1H22 results missed our expectations

Lily & Beauty Cosmetics (Lily & Beauty) announced its 1H22 results: Revenue declined 16.1% YoY to Rmb1.56bn, net profit attributable to shareholders dropped 97.0% YoY to Rmb6mn, and recurring net profit fell 108.5% YoY to -Rmb14mn (vs. Rmb161mn in 1H22). Non-recurring gains and losses were mainly contributed to by government subsidies and return on investments. In 1Q22 and 2Q22, the company’s revenue dropped 5.3% and 23.5% YoY, net profit attributable to shareholders dropped 71.5% and 104.1% YoY, while recurring net profit fell 73.0% and 121.6% YoY. The firm's 1H22 results missed our forecast, as the company's daily operations were under pressure following the COVID-19 resurgence in Shanghai and other domestic regionsTrends to watch

Revenue declined due to the COVID-19 resurgence; proportion of revenue from non-Tmall platforms increased slightly. By business, revenue from Lily & Beauty’s retail e-commerce business declined 17.1% YoY to Rmb1.42bn, with its revenue contribution at 91.2%. Revenue from brand marketing operations dropped 52.2% YoY to Rmb49mn, with its revenue contribution at 3.1%. By platform, revenue from the Tmall domestic platform fell 17.2% YoY to Rmb1.37bn in 1H22. Revenue from Tmall Global declined 34.4% YoY to Rmb50mn, while revenue from other platforms (e.g., Douyin, Pinduoduo, Lazada, and Shopee) increased 10.5% YoY to Rmb137mn in 1H22, and the proportion of revenue from non-Tmall platforms increased 2.1ppt YoY to 8.8%.

Gross margin down YoY; profitability under pressure. In 1H22, the overall gross margin (GM) decreased 6.2ppt YoY to 30.2%. GM from the retail e-commerce business dropped 3.5ppt YoY to 31.0%, and GM of the brand marketing operation service fell 33.2ppt YoY to 50.2%. The company’s costs were under pressure. On the expense side, the expense ratio in 1H22 grew 3.4ppt YoY, and the sales expense ratio rose 3.1ppt YoY. The attributable net profit margin declined 10.7ppt YoY to 0.4%, and recurring net margin dropped 9.6ppt YoY to -0.9%. The profitability declined significantly.

Watch HoH recovery, brand and category expansion in 2H22. In the short term, along with improving COVID-19 prevention measures and as the resurgence eases (particularly in Shanghai, where the firm’s headquarters is located), we suggest paying attention to the HoH improvement of the company's revenue and profit. In the medium to long term, in 1H22, the company will continue to rely on e-commerce platforms such as Tmall and Douyin to cooperate with more than 60 brands such as Sulwhasoo, The History of Whoo, Schwarzkopf, and freeplus. The number of the company's partner brands remained relatively stable. Meanwhile, in 1H22, the company expanded its business scale in new platforms represented by Douyin, and its businesses on Douyin maintain steady growth. In addition to the cosmetics category, the company has expanded its presence in segments such as food, food storage containers, etc. It has reached cooperation intentions with brands such as Chips Ahoy and LOCK&LOCK. In addition, the company also continues to grow self-owned brands such as Meiyitang, Yurongchu, Xunweidang’an, and Aibeimeng. We suggest watching the progress of the company’s category and brand expansion in multi-platforms.

Financials and valuation

Considering the impact of COVID-19, we lower our 2022 and 2023 earnings forecasts 35% and 5% to Rmb232mn and Rmb407mn. The stock is trading at 23x 2022e and 13x 2023e P/E. We maintain an OUTPERFORM rating. Given lower earnings forecasts, we cut our target price 9% to Rmb17.3, implying 30x 2022e and 17x 2023e P/E, offering 33% upside.

Risks

COVID-19 resurgence; intensifying competition; overdependence on a single distribution platform; customer churn; inventory impairment.