Beauty China

Beauty China Holdings
FY05: Color Zone Performing Well
Beauty China reported FY05 earnings at HK$109.6m (up 24% yoy), which was
in line with our expectation. Revenue grew 32% yoy to HK$346.6m, 8% above
our forecasts. Color Zone brands continued to be major contributor. A final
dividend of S$0.018 was declared, implying 25% payout ratio and 2% yield.
FY05 revenue grew 32% yoy to HK$347m, mainly driven by Color Zone series
products. Color cosmetic products contributed 65% of revenue, with the
remaining 35% of skin care products. However, EBIT margin dropped from 37%
in FY04 to 32%, because a) Marketing expenses continued to rise to 17% of
total sales, b) other operating expenses increased due to higher product
development cost, allowance for doubtful debts and 1.5m share option
expenses. Net profit grew 24% thanks to a zero tax rate.
Retail outlet expansion on schedule. 900 Color Zone outlets and 60 Charming
Lady outlets have been established end-FY05. Management plans to expand to
1200 and 150 separately by end-FY06. Products are also sold through 42 Sa Sa
stores in Hong Kong and Macau, though sales contribution from Sa Sa was only
1% of total revenue in FY05.
Sales growth momentum expected to maintain, given a) Market is still very
fragmented for mass market cosmetic products. Although foreign brands such
as Maybelline dominate, there’re still 5,000 local manufacturers, 90% of whom
are small scale operators. The market share of Beauty China was merely around
1% out of color cosmetics and skin care sales in China, therefore we believe the
small base will allow it to maintain over 20% sales growth in the next three
years, by grabbing market share of local competitors. b) Color zone has already
gained some brand awareness in its target population, especially compared with
other local brands. Contribution from new retail outlets will ramp up after initial
dilution.
Competition will continue to shoot up expenses, especially marketing
expenses. Percentage of marketing expenses out of revenue had kept rising
from 11% to 17% in the past two year, but still quite low compared with its peers.
Given the fierce competition, we expect marketing expenses will continue to
grow for brand building. Additional depreciation will incur out of HK$20m
investment of R&D center and flagship store plan. Distribution and
Administration expenses are expected to rise in tandem with sales growth.
The stock is currently at 12x FY05 PE. Given the stronger-than-expected sales
growth, we’re reviewing our target price and recommendation with possible upgrade