Beauty China Holdings Ltd - Secrets of Beauty

Beauty China Holding Ltd (BCH) used to be a brand management company that
owns and manages two cosmetic brands Colour Zone and CharmingLady,
which targeted China’s mass market. Recently, BCH expanded its business to
produce cosmetic products in China, which makes it an integrated cosmetics
player. Colour Zone is targeting trendy women between 18-28 of age, and
CharmingLady is targeting office-going women above 25. Colour Zone
products are now distributed via more than 1275 outlets in all provinces
throughout China. CharmingLady products are available in around 150
department store counters in China.
Niche market player
BCH is well positioned in a niche market, especially for its Colour Zone brand. Colour
Zone targets young girls, who are 18-28, with product price ranging from RMB15 to
109. Usually, we don’t see established brands competing at this relatively low price.
Promising industry
China’s cosmetic industry is a booming industry. In our opinion, China’s cosmetic
industry will benefit from increasing consumer-spending power, booming service
sector, increasing interest in physical appearance, and modernizing retail and
distribution networks.
Strong and stable track record
In the past seven years, BCH has experienced strong and stable growth. The number
of its outlets grew from 450 in year 2003 to 1275 March 2007. It achieved CAGR of
revenue and net profits of 38.4% and 33.4% respectively since year 2000.
Resume coverage with a buy at fair value of S$1.65. We estimate the net earning
for FY07 and FY08 as HKD 168 mln and HKD 211 mln, which translates into a
growth of 24.4% and 26.1% in the next two years. Based on 21x, 18x and 14x PE for
FY06, FY07 and FY08, we arrive at a fully diluted fair value of S$1.65 per share,
which represents an upside of 41% from its previous close.