New share option plan announced
- Proya announced the launch of a second equity incentive scheme for 101 core employees (3.6% of total full time employees) for FY22F–24F.
- We believe this scheme will further motivate the management team to accelerate the company’s market penetration on live-streaming platforms and gain market share.
- We now forecast that the company’s sales will grow by 15%–20% yoy in 2Q22F and 22.8% yoy in FY22F.
- Reiterate Add with an unchanged DCF-based TP of Rmb175.
Share option plan to drive medium-term growth
The company launched its first share incentive scheme in Jul 2018, and it was completed in 2020. It led to the company’s sales and net profit achieving a CAGR of 28% and 33% yoy in FY18–20, respectively. The Company has grown rapidly in the e-commerce channel; its online sales contribution improved from 36% in FY17 to 70% in FY20 and 85% in FY21. On 8 Jul, the Company announced the launch of a second equity incentive scheme for FY22F–24F. In this scheme, the Company will grant share options to 101 employees, including top and middle level management and other core employees, for a total of 2.1m shares (0.75% of the total number of shares), with a grant price of Rmb78.56 per share. This share option plan requires that both sales and net profit for FY22F–24F grow no less than 25%, 23% and 22% yoy, respectively in FY22F–24F. The related expenses for the plan will be Rmb163m, which will be amortized by annual amounts of Rmb39.5m, Rmb74.5m, Rmb35.9m and Rmb12.6m in FY22F–25F, respectively. We expect this option plan to highly motivate the employees to accelerate the product structure upgrades, further improve the Company’s brand power, and build a strong market position on live-streaming platforms, like TikTok and Kwai.
Successful customer-oriented product strategy
Management said the performance of Proya’s star products improved in this year’s 618 online shopping festival, and its sales contribution from Tmall has already surpassed last year’s 70% for the Double 11 shopping festival. The Proya brand’s Double Anti-aged Essence and Facial Mask, Day C and Night A Serum set, and Red-Ruby Serum and Hyaluronic Acid Serum were the most popular with consumers during the festival. In early July, the Company launched the Double White Serum from Proya Time Lab, which has the double features of a full face whitening tube and a local acne printing tube, providing consumers with a more refined whitening scheme. The Company will upgrade its existing star products and launch new products, such as facial masks. Proya has a good understanding of the needs of Chinese consumers and consistently launches popular products to cater for the consumption upgrade trend. We expect the Company’s ASP and gross margin to further improve in the next three years.
The Timage brand is in the exploration stage
The Timage makeup brand also achieved rapid sales growth in this year’s 618 online shopping festival. Timage products focus mainly on base makeup, and their main price range is Rmb150–200 per unit. Tmall and TikTok are the two major channels for Timage. The Company cooperates with middle level KOLs and has strengthened its own self-livestreaming team. We expect the Timage brand to turn profitable in FY22F.
Reiterate Add with an unchanged DCF-based TP of Rmb175
We reiterate our Add rating for Proya, as we believe it will continue to gain market share through a product mix upgrade and online channel expansion. The company’s customer-oriented product-development strategy has improved its overall ASP and margins. We use DCF valuation to derive TP (WACC:9% and Terminal growth rate of 3%). Downside risks include any quality issues and a slowdown in cosmetics consumption demand.