Strong earnings growth in 2Q23
- Proya announced net profit of Rmb460m-490m for 1H23 (up 55-65% yoy), above our expectation, on the back of strong sales during the 618 shopping festival.
- We now estimate net profit grew 82-104% yoy in 2Q23F to Rmb252m-282m; Proya is slated to release its detailed interim results on 31 Aug.
- We now forecast Proya’s sales to grow by 26.7% and its net profit by 32.3% in FY23F, mainly driven by increased sales contribution from its star products.
- Reiterate Add with an adjusted DCF-based TP of Rmb156.
Strong net profit growth in 2Q23 with better margin improvement
We think such strong earnings growth in 2Q23 was mainly driven by strong sales of its core products in this year’s 618 shopping festival (held annually, typically over 1-18 Jun), with product discounts offered this year lower vs. last year as well. We think that as customer awareness of Proya’s star products have improved over the past two years, the discounts offered for them during the 618 shopping festival had also been reduced, fetching better ASPs and resulting in higher contribution to Proya’s overall sales in 2Q23F. We forecast improvement in Proya’s FY23F GPM and NPM to 70.2% and 13.3%, from 69.7% and 12.8%, respectively, in FY22.
Star products maintaining stable 618 sales growth trend
According to Proya’s website, during this year’s 618 shopping festival, its gross merchandise value (GMV) on Tmall, Tiktok and JD.com platforms grew 80%+, 80%+, and 70%+, respectively, and it achieved first place in the domestic beauty category of all three platforms’ rankings in terms of GMV. Its Red Ruby face cream sold over 50k pieces (GMV growth vs. last year’s 618: 333%); its Double-Anti facial mask sold over 5m boxes (GMV: +317%); its serum products under the Hyaluronic Acid, Double-Anti and Red Ruby series sold 30k (GMV: +56%), 1m (GMV: +39%) and 50k pieces (GMV: +21%), respectively. Its popular package products, Morning C and Night A, maintained strong sales growth momentum and sold over 40k pieces (GMV: +43%).
Profitability of new brands to improve
During this year’s 618 shopping festival, the GMV of Proya’s makeup brand Timage was 50%+ and 70%+ higher than last year’s event on the Tmall and Tiktok platforms, achieving the 2nd and 4th place in the respective platforms’ domestic makeup rankings, in terms of GMV. The GMV of the company’s new shampoo brand Off & Relax (O&R) was 300%+ higher this year vs. last year’s event on the Tmall platform. Proya has optimised the products under its Hapsode brand, resulting in GMV growth of 30%+ in Tmall and 130%+ on Tiktok vs. last year’s 618. We expect the NPM of Timage, O&R and Hapsode brands will improve yoy in FY23F.
Reiterate Add with an adjusted DCF-based TP of Rmb156
We lift our FY23F-25F net profit by 3.5-3.7% to reflect Proya’s stronger sales growth outlook. We believe its established online channel operations, particularly live-stream platforms, will continue to deliver strong sales growth, and that its star SKU products have gained widespread recognition, strengthening its brand awareness. As such, we reiterate Add. Our TP is derived from a DCF valuation with 9% WACC and a 3% terminal growth rate. Risks include intensified price competition impacting its margins. On 29 May 2023, Proya completed its FY22 equity distribution plan; using its capital reserves, it distributed to shareholders four new shares for every 10 existing shares. With this and some bond conversions, its total shares outstanding rose 40%, diluting its share price and our TP.
Valuation and risks
We raise our net profit forecasts for FY23F-25F by 3.5-3.7%, to reflect Proya’s stronger sales growth outlook. We reiterate our Add rating as we believe Proya’s established online channel operations, particularly on the live-stream platforms, will continue to deliver strong sales growth, supported by strengthening brand awareness of its star SKU products (more widespread recognition). Our TP is derived from a DCF valuation with 9% WACC and a 3% terminal growth rate. Risks include intensified price competition which could impact the company’s margins.
Downside risks include 1) strong price competition, which might hurt the company’s margins; 2) the gradual recovery in its offline channel may divert online customer traffic to offline stores, currently a weak spot for Proya; and 3) international brands may increase their marketing investments in China, which could impact Proya’s sales growth.
Potential re-rating catalysts include 1) an increase in the contribution from star SKUs which could lead to a further improvement in its GPM; and 2) an improvement in the rate of repeat purchases on TikTok which could further boost sales growth.
Proya’s total shares outstanding increased from 283.5m as at end-Mar 2023 to 396.9m at end-Jun, up 40%, due to the following reasons: 1) On 8 Dec 2021, Proya issued 7.52m convertible bonds totaling Rmb752m maturing in 6 years on 7 Dec 2027. Over the period of 1 Apr to 20 Jun 2023, 117 of these bonds were converted into A shares of the company. As at end-Jun 2023, the amount of convertible bonds yet to be converted was Rmb750m, accounting for 99.88% of the total issue; 2) On 29 May 2023, the company completed its equity distribution plan for FY22, whereby it using its capital reserves, it issued to all shareholders four new shares for every 10 existing shares own. This raised its total shares
outstanding by 113.4m.
Factoring the increase in Proya’s total outstanding shares (share price dilution) and our net profit forecasts for FY23F-25F, our DCF-based target price is now at Rmb156, from Rmb213 previously.