Key Takeaways:

Eternal Beauty has filed for a Hong Kong IPO, reporting its profit rose 20% year-on-year in the first half of its current financial year

The perfume seller plans to use funds from the listing to further expand its self-owned brands

A new beauty pageant is shaping up on the Hong Kong Stock Exchange, following last year's hot listing of popular cosmetics brand Mao Geping (1318.HK). That share sale brought in suitors left and right and was ultimately oversubscribed by more than 900 times. As investors clamored for a piece of the company, its stock soared on its opening day, closing up 76%.

The stock hasn't disappointed since then, either, continuing to climb to its current level that's up nearly 150% from the IPO price. The stock's hot reception may be inspiring perfume major Eternal Beauty Holdings Ltd. to restart its earlier attempt at a Hong Kong listing.

Its new listing document filed earlier this month shows Eternal Beauty's revenue has been rising steadily from 1.68 billion yuan ($231 million) in its fiscal year through March 2022 to 1.86 billion yuan in its fiscal year through March 2024. Its profit over that period rose from 171 million yuan to 207 million yuan. Its revenue for the six months through last September - the first half of its current fiscal year - rose 14.2% year-on-year to 1.06 billion yuan, while its profit over that time rose 20% to 116 million yuan.

The company's mainstay is perfume, though it also deals in other products like color cosmetics, skincare and personal care products, eyewear and home fragrances. Its revenue comes primarily from the sale of its own-branded products, and from managing brands for other companies. It currently provides such management services to 66 outside brands, including such big names as Hermès, Van Cleef & Arpels, Chopard, Albion and Laura Mercier.

The company logged one of its earliest milestones in 1987 when it was authorized to distribute a French company's perfumes in China. It recorded another in 1999 when it started developing its own Santa Monica eyewear brand. It currently offers three product categories under the brand, including five Santa Monica perfumes launched in 2022, positioned as entry-level premium products.

Demand for beauty

Eternal Beauty is no doubt encouraged by Mao Geping's success story, reflecting the resilience of cosmetic sales in China despite the current weak consumer market. Even though people may need to economize a little during the slowdown, many may still feel compelled to spend on making themselves look better.

Data from China's National Statistics Bureau shows that cosmetics sales in China rose from 394 billion yuan in 2022 to 436 billion yuan last year. Eternal Beauty's listing document also reveals that the scale of China's retail perfume market jumped from 14.6 billion yuan in 2018 to 26.1 billion yuan in 2023, growing around 12.3% annually. The growth is expected to continue at a similar rate, reaching 47.7 billion yuan in 2028.

Against the backdrop of such strong growth, Eternal Beauty stands out for its substantial first-mover advantage. The company was founded by Hong Kong businessman Lau Kui Wing in 1980 and set up a branch on the Chinese Mainland in 1987 introducing international perfume brands to the market. As China's economy boomed over the next three decades, Eternal Beauty also thrived on growing demand for its products from the country's emerging middle class.

According to third-party market data in its listing document, Eternal Beauty was China's third largest perfume seller in terms of retail sales in 2023, and was also the only brand management company for other top perfume makers. Its leading position in a rising industry has given it an advantage as a market old-timer over later arrivals to China's beauty scene.

Its long history has also given the company a store network that would make its rivals green with envy. That network includes 7,500 retailers in over 400 Chinese cities as of last September, in addition to over 100 of its own self-operated brick-and-mortar retail stores. It also hawks its wares online on e-commerce and social media platforms.

Expanding self-owned brands

As in many businesses, self-brand operation for perfume makers like Eternal Beauty typically delivers better profits compared with distributing and managing other brands. The company already has such experience through its development of the Santa Monica brand, and it plans to use money from the IPO to further expand its own brand stable as well as acquire and invest in other brands. That, in turn, should help to not only boost its revenue, but also improve its gross margin.

In valuation terms, Mao Geping has set a high standard by logging a trailing price-to-earnings (P/E) ratio of 40 times. Much of that may owe to the fact that the company owns its own brands, which helped it generate a profit of close to 500 million yuan in the first half of last year. While Eternal Beauty has plenty of experience in perfume sales and brand management, its weaker profit profile may make Mao Geping an inappropriate comparison.

Instead, a better comparison might be Hong Kong's Sa Sa International (0178.HK), which trades at a more down-to-earth trailing P/E ratio of 13.7 times. Using Sa Sa's P/E multiple and an annual profit forecast of HK$230 million would give Eternal Beauty a market value of about HK$3.2 billion ($411 million) - not huge, but also not small change for the latest beauty queen to list in Hong Kong.