Investment highlight

Cover L'Occitane for the first time (00973) to rate the outperform industry, with a target price of HK $22.00, corresponding to the price-to-earnings ratio of 26x/21x FY2020e/FY2021e. The reasons are as follows:

The continued trend of an aging world population, growing consumer awareness and increasing purchasing power in emerging markets have boosted demand for high-end skin care products using natural raw materials. We believe that Oshudan will benefit as one of the leaders in this market segment.

The LimeLife and Elemis brands that the company has acquired in recent years are opening up new markets (Elemis is entering the Chinese mainland market), drawing on the company's distribution network and marketing experience.

As high-margin facial care products account for an increasing share of sales, offline store opening slows down and operating leverage increases, we believe that the company's operating profit margin is expected to recover and improve.

What is the biggest difference between us and the market? We believe that the company's current valuation level does not adequately reflect the growth potential of LimeLife and Elemis.

Potential catalyst: performance is expected to exceed expectations in the next 6-12 months.

Profit forecast and valuation

We expect the company's FY2020e/21e EPS to be 0.09max 0.12 euros and FY2020e-23e CAGR to be 21%, based on increased same-store sales and revenue growth from LimeLife and Elemis volume, superimposed operating leverage to improve profit margins.

Our target price of HK $22.00 is based on the price-to-earnings ratio of 26x/21x FY2020e/FY2021e.

The current share price is HK $16.20, corresponding to the price-to-earnings ratio of 20x/15x FY2020e/FY2021e.

Our target price has 35.8% upside over the current share price.

Risk

LimeLife and Elemis volume is lower than expected; Hong Kong market may continue to drag on overall performance; increased competition; foreign exchange rate movements; goodwill and brand value impairment.