Goldman Sachs·2025-05-12 03:14Investment Rating - The report maintains a "Buy" rating for Giant Biogene and Shanghai Jahwa, reflecting their potential for growth and turnaround [11][26]. Core Insights - The China beauty sector is showing signs of stabilization, with demand shifting from negative year-over-year (yoy) growth to a flat performance, particularly noted during Women's Day [1]. - Onshore sales growth in 1Q25 re-accelerated to 3.2% yoy, surpassing the full-year estimate of 1.2% yoy, although this was countered by a decline in the DFS channel [1]. - The sector has experienced a 50% rerating, with the 12-month price-to-earnings (PE) ratio moving from 20x to 30x, indicating a recovery towards mid-cycle valuation levels [1][7]. Summary by Sections Sales Performance - The covered companies in the China cosmetics sector reported mixed results for 2024/1Q25, with most missing sales expectations except for Giant Biogene, which outperformed due to effective cost management [2][25]. - The average selling expenses ratio decreased by 6.8 percentage points yoy in 4Q24 and 3.7 percentage points yoy in 1Q25, indicating improved cost discipline across the sector [2][25]. Competitive Landscape - Local brands are gaining market share, with emerging leaders like Giant Biogene, Marubi, and Chicmax achieving over 30% sales growth, while global brands are pulling back on promotions to focus on quality growth [3][13]. - The premium segment remains largely dominated by global brands, but local brands are expected to capture more market share over the next 5-10 years [6]. Valuation Trends - The beauty sector's valuation has rebounded to around 30x PE, reflecting a recovery from downcycle lows and aligning more closely with global peers [7][8]. - Limited valuation upside is anticipated as the sector stabilizes at mid-cycle levels, with potential idiosyncratic rerating drivers emerging from new product categories and brand expansions [8]. Catalysts for Growth - Key upcoming events include the 618 shopping festival and increased activity in the medical aesthetics space, which could provide growth opportunities for companies like Giant Biogene [9][10]. - The report highlights the importance of effective execution and brand expansion as critical factors for sustained growth in the sector [8][11]. Stock Preferences - The report favors emerging leaders such as Giant Biogene and Shanghai Jahwa, while maintaining a neutral stance on MGP, Proya, and Botanee due to concerns over growth visibility and execution [11][26]. - A sell rating is assigned to Bloomage, reflecting challenges in revitalizing its cosmetics business amid intensified competition [11][26].