Investor hunting for undervalued gems, Pretium Consulting

Jay Ju

Investor hunting for undervalued gems

Thematic (Sector/Industry)

South korea Consumer staples / Thematic (Sector/Industry)

Hankook Cosmetics Manufacturing (003350 KS)

Update on Korean cosmetics industry Adding to <a href="https://www.smartkarma.com/profiles/1077" target="_blank" data-smartkarma-citation="accounts:1077">Ally Park</a>’s fantastic notes regarding the Korean cosmetics industry, I wanted to follow up with some additional factors in what is driving the industry. In this report, we would like to highlight the key factors that are important to consider when looking at the Korean cosmetics industry. <ul class=""><li>Supply vs. demand dynamics: While cosmetics is not a commodity and usually analysts do not perform demand vs. supply analysis to determine industry returns, we believe the industry is becoming more driven by competitive factors going forward. The market is already expecting an upturn in ROIC in 2018E coming from rising demand vs. supply.</li><li>Channel exposure becomes very important: Customers are much less brand loyal than before, according to CLSA research as consumers own more products than before and are willing to trade down to cheaper and less-prestigious brands; as brands build up their capacity and come out with new products faster than ever before, the brand loyalty could weaken, making industry economics more likely susceptible to competitive pressure going forward. We think given less differentiation, channel exposure (as they provide the platform) becomes very important. Internet and H&amp;B are the fastest rising medium in the cosmetics industry.</li><li>ODMs continue to increase production share: Shares of OEM/ODM is likely to continue to expand due to rising channel share in H&amp;B Stores &amp; online which provides a level playing field for small to mid-cosmetics brands. These brands also normally don’t have their own manufacturing facilities due to the high fixed burden.</li><li>Rising marketing competition from brand makers: Actual design &amp; production for mass products are increasingly outsourced to ODM companies, which means that differentiation comes from more from the brand image vs. quality, leading to higher marketing spend %, which could hurt brands’ profitability in the long run.</li><li>China demand coming back but rising localization trends could mean trouble for Korean brand makers in the long run.</li><li>Overall our initial thoughts are leaning towards a bearish stance given the supply side pressures, lower differentiated products, strong competition (marketing) and platforms (H&amp;B stores, online) getting more bargaining power. We think the channel beneficiaries, ODM/OEM players are likely to grasp increasing value share of the overall industry. </li></ul>

Update on Korean cosmetics industry Adding to Ally Park’s fantastic notes regarding the Korean cosmetics industry, I wanted to follow up with some additional factors in what is driving the industry. In this report, we would like to highlight the key factors that are important to consider when looking at the Korean cosmetics industry. Supply vs. demand dynamics: While cosmetics is not a commodity and usually analysts do not perform demand vs. supply analysis to determine industry returns, we believe the industry is becoming more driven by competitive factors going forward. The market is already expecting an upturn in ROIC in 2018E coming from rising demand vs. supply.Channel exposure becomes very important: Customers are much less brand loyal than before, according to CLSA research as consumers own more products than before and are willing to trade down to cheaper and less-prestigious brands; as brands build up their capacity and come out with new products faster than ever before, the brand loyalty could weaken, making industry economics more likely susceptible to competitive pressure going forward. We think given less differentiation, channel exposure (as they provide the platform) becomes very important. Internet and H&amp;B are the fastest rising medium in the cosmetics industry.ODMs continue to increase production share: Shares of OEM/ODM is likely to continue to expand due to rising channel share in H&amp;B Stores &amp; online which provides a level playing field for small to mid-cosmetics brands. These brands also normally don’t have their own manufacturing facilities due to the high fixed burden.Rising marketing competition from brand makers: Actual design &amp; production for mass products are increasingly outsourced to ODM companies, which means that differentiation comes from more from the brand image vs. quality, leading to higher marketing spend %, which could hurt brands’ profitability in the long run.China demand coming back but rising localization trends could mean trouble for Korean brand makers in the long run.Overall our initial thoughts are leaning towards a bearish stance given the supply side pressures, lower differentiated products, strong competition (marketing) and platforms (H&amp;B stores, online) getting more bargaining power. We think the channel beneficiaries, ODM/OEM players are likely to grasp increasing value share of the overall industry. 

Amorepacific Corp (Preferred) (090435 KS)

Update on Korean Cosmetics Industry