brand stores.
C-beauty brands continues to expand through Cosmetic Stores

 Multi-brand CS rapidly grew in tier 3 cities and below, supporting domestic brands growth. Under Marubi's CS channel,
64% are tier 3 and below. Domestic brands dominate multi-brand CS with 85% of SKU sold in this channel.
 The high fragmentation and low cost give cosmetic companies plenty bargain power and makes this channel harder to
become disrupted by ecommerce compared to department stores. According to CBO, 81% of multi-brand CS retailers
have 5-30 stores.
 New formats of CS stores have emerged to attract young consumers. In the past, the target customers for CS were aged
30-50 years and they failed to capture young consumers. In the recent years, the cosmetics industry has seen newer
formats of CS stores with innovative designs and trendy products to attract young consumers. Some examples are:
 HARMAY: started from Taobao in 2008 and opened its first offline store in 2018. It applied "warehouse" style
decoration in its stores with more than 15,000 SKUs ranging from premium brands such as La Mer and Estee
Lauder, to trendy value domestic cosmetics brands such as Judydoll. Moreover, prices of these international
brands are more competitive than other offline channels. In 2019, it received investment from Hillhouse with
valuation at RMB 500mn.
 The COLORIST: Opened in 2019 targeting the 14-35 age group. In contrast to pushy beauty assistants (BA) in
traditional multi-brand stores, the COLORIST created a "no active service" approach; store staff will provide
support to customers only when requested
 WOW COLOUR: established in 2019 to initially focused on selling trendy domestic color cosmetic brands, such as
Judydoll, Girlcult, and Colorkey, which accounted for 70% of SKU. It has now increased its skincare mix to 45%.
EXHIBIT 71: New multi-brand CS EXHIBIT 72: Traditional multi-brand EXHIBIT 73: Single brand store:
Cosmetic Shop: Harmay CS: T3C Etude House
Source: Bernstein photo Source: Bernstein photo Source: Bernstein photo

EXHIBIT 74: Domestic brands account for 85% of SKUs EXHIBIT 75: Tier 3 and below cities account for the
sold in multi-brand stores majority of Marubi's CS channel
Source: CBO, Bernstein analysis Source: Company reports, Bernstein analysis
EXHIBIT 76: Online and CS channel accounts for ~90% of EXHIBIT 77: Multi-brand chain retailers with over 100
Proya and Marubi's sales in 2019 stores only account for 3% of the market
Source: Company reports, Bernstein analysis Source: CBO, Bernstein analysis

THREE KEY CONSUMER TRENDS THAT DRIVE C-BEAUTY GROWTH

To the consumer, C-beauty is culturally relevant, C-beauty brands can challenge foreign players in areas they still can't quite
grasp. For example, some foreign celebrity brands believe overseas celebrity status carries over into China automatically. In
China’s insular media arena, millennials are increasingly influenced by Chinese/Asian celebrities. Kim Kardashian’s KKW
fragrance had 1.1 million followers on Instagram but only 104k on Weibo and engagement in China was low. Whereas Rihanna’s
Fenty Beauty achieved success as it was launched with Chinese new celebrity Wang Ju and HEYTEA collaboration. China's
cosmetics market is dynamic and fast changing. Understanding the key trends explains the above anecdote:
 Increasing cosmetics demand from the young generation
 Increasing cosmetics demands from low-tier cities
 Rising national pride
INCREASING COSMETICS DEMAND FROM THE YOUNG GENERATION

Among different generations, Millennials are the key consumers today, yet Gen Z is growing the fastest. Generation Z's
consumption is growing the fastest among all generations and the portion of cosmetics spending (Exhibit 79). Although
Generation Z is still growing it contributes to a relatively small portion of China's total cosmetics consumption, they will
inevitably spend more on cosmetics than past generations once they mature.
 Millennials and Gen-Z account for 60% of online cosmetics consumption in China (Exhibit 78), Generation Z (born after
1995) are rising in spending power and propensity to spend. Millennials and Gen-Z represent less than 30% of the
population between age 15 to 64 but represent ~60% of the online cosmetics consumers on t-mall and other
platforms. They spend 50-70% more online vs. their older cohorts.
 Chinese Gen Z is starting skincare earlier than the previous generation, young customers are after anti-ageing products
(higher ASP category). For example, the bestselling cream of Guerlain "imperial orchid" is mainly purchased by women
between 50-80 years old in Europe, but in China, by women between 20-353.
 Millennials and Gen-Z not shy about being Chinese they have a high appreciation for the strong Chinese cultural identity.
Surveys by VIP shop at last June suggest that more than 65% of the respondents trust local brands and will consider
using local brands for most of their products.
EXHIBIT 78: Generation Y accounts for the majority of EXHIBIT 79: …but we see big potential for younger
cosmetics spending… generations
Source: Qianzhan Institude, Bernstein analysis Source: Qianzhan Institude, Bernstein analysis
3 Jing Daily

RISING NATIONAL PRIDE

To the consumer, C-beauty is culturally relevant, C-beauty brands can challenge foreign players in sociocultural areas. For
example, some overseas celebrity status may not always carry over into China. Domestic shows and Chinese/Asian celebrities
are increasing their influence on Chinese consumers. Kim Kardashian’s KKW fragrance had 1.1 million followers on Instagram
but only 104k on Weibo and the brand engagement was limited. Whereas Rihanna’s Fenty Beauty achieved success as it was
lunched with a Chinese celebrity and HEYTEA collaboration.
With rising national pride, “Buy-Chinese” (Guohuo) has been an undeniable trend China's cosmetics sector. Millennials and
Generation Z are C-beauty’s biggest advocate, because they identify with the brand's core values. These consumers want to
connect with their own cultural heritage and are willing to view local brands as high-quality, trendy and desirable. More
successful C-beauty brands have succeeded in communicating their brand ethos, examples are below and in our Friday blast
(link).
 Marie Dalgar: advocating diversity in China: In August 2018, Marie Dalgar launched the short video "I love me as I am",
which featured three “social outcasts” in China's conservative social environment. A pole dancer, a plus-size woman, a
transvestite. This was one of the earliest campaigns to openly address social stigmas, the video quickly reached over 1
million shares and comments on Weibo alone.
 Florasis (Huaxizi): focus on oriental aesthetics by incorporating Chinese heritage into the design. In 2020, they
collaborated with Beijing Forbidden city and launched a series of eye shadow palette that gained great attention
among young consumers at online social platforms.
 Chando: local ingredients from the Himalayas and social stigma marketing. Founded in 2001, Chando is a natural
beauty brand that features mostly local ingredients from the Himalayas. On Marth 8, 2019 (International Women's Day),
the brand launched a hugely popular social stigma video advocating "beauty at any age and size" Weibo
 Hedone: self-expression rather than self-perfection. This cult beauty brand that everyone on Xiaohongshu and Weibo
seems to be talking about. The color cosmetics brand, which launched in 2016, is known for its playful makeup
collections, cute and cheeky packaging, and powerful campaign video. The world of hedone treats makeup as an outlet
for self-expression rather than a simple self-perfecting tool. The brand’s daring and defiant stance on beauty is
reflected in product names like its “bi*ch girl” lipstick.
Even before the pandemic “buy Chinese” was trending. The rise of national pride is beneficial to domestic cosmetic brands, as
Exhibit 80 shows, Baidu media index indicates number of mentions for "buying Chinese" ("Guohuo") in online news and social
media, surged in 2019 (Exhibit 80). But in the post-COVID-19 age, there is an even stronger drive. The tense relationship
between the two global superpowers and the virus driven anti-China sentiment made many consumers boycott foreign brands.

EXHIBIT 80: Baidu media index for "buying Chineses" (国货) exploded in 2019, suggesting the rising of national
pride
Source: Baidu index, Bernstein analysis
According to Tencent's "2019 High-end Cosmetics Consumption White Paper", 42% of customers prefer domestic cosmetics
products (Exhibit 81), and ~90% of customers would like to try them in the future (Exhibit 82).
EXHIBIT 81: 42% prefer Chinese cosmetics brands, all EXHIBIT 82: 91% would more than likely buy domestic
else equal? brands in the future
Source: Tencent, Bernstein analysis Source: Tencent, Bernstein analysis

INCREASING COSMETICS DEMANDS FROM LOW-TIER CITIES

Over the past 20 years, due to better knowledge of local markets and deep-rooted experience of distribution channel, domestic
cosmetics companies grew through cosmetics stores in lower-tier cities, where foreign brands are reluctant to penetrate. This
market positioning and channel has supported the growth of the top C-beauty companies.
The development of e-commerce has allowed cosmetics brands to increase exposure to lower-tier city consumers. With the
emergence of multiple new social media marketing strategies, cosmetics consumption from lower-tier cities has quickly grown
beyond basic skincare needs to emulate the cosmetics routine of 1st and 2nd tier cities consumers.
More importantly, consumers from lower tier cities already account for ~50% of China's online cosmetic consumption and are
growing faster than tier 1 and tier 2 cities. The growth of online cosmetic consumption from lower tiers increased by 38%, vs.
16% from top tier cities in 2019. We believe that higher penetration into lower-tier cities, increasing average cosmetics
spending, and ecommerce will continue to support cosmetics growth.
EXHIBIT 83: Product discovery for EXHIBIT 84: Product discovery for EXHIBIT 85: Are trends in 1st and 2nd
low-tier city consumers high-tier city consumers tier cities helpful in your
consumption decisions
Source: Vipshop, iResearch, Bernstein analysis Source: Vipshop, iResearch, Bernstein analysis Source: Vipshop, iResearch, Bernstein analysis
EXHIBIT 86: Lower-tier cities accounts for ~50% of EXHIBIT 87: …and is still quickly growing (data below
China's online cosmetics consumption… shows 2019 yoy growth rate)
Source: Tmall, Bernstein analysis Source: Youzan, Bernstein analysis

Final words and conclusion: Chinese brands understand their competitive advantages and limitations in appealing
to domestic consumers
The growth strategy for Chinese consumer brands in many ways, has become less apparent than ever before. Chinese brands'
primary focus continues to be China, establishing themselves to compete with foreign brands domestically and developing
unique business models that don't exist anywhere else in the world. Clearly, there are areas where ten or even twenty years are
insufficient to build a brand and the institutional, technical capability to genuinely compete with best-in-class consumer brands
globally. Premium autos and luxury goods top the list of categories where the moats remain too wide even after two or three
decades. However, what is increasingly clear is that Chinese brands understand their competitive moats and limitations in
appealing to domestic consumers and are moving to exploit that opportunity.
Chinese cosmetic brands will continue to take share over the next decade, we see a common trend that C-brands are more
likely to succeed in sectors with high growth and high market fragmentation. C-beauty brands are very attuned to consumer
demand in both product development and marketing strategies. C-beauty has the advantage of a more agile supply chain that
allows for nimble responses and adaptation to local trends. These companies will continue to experiment with innovative new
products, marketing and technologies.
For C-brands to build competitive moats, the companies should invest in the long term to tell the brand story. Many C-brands
have succeeded with sales driven tactics through “explosive products” (viral product of the month) through Tmall and
Xiaohongshu. However, in the long term, Chinese consumers will want to understand the value of a long-lasting brand. It takes
time and consistency to grow the core of a brand’s value proposition. Consumers want to understand the brand ethos, identity
and core values. Some C-beauty brands have succeeded in doing so, examples from national pride section and in our Friday
blast (link).

ESG
MATERIALITY MATRIX
We have created a materiality map (Exhibit 83) to highlight the degree of importance of the ESG issues among the cosmetics
companies and isolated the few that are most important in this sector.
We look at two broad dimensions, the importance to ESG stakeholders and operational materiality. On the Y axis, we look at how
important each issue is to ESG stakeholders, including consumers, employees, suppliers, investors, and the media. On the X
axis, we rate the impact on company operations – examples like the financial impact of fines on air emission or waste violation,
higher expenses on using recyclable packaging and materials (environmental), loss of consumer trust from cooperating with
suppliers who fail to demonstrate ESG practices (social), or governance risk of concentrated power, such as when a company
founder controls board and senior management.
EXHIBIT 88: China cosmetic sector materiality matrix
Environmental
Air Emission – cosmetics companies can create high air emissions during both manufacturing process (from raw material to
product) and transportation process (from manufacture to consumers). In general, cosmetic companies combat carbon
emissions through improving operation efficiency and responsible sourcing/supply chain management. For example, in 2020,
Estee Lauder set a target to expand its Net Zero carbon emissions commitment and set a science-based target covering
Scopes 1,2 and 3 emissions.
China as a whole has committed to reducing its carbon dioxide emissions per unit of GDP (carbon intensity) by more than 65%
from 2005 levels by 2030, and to achieve carbon neutrality by 2060. For the Chinese cosmetics companies,
 Proya upgraded its production base in 2013 and installed "solar auxiliary heating system", which is solar energy to pre-heat
the boiler room's water before using natural gas for heating. Proya indicated that this system can save more than 6,000
cbm of natural gas every month and reduce the emission of carbon dioxide and other waste to the atmosphere.
 Shanghai Jahwa focuses on implementation of "green design" and "life-cycle management" and optimization of
manufacturing process to save materials and reduce waste emissions. In 2019, Jahwa's Shanghai Qingpu factory was
certified by China's Ministry of Industry and Information Technology as "green factory".

Water Consumption – water is a key component of beauty and personal care products. According to Univar Solutions Lab
experts4, a cream formula contains 60-85% of water, a lotion up to 90%, and shower gel or shampoos up to 95%. Water
scarcity is also an important issue in China generally – China has only 6% of the world's total freshwater resources and needs to
accommodate 20% of the global population.
Cosmetic companies have been developing water-free products (which usually contain oil) to address this issue. Water used in
the manufacturing process also plays a huge rule. In 2020, Estee Lauder (EL, covered by Callum Elliott) upgraded the water
softening system at Blaine, Minnesota, which is expected to result in a reduction of more than 600K gallons of water used each
year at full capacity.
 Proya has implemented a "reclaimed water recycling system" in its production base, in order to recycle the used water as
garden water, toilet flushing, and pallet and floor cleaning. Proya indicated this system can reduce water consumption by
1,500 tons every month.
 Shanghai Jahwa has established a system in monitoring environmental and energy data and identified six energy-saving
projects in the factories in 2020. The company claimed to have saved 17,640 tons of water via these projects. Shanghai
Jahwa was also awarded the title of "water-saving enterprise" by Shanghai government.
Water management – In 2019, L'Oreal had 35% reduction in waste generated at plants and distribution centers since 2005. In
2020, Estee Lauder targets to achieve zero industrial waste to landfill for all global manufacturing, distribution and innovation
site. Proya has implemented its own "sewage treatment system" in purifying wastewater, and after purification, more than 200
tons of sewage has been used for factory's daily cleaning and plants watering every day. Marubi also built up its own wastewater
treatment station, which has treatment capacity of 50 tons per day.
Packaging and materials – In general, we think the companies have the incentive to simplify packaging to control costs. In China,
as ecommerce captures 30% of total sales, shipping packages are important too. By 2025, 75-100% of Estee Lauder's
packaging will be recyclable, refillable, reusable or recoverable. Shanghai Jahwa has upgraded the transportation packaging for
its major brands, using clustered shrink wrap or shrink film in replacement of traditional boxing. This initiative reduced paper
consumption, labor costs, and effectively reduced procurement costs.
EXHIBIT 89: Cosmetic companies will emit CO2 during their manufacturing and transportation process
Source: Statista, Bernstein analysis
4 https://www.cosmeticsbusiness.com/news/article_page/Blue_gold_Water_in_cosmetics/156328

Social
Elimination of animal testing in determining product safety. The global advocacy of a "cruelty-free" manufacturing process is a
big part of cosmetic ESG initiatives in recent years. For the leading international players, Estée Lauder claimed that it was one of
the first cosmetic companies to eliminate animal testing (started from more than 30 years ago). L’Oreal also claimed to have
eliminated animal testing in 1989, long before Europe's animal testing ban (March 2013). However, both companies have been
criticized for not being completely "cruelty-free" as they still maintain animal testing for their products sold in China and some
other countries, where such testing is required by law. Since June 2014, China has exempted the mandatory animal testing for
domestic-made cosmetic products, and according to the latest documents released by the China National Medical Products
Administration, starting from May 1st, 2021, China will also exempt imported cosmetics from animal testing. We believe more
"cruelty-free" brands will be able to enter the Chinese market after the new regulation comes into effect.
Responsible Sourcing – responsible sourcing is not only an ESG consideration but also an important component in product
quality control. L’Oréal evaluates and selects its suppliers based on five key pillars, with social and environmental performance
being an important factor (the rest includes quality, innovation, supply chain and service, and competitiveness).
Gender equality and inclusion – Cosmetics companies usually market on gender equality to establish brand equity/images.
Loreal has a HER project to support women in the supply chain, and to enable women to develop skills within a safe and
empowering environment. Proya's 5 International Women's Day's campaign focused on gender equality and stereotypes, which
generated over 100m reads on Weibo. In fact, Proya is one of the forerunners among Chinese cosmetic companies in
advocating gender equality. It became the strategic partner of UN Women (United Nations Agency for Gender Equality and the
Empowerment of Women) in 2013 and has been running various projects including donations supporting women workers,
seminars for equal employment, and charity sport events each year.
Serving the community – serving the community is one way that cosmetic companies can build brand equity and image. L'Oreal
has a "Solidarity Sourcing Programme", which in 2019 enabled 70K people from communities facing social or financial
challenges to gain access to or retain a job and a decent income. The Chinese cosmetic brands, Proya, Marubi and Shanghai
Jahwa, also had their own community service projects, which mainly focus on supporting the education of the underprivileged
children and the rural schools. For example, Marubi donated 200K RMB to an impoverished town in Hebei to help build primary
schools in the area; the company also donate money for infrastructure work in impoverished counties in Guangdong Province.
Governance
Corporate Ethical Principles – good companies establish corporate ethical principles and cultivate vigorous company culture.
L'Oréal has four principles: integrity, respect, courage and transparency.
Compliance with the government – need to comply with the government in China. From 2021 Jan 1st, a new regulation on
cosmetics has been imposed by the State Food and Drug Administration of China (Exhibit 90). With the purpose to fight against
counterfeits/ illegal activities/misleading advertisement & labelling, protect intellectual property, ensure safety and quality, the
new regulation imposes stricter stipulations on cosmetics materials/products, production/ operation, labeling/advertisement
and provides more flexibilities and transparences on supervision of supervision.
Founder control and holding dual role of Chairman and CEO. If the controlling shareholder takes advantage of its chairman and
senior management positions to exercise control or major influence on a company, it is possible that the public shareholders'
interests may be affected or deprioritized. The founder control is very significant in both Marubi and Proya, both of which have
high concentrated equity ownership, and the founders are holding both the chairman of board and CEO positions. For Marubi,
Mr. Sun Huaiqing and wife Wang Xiaopu aggregately hold 80% of all outstanding shares, and Mr. Sun also serves as the
company’s Chairman and CEO. For Proya, the controlling shareholders (Mr. Hou Juncheng and wife Fang Aiqing) hold a lower
percentage of shares (36%) compared to Marubi, and Mr. Hou serves as chairman but not CEO. However, Proya's CEO, Mr.
Fang Yuyou, is the brother-in-law of Mr. Hou, and is the second largest shareholder (22%) of Proya, which makes the board and
senior management a group with shared interests.
5 https://www.163.com/dy/article/G4L5AOUA0518L346.html

EXHIBIT 90: New regulation on the Supervision and Administration of Cosmetics

Items Key Requirements Explanations\ Implications
1. The cosmetic materials with the functions of antiseptic,

1. Registration is the process that regulation department
sun protection, coloring, dying, freckle-removing, whitening
examines the cosmetics products/materials in terms of safety
are special materials; The cosmetic products with the
and quality control, and decides its success of application;
functions of dying, perm, freckle-removing, whitening, sun
Filling is the process regulation department records the
protection, anti-hair loss and other claimed new functions
evidences of safety and quality control on new cosmetic
are special cosmetics. New special cosmetic materials and
products/materials, and makes it available for further review.
products require registration with the State Food and
Registration is a more restricted regulation process.
Drug Administration before putting into production;
2. If materials are already on cosmetic material catalogue
Otherwise, filling is required
published by State Food and Drug Administration, they can be
Cosmetic raw 2. During 3 years since the new materials put into
directly put into production.
materials and production and sales, annual usage/safety report is
3. The differentiation between registration and filling is a new
products required to submit to authority. The new cosmetic
cosmetic management method and this separation improve
materials with no safety issue after 3 years in the market
the cosmetic regulation quality/ efficiency and in generally
will be included cosmetic material catalogue drafted by the
increase entry standard of cosmetic production and operation.
State Food and Drug Administration
4. The new regulation clarifies the data requirements and
3.The same requirements apply to imported cosmetics,
processing time limits for registration and filing, improves
which are required to submit extra evidences on
transparency, simplifies the filing procedures, it also further
permission for selling on original countries/obey with
encourages and supports cosmetic research and innovation,
production regulation in original counters/ cosmetic
protects the legitimate rights and interests of entities and
researches and experiments
individuals.
4. Special cosmetic registration permit has 5-year use
period, and it requires renewal 30 days before expiry.
1. Cosmetic companies qualifying for producing cosmetics

should meet the imposed standards of environment,
technical staff, inspection and management system about
1. Counterfeit products and illegal addition activities are further
quality/safety. The permit for production has 5-year use
curbed
period and requires renewal before expiry
2. Impose further responsibilities on e-commerce platform,
2. Cosmetic companies should establish inspection
beauty salons and hotels, reduce the space for cosmetic "grey
mechanism and put on record on raw materials, package
area"
as well as sale histories, the records should be available
2. Regardless of whether it is an e-commerce platform or a
for authority review at least 1 year after the product expiry
Production and livestreaming, online is only a sales channel, and cosmetics
day
operation need to be produced, stored, transported, and distributed
3. E-commerce platform should require the cosmetic
offline. Taking into account the strong concealment of the
business entities on it register with real name, and the
online transaction model, in order to avoid regulatory blind
platform should be responsible for managing and reporting
spots, the new cosmetics regulation place detailed
to authority in the case of violation on cosmetics regulation,
responsibility on cosmetic operating entities, ensure it is clear
conducted by the cosmetic business entities on its
that who are responsible for the productions and who are
platform.
responsible for the distributions
4. Beauty salons and hotels which provide cosmetics
during operation should also obey the regulation the same
as cosmetic business entities.
1. Cosmetic products should have labels indicating 1)

Product name, special cosmetic product registration
number: 2) Register/ filing person and production company
names and addresses; 3) Cosmetic production permit
number; 4) Cosmetic products standard code: 5) Full
ingredients; 6) Net weight; 7) Period of use, use
instruction and necessary warnings; 8) Other contents
required by standards and laws.
1. The information on cosmetic products are more accurate
2. The cosmetic labels should NOT contain: 1) Explicitly or
Labelling and authentic
implicitly indicate the function of medical treatment; 2) Fake
2. Transparency of cosmetic marketing is further improved
or misleading information; 3) Anything that is against
social order and civil code. 4) other information that is
prohibited by standards and laws.
3. The content of cosmetics advertisements should be true
and legal. Cosmetics advertisements must not explicitly
state or imply that the products have medical effects, must
not contain false or misleading content, and must not
deceive or mislead consumers.
Source: www.gov.cn, Bernstein analysis

SECTOR VALUATION
China cosmetics stocks are relatively new to the public market. Most Chinese cosmetics companies started to be listed after
2018, except for Shanghai Jahwa (600315.CH, not covered) who began trading back in 2001 (the company itself dates back to
1898 and it contains personal care product lines).
Currently, there is no specific index on the Chinese cosmetics industry. We used the follow three comparisons: MSCI China
consumer discretionary index as an industry benchmark, and Mature Western cosmetics companies for sector valuations
comps. China Discretionary sector is trading at historical high at 30x P/E. Cosmetics sector has long-term growth certainty,
high TAM and penetration growth. This explains the 50x P/E for the foreign cosmetics peers.
In our view, good Chinese cosmetics companies should enjoy a multiple premium compared to the broader consumer sector
given their high growth and higher margin profile. Chinese cosmetics companies also have:
 PSG: Lower PSG vs. foreign peers
 Earnings growth: Higher earnings growth
 PEG: Lower PEG vs. foreign peers, particularly from successful C-beauty operators like Proya and Marubi
EXHIBIT 91: China Discretionary sector is still trading at EXHIBIT 92: Foreign cosmetic peers saw healthy
historical high despite the recent de-rating multiple expansion over the past decade
MSCI China Consumer Discretionary Average of Western Cosmetic

Index Forward P/E Companies Forward P/E
40x 60x
35x 55x Includes Estee Lauder, L'oreal,
30x 28.9x
50x Shiseido, and Amorepacific Corp 50.1x
25x
45x , Kose, FANCL
22.6x 40x
20x 36.6x
35x
15x 16.1x
30x 29.3x
10x 9.5x 25x
22.0x
5x 20x
0x 15x
10x
Forward P/E average

Forward P/E average
average+1sd average-1sd
average+1sd average-1sd
Source: Bloomberg, Bernstein analysis Source: Bloomberg, Bernstein analysis

Proya is trading at 2.0x China consumer discretionary – close to its historical average. Marubi is trading at 1.4x China consumer
discretionary, significantly below its historical average.
EXHIBIT 93: Proya is trading at 2.0x China consumer EXHIBIT 94: Marubi is trading 1.3x China consumer
discretionary, at its historical average discretionary, below its historical average
Relative PE: Proya is trading at Relative PE (NTM)

slightly above historical average Marubi is trading at below average
3.5x 3.5x
3.0x 3.0x
2.5x 2.5x
2.5x 2.5x
2.0x 2.0x 2.0x

2.0x 2.0x
1.5x 1.5x
1.5x 1.5x 1.3x
1.0x 1.0x
0.5x 0.5x
0.0x 0.0x
1/1/2019 1/1/2020 1/1/2021
Relative P/E Average Relative P/E Average

+1 S.D. -1 S.D. +1 S.D. -1 S.D.
1) PSG
C-beauty companies have lower PSG compared to foreign cosmetic peers.
EXHIBIT 95: C-beauty companies have lower PSG compared to foreign cosmetic peers
Source: Bloomberg Bernstein analysis

Note: Amore Pacific removed from chart as PSG was 10.3x due to 0.3% revenue growth CAGR, Other Japanese companies such as Shiseido, Kao, Kose are
removed due to negative revenue CAGR

2) Earnings growth
C-beauty companies have higher earnings growth expectations vs. foreign peers
EXHIBIT 96: C-beauty companies have higher EPS growth expectations vs. foreign peers
Source: Bloomberg, Bernstein analysis;

Note: YSG excluded as they have negative earnings
3) Company PEG
C-beauty companies have lower PEG compared to foreign cosmetics peers.
EXHIBIT 97: Proya and Marubi are cheaper than foreign peers
PEG ratio: Proya vs. Marubi vs. comparables (NTM P/E over 19-22 EPS CAGR)
6.0x
Average: 3.0x Average: 3.4x
5.4x 5.3x
5.0x
3.9x
4.0x
3.5x
3.2x
1BF P/E
3.0x
2.2x 2.2x
2.0x
2.0x
1.6x
1.0x
0.0x
Proya Marubi Shanghai Yujiahui L'Oreal SA Estee Lauder Amorepacific Fancl Corp LG Household
Jahwa Cos Inc Corp & Health Care
Ltd
Cosmetic comparables

Note: Japanese companies such as Shiseido, Kao, Kose are removed due to negative EPS CAGR

PROYA – OUTPERFORM (TP: RMB 223)

Proya (603605.CH): Outperform, target price of RMB 223 (+39% potential upside) based on 52x NTM P/E. We are constructive
on Proya's growth prospects in China given its compelling proposition to young and aspiring consumers - Affordability, Access
and Assortment are its key differentiators. We believe Proya's company strategy in premiumization, color cosmetics and online
should support solid, long-term growth. Proya is the fastest growing listed beauty company globally (highest revenue CAGR
between 2013-19), the fastest growing domestic skincare brand in China (2017-19), and one of the most prominent skincare
brands in China. We expect 26% revenue CAGR between 2020-2025. Proya's revenue and margin growth should be driven by
premium skincare product extensions, color cosmetics growth, and strong online development. Product premiumization
supported by new product launches, ingredient innovation and packaged sets. We are above consensus for 2021-22 EPS for
Proya. We expect EPS growth of 33% and 25% in 2021 and 2022 respectively. We expect earnings to grow at 27% CAGR
between 2020-2025 and ROIC to increase from ~16% to ~19% by 2025. Valuation is rich but justified by sector growth
potential, quality returns (EPS, CAGR and ROE) and earnings growth. Moreover, Proya's PSG is lowest among peers.
Proya is the fastest growing listed skincare and cosmetics company globally
Proya Cosmetics (SHA: 603605) was listed on the Shanghai Stock Exchange in November 2017. Proya' s skincare was founded
with the concept of "ocean biotech". Over the decade between 2008-17, Proya's brand portfolio has expanded to 15 brands:
including owned 6 brands, 3 partnership brands, and 6 brands through Cross-border Ecommerce (CBEC). 85% of revenue
comes from the core brand: "Proya" which is based on ocean-based ingredients
 4% of revenue is from Uzero, natural herb-based skincare with offline stores.

 6% revenue from 4 other brands (ANYA "Han Ya", Cats & Roses, Hapsode "Yue Fu Ti" and YOYA "Yu Ya") & 3
partnership brands (TZZ, TIMAGE, YNM)
 5% revenue from cross-border ecommerce (CBEC). In 2019, Proya established CBEC with Zhongwen E-commerce
for European (Spanish, UK, French, UK, Italian) and Japanese brands. Proya's fully owned subsidy-Hongkong Xinghuo
industry limited owns 53% shares of Hongkong Zhongwen.
Proya had highest revenue CAGR between 2013-19 compared to global traded peer, this was even more evident between
2017-19 (Exhibit 98)). Among the listed comparable cosmetic companies globally (China, Korea, Japan, U.S. and Europe), Proya
had the highest revenue CAGR between 2017-2019 with 32% revenue CAGR. Proya's skincare lines supported its robust
growth. Skincare contributed to ~99%+ of Proya's retail sales, and ~90% of company revenue until 2019.
EXHIBIT 98: Proya has the highest revenue CAGR (2017-2019) vs. domestic and international peers
Source: Bernstein analysis, Bloomberg

Note: Yatsen removed from chart as data only available from 2018

EXHIBIT 99: Proya's ASP continues to increase with new EXHIBIT 100: Highest growth among top domestic peers
product launches and premium products between 2010-2019
Proya's online retail ASP trend

300
259
250 239
200
RM B
150 127
122
106 110
100
50
0
2017 average 2018 average 2019 average 2020 average 2020 Premium 2020 Premium
skincare ASP skincare ASP skincare ASP skincare ASP product: "Double- product: "Red
anti" youth gem" deep ocean
essence energy
EXHIBIT 101: Among the top beauty brands in China, Proya's skincare market share ranking improved from 27 th to
14th place between 2010-2019

Proya has "triple A" positioning

Proya targets mass market young consumers (20-35yr old, generation Z and millennials) from lower tiers (tier-3 below). This
consumer cohort has strong cosmetic demand yet limited access to top skincare brands. We believe Proya's proposition to
these consumers is Affordability, Access, Assortment (triple A).
 Affordability – Proya offers high quality products (ingredient focus, R&D focus, research institute collaboration) at low
prices, its pricing is among the lowest vs. top brands.
 Access –Wide assortment and strong distribution strategy both offline and online, T-mall alone has 17,000 unique items
(No. of SKU's*No. of online shops).
 Assortment - Proya offers high number of SKU’s available online. Its innovation agility allows the brand to achieve
continued success in Skincare product launches. Its color cosmetics sales also grew rapidly, with better customers
feedback scores on Taobao vs. multinational leaders.
Premium skincare product expansions

Under the "triple A" positioning, Proya has consistently launched new products over the past years. Between 2018-2020, Proya
launched 5 product series each year (Exhibit 103), successful lines included Proya's makeup line "Insbaha" and hit series
"Bubble SPA mask". For example, Proya's Black bubble mask went viral on Douyin (Tiktok) and generated in total RMB ~330m
on one single SKU (Exhibit 103).
 Premium product launches: Proya begun developing and launching products with premium ingredients. For example, the
Red Gem Deep Ocean Energy Cream launched in November 2020 had a relatively high ASP of RMB 310. The product
contains quality active ingredients such as peptides for collagen regeneration and was developed with a European
research lab. Premium ingredients were sourced from suppliers such as Lipotrue (active ingredient supplier) from Spain,
DSM from Netherland and BASF (chemical company) from German and Ashland from US.
 Ingredient upgrade through R&D partnerships: Proya intends to launch more products backed science through
partnerships with research centers around the world. Most recently, Proya announced strategic cooperation in 2018 with
key partners in France to support their R&D development with IREMER (French Research Institute for Exploitation of the
Sea) and with CEVA (Center for Study and Promotion of Algae, France). Proya has established a joint laboratory with CEVA
to co-develop exclusive functional patented products. CEVA has extracted active ingredients from farming 800 species of
algae, which are used by global cosmetics brands in anti-aging products.
 Patents: As a result of the focus on R&D, as of 1H20, the company owned 295 authorized patents, including 68 for
inventions, 28 for utility models and 199 for packaging design.
EXHIBIT 102: Skincare contributed to 90%+ of Proya's revenue until 2019, and would continue to contribute 75%+
Proya's product category revenue contribution
1% 2% 2% 1% 1% 1% 1%
100%
2% 1% 1% 1% 5%
90% 3% 15% 19% 20% 21% 23% 24%
80%
70%
60%
50% 97% 98% 99% 99% 99%
93%
40% 83% 79% 78% 77% 76% 75%
30%
20%
10%
0%
2014 2015 2016 2017 2018 2019 2020E 2021E 2022E 2023E 2024E 2025E
% Skincare + Cleanser % Color Cosmetics % Others
Source: Company reports, Bernstein analysis and estimates

Over the next 5 years, we estimate company revenue growth rate of 26% CAGR between 2020-2025, consistent with the
recent three-year performance. We expect skincare will still be the main driver of growth and color cosmetics will provide
additional boost for some brands. We believe the continuing growth of Proya is due to its commitment to drive product upgrade
through premium skincare product expansions, take off of color cosmetics and successful online development and marketing
strategies.
Exhibit 103: From 2018 to 2020, Proya launched at least 5 product series each year
Source: Bernstein analysis, Moojing.com, Company photos used with permission

Strong online development

Proya is leading industry and peers in online penetration and growth, Since 2016, Proya's online growth outpaced industry and
peers significantly. Proya has maintained ~60% online growth over the past three years, consistently higher compared to peers.
Proya's online sales contribution grew from 11% to 53% between 2014-19. We forecast Proya's online business to reach 77%
by 2025E with 32% CAGR in online sales from 2020-2025 (Exhibit 104), strengthened by:
Diverse online distribution Proya's distributes through 3rd party distributors as well as self-operated online stores. The major
platforms used are Tmall, JD, PDD, VIP Shop and others such as Taobao. 50% of the sales are self-operated, of which T-mall is
fully self-operated. Self-operated stores have highest GP margin of 70% or higher.
Contribution growth from DTC (direct to consumer) supported by data focused in-house team: We expect greater contribution
growth to come from DTC to reach 58% by 2025. Proya's online operations are executed in-house rather than outsourced.
They own a subsidy that focuses on developing Proya's online business, the entity is responsible for the operations on Taobao,
Tmall and JD. This team focuses on data analytics and market trends analysis to devise promotion tactics. The in-house
operations controls data, speed of launches, channel distribution and potentially at a lower cost vs. 3 rd party.
Strong social media marketing strategy Proya deploys a unique social media marketing strategy which is executed through:
 Short video Douyin (Tiktok): to cast a wide net across all consumer cohorts In July 2019, Proya's Black bubble mask went
viral on Douyin (Tiktok), and generated in total RMB ~330m on one single SKU.
 Long video Bilibili: used for detailed content reviews Bloggers in platforms share user experiences and product reviews.
Fans provide complete reviews of items and comparisons with other products, along with comprehensive pictures of
characteristics/suitability/effects of the items. 1000+ video shares (mostly consumer/KOC videos like YouTube).
 Livestreaming: used for: Promotional sales. Proya is believed to strategically manage livestreaming online traffic, increase
livestreaming intensity through targeting customers with unpaid orders, as well as customers with high historical GPM.
 Other platforms: Weibo, WeChat, Meipai, and Xiaohongshu Proya also has been active on other platforms to increase its
online exposure. On Weibo, Proya published more than 10k threads and has 1.2 mn followers. On Meipai, Proya has more
than 1000 followers. On Xiaohongshu, Proya published 422 notes and has 66k followers.
 Multi-type KOL's cost effective mass brand building. Instead of focusing on cosmetics KOLs, Proya cooperates with
multiple types of KOLs. For example, in July 2019 facial masks campaign, Proya invited male comedian KOLs to promote
the products, and achieved 3mn+ views. This KOL strategy casts a wide net across all consumer cohorts and build mass
brand awareness. The result: orders surged after the campaign, and a significant portion were from male customers.
 MCN's: Content creation through MCN investments: In 2019, Proya made additional investments in MCNs (multi-channel
network) for digital content management with operators such as Hangzhou Wanyan, Ningbo Segu, Xiongke, etc. Hangzhou
Wanya is 80% controlling interest; the other two are minority holdings.
EXHIBIT 104: Strong online: Between 2020-2025, we forecast 13% CAGR offline, and 32% online CAGR

High growth in color cosmetics segment

After various experimentation with multiple brands, Proya has refined it positioning in the color cosmetics market and hit the
bullseye on color cosmetics. We see this from the recent success in TIMAGE and INS BAHA. We believe its success was due to
its quality and Asian skin suitability, as well as Proya's online marketing strategies. Overall, we believe color cosmetics growth
will be driven by:
 Sector growth: Penetration growth in color cosmetics: As per industry analysis, the color cosmetics sector is expected to
grow at 14% from 2019 to 2025. 2017-19 Proya's color cosmetics saw ~188% growth. We forecasted 38% revenue
CAGR for Proya's color cosmetics business between 2020-2025 (Exhibit 105).
 New brands: Successful launch of two new color cosmetics brands TIMAGE and INS BAHA TIMAGE and INS BAHA (under
Proya) were launched in 2019. According to T-mall sell through data, TIMAGE had tremendous growth with 259% CAGR
between 2017- 2020. Proya brand's color cosmetics also grew 59% CAGR between 2017-2020. Proya and Timage
contribute to 97% of Tmall & Taobao sales in color cosmetics.
 New product launches: TIMAGE's and Ins Baha's success has been supported by explosive products. Proya will continue to
innovate through these popular product lines and social media marketing, to expand its consumer reach. Looking at online
sell through, explosive products are increasing in sales contribution for the Timage and Ins Baha. For example, "Ins Baha no
wear lasting foundation" contributed to ~50% of 2020 Proya core brand's color cosmetics online6 sales. "Timage master
high shine shading plate" was also the Tmall & Taobao best seller and generated 61mn sales 2020 YTD, representing 44%
of 2020 Timgae brand's YTD sales.
EXHIBIT 105: Proya's color cosmetics segment is seeing faster growth
Financial forecast
Revenue
We expect 26% revenue CAGR between 2020-2025. We believe Proya's revenue and margin growth to be driven premium
skincare product expansions, color cosmetics growth, and strong online development. We believe the company will continue to
deliver high growth given its: 1) Strong skincare revenue growth (+23% CAGR) from the core "Proya" brand, supported by R&D.
2) Portfolio diversification and expansion, with accelerated growth in other brands as well as cosmetics (+33% CAGR). 3)
Accelerated E-commerce penetration and online marketing strategies (+32% CAGR for online channel growth)
Margins
GPM: Since 2019, Proya introduced the cross-border brands into its brand portfolio, and the revenue mix increased to ~10% in
2020. Because the cross-border brands have much lower GP margin (~25% vs. Proya main brand's ~67%), the overall
6 Tmall and Taobao sales from Moojin data

company's GP margin in 2020 was expected to be lower. However, we believe the company's overall GP margin to improve
from more high-end skin care product launch (e.g. essence) under the core "Proya" brand, and with higher ASP through
premium product lines, and higher revenue mix of 1P online development (higher margin than selling to distributors).
SGA: In 2020, we expect Proya's total SG&A margin to decrease from 48.4% to 46.2%, due to 1) new GAAP account changes
have shifted logistic cost from selling expenses to COGS, 2) reduced offline POS caused by Covid, which reduced the rental
cost; 3) less expenses on travel and other admin cost. Going forward, we expect Proya to maintain its SG&A margin ratio, which
includes: Gradual increase in selling expense and R&D ratio over revenue, offset by decrease in general and admin expense
ratio.
NPM: we forecast 5-Y CAGR of 28% between 2020-2025, and NP margin to improve from 12.8% to 13.6%.
EPS: We forecast +24%, +33%, and +25% EPS growth in 2020, 2021 and 2022, with target price of RMB 223(+39%)
potential upside) based on a 52x P/E (1-year BF) multiple. ROIC: topline expansion (how effectively they’re growing topline) is
the key contributor, Proya will benefit from scale and generating revenue more efficiently (higher rev/capital invested ratio).
EXHIBIT 106: We expect Proya's revenue to grow at a 26% CAGR from 2020-2025
Source: Company filings, Bernstein estimates and analysis
EXHIBIT 107: Proya: We expect EPS to grow at 27% EXHIBIT 108: Proya: We expect ROIC to significantly
CAGR from 2020-2025 improve from 2020-2025
RMB Proya EPS forecast 25% ROIC vs. WACC
9.0 16.0%
8.20
13.6%
8.0 13.0%13.1%13.2%
13.4%
14.0% 20.1%
12.6%12.8% 19.0%
12.2% 20%
7.0 17.9%
11.3% 6.44 12.0% 16.8%
6.0 15.6%16.1%15.7%
9.5%
9.1%
8.7% 5.09 10.0%
15% 13.4%
5.0
4.04 8.0% 12.1%11.7%
11.4%11.4%
4.0
3.24
6.0%
3.0 2.44
10% WACC: 10.1%
1.96 4.0%
2.0
1.30 1.44
1.05 0.96 1.02
1.0 2.0% 5%
0.0 0.0%
0%
Source: Company filings, Bernstein estimates and analysis Source: Company filings, Bernstein estimates and analysis

Valuation
Since Proya’s listing in late 2017, the stock price has increased 7x, partly supported by strong fundamentals growth from
executing the growth plan set out in the employee incentive plan issued in 2018, and partly driven by multiple expansion. The
sector TAM and growth opportunities discussed earlier, and the company's ability to deliver EPS growth at a rapid rate have also
contributed.
Proya currently trades at 49x NTM P/E, higher than historical average since IPO. We used 52x P/E (1BF) as our target P/E.
EXHIBIT 109: Proya historical NTM P/E EXHIBIT 110: Proya is trading at 2.0x China consumer
discretionary, at its historical average
Proya Forward P/E

80.0x
70.0x
60.0x
52.1x
50.0x 49.4x
40.0x 38.4x
30.0x
20.0x
24.6x
10.0x
0.0x
Proya average 1SD -1SD
EXHIBIT 111: Proya's stock sentiment has been supported by consistent earnings growth

Proya's high price multiple can be justified by:

Sector attractiveness: As discussed in the sector valuations section, the Cosmetics sector has long-term growth certainty, high
TAM and penetration growth. This explains the average 50x P/E for the cosmetic sector globally. China's Cosmetics has double
digit sector growth CAGR, early stage of life cycle, average consumption per capita is 6x lower than Asian peers.
Stock attractiveness
 Earnings growth: Among Chinese cosmetic companies, Proya is the most expensive one but it is justified by its higher
growth potential (Exhibit 112), as well as Proya's higher EPS growth expectations vs. domestic and foreign peers
 PEG: Proya's PEG ratio is the second lowest among peers.
 PSG: Proya's PSG is only 0.4x lowest among peers.
 High Quality: Based on forward P/E (22) and compared with EPS growth + ROE (a quality metrics that measures growth of
the stock as well as the quality of the growth).
EXHIBIT 112: Proya has higher EPS growth expectations EXHIBIT 113: PEG and PSG: Proya is cheaper than foreign
vs. domestic and foreign peers peers
PEG ratio: Proya vs. Marubi vs. comparables (NTM P/E over 19-22 EPS CAGR)
6.0x
5.4x 5.3x
5.0x
3.9x
4.0x
3.5x
3.2x
1BF P/E
3.0x
2.2x 2.2x
2.0x
2.0x
1.6x
1.0x
0.0x
Proya Marubi Shanghai Yujiahui L'Oreal SA Estee Lauder Amorepacific Fancl Corp LG Household
Jahwa Cos Inc Corp & Health Care
Ltd
PSG ratio: Chinese vs. foreign comparables (NTM P/S over 3Y sales CAGR)
2.5x
2.1x
2.0x
2.0x
1.5x
1BF P/E
1.0x 0.9x
0.7x
0.6x
0.5x 0.4x
0.3x
0.1x 0.1x
0.0x
Proya Marubi Shanghai Yujiahui Yatsen L'Oreal SA Estee Lauder Fancl Corp LG Household
Jahwa Cos Inc & Health Care
Ltd
Source: Bernstein analysis Source: Bernstein analysis

EXHIBIT 114: High quality: Proya's P/E reflects strong EPS growth + ROE
Cosmetic companies P/E valuation vs. EPS growth + ROE

90.0x
Shiseido Co Ltd
80.0x
70.0x
60.0x Shanghai Jahwa

Amorepacific Corp Proya
50.0x
P/E (1BF)
Pola Orbis Holdings Inc Fancl Corp Estee Lauder Cos Inc
Yujiahui
40.0x L'Oreal SA Marubi
30.0x Kao Corp
20.0x LG Household & Health

Care Ltd
10.0x
0.0x
0 10 20 30 40 50 60 70
3-Y EPS CAGR (2019-2022) + ROE (2022) in percentage

Note: Japanese companies such as Shiseido, Kao, Kose are removed due to negative EPS CAGR
Bernstein vs. Consensus

EPS forecast is +6% vs. consensus from 2021-2022. We are higher than consensus in the topline forecast (+5%) from 2021-
2022 on successful new product launches. We have a higher OP forecast as we believe the company will benefit from its larger
scale.
EXHIBIT 115: Proya financial forecast: Bernstein vs. consensus
Source: Bloomberg, Bernstein analysis and estimates

MARUBI: MARKET-PERFORM (TP: RMB 61)

We initiate coverage on Guangdong Marubi Biotechnology (603983.CH) with Market-Perform. Our TP RMB 61 (+11%
potential) based on 33.7x 1BF P/E. Founded in 2002, the company listed on the Shanghai Stock Exchange in July 2019. Key
points of our thesis are: 1) The company is famous for its eye treatment products which accounts for over 30% of its revenue.
Despite the expected high CAGR for this segment, eye treatment only captures a small portion of cosmetic spending, and it
faces a lower growth ceiling. 2) Its low-tier premium positioning serves as a double-edged sword – on one hand, we believe
Marubi is avoiding direct competition with true premium foreign brands; On the other hand, they have fewer growth levers to
pull. If they go more premium, they face more fierce competition with foreign brands; if they go mass, brand equity and margin is
likely to take a hit. 3) Marubi is working to pivot towards e-commerce and cater to the demand from the younger generation
which can bring greater growth potential. If that starts to materialize, we would likely become more constructive on the name.
We are below consensus for 2021-22 EPS for Marubi. In 2021 and 2022. We expect earnings to grow at 17% CAGR between
2020-2025. Valuation is at all time low due to limited growth catalysts and upward pressure on its SG&A spending as it shifts
focus to online distribution, and shareholding concentration
Eye Treatment is a niche market with lower growth ceiling

Lower growth ceiling of Eye Treatment niche will be an issue if the company fails to address non-Eye Treatment market. Eye
Treatment is a niche market. According to Moojing data, eye treatment only accounted for 6% of total beauty and skincare
online sales in 2020, although it is expected to reach 7.2% in 2025E, and despite the fast online growth for Eye Treatment at
56% CAGR 2017-2020E, the growth contribution isn’t significant.
Eye Treatment is a discretionary category that does not weather economic downturns well. In China, data suggests that eye
treatment sales online are correlated with total online spending. Eye cream is usually considered an add-on step during daily
skincare routine. The step could be easily cut and "is eye cream a necessity?" has been constant debate among the beauty
community7.
Maurbi's reliance on Eye Treatment category is increasing. Eye Treatment accounts for over 30% of Marubi’s overall revenue,
and the proportion has been rising. Going forward we continue to Marubi's eye treatment exposure to further increase, given its
strong brand image and new eye care product launch targeting the younger generation. By 2025, we expect eye treatment
products to capture 38% of revenue.
EXHIBIT 116: Eye treatment is 6% of total beauty and EXHIBIT 117: We expect eye treatment increase in
skincare sales online Marubi's revenue contribution
Marubi's product category revenue

contribution
2% 1% 1% 1% 1% 1% 1% 1%
100%
90%
80%
70% 62% 62% 62% 61% 60%
60% 68% 64% 68% 63%
50% 72%
40%
30%
20% 32% 34% 31% 35% 36% 37% 37% 38% 38%
10% 28%
0%
% Color Cosmetics and others

% Skincare & Cleanser
% Eye Treatments
Source: Moojing, Bernstein estimates and analysis Source: Company reports, Bernstein estimates and analysis
7 https://theskincareedit.com/is-eye-cream-necessary

Its low-tier premium positioning is a double-edged sword

In our view, Marubi does not directly compete with foreign premium brands as they are in the "low tier premium segment" (Exhibit
45 and Exhibit 118). We believe Marubi is avoiding direct rivalry with premium foreign brands to build market share without the
competitive threat. We believe Marubi is perceived as "premium" in lower tier cities.
However, this positioning strategy is a double-edged sword for future growth. They have less growth levers to pull compared
with mass brands. If Marubi seeks ASP growth and chooses to be priced more premium, it would face fierce competition from
well-established foreign brands. Foreign brand dominates premium eyecare category and are winning; if Marubi lowers pricing
to focus on the mass market, both brand equity and margin will take a hit. They can only move in one direction in terms of price
and positioning. The company must be prepared to move up eventually and maintain its premium positioning.
EXHIBIT 118: In Eyecare: Marubi's ASP is lower than premium foreign brands
Top 20 eyecare brands online ASP on Tmall (2020 YTD Nov)

2000
1,775 Foreign brands Domestic brands
1800
1600
1400
1200
RMB
1000
733
800
551 549
600 472
399 356 335
400 294
221 216
200 111 112 100 98 93 90 87 85 59
0
EXHIBIT 119: Foreign brands are taking share in Eye EXHIBIT 120: Marubi lost market share to foreign
Treatment segment online brands, from 11.1% to 4.7% between 2017-2020
Source: Moojing, Bernstein analysis Source: Moojing, Bernstein analysis

Well positioned in Cosmetic Store and actively pivoting towards E-commerce and younger generations
Channel shift towards E-commerce means topline and margin upsides: Marubi relied on cosmetic stores in the early days –
nearly half of its offline revenue came from CS in 2016; that percentage has come down to less than 36% in 2019 and will
continue to decline as they invest more in E-commerce. Marubi's E-commerce only took off more in the recent years, of which
60-70% are 3rd party model where companies have less control compared with DTC (direct to consumer model). This is an
opportunity for Marubi. However, the pivot towards more 1P online sales (DTC model) will help to alleviate the GPM contraction.
We estimate Marubi's GP to maintain around ~69% in the next 3-5 years.
The pivot towards E-commerce and younger generation (aligned to our themes) might work, and the higher demand growth from
lower tier cities is what might benefit them. This is a potential growth driver for the company going forward, although these new
areas and new marketing tools being piloted, and they are faced with competition from more experienced E-cosmetics
EXHIBIT 121: Marubi's channel development forecast – Online vs. Offline
EXHIBIT 122: Marubi relied on cosmetic stores in the early days but is pivoting towards E-commerce

Expected increased investments in marketing is likely to take a toll on margin; how it balances between growth
and profits remains to be seen
Traditionally Marubi is famous for memorable TV ads (used the same slogan for its eye serum product for over 10 years and the
ads went viral when first launched). Marubi has high margins compared to other cosmetic companies due to lower marketing
spending. Marubi had efficient advertising – celebrities, EV, memorable and repetitive ads that build brand awareness, which
worked well in the past. In 2020, we expect Marubi's total SG&A margin to increase due to the advertisement and branding cost
to support new product launches, such as Marubi's Little Red Pen, as well as the new GAAP account changes that shifted
logistic cost from selling expenses to COGS. However, going forward, we expect Marubi to see SG&A going up in the short term
given the need to increase selling expense for new product launches.
EXHIBIT 123: Marubi has higher margin compared to other cosmetic companies
EXHIBIT 124: Driven by its lower SG&A spending

Concentrated shareholdings
As of 3Q20, The founder and major shareholder Sun Huaiqin holds 72.72%% of the shares, the second shareholder Wang
Xiaopu (spouse) holds 8.08 % of the shares , the third shareholder L Capital holds 7.11%(Exhibit 125). The lock up period for L
Capital was 12 months from IPO, which ended on 27 July 2020. On 27th July 2020, L Capital announced plans to have share
reduction of no more than 6% of Marubi's total shares. On 21th Nov 2020, Marubi announced that L Captial had reduced 1.86%
of Marubi's total share capital (1% from call auction, and 0.87% from block trade). The announcement on Nov 21 st also noted
that L Capital plans to reduce no more than 2% of shares via call auction between 18th Aug 2020 and 13th Feb 2021.
EXHIBIT 125: Marubi's equity holding structure
Source: Company reports, Bernstein analysis
Financial forecast
Revenue
Marubi's revenue growth had been stable during 2016-2019, with 3-year revenue growth at +14%. We forecast Marubi's 2020
revenue growth to be flat, mainly as a result of estimated sharp decline in offline channel. During 1H20 when COVID hit the
offline retail, Marubi suffered huge offline YoY decline of -23%, which was offset by strong online growth (+27% in 1H20),
resulting in -3% revenue decline in the first half year. We expect Marubi to improve offline sales performance in 2H20, resulting
in a small decline of -1.5% revenue growth for 2020.
We expect the company to have +16% revenue CAGR from 2020-2025. We believe the company would deliver topline growth
through: Eye Treatment (+18% CAGR) and Skincare (+17% CAGR) segments, supported by ASP growth in the new products
and Marubi has been focusing on "youthfication" strategy to expand the consumer base to younger generations. We expect
growth to come from in Marubi core brand (+17% CAGR).
Margins
GPM: Marubi's GP margin is higher than other Chinese peers. We believe this is due to 1) premium brand positioning 2) Marubi
focuses on Eye Treatment, whose GP margin is higher. In 2020, this was slightly impacted by the new GAAP account changes
which shifted logistic cost from selling expenses to COGS. We believe the company's overall GP margin will be steadily
improving from 68% to 68.8% between 2020-2025, given expected growth from Eye Treatment segment and higher sales
from online 1P (online 1P has ~10% higher GP margin than online 3P channel, i.e. 74% vs. 64% in 2018, according to Marubi's
Prospectus).
NPM: We expect NP margin to maintain at ~29% during 2020-2021 and it has the potential to grind up higher if the company's
selling expense ratio could come off after the near-term intensive spending in rolling out new products catering to the younger
consumers. In the long term, we forecast 5-Y CAGR of +17% in net profits between 2020-2025.

SG&A: In the near term, we expect Marubi's total SG&A margin to increase in the near term due to the advertisement and
branding cost to support new product launches, such as Marubi's Little Red Pen.
EPS: We expect EPS to grow at +17% from 2020 to 2025. ROIC: topline gradual expansion (how effectively they’re growing
topline) is the key contributor, Marubi will benefit from scale and generating revenue more efficiently (higher rev/capital
invested ratio).
EXHIBIT 126: Marubi: We expect revenue to grow at a 16% CAGR over the next five years
EXHIBIT 127: Marubi: We expect EPS to grow at 20% EXHIBIT 128: Marubi: We expect ROIC to gradually
CAGR over the next five years improve but remain lower than prior peak levels
RMB Basic Earnings Per Share 50% ROIC vs. WACC
3.0 2.83
45%
2.5 2.41 40%
35%
2.04
2.0 30%
1.74 25.0%
23.4%
1.49 25%
1.5 1.35 19.3%
1.27 20% 17.9% 16.9%17.1%
1.15 15.9% 16.2% 16.4%
14.4%
15%
1.0 0.87
0.64 10%
0.5 5% WACC: 10.4%
0%
0.0
Source: Company filings, Bernstein estimates and analysis Source: Company filings, Bernstein estimates and analysis

EXHIBIT 129: We expect Marubi to gradually increase selling expenses cost ratio, decrease in general & admin
expenses cost ratio, and maintain stable R&D cost ratio
Marubi: SG&A expense forecast breakdown

50.0%
46.0%
45.0% 42.0% 41.6%
39.9% 40.6% 40.6% 40.4% 39.8% 39.3%
40.0% 37.4%
35.0% 39.1%
34.5% 33.9% 33.9% 33.6% 34.1% 34.2% 33.8%

30.0% 33.4%
30.0%
25.0%
20.0%
15.0%
10.0%
4.7% 5.0% 4.6% 5.0% 4.5% 4.5% 4.2% 4.1% 4.0% 3.9%
5.0%
2.1% 2.1% 2.1% 2.5% 2.8% 2.8% 2.8% 2.8% 2.8% 2.8%
-
2016 2017 2018 2019 2020E 2021E 2022E 2023E 2024E 2025E
SG&A margin% Research & development Selling expenses General and administrative expenses

*Chart not including finance cost and taxes and surcharges
Valuation: our valuation of 33.7x NTM P/E for Marubi is below historical average
Marubi currently trades at 33.7x NTM P/E (March 29, 2021), versus its historical average of 42x and close to its lowest level
since IPO. The relatively low valuation may due to its business risks – limited growth catalysts and upward pressure on its SG&A
spending as it shifts focus to online distribution, and shareholding concentration. We used 33.7x P/E (1-Y BF) as our target
P/E.
Relative P/E vs. All China Consumer Staples: Marubi had multiple expansion during 1h20 (peaked at 60x NTM P/E in May 2020),
the stock rallied in 1H20, when it had 2.5x to 3x of relative P/E relative to Consumer Discretionary industry. Marubi is now
trading at relative 1.3x NTM P/E. We believe Marubi will stay at current trading multiple in the near term given the earnings
outlook, and it's reflected in our TP (based on 33.7x NTM P/E)
Marubi vs. Proya and other key Chinese consumer stocks

 Earnings Growth: Marubi lower EPS of 11% growth vs. domestic and foreign peers (Exhibit 112)
 PEG: Despite having a much lower trading multiple than Proya, Marubi does not look cheap on a growth perspective: its
PEG ratio of 3.4x is higher than Proya's 2.0x (Exhibit 113)
 PSG: Marubi's PSG ratio has an even higher gap than Proya (0.7x vs. 0.3x) (Exhibit 113)

EXHIBIT 130: Marubi's now trading at 35x, lower than EXHIBIT 131: Marubi is trading at 1.3x China consumer
historical average, reflects market concerns on growth discretionary, below its historical average
and profitability
Marubi's forward P/E Relative PE (NTM)

Marubi is trading at below average
60x 3.5x
55x
3.0x
50x 2.5x
48.0x 2.5x
45x
40x 41.4x 2.0x
2.0x
35x 1.5x
33.7x 1.3x
34.8x 1.5x
30x
1.0x
25x
20x 0.5x
15x 0.0x
10x
Relative P/E Average

Marubi average 1SD -1SD +1 S.D. -1 S.D.
Bernstein vs. Consensus

Given that Marubi's growth catalysts are limited, we are below consensus for both topline and bottom- line forecasts.
EXHIBIT 132: We are 5-6% below consensus
Source: Company report, Bloomberg, Bernstein analysis

APPENDIX
CHINA COSMETICS SECTOR HAS LARGEST TAM AND HIGHEST GROWTH GLOBALLY
Our beauty universe is defined by Skincare and Color Cosmetics

Beauty - if defined broadly - is an industry that encompasses multiple sub-sectors with products ranging from a USD $5
Colgate toothpaste tube to a USD$500 La Mer Concentrate Serum. We see the China cosmetics market an attractive market
and focus mainly on two key sub-segments: Skincare and Color Cosmetics (Exhibit 133) as they contribute to ~75% of the
beauty industry and are the only categories gaining in market share in China's beauty sector (Exhibit 134).
EXHIBIT 133: We focus our discussion on two key sub-categories within beauty: Skin Care and Color Cosmetics
Source: Pixabay, Bernstein analysis
EXHIBIT 134: Skincare + Color cosmetics contribute to ~75% of the beauty industry in China, and are the only two
categories growing market share

China is the largest cosmetics market with the highest growth. Global cosmetics is a USD$200B+ market size (in 2019 see
Exhibit 135). China is the largest market with USD$43B annual sales, which captures ~20% of the global market. China was the
fastest growing market with a 13% CAGR from 2004-2019, when global average was 5%. That's even before considering
Chinese cosmetics tourism, DFS and "Daigou". We expect China cosmetic market to grow at 9% CAGR and reach ~RMB 500B
by 2025 (Exhibit 5). (For more information on how the "Daigou" model operates please see Weekend Consumer Blast: Who
bought all the La Mer face creams from Korean duty-free? Chinese "Daigou" value chain economics)
EXHIBIT 135: Global Skincare and Color cosmetics is a $200B+ market; China is the largest market accounting for
about 20% of global cosmetic spending
Global skincare and color cosmetics is a $200B+ market
EU
US$25-30B
Asia ex US
China CAGR 2-3%
US$40B
US$40B
US$40B
China CAGR 5-8% CAGR 4%
US$43B
CAGR 13%
Source: Euromonitor, Bernstein analysis, the market size numbers are based on 2019 data, CAGR are estimated from 2004-2018 data.
EXHIBIT 136: We expect China cosmetic market to grow at 9% CAGR and reach RMB 500B by 2025
ENORMOUS GROWTH POTENTIAL, SUPPORTED BY RISING WEALTH AND CULTURE

Cosmetic spending is a story of wealth and culture. In 2019, the annual cosmetic spending per capita in China was only
USD$31, 6x lower compared with $193 in Japan. We expect this to increase to US$51 by 2025, still significantly below peers.

Wealth: more affluent consumers are more inclined to spend on cosmetics. As (Exhibit 137) shows, cosmetic spending rises
with disposable income. The China cosmetic market should grow with disposable income and higher proportion of disposable
income allocated to cosmetics (Exhibit 138). Consumption behavior shifts (particularly among the young generation), Channels
developments (including e-commerce) and government efforts will likely to fuel China cosmetics growth and support further
penetration into lower-tier cities. We see that consumers from lower tier cities already accounts for ~50% of China's online
cosmetic consumption (Exhibit 139) and is growing faster than tier 1 and tier 2 cities (Exhibit 140).
Culture: countries in East Asia (Japan, Korea) tend to spend more on cosmetics than Foreign peers. Asian women view skincare
as a long-term investment. “Skincare is the most rational investment a woman can make on herself” –Linda Zhong, a live-
streaming hostess. These cultures believe that Skincare produces long lasting results on staying youthful whereas makeup is a
quick fix and may be even harmful to the skin. In addition, we think there is also a degree of sociocultural reason as well.
EXHIBIT 137: Cosmetic spending rises with disposable income; countries in East Asia tend to spend more on
cosmetics than Foreign markets (HK, Korea and Japan's numbers are partially inflated by China tourism)

Note: Hong Kong is removed from the above chart to reduced skewness, we believe the numbers are likely inflated due to Chinese tourism consumption

EXHIBIT 138: We think China consumers would allocate a touch more of their disposable income on cosmetics as
they get wealthier and as "Daigou" fades out
East Asia countries tend to spend more on cosmetic

1.2%
% of disposable income spending in cosmetics
China consumers are likely to

allocate even more of their
1.0% Korea, 0.99%
disposable income on cosmetics as HK, 0.97%
they get wealthier
0.8% Japan, 0.82%
China 2025E , 0.74%
China, 0.70%
0.6%
0.4% Canada, 0.33%

Developed UK, 0.37%
US, 0.24%
Western markets Italy, 0.32%
0.2%
France, 0.34% Germany, 0.32%
-
-- 5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000 45,000 50,000
Disposable income per capita
EXHIBIT 139: Lower-tier cities account for ~50% of EXHIBIT 140: …and is still quickly growing (data below
China's online cosmetics consumption… shows 2019 YoY growth rate)
Source: Tmall, Bernstein analysis Source: Youzan, Bernstein analysis

TOP & BOTTOM 25 BRANDS

EXHIBIT 141: Top & Bottom 25 brands list in market share growth in China skincare/ color cosmetics sector
Foreign Share Foreign
Share Market Market
or growth or
Skincare Brand growth share Color cosmetics brand share
Domestic (2010- Domestic
(2010-2019) (2019) (2019)
brands 2019) brands
Top 25 in market share growth
Pechoin 4.31% 4.48% Domestic Yves Saint Laurent 1.12% 1.12% Foreign
Chando 3.38% 3.38% Domestic Dior 1.05% 1.49% Foreign
Estée Lauder 2.08% 3.60% Foreign Perfect Diary 0.90% 0.90% Domestic
Lancôme 1.95% 3.69% Foreign Mac 0.81% 0.91% Foreign
KanS 1.87% 2.08% Domestic Giorgio Armani 0.78% 0.81% Foreign
One Leaf 1.65% 1.65% Domestic Lancôme 0.60% 0.80% Foreign
Innisfree 1.50% 1.50% Foreign Givenchy 0.54% 0.61% Foreign
SK0II 1.44% 1.74% Foreign Innisfree 0.51% 0.51% Foreign
Hanhoo 1.14% 1.14% Domestic Chioture 0.47% 0.47% Foreign
La Mer 1.11% 1.21% Foreign Estée Lauder 0.41% 0.60% Foreign
Winona 1.07% 1.07% Domestic Zeesea 0.40% 0.40% Domestic
HomeFacial Pro 0.93% 0.93% Domestic Carslan 0.40% 0.77% Domestic
Yunifang 0.91% 0.95% Domestic Age 20's 0.39% 0.39% Foreign
The History of Whoo 0.88% 0.92% Foreign Chanel 0.37% 0.63% Foreign
Proya 0.83% 1.34% Domestic KanS 0.34% 0.34% Domestic
Kiehl's 0.82% 0.89% Foreign Marie Dalgar 0.33% 0.39% Domestic
DR's Secret 0.70% 0.70% Foreign Max Factor 0.32% 0.47% Foreign
ÍPSA 0.66% 0.67% Foreign Cle de Peau 0.26% 0.28% Foreign
Wetcode 0.61% 0.95% Domestic Tom Ford 0.22% 0.22% Foreign
Longrich 0.60% 0.60% Domestic Make Up For Ever 0.22% 0.29% Foreign
Shiseido 0.54% 1.03% Foreign Bobbi Brown 0.18% 0.30% Foreign
Beautrio 0.53% 1.65% Domestic Shu Uemura 0.17% 0.27% Foreign
Cle de Peau 0.53% 0.57% Foreign Laneíge 0.16% 0.27% Foreign
Sulwhasoo 0.48% 0.48% Foreign Chando 0.16% 0.16% Domestic
Bioderma 0.48% 0.48% Foreign Lansur 0.16% 0.29% Domestic
Bottom 25 in market share growth
Neutrogena -0.27% 0.42% Foreign Colour Zone -0.02% 0.00% Domestic
Garnier Mininurse -0.28% 0.00% Foreign Be -0.02% 0.00% Foreign
G&H -0.28% 0.11% Foreign Anna Sui -0.03% 0.03% Foreign
Vitabelle -0.30% 0.31% Domestic Impress -0.03% 0.00% Foreign
Dabao -0.31% 0.40% Foreign Sekkisei -0.03% 0.01% Foreign
Fancl -0.36% 0.44% Foreign Supreme Aupres -0.03% 0.00% Foreign
Nivea Visage -0.36% 0.46% Foreign Olay -0.03% 0.00% Foreign
Pure & Mild -0.41% 0.20% Foreign Mamonde -0.03% 0.48% Foreign
Garnier -0.41% 0.00% Foreign Red Earth -0.04% 0.01% Foreign
DHC -0.50% 0.27% Foreign Maquillage -0.04% 0.01% Foreign
Aupres -0.52% 1.57% Foreign Cocool -0.05% 0.00% Domestic
Za -0.52% 0.47% Foreign Tiens -0.06% 0.01% Domestic
Tiens -0.54% 0.03% Foreign BeneFit -0.06% 0.03% Foreign
Tjoy -0.56% 0.00% Foreign Lunasol -0.06% 0.00% Foreign
Vichy -0.65% 0.39% Foreign DHC -0.07% 0.04% Foreign
MG -0.66% 0.16% Foreign Aupres -0.10% 0.17% Foreign
Pond's -1.03% 0.12% Foreign Za -0.10% 0.13% Foreign
L'Oréal Paris -1.33% 3.72% Foreign L'Oréal Paris -0.10% 1.43% Foreign
Perfect -1.37% 1.16% Foreign Perfect -0.11% 0.10% Foreign
Chcedo -1.51% 0.00% Domestic Chcedo -0.13% 0.00% Domestic
Avon -1.68% 0.15% Foreign Mary Kay -0.20% 0.21% Foreign
Longliqi -1.82% 0.00% Domestic Revlon -0.21% 0.05% Foreign
Mary Kay -2.01% 2.26% Foreign Avon -0.22% 0.00% Foreign
Artistry -2.24% 1.10% Foreign Artistry -0.24% 0.08% Foreign
Olay -3.30% 3.37% Foreign Maybelline New York -1.01% 2.05% Foreign

DISTRIBUTION CHANNEL COMPARISONS

EXHIBIT 142: Channels comparison
Channels Market position Characteristics Channel example Brands
º Targeting low-end or
price sensitive customers
Mass market brands such
Supermarkets( º Simple shelf display
Value Walmart, Sun Art etc. as Pechoin, Dabao,
KAs) without beauty consultant
Maxam etc
or try-on service
º Targeting high-end
customers
º Well-designed counter
Hismitsu Department Premium foreignl brands
Department display
Premium Store, Wangfujing such as Channel, Dior,
stores º Beauty consultants to
Department store etc. Shisedo etc.
make recommendations
and offer try-on serivce
º Designed shelf display

split by brand
º More prevailing in 2nd- Local brands such as
Cosmetic Value to mid- 3rd tier cities Sephora,Watson, Proya, Marubi or
stores premium º Beauty consultants to Sasa, Gialen,etc. Japanese/Korean brands
make recommendations like Kissme etc.
and offer try-on serivce
º Targeting at young
customers T-mall, JD offer all major
º Virtual display local and international
T-mall, JD.com,
E-commerce Vary across º Next day (express) brands; Others platforms
Taobao, Pingduoduo,
platforms different platforms delivery focus on value brands
Jumei etc
º Less engaging in such as Perfect Diary,
consumer experiences Yunifang etc.

E-COMMERCE PLATFORMS AND CONTENT MANAGEMENT

3 large internet giants T-mall, JD, PDD (stock ticker: BABA, JD, and PDD, covered by Robin Zhu) dominate online sales. Brands
must balance platform mix based on company objective e.g. customer reach, channel control, CRM, and margin/cost.
EXHIBIT 143: Brands must balance platform mix based on target audience; each platform offers something
different
Source: Platforms' apps, Bernstein photos, Bernstein analysis
Digital and content management

When it comes to digital and content management, brand can self-operate online stores or hire an agent such as Tmall partner
(TP). At the early stages of entering an online platform, brands were unfamiliar with the online operation, platform rules and data
tools, so they outsourced platform management to TP. With the booming emergence of digital e-commerce platforms, TP has
extended services to JD, VIP shop, Xiaohongshu and other platforms.
On T-mall platform, International brands are more likely to employ TP - 83% of international brands use agent, compared to
38% used by domestic brands (Exhibit 144). Proya operates its own digital platform supported by in-house ecommerce team.
They founded Zhejiang Beautiful Valley – wholly owned own subsidy that focuses on developing Proya's online business.
Zhejiang Beautiful Valley is responsible for the operations on Taobao, Tmall and JD. This team focuses on data analytics and
market trends analysis to devise promotion tactics. The inhouse operations Proya with advantages in data, speed in new
product launches, channel control and potentially lower cost vs. using T-mall Partners (TPs) or distributor.

EXHIBIT 144: Differences in digital monument approach EXHIBIT 145: Social media platform comparison
for domestic vs. foreign brands
Source: IQingyan.com, Bernstein analysis Source: Talking data, CCSight, Bernstein analysis
Note: cosmetics product % refer to the percentage of cosmetics products to
Top 1000 products
MILLENNIAL AND GENERATION Z ARE THE KEY COSMETIC CONSUMERS

EXHIBIT 146: Key cosmetic consumers: Generation Y (millennial): born between 1980-1994 (27-41 years old) and
Generation Z: born between 1995-2015 (6-26 years old)

PROYA EQUITY STRUCTURE

The shareholdings as of 1H20: The founder and major shareholder Hou Juncheng holds 36.09% of the shares, the second
shareholder Fang Yuyou holds 24.27% of the shares (Exhibit 147). Fang yuyou is the brother of Hou Juncheng’s wife.
EXHIBIT 147: Proya's equity holding structure as of 1H20
Yinhua wealth
Basic pension Hong Kong theme mixed China universe
insurance funds Abu Dhabi Li Xiaolin securities clearing asset management Others
investment authority Cao Liangguo Xun Junqing Hou Juncheng Fang Yuyou securities 22.88%
1606 mixed 3.77% 2.05% 3.69% 36.09% 24.27% company investment fund stock mixed
0.42% 0.57% 4.58% 0.43%
1.25%
Proya Cosmetics
Co. LTD (603605)
Proya(Hangzhou) Zhejiang Beautiful

Trading Limited Valley Limited
100% 100%
Huzhou Chuangdai
E-Commerce Anya (Huzhou)
Limted Cosmetics Limited
100% 100%
Leqing Laiya Hapsode (Hanzhou)

Trading limited Limited
100% 100%
Hangzhou Proya
Huzhou UZERO Commerce
Trading limited Management
100% Limited
100%
Ningbo Keshi HongKong Xinghuo

Trading Limited Industry Limited
100% 100%
Mi Jing Si Yu (Hang
zhou), 100%
Source: Company reports, Bernstein analysis

APPENDIX - FINANCIAL FORECASTS
EXHIBIT 148: Income Statement--Proya

Proya Cosmetics Co.,Ltd. - Income Statement 2020-2023 2020-2025
(in RMB million, unless otherwise stated) 2020E 2021E 2022E 2023E 2024E 2025E 3Y CAGR 5Y CAGR
Revenue 3,830 5,004 6,205 7,745 9,659 12,076 26% 26%
Cost of sales (1,438) (1,844) (2,265) (2,801) (3,463) (4,293)
Gross profit 2,392 3,160 3,940 4,943 6,196 7,783
Total SG&A (1,789) (2,347) (2,926) (3,666) (4,580) (5,725)
Operating Profit 603 814 1,014 1,278 1,616 2,058
Non-operating activities (5) - - - - -
Profit before taxation 598 814 1,014 1,278 1,616 2,058
Income tax (94) (163) (203) (256) (323) (412)
Net Profit 504 651 811 1,022 1,293 1,647
Profit attributable to:
Equity shareholders of the Company 490 651 811 1,022 1,293 1,647 28% 27%
Non-controlling interests 14 - - - - -
Basic EPS (RMB) 2.44 3.24 4.04 5.09 6.44 8.20 28% 27%
W.A. shares outstanding (mn) 201 201 201 201 201 201
Key Ratios
Revenue YoY% 22.6% 30.7% 24.0% 24.8% 24.7% 25.0%
Net profit YoY% 24.7% 32.9% 24.6% 26.0% 26.5% 27.3%
EPS YoY% 24.4% 32.9% 24.6% 26.0% 26.5% 27.3%
Gross profit margin % 62.5% 63.2% 63.5% 63.8% 64.1% 64.5%

SG&A as % of revenue -46.7% -46.9% -47.2% -47.3% -47.4% -47.4%
Operating profit margin % 15.7% 16.3% 16.3% 16.5% 16.7% 17.0%
Net profit margin % 12.8% 13.0% 13.1% 13.2% 13.4% 13.6%
EBIT as % of revenue 15.4% 15.9% 16.0% 16.1% 16.4% 16.7%
EBITDA as % of revenue 17.4% 17.7% 17.7% 17.8% 17.9% 18.1%
ROIC % 15.6% 16.1% 15.7% 16.8% 17.9% 19.0%
Key Operating Metrics
Selling expenses/Sales % 36.4% 37.5% 38.0% 38.4% 38.8% 39.1%

Staff costs/Sales % 6.9% 8.4% 7.8% 7.3% 6.6% 6.0%
Branding and advertisement expenses/Sales % 27.4% 26.8% 27.9% 28.8% 29.8% 30.8%
Logistics expenses/Sales % 2.2% 2.3% 2.3% 2.3% 2.3% 2.3%
Capex
Cash capex (193) (288) (341) (410) (502) (616)
Cash capex/Sales % -5.0% -5.8% -5.5% -5.3% -5.2% -5.1%
R&D
Total R&D investment (92) (124) (158) (202) (256) (327)
Total R&D investment/Sales % -2.4% -2.5% -2.6% -2.6% -2.7% -2.7%
Working capital
DOH (days) 95 93 88 88 89 88
Cash conversion cycle (days) (27) (27) (28) (28) (27) (27)
Changes in Net working capital (RMB mn) 43 (9) (5) (1) (10) (10)
Source: Company reports, Bernstein estimates and analysis

EXHIBIT 149: Balance Sheet--Proya

Proya Cosmetics Co.,Ltd. - Balance Sheet
(in RMB million, unless otherwise stated) 2020E 2021E 2022E 2023E 2024E 2025E
Cash & equivalents ST & LT market. securities 1,502 2,587 2,962 3,450 4,062 4,855
Accounts Receivables and other Receivables 188 241 320 372 477 600
Inventories 438 498 594 756 927 1,144
Other Current Assets (inc. Derivatives) 110 110 110 110 110 110
Total Current Assets 2,239 3,437 3,986 4,688 5,576 6,708
Total PP&E, Intangible assets and long term deferred expenses

1,132 1,332 1,567 1,851 2,206 2,645
Other Non-current Assets 60 60 60 60 60 60
Total Non Current Assets 1,213 1,416 1,657 1,948 2,312 2,762
Total assets 3,451 4,853 5,643 6,636 7,888 9,471
Accounts payables and other payables 631 735 905 1,117 1,384 1,713
Short-term Borrowings 299 299 299 299 299 299
Current Portion of LT Borrowings -- -- -- -- -- --
Total Current Liabilities 1,091 1,196 1,365 1,578 1,844 2,173
Long term borrowings 30 830 830 830 830 830

Other non-current liabilities 16 16 16 16 16 16
Total Non Current Liabilities 46 846 846 846 846 846
Total liabilities 1,137 2,042 2,211 2,424 2,690 3,019
Common stock / additional paid in capital 1,070 1,113 1,165 1,230 1,310 1,411
Treasury Stock - Common (16) (16) (16) (16) (16) (16)
Retained earnings / accumulated deficit 1,233 1,689 2,257 2,972 3,877 5,030
Other comprehensive income / (loss) (0) (0) (0) (0) (0) (0)
Total Shareholders Equity 2,288 2,785 3,405 4,186 5,172 6,425
Minority Interest 26 26 26 26 26 26
Total Equity 2,314 2,812 3,432 4,212 5,198 6,451
Total Liabilities & Equity 3,451 4,853 5,643 6,636 7,888 9,471
Key Ratios
Quick ratio % 155% 237% 240% 242% 246% 251%
Current ratio % 205% 287% 292% 297% 302% 309%
Total Debt/Equity ratio % 14% 40% 33% 27% 22% 18%
Total Debt/Asset ratio % 10% 23% 20% 17% 14% 12%
EXHIBIT 150: Cash Flow Statement--Proya

Proya Cosmetics Co.,Ltd. - Cash Flow Statement
Net cash generated from operating activities 522 730 913 1,147 1,430 1,814
Net cash used in investing activities (5) (292) (347) (418) (511) (627)
Net cash used in financing activities (129) 647 (191) (242) (307) (393)
Cash and cash equivalents at period end 1,502 2,587 2,962 3,450 4,062 4,855
FCF (proxy) 400 427 554 714 899 1,161

FCF (proxy) margin 10.4% 8.5% 8.9% 9.2% 9.3% 9.6%

EXHIBIT 151: Income Statement – Marubi

Guangdong Marubi Biotechnology Co Ltd. - Income Statement 2020-2023 2020-2025
(in RMB million, unless otherwise stated) 2020E 2021E 2022E 2023E 2024E 2025E 3Y CAGR 5Y CAGR
Revenue 1,774 2,089 2,442 2,839 3,291 3,795 17% 16%
Cost of sales (567) (663) (769) (890) (1,028) (1,186)
Gross profit 1,206 1,426 1,673 1,948 2,262 2,609
Total SG&A (597) (722) (844) (977) (1,113) (1,262)
Operating Profit 609 705 829 971 1,149 1,347
Non-operating activities (2) 6 6 6 6 6
Profit before taxation 607 711 835 977 1,155 1,353
Income tax (99) (117) (138) (161) (191) (223)
Net Profit 508 593 697 816 964 1,130
Profit attributable to:
Equity shareholders of the Company 508 596 699 818 967 1,133 17% 17%
Non-controlling interests - (2) (2) (2) (3) (3)
Basic EPS (RMB) 1.27 1.49 1.74 2.04 2.41 2.83 17% 17%
W.A. shares outstanding (mn) 401 401 401 401 401 401
Key Ratios
Revenue YoY% -1.5% 17.8% 16.9% 16.2% 15.9% 15.3%
Net profit YoY% (to equity shareholders) -1.3% 17.3% 17.4% 17.0% 18.3% 17.1%
EPS YoY% -6.4% 17.3% 17.4% 17.0% 18.3% 17.1%
Gross profit margin % 68.0% 68.3% 68.5% 68.6% 68.7% 68.8%

SG&A as % of revenue -33.7% -34.5% -34.6% -34.4% -33.8% -33.2%
Operating profit margin % 34.3% 33.7% 34.0% 34.2% 34.9% 35.5%
Net profit margin % (to equity shareholders) 28.6% 28.5% 28.6% 28.8% 29.4% 29.9%
EBIT as % of revenue 31.8% 32.7% 32.9% 33.1% 33.8% 34.3%
EBITDA as % of revenue 32.8% 33.9% 34.1% 34.4% 35.1% 35.7%
ROIC % 14.4% 15.9% 16.2% 16.4% 16.9% 17.1%
Key Operating Metrics

Capex
Cash capex (65) (85) (101) (121) (143) (169)
Cash capex/Sales % -3.7% -4.1% -4.2% -4.3% -4.4% -4.5%
R&D
Total R&D investment (50) (58) (68) (79) (92) (106)
Total R&D investment/Sales % -2.8% -2.8% -2.8% -2.8% -2.8% -2.8%
Working capital
DOH (days) 97 69 73 74 72 74
Cash conversion cycle (days) (175) (141) (147) (149) (147) (148)
Changes in Net working capital (RMB mn) 151 39 68 35 63 74

EXHIBIT 152: Balance Sheet--Marubi

Guangdong Marubi Biotechnology Co Ltd. - Balance Sheet
Cash & equivalents ST & LT market. securities 2,476 2,887 3,391 3,937 4,602 5,382
Accounts Receivables and other Receivables 4 5 6 7 8 9
Inventories 115 135 174 188 220 259
Other Current Assets (inc. Derivatives) 565 565 565 565 565 565
Total Current Assets 3,161 3,591 4,137 4,696 5,395 6,215
Total PP&E, Intangible assets and long term deferred expenses 301 361 432 517 617 735
Investment in Associates -- -- -- -- -- --
Other Non-current Assets 45 45 45 45 45 45
Total Non Current Assets 346 405 477 561 662 779
Total assets 3,507 3,997 4,613 5,258 6,057 6,994
Accounts payables and other payables 354 412 521 570 667 780
Short-term Borrowings 57 57 57 57 57 57
Other current liabilities 194 194 194 194 194 194
Total Current Liabilities 605 663 772 822 918 1,032
Long term borrowings 8 25 45 69 98 132

Other non-current liabilities 27 27 27 27 27 27
Total Non Current Liabilities 35 52 72 96 125 159
Total liabilities 640 715 844 918 1,043 1,190
Share capital 401 401 401 401 401 401

Reserve 754 754 754 754 754 754
Retained earnings / accumulated deficit 1,711 2,128 2,618 3,190 3,867 4,661
Other comprehensive income / (loss) (0) (0) (0) (0) (0) (0)
Total Shareholders Equity 2,867 3,284 3,773 4,346 5,023 5,816
Minority Interest -- (2) (4) (6) (9) (12)
Total Equity 2,867 3,281 3,769 4,340 5,014 5,804
Total Liabilities & Equity 3,506 3,996 4,613 5,257 6,057 6,994
Key Ratios
Quick ratio % 410% 436% 440% 480% 502% 523%
Current ratio % 522% 541% 536% 572% 588% 603%
Total Debt/Equity ratio % 9% 8% 8% 7% 7% 7%
Total Debt/Asset ratio % 7% 7% 6% 6% 6% 5%
EXHIBIT 153: Cash Flow Statement--Marubi

Guangdong Marubi Biotechnology Co Ltd. - Cash Flow Statement
Net cash generated from operating activities 224 657 795 888 1,070 1,255
Net cash used in investing activities 236 (85) (101) (121) (143) (169)
Net cash used in financing activities (118) (162) (189) (221) (262) (306)
Cash and cash equivalents at period end 2,476 2,887 3,391 3,937 4,602 5,382
FCF (proxy) 575 550 667 736 891 1,044

FCF (proxy) margin 32.4% 26.3% 27.3% 25.9% 27.1% 27.5%

DISCLOSURE APPENDIX
VALUATION METHODOLOGY
China Consumer
We value our companies in China Consumer sector based on target next-twelve-month price-to-earnings (NTM P/E) multiples.
We select the target NTM P/E based on company's profit growth and return on invested capital (ROIC). We believe that stocks
with higher long-term growth rates and higher ROIC deserve higher multiples and so we apply incremental company premiums
or discounts to individual stocks to reflect their outlook for growth and returns.
We use a blended forward EPS estimates of FY2020 and FY2021 to set our 1-year target prices.
RISKS
China Consumer
China cosmetics
The China cosmetic sector is one the highest levels of opening-up consumer sectors to foreign brands. The competition
between domestic and foreign players could become increasingly intense if more international brands enter China. The fast
development of cosmetics e-commerce gives Chinese brands opportunities to grow revenue significantly, but it also pushes up
the cost of online marketing, platform capex, and consumer subsidies, thereby possibly reducing the overall sector profitability.
China's overall cosmetic market growth also depends on the disposable income growth and per capita spending on cosmetics,
both of which are sensitive to changes in macroeconomic conditions.
Downside risks:
+ Consumer preference shift: Proya may lose market share if it fails to capture the new product demand caused by the
consumer preference shift. + Reliance on online channels: Proya has a higher reliance on online channels than other Chinese
competitors, which may need continuous Capex investment and reliance on e-commerce partners. + High marketing expense:
Proya maintains high marketing expense to boost top-line growth, which could lead to future dilution of EPS
Guangdong Marubi Biotechnology Co Ltd
Downside risk:
+ High reliance on eye care products: Marubi's reliance on eyecare products may cause high volatility of revenue growth
depending on the sector growth and consumer's preference shift. + High reliance on distributors: Marubi has predominantly 3P
business which may limit its potential in margin growth. + Effectiveness of advertisement: Marubi relies heavily on TV ads,
celebrity endorsement, and other types of social media ads. Its revenue growth depends on the effectiveness of the
advertisement.
Upside risks:
+ Marubi's eye care segment may be able to enjoy further increases in margins. + New skincare and cosmetic brands may drive
higher revenue growth than expected. + Cost-saving initiatives and discipline in advertising budget may deliver higher than
expected EPS growth

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30 March 2021

Analyst Page Bernstein Events Industry Page Financials Comp Valuation

BERNSTEIN TICKER TABLE

COVERAGE INITIATION O - Outperform, M - Market-Perform, U - Underperform, N – Not Rated

CHINA CONSUMER BERNSTEIN 2

VALUATION COMPS TABLE

EXHIBIT 1: Valuation Table

Investment Implications ...................................................................................................................................................................................................... 2

Valuation Comps Table ....................................................................................................................................................................................................... 3

Portfolio Manager's Summary ........................................................................................................................................................................................... 7

China cosmetics S-Curve: C-beauty companies should invest in scaling up ..............................................................................................29

C-brands can differentiate through distribution and marketing ..........................................................................................................................36

CHINA CONSUMER BERNSTEIN 3

The Cosmetic Store (CS) is less likely to be disrupted ........................................................................................................................................47

Three key consumer trends that drive C-beauty growth ........................................................................................................................................49

Increasing cosmetics demand from the young generation...............................................................................................................................49

Rising national pride ......................................................................................................................................................................................................50

Increasing cosmetics demands from low-tier cities ...........................................................................................................................................52

Materiality matrix ............................................................................................................................................................................................................54

Sector valuation ...................................................................................................................................................................................................................58

Proya – Outperform (TP: RMB 223) .........................................................................................................................................................................61

Marubi: Market-Perform (TP: RMB 61) ....................................................................................................................................................................71

Enormous growth potential, supported by rising wealth and culture ............................................................................................................80

Top & Bottom 25 brands ..............................................................................................................................................................................................83

Distribution channel comparisons ............................................................................................................................................................................85

E-commerce platforms and content management .............................................................................................................................................86

Millennial and Generation Z are the key cosmetic consumers .........................................................................................................................87

Proya equity structure ...................................................................................................................................................................................................88

Appendix - Financial Forecasts ......................................................................................................................................................................................89

CHINA CONSUMER BERNSTEIN 4

EXHIBIT 2: Six key convictions that impact our investment thesis

Source: Bernstein estimates and analysis

EXHIBIT 3: China Cosmetics: Bernstein stock recommendations

OUTPERFORM, TP = CNY 223 (~39% potential upside)

MARKET-PERFORM, TP = CNY 61 (~11% potential upside)

Source: Company, Bloomberg, Bernstein estimates and analysis.

CHINA CONSUMER BERNSTEIN 5

EXHIBIT 4: Bernstein vs Consensus

As of date: Proya Marubi

Bernstein rating Outperform Market-Perform

0xU 3xM 31xO 0xU 1xM 26xO

Market cap (USD bn) 5 3

Target Price (TP)

CHINA CONSUMER BERNSTEIN 6

PORTFOLIO MANAGER'S SUMMARY

Long -term growth

Source: Euromonitor, Bernstein analysis and estimates

CHINA CONSUMER BERNSTEIN 7

We prefer companies with established foundation in the core segment – Skincare

China Cosmetic Market Growth by Segment

Source: Euromonitor, Bernstein estimates and analysis

CHINA CONSUMER BERNSTEIN 8

C-beauty evolution – C-beauty is winning in the mass skincare segment

“Daigou” diverged Ecommerce

Prior to 2008 2012-2016 2018-19

Source: Bernstein analysis

CHINA CONSUMER BERNSTEIN 9

Top & bottom 25 brands in market share growth

Source: Euromonitor, Bernstein analysis

Source: Euromonitor, Bernstein analysis

CHINA CONSUMER BERNSTEIN 10

C-beauty brands: how to win? Scale is key

Source: Bernstein analysis

CHINA CONSUMER BERNSTEIN 11