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Author: Xiao Li Fei Dao, Editor: Xiao Shi Mei

In the past few years, there were three major players in the Chinese cosmetics general agent market, including Meiti, Hengcheng and Yingtong, and their business scale had been rising steadily. However, in recent years, the industry has changed suddenly, Meiti has collapsed, Hengcheng has retreated, and only Yingtong is still active in the market.

On July 18, Yingtong Holdings formally submitted its prospectus to the Hong Kong Stock Exchange, hoping to seek faster development with the help of the capital market. However, the embarrassing reality that the company has to face is that the basic distribution agency model of its business is fraught with hidden concerns, and the road to cultivating its own perfume brand or doing external mergers and acquisitions is also bumpy.

[The transcript is quite satisfactory]

Yingtong Holdings' business model is not complicated, and it is essentially a distribution agent. It obtains the authorized agency of international brands such as Hermès, Van Cleef & Arpels, and Chopard, and then sells them through retail channels (such as Watsons and Sephora), next-level distributors, direct sales and other sales networks to make profits.

After 40 years of development, Yingtong currently manages 63 brands, covering perfumes, cosmetics, skin care products, personal care products, glasses and home fragrances. Among them, perfumes are the absolute majority of the company's distribution agency, accounting for more than 80% of the revenue. According to the retail sales in 2023, Yingtong has become the largest perfume brand management company in the comprehensive market of mainland China, Hong Kong, China and Macau.

In the fiscal years 2022-2024 (ending March 31 of each year), the company's revenue will be RMB 1.675 billion, RMB 1.699 billion, and RMB 1.864 billion, respectively, with a compound annual growth rate of 5.49%. The net profit will be RMB 171 million, RMB 173 million, and RMB 206 million, respectively, with a compound annual growth rate of 9.76%.

The gross profit margin of sales in the latest fiscal year was 50.34%, maintaining a slight downward trend for two consecutive years. The net profit margin in the latest fiscal year was 11%, showing a slight upward trend. Among them, the sales expense rate was as high as 27.6%, and the management expense rate was 10.86%.

Judging from the above core financial data, Yingtong Holdings' performance growth rate is not fast, but its profitability is still good. It has achieved "passive profits" by relying on the sales channels cultivated over the past years.

However, what was widely criticized by the market was that Yingtong carried out a clearance dividend before its IPO.In the fiscal years 2022-2024, the company distributed dividends of 128 million yuan, 189 million yuan and 314 million yuan to the controlling shareholders Liu Jurong and his wife (holding 100% of the shares), with a cumulative amount of 631 million yuan, which is 80 million yuan higher than the net profit in the same period.

The large dividends paid out before the IPO show that the company is not that short of money. After the dividends are paid out, the company will have to raise funds through a large IPO. It is inevitable that there will be some ridicule and doubt in the market that the company is raising money through the IPO.

[Potential threats to the basic market]

Ying has reaped the benefits of channel distribution in the past, but it remains to be seen whether it can maintain its basic market share in the future.

For many years, distribution agents have been active in all walks of life. It is a business model that mainly relies on information asymmetry and supply and demand asymmetry in offline channels to earn price differences. Today, online retail sales account for nearly 30% of total retail sales, partially replacing the lengthy offline distribution agent model, and the trend is quite obvious.

Under such a trend, beauty and cosmetics sales channels, including perfumes, are also undergoing profound changes.

According to Qingyan Intelligence, in 2023, China's online cosmetics sales will reach 404.59 billion yuan, a year-on-year increase of 10%, and the market share will reach 50.8%, an increase of 2.2% year-on-year, surpassing offline channels for the first time.

Among online channels, Taobao and Douyin accounted for 22.6% and 16.9% respectively, becoming more and more mainstream sales channels for beauty products. Meanwhile, the share of offline channels that used to be strong, such as department stores, CS, and KA, continued to decline to 20.2%, 18.4%, and 8.7% respectively.

▲Market share of cosmetics in various channels in 2023, source: Huajin Securities

In addition, in 2023, the sales of domestic cosmetics increased by 21% year-on-year, and the market share reached 50.4%, surpassing foreign brands for the first time. This is a milestone event, which means that domestic consumers are no longer fascinated by international cosmetics brands.

The profound changes in the industry are unfavorable to Yingtong, which relies on foreign brands to make money through channel distribution.

In fiscal year 2024, retailer channels accounted for 45.3% of Yingtong's total revenue. Among them, online sales accounted for 17.6%, a decrease of 4.6% from fiscal year 2022. In addition, the distribution channel accounted for 30.1%, of which online sales accounted for 11.6%, a decrease of 3.7% from fiscal year 2022. Online self-operated channels accounted for only 6.8%, which also declined significantly.

▲ Yingtong’s revenue channel classification, source: prospectus

It can be seen that the online share of Yingtong's major channels is on a downward trend. The reasons are: first, online traffic is becoming more and more expensive, and market competition is becoming more and more fierce. Second, the trend of online brand direct sales is obvious, and the share of distribution agents is being compressed.

The online sales trend in the beauty industry is becoming increasingly obvious, but Yingtong’s strength lies in offline channels, and it will almost certainly be affected in the future.

In addition, the perfume business represented by Yingtong faces another potential risk - international brands revoking their authorization.

This is a risk event that has already occurred. In December 2022, Yingtong's authorized distribution agreement with a luxury brand expired, and this distribution right contributed 420 million yuan to Yingtong in fiscal year 2023, accounting for 25.5% of total revenue.

In the future, it may become a trend for international brands to start direct sales. In September 2023, the Swiss Richemont Group established a high-end perfume and beauty department. After that, the group took back the six major perfume and beauty businesses of Cartier, Van Cleef & Arpels, Montblanc, Dunhill, Chloé, and Alaïa. Previously, the perfume licenses of the top five brands were all given to Inter Parfums.

Inter Parfums has been cooperating with Yingtong for more than 30 years and ranks among the top five suppliers of the latter. It should be noted that the transaction volume between the two parties in fiscal year 2024 was as high as 225 million yuan, accounting for 23.8% of Yingtong's total procurement amount.

In addition, Kering, the parent company of French luxury brand Gucci, also established a beauty department in 2023, starting the "increase direct sales and reduce agency sales". Before Richemont and Kering, many well-known brands such as Hugo Boss, Jack Wolfskin, and Michael Kors also announced plans to take back agency rights.

Why are overseas luxury goods companies trying to withdraw their agents?

Market capitalization observation believes that there are three main reasons:

First, agents are one of the important reasons for channel diversion, disruption of price system, and damage to the main brand.

Secondly, luxury companies initially authorized agents in order to expand the market. Once the market has taken off and consumers have recognized it, it is inevitable to gradually shift to direct sales.

Third, beauty and cosmetics sales channels have undergone major changes, with a clear trend towards onlineization. This also makes it easier for brands to establish direct contact with consumers through online flagship stores, eliminating lengthy distribution and agency links and improving their own profitability.

Overall, whether it is the potential risk of brands revoking their authorizations or the increasing shift of beauty sales channels to online, it will pose a considerable threat to Yingtong's basic base.

[New growth curve is hard to find]

Of course, in order to get rid of potential threats, Yingtong did not sit idly by and began to develop its own perfume brand.

In 2022, the entry-level perfume brand Santa Monica was launched. However, after several years of operation, the results were not satisfactory. In the 2024 fiscal year, the revenue was 17 million yuan, accounting for less than 1% of the total revenue.

In the future, Yingtong wants to further expand and strengthen Santa Monica and make it a new growth engine for the company's future performance, which will be quite difficult.

Competition in the perfume market is becoming increasingly fierce, and it is becoming increasingly difficult to stand out. According to Tianyancha, there are currently more than 310,000 perfume companies in the country, and the number of annual registered companies has increased significantly from 3,595 in 2013 to 88,000 in 2023.

The reason why capital from outside the industry can pour into the perfume industry is that the threshold for making perfume is not high. Of course, this will inevitably intensify the intensity of competition in the industry.

In terms of market structure, the high-end perfume sector is still controlled by foreign capital, and the brand appeal is deeply rooted. According to a third-party data, in the Taobao brand sales list in the first half of 2024, the top 20 are almost all foreign brands, and Chanel, Hermès, and Dior account for nearly 20% of the market share. The only domestic brand on the list is Bing Xili, ranking 16th.

In the low-end market, the emerging domestic brands are gaining momentum, with the main battlefield being on short video platforms led by Douyin. In the first half of 2024, the top three Douyin perfume sales were Herbal Ocean, fpf, and Gucci, all of which are domestic brands, and their sales volume and sales revenue increased by 37%-363% year-on-year.

From this perspective, Santa Monica has difficulty gaining ground in the mid- to high-end market, and in the low-end market, the competition is about who has stronger online channels and marketing capabilities, and Yingtong does not have an advantage.

In addition to internal growth, beauty companies can also seek breakthroughs through external mergers and acquisitions. But this path is also not easy for Yingtong.

Overseas brand giants have successively participated in mergers and acquisitions in pursuit of growth, and high-quality targets are becoming increasingly scarce worldwide, so merger and acquisition valuations are naturally rising.

In terms of overseas markets, in 2022, Spanish beauty giant Puig defeated L'Oréal and Estee Lauder and acquired Swedish niche perfume brand Byredo for $1 billion. In July 2023, Kering Group acquired Creed for 3.5 billion euros to accelerate the layout of high-end perfume and beauty business. In the domestic market, L'Oréal has made minority equity investments in mid-to-high-end local brands such as Guanxia and Wenxian that have emerged in recent years.

Suitable M&A and investment opportunities for Yingtong will not appear easily.

In summary, Yingtong's distribution agency base faces two major threats, and in terms of cultivating the second growth curve, it has not yet seen much potential, and future performance growth will face considerable pressure. In the past few years, Yingtong has reaped the super dividends of foreign brands entering China. However, this dividend cannot be sustained for a long time, and the company's days of "making money without doing anything" may not be many in the future.

Disclaimer

The content of this article related to listed companies is the author’s personal analysis and judgment based on the information disclosed by listed companies in accordance with their legal obligations (including but not limited to interim announcements, regular reports and official interactive platforms, etc.); the information or opinions in the article do not constitute any investment or other business advice, and Market Value Observation shall not bear any responsibility for any actions arising from the adoption of this article.