Focusing on the booming cosmetics industry is expected to benefit from the new cosmetics company's entry into the cosmetics processing industry through the acquisition of Northbell in 2019, with cosmetics ODM business accounting for 68 per cent of revenue by the end of 2021. At the end of September 2022, the company announced its intention to divest the turpentine deep processing business and further focus on the cosmetics business. Affected by the epidemic in 2020, China's cosmetics market grew by 7% year-on-year and remained high downstream, according to Euromonitor.
With the continuous diversified expansion of the population, channels and brands of cosmetics, the demand of brands for upstream processing enterprises is increasing, which brings growth opportunities to OEM/ODM enterprises with competitive advantages. In addition, the "Cosmetic quality Management Standard" and other new regulations of the cosmetics industry began to implement in 2022, which put forward higher requirements for the production quality of cosmetics. Brands who are difficult to meet the production quality requirements and can not achieve rapid adjustment in the short term after the implementation of the "norms" will rely more on processing enterprises for production. The head OEM/ODM enterprises with better domestic production facilities and production management systems and richer capacity reserves are expected to benefit, and the industry concentration is expected to increase.
The company strengthens research and development, production capacity, category, customer expansion, Longtou market share is expected to continue to improve China's OEM/ODM market concentration is low, Northbell market share of about 4%, is the local market share of the highest enterprises. In terms of R & D, the company's R & D expenditure rate is relatively stable, basically more than 3.20%, and the 2022H1 R & D expenditure rate is 4.57%, an increase of 1.79pct over the same period last year. Through the combination of industry, university and research, we will continue to innovate in the fields of raw materials, formulations, processes and categories, and promote the rapid transformation of scientific and technological achievements. In terms of production capacity, the company is currently the largest mask manufacturer in China, with a production capacity of 1.97 billion tablets in 2020 and 2.13 billion tablets in 2021. On the basis of the slight increase in mask production capacity, the company focuses on expanding the production capacity of skin care products and wipes. The production capacity of skin care products in 2020 and 2021 will be 280 million pieces, and the production capacity of wet wipes will be 122 million tablets. In terms of categories, the company continues to innovate facial masks, develop a variety of characteristic products, and expand the category of skin care products. Skin care series account for 29% in 2021, which is 4pct higher than that in 2020. In addition, the company continues to open up new customers while strengthening cooperation with old customers such as Watsons and Unilever. Emerging brands such as Yatsen and botanist have been among the company's top five customers since 2019, accounting for 6 per cent and 4 per cent of revenue in 2021, respectively. The company has formed advantages in research and development, production capacity, products and customers, and it is expected that the market share will continue to increase.
Investment suggestion
The company is affected by the epidemic in the short term, and its performance is under pressure. However, as a leading domestic processing enterprise, Northbell has established barriers in R & D, production capacity, customers and other aspects through years of investment. After the implementation of the new regulations on cosmetics, the market share has further increased. We estimate that in 2022-2024, the company's EPS will be 0.08 Universe 0.26 0.22 yuan, and the corresponding PE will be 65-20-23 times. Cover for the first time, give "buy"
Rating.
Risk hint
Upstream raw material price fluctuation; production capacity is not as expected; epidemic situation is repeated and so on.