How does GIANT BIOGENE grow?

The purchasing power of women is also beginning to decline.

In the first 6 months of 2024, the overall domestic social retail sales increased by 3.7% year-on-year, but cosmetics only grew by 1%. This contrast was almost unheard of before 2021, but since 2022, the growth rate of cosmetics has been weaker than that of overall social retail sales, ultimately falling behind for the whole year, and this trend continues to this day.

The continuous underperformance of cosmetics compared to social retail sales means that the consumption power of women, who are the core customer group of this industry, is also beginning to shrink. The lipstick economy, long regarded as a benchmark by the market, is facing a crisis of faith.

However, amidst the industry's gloom, GIANT BIOGENE, which mainly sells functional skincare products and medical dressings, has achieved growth against the trend. In the first half of this year, it achieved revenue of 2.54 billion yuan, a year-on-year increase of +58.2%, and a net profit attributable to the parent company of 980 million yuan, a year-on-year increase of 47.4%, both exceeding industry expectations.

In a sluggish consumption environment, companies that can grow against the trend must have their own outstanding features. What exactly is driving the further amplified growth of GIANT BIOGENE?

1. Providing New Choices

The era of component cosmetics and new energy vehicles is essentially about finding increments in the stock market through the competition of new technologies and applications. While popular skincare products have marketing elements, the underlying raw material technology support is essential.

From a product perspective, GIANT BIOGENE relies on preparing new types of raw materials, with the recombination of collagen as the starting point of a new story, changing user habits to drive market demand and achieve growth.

The business model of beauty and skincare stands out in the entire market. After forming brand stickiness, marketing costs remain low, and sustained growth is foreseeable. Therefore, whether domestic or international, most companies in the beauty and skincare industry have particularly high gross profit margins, averaging 60-70%. However, GIANT BIOGENE's gross profit margin is even higher, maintaining a high level even though it slightly declined in the first half of this year.

Achieving above-average gross profit margins is related to the company's focus on the new ingredient component of recombined collagen.

Recombined collagen is derived from synthetic biological technology and has moisturizing, repairing, whitening, anti-aging, and other effects. It not only has lower infection risks than traditional animal-derived collagen but also higher stability than mainstream hyaluronic acid products in the market, making it a new favorite in the three major beauty and skincare tracks of skincare, injections, and medical masks.

According to Frost & Sullivan data forecasts, from 2022 to 2027, the market size of recombined collagen products in China will rapidly develop at a compound annual growth rate of 42.4%, increasing from 18.5 billion yuan to 108.3 billion yuan. This growth rate is much higher than other raw materials such as animal-derived collagen, hyaluronic acid, and retinol.

GIANT BIOGENE is the world's first enterprise to successfully research and produce recombined collagen products on a large scale, and currently the only leader in this market. Starting from upstream raw materials, the company has bet on a rapidly growing niche field.

In addition, the shift in consumer demand is also one of the key driving factors for its development.

From the perspective of consumers, most consumption has a core demand, which is efficiency. From Manner's unsuccessful attempt to follow the route of premium coffee to Starbucks' third space narrative hitting a wall in China, it can be seen that behind this is the time and patience deprived from contemporary workers under heavy pressure.

For skincare products, faster effectiveness has also become a core demand for consumers. Skincare products with restructured collagen can show obvious effects in two weeks, meeting market demands for quick and safe results.

Furthermore, due to the higher difficulty in the preparation process and better product effects of restructured collagen, the unit price has also increased. For example, a repair-focused face mask, GIANT BIOGENE's Kefumei brand products are about 10 yuan more expensive than Fuerjia's. This explains why the company can achieve above-industry average profits from the gross margin perspective.

Currently, the company has two major brands, with their core products centered around restructured collagen. Both brands have maintained double-digit growth for many years, leading the company to continuously achieve revenue growth.

More importantly, as an industry leader, GIANT BIOGENE is not only one of the global enterprises with the largest production capacity of restructured collagen, but also one of the few companies directly facing consumers, able to establish brand awareness in the process of changing consumer habits.

This means that in a relatively new skincare field, GIANT BIOGENE is not only the leader in upstream raw material preparation, but also the first brand that consumers can reach and recognize downstream. The full coverage of upstream and downstream also gives the company a much higher growth ceiling compared to its peers.

Of course, strong product performance is one of the determining factors for growth but not the only one.

Second, the competitive barrier of channels

The company's growth prospects cannot be solely based on product performance, but must also consider multiple factors. From the perspective of channels, the distribution channels have shouldered the heavy burden of the company's profit margin growth, and in the future, this part is expected to become one of the important cornerstones for the company to maintain high profit margins.

For a long time, GIANT BIOGENE's products have mainly relied on private domain traffic in WeChat Moments. In an era where platform economy is not well developed, this business model mainly relies on offline distribution channels to reach consumers, making distribution channels the foundation of GIANT BIOGENE This basic plate successfully entered the hospital and OTC channels by relying on the identity of "the first company in China to be approved to launch reconstituted collagen medical dressings under Class II medical device registration in 2011", eliminating the high expenses required to open independent stores, significantly reducing operating costs, and thus making the profit margin of distribution channels higher than online channels.

Looking at historical performance, in years where the proportion of distribution channels is higher, the company's net profit margin is at historical highs.

However, the distribution channels and the difficulty of circulating certain medical device products online have to some extent limited the room for development, resulting in the company's revenue scale not being large.

In 2021, with the development of the platform economy, the company actively shifted its marketing direction, increased efforts to develop online channels, and promoted with a more reasonable product positioning, successfully achieving fission and moving towards the public eye. Over these 3 years, the company's revenue has rapidly grown from 1.2 billion to 3.5 billion, an increase of nearly 200%, successfully breaking through the private domain circle and raising the revenue ceiling.

However, this has brought about a problem. With rapid expansion, the company's sales expenses have been continuously increasing. And judging by the current high-speed growth trend, this problem is unlikely to improve significantly in the short term.

Furthermore, the proportion of revenue from distribution channels is being squeezed by the rapidly growing online channels, causing the company's net profit margin level to slide from its peak. However, compared to peers with almost no distribution channels, it is still considerably higher.

And in terms of sales volume, revenue from distribution is still growing.

With the difficulty of improving online sales expenses in the short term, the company can only hope for the distribution channels to maintain a profit level above the industry average.

Looking at the number of hospitals already entered, the company's products are currently deployed in over 1,500 public hospitals, over 2,500 private hospitals and clinics. It is unlikely for high-speed growth to occur before the company's Class III new product is certified (management expects certification in the first quarter of next year) However, continuous growth is not a problem, as many medical beauty projects are still on the rise. Take hyaluronic acid injections as an example. According to the "In-depth Research and Analysis Report on the Competitive Landscape and Investment Planning of the Chinese Medical Beauty Industry from 2024 to 2029," the market size of hyaluronic acid injections is expected to grow at an annual rate of 13% in the next 5 years. After this procedure, the first step is to apply the medical dressing given by the doctor, and it needs to be used frequently and continuously in the following week. Therefore, there should be no major issues with the stable and continuous growth in the offline channels.

Secondly, the company also has the OTC channel to achieve rapid volume expansion.

Due to the trend of chain operation, the number of licensed pharmacies nationwide has surged to over 600,000 by the end of 2023, exceeding the number of existing new tea shops by more than 100,000, collectively entering the "era of ten thousand stores." However, under the trend of intensive and large-scale development in the pharmaceutical industry, the dilemma of increasing competition and diluted revenue per store has gradually emerged. The expansion of local life businesses on delivery and e-commerce platforms has diverted a large number of offline consumers, further accelerating the end of the era of high-profit margins for pharmacies.

In response to the urgent need for profitability, 60% of pharmacies have introduced functional cosmetics to dilute the cost of selling medical insurance catalog products online. As a brand supplier, the increase in downstream demand is naturally beneficial for GIANT BIOGENE. Currently, the company's products cover only 650 pharmacies, compared to the existing tens of thousands of stores, there is still a lot of room for growth.

More importantly, although all beauty brands can be distributed offline, not all cosmetics can enter the OTC channel. With existing qualifications and a foundation in offline products, GIANT BIOGENE's brand has already been endorsed by professional institutions. This "endorsement" not only successfully captures the minds of ingredient enthusiasts in terms of products but also establishes a competitive barrier in offline channels.

Under the protection of competitive barriers, the company's distribution channels still have considerable room for growth, and distribution costs will not increase significantly. With the establishment of brand stickiness in the future, the reduction in marketing costs also indicates that the company's above-industry profit level is sustainable to a certain extent.

Overall, GIANT BIOGENE relies on starting from product raw materials to provide better choices for the market, and establishing sales barriers at the distribution end to achieve better-than-expected growth. However, if all of this happens in a booming industry, there is a high possibility of continuously exceeding expectations. But now, the domestic cosmetics industry is in a state of desolation.

III. Be cautious about bottom fishing

In the current environment, the collapse of leading stocks is no longer a novelty. The medical beauty leader Aimeike, which has been growing rapidly in the past, only achieved a revenue growth rate of 2% and a profit growth rate of 8% in the second quarter of this year. In a weak environment, the stock price of companies with growing performance may not rise, but if it falls short of expectations, it will definitely plummet.

On the day the performance was announced, Aimeike fell by more than 12%, and GIANT BIOGENE, which belongs to the same conceptual sector, was also affected, losing a significant portion of the gains brought about by the better-than-expected financial report from the previous day.

Although GIANT BIOGENE's current valuation is at a low level since its listing, and the latest semi-annual report achieved better-than-expected growth. However, the overall cumulative year-on-year growth of cosmetics continues to lag behind social zero. In a sluggish industry, the likelihood of continuous better-than-expected performance is small. What the market fears is that under the continuous low consumer outlook, the company's performance, like Aimeike, cannot sustain high growth After all, the average customer price of the two major brands under the company is not low, which subjectively does not conform to the current trend of downgrading consumption.

Therefore, it is very necessary to carefully choose whether to bottom fish according to your own investment strategy.

Conclusion

From the increasingly differentiated consumer demand to the retreat of some overseas products by domestic brands, it indicates that the competition in the cosmetics industry is becoming more transparent and intense. Only by forming differentiated competition can new stories be told.

Giant Biogene has formed a certain level of differentiated competition from product ingredients to sales channels, and the latest disclosed performance once again demonstrates the company's ability to sustain growth. However, at the current stage, almost all growth is within the foreseeable range of existing business fluctuations, and the variables that are truly expected to break through the valuation range have not yet appeared. For example, the downward trend in sales net profit margin has been reversed.

Looking at the industry as a whole, due to the lack of support from economic prosperity, the short- to medium-term operating trends of many consumer companies are not clear enough, making it difficult to enjoy valuation increases when investing in such targets, and the returns are relatively thin