Mao Geping is a scarce high-end makeup artist brand in China. It has a differentiated position. The company's performance growth has accelerated in recent years, with 24H1 revenue +41% and net profit +37%. Currently, the brand's potential is rising. The product side is driven by makeup+skincare explosions and second-tier product layout. The number of stores in terms of channels is expected to grow steadily. At the same time, with the expansion of the product matrix and the increase in the stickiness of repurchases, there is still room for improvement in same-store revenue. We expect net profit for 2024-2026 to be +37%, +30%, and +21%, respectively. The closing price on December 16 corresponds to 24PE26.7X, 25PE20.5X, and 26PE16.9X, giving a “Highly Recommended” rating for the first time coverage.

Mao Geping: A representative brand of high-end domestic beauty. Performance growth has accelerated in recent years. Founder Mao Geping has been deeply involved in the beauty industry for 40 years. He founded the company in 2000. His business covers makeup, skincare and cosmetics training. In recent years, he has used online channels to quickly break the circle and enter the fast track of growth. Revenue CAGR = 48% in 2020-2023; 24H1 revenue was +41% year-on-year, with makeup/skincare accounting for 55%/41% respectively, and online/offline channels accounting for 49%/51% respectively. Makeup and online channels are growing faster. Brand premiums also bring high profit margins. The company's profitability is at a higher level in the cosmetics industry. 24H1 gross profit margin is 85%, net profit margin is 25%, and 24H1 net profit is +37% to 0.44 billion yuan.

Industry pattern: China's high-end makeup market space is large, and high-end domestic brands with both product power and brand power are scarce. Euromonitor expects facial makeup to be the fastest growing category in the Chinese makeup market, 2023-2028E CAGR = 8.4% (the largest sub-category of base makeup and concealer CAGR = 11.5%); the share of high-end makeup is expected to increase from 50.4% in 2023 to 52.3% in 2028, with more market space.

In terms of the industry pattern, the top share rankings are still dominated by foreign brands positioned in the middle and high-end positions (such as YSL, Lancôme, Chanel, etc.). Domestic brands mostly target the public, and Mao Geping is one of the few high-end domestic brands. In recent years, emerging domestic brands have had an impact on traditional mass brands in 2018-2019 through marketing+value+popular positioning, but due to the failure to build a brand moat and channel dividends, some brands such as Huaxizi and Perfect Diary have experienced a rapid decline in share since 2021; instead, domestic and foreign high-end brands with product and brand power have shown more resilience. Mao Geping's share in the makeup market has steadily increased from 0.5% in 2018 to 2.0% in 2023.

Dismantling competitive advantages:

1) Differentiated positioning: domestic high-end price range, skincare+makeup collaboration. Most domestic makeup brands are in the low to medium price range of 350 yuan, while the middle and high-end price ranges are controlled by foreign brands. There is a gap in the price of the Mao Geping Card for Chinese and foreign brands, accurately filling the gap in domestic high-end cosmetics, and can also be used as a “replacement” for higher-priced foreign brands. At the same time, when targeting international brands, the product matrix includes skincare & makeup, extending and collaborating with the advantages of base makeup, which is clearly different from domestic brands.

2) Product: The founder led product development. The two major explosives, caviar mask & powder, account for more than 30%, and second-tier products already have a layout. Mao Geping himself has extensive experience and controls product development. Currently, the company has successfully created two major explosions. The 24H1 light-sensitive non-marking powder series and luxury caviar mask have earned more than 0.2 billion yuan and 0.45 billion yuan, which together account for more than 30% of the company's revenue. The product matrix is quite complete. As of the end of 24H1, there were 387 SKUs, covering multiple sub-categories, and second-tier products (such as caviar cushion, small gold fan powder, dark cream, etc.) have emerged.

3) Brand: A rare makeup artist brand, empowered by personal IP, and continuing to deepen Oriental aesthetic mentality. Compared to overseas brands such as NARS and Shu Uemura, Mao Geping is also scarce in the domestic market as a makeup artist brand.

In recent years, KOL cooperation and personal media creation have all continuously strengthened Mao Geping's personal IP, leading the brand to break the online circle. Other brand promotion methods that match the brand's tone are also selected more accurately, such as continuing to explore Oriental aesthetics through the Forbidden City co-branded series “Qi Yun Oriental”, sponsoring the figure swimming team, and signing a contract as the official beauty service provider for the Chinese national team.

4) Channel: Offline experiential services increase consumer reach & repurchase stickiness, and continue to break through online customer acquisition.

The company started offline and is deeply involved in high-end department store channels to provide consumers with experiential and personalized services. Currently, it has more than 2,700 beauty consultants across the country, enhancing reach and customer base stickiness. As of June 30, 2024, the number of counters was 402, the number of offline channel members exceeded 4.2 million, and average same-store revenue also maintained double-digit growth (24H1 +18%). Online channels not only brought in new customers through brand expansion and breaking circles, but also undertook the conversion and repurchase of offline traffic. According to statistics from third-party platforms, Mao Geping's cumulative growth rates on Tmall and Douyin in the first 11 months of this year were 66% and 71%, respectively.

Profit forecasting and investment advice. As a scarce high-end makeup artist brand in China, Mao Geping is currently in a period of rising brand power. The product side is driven by explosives and a second-tier matrix layout. The number of stores in terms of channels is expected to grow steadily. At the same time, as the product matrix expands and the stickiness of repurchases increases, there is still room for improvement in same-store revenue. We expect net profit for 2024-2026 to be +37%, +30%, and +21%, respectively. The closing price on December 16 corresponds to 24PE26.7X, 25PE20.5X, and 26PE16.9X, giving a “Highly Recommended” rating for the first time coverage.

Risk warning: the risk of new stock listings and large stock price fluctuations, the risk of intense competition in the industry, the risk of product promotion and sales falling short of expectations, the risk of excessive family ownership, the risk of strong ties between the founder and the company's image, and the risk of channel expansion falling short of expectations.