The company completed the divestment of the turpentine deep processing business at the end of 2022, focusing on the cosmetics business. However, since '22, the cosmetics business has been under heavy pressure due to various factors such as declining industry sentiment, falling overseas wipes orders, and low capacity utilization. Starting in 23Q2, the business began to reduce losses, and 24Q2 reversed losses. 24Q3's gross margin/net margin was further restored to 18.94%/4.59%. As one of the leading cosmetics foundries in China, the company is expected to continue to benefit if the subsequent prosperity of the industry recovers significantly; at the same time, the company will increase internal skills training and improve production efficiency, and costs such as asset depreciation and amortization are expected to continue to be optimized. We expect the company's operating performance to continue to improve. Maintain an increase in holdings rating.

24Q2 turned losses into profits, and 24Q3's profitability further recovered Northbell (cosmetics business entity) revenue of 1.961 billions/yoy -5.63% in '23, and net profit attributable to Northbell owners' equity of -50.34 million yuan, putting pressure on operations. In 24Q2, the company's gross margin/net margin reached 16.11%/2.75%, Q3 was further repaired to 18.94%/4.59%, and revenue yoy was corrected (Q3yoY 2.2% VS24H1 was -7.14%). Order demand from some of the company's customers has yet to recover, but the cost of using large-scale procurement to control raw material procurement costs, improve production and management efficiency, and asset depreciation and amortization have declined year-on-year.

The boom in the cosmetics industry needs to be further repaired. According to the National Bureau of Statistics, the domestic product performance surpassed the online market. From January to November '24, the cosmetics quota was above the zero scale of 401.5 billion/yoy -1.3%.

According to Qingyan, from January to October '24, Taotian/Jingdong/Douyin/Kuaishou Beauty's total GMV was 9.18%. By platform, Taoxie/Douyin beauty market GMV was under slight pressure, and Douyin was growing faster. By brand, the total GMV of the top 20 domestic brands in online channels reached 55.33 billion yuan/yoy 50.62%. The growth rate exceeded the overall level of the market and continued to increase its share. In August 2024, the small video store was upgraded to a WeChat store, fully connected to the WeChat ecosystem; recently, the WeChat store launched a “gift function”. Beauty as a product with strong social attributes is expected to benefit from the development of the WeChat e-commerce system, and the number of new channels can be expected. As a leading domestic cosmetics foundry, the company is also expected to benefit.

Profit forecasting and valuation

The company's net profit for 24-26 is estimated to be 0.036/0.13/0.154 billion yuan, compared to the company's 25-year Wind's consistent profit forecast 21 times PE. Considering the gradual restoration of the company's business situation, there is a possibility of a reversal, and the target price is 6.25 yuan for 25 years, maintaining an increase in holdings rating.

Risk warning: Industry prosperity continues to be sluggish; downstream customer demand is weak; market competition intensifies.