Declining Revenue, Soaring Profits - Shanghai Jahwa's Jubilation and Concerns

On August 28th, Shanghai Jahwa Group, the owner of brands such as Herborist, Dr. Yu, Liu Shen, and Maxam, released its financial report for the first half of the 2023 fiscal year. After reading it carefully, the information disclosed reveals both intriguing insights and underlying challenges.

 

Financial Report Highlights:

In the first half of this year, Shanghai Jahwa achieved operating revenue of 3.629 billion yuan, a 2.3% year-on-year decrease, marking its lowest revenue since 2018. However, net profit reached 300 million yuan, surging by an impressive 90.90%, marking the highest growth rate in a decade. In the second quarter, Shanghai Jahwa began to experience a recovery in domestic business revenue, which grew by 10.20% year-on-year.

 

 

By brand category, the skincare business was the only segment among Shanghai Jahwa's four major business sectors that recorded growth. During the period, skincare revenue increased by 7.16% year-on-year, reaching 871 million yuan, accounting for 24.06% of the company's main business revenue. Dr. Yu saw growth exceeding 50%, and Herborist achieved both increased revenue and market share. Personal care and household cleaning business revenue decreased by 0.5% to 1.724 billion yuan, but it remains the highest contributor to the company's main business revenue, accounting for 47.59%. The maternity and baby care business saw a 10.91% decrease in revenue to 911 million yuan, making up 25.14% of the company's main business revenue. The cooperative brand segment, which includes Pianzaihuang (oral care), Femfresh, and Batiste, saw a substantial revenue decline of 19.37% to 116 million yuan.

 

 

Driven by the growth in skincare, Shanghai Jahwa's domestic business achieved 2.843 billion yuan in revenue in the first half of the year, with a 10.20% year-on-year growth in the second quarter. However, its overseas business experienced a 12.28% decline, with revenue reaching 786 million yuan. Shanghai Jahwa attributes this decline to factors such as increased inflationary pressure in the UK, intensified competition in the maternity and baby care category, and distributor inventory reductions.

 

 

By retail channels: Shanghai Jahwa's online business, including domestic and international segments, generated 1.318 billion yuan in revenue, accounting for 36.39%. In the second quarter, the revenue share of its online business increased to approximately 46%. During the important 618 shopping festival in the first half of the year, Shanghai Jahwa's online channel revenue across all brands grew by 34%, with Tmall channel increasing by 31%, Kuaishou channel by 275%, and Douyin channel by 270%. Simultaneously, its offline new retail business grew by approximately 34%, making up 26% of domestic offline business revenue, reaching a new record.

 

In the first half of this year, Shanghai Jahwa's research and development expenses amounted to 77.5285 million yuan, a year-on-year increase of 18.39%, with a 0.37 percentage point increase in research and development expense ratio. Operating costs in the first half of the year decreased from 1.489 billion yuan to 1.443 billion yuan compared to the same period last year. Sales expenses also decreased from 1.607 billion yuan to 1.580 billion yuan, and management expenses decreased from 319 million yuan to 303 million yuan.

 

ConCall:

 

With the decline in revenue and the surge in profits, Shanghai Jahwa's half-year performance is delightful but makes concerns at the same time. 

 

The delightful part is, the company's adjustment strategies in the first half of the year have yielded significant positive results, allowing it to increase profits even amidst the slow recovery of the domestic skincare market.

 

According to Shanghai Jahwa, the gross profit margin of the skin care business increased by 2.83 percentage points in the second quarter, which also drove the rapid growth of revenue from high-margin skin care products, which pushed the overall gross profit rate.

 

Based on the financial report, Shanghai Jahwa's profitability recovery can be attributed to several factors:

 

In the first half of the year, several brands under Shanghai Jahwa underwent brand image upgrades, new product launches, and upgrades to their star products. First and foremost, they enhanced their market recognition through celebrity endorsements and IP marketing, thereby boosting brand reputation. For instance, after announcing Bai Yu as the brand ambassador in March, Dr. Yu’s new product, the Skin Barrier Repair Moisturizing Cream, quickly became a rising star product, contributing to Dr. Yu’s double-digit growth.

 

Herborist officially announced Cheng Yi as the brand ambassador (facial mask category) in April. In collaboration with Tmall's Big Day, the brand secured the top spot in Tmall's beauty sales ranking. Data shows that within 24 hours of Herborist announcement of Cheng Yi, their total brand sales GMV surpassed 13 million yuan.

 

 

Men's skincare brand gf partnered with Glory of Kings and KPL champion team eStarPro. Their new product, the " Moisture All-Nighter Cream," was released on Tmall's Big Day in a collaborative gift box with Glory of Kings. On the same day, it claimed the top spot in the men's skincare gift box sales category. Simultaneously, Vive collaborated with the Soong Ching Ling memorial residence in Shanghai's "Soong Cultural and Creative" brand to release a gift box, whick entering Tmall's Top 4 new skincare gift boxes after its launch.

 

Then, the increased research and development expenses for the group in the first half of the year also manifested in new product launches for their personal care and household cleaning brands. For example, Liushen, which used to be limited mainly by seasonality, introduced two portable products, the "Mosquito-Repelling Egg" and the "Cooling Egg". Fueled by the "Summer Heat Economy," these two new products achieved over 220,000 sales on e-commerce platforms during the 618 shopping festival, claiming the second spot on Tmall's hot-selling mosquito repellent products list. Additionally, Giving brand launched the Soothing Cream and partnered with Li Na as its brand ambassador, and also giving a fresh upgrade to its Sunscreen Lotion.

 

 

Furthermore, considering the pricing of these new products, generally higher pricing implies higher profit margins for individual products. Therefore, driven by multiple factors such as celebrity endorsements, IP marketing, and recognized product efficacy, the increase in product sales also boosted the overall gross margin level of Shanghai Jahwa.

 

Lastly, in the first half of the year, Shanghai Jahwa managed to reduce its total operating costs, sales expenses, and management expenses, contributing to improved profitability.

 

However, Shanghai Jahwa still has its concerns.

 

On one hand, despite reducing operating costs and increasing R&D expenditure in the first half of the year, the overall pace of product development for brands under Shanghai Jahwa still lags behind major domestic competitors. The lack of star products with strong reputations means these brands are at risk of being forgotten by consumers. In a time of too much information and product offerings, catering to evolving consumer trends and continuously innovating star products has become essential to attracting consumers.

 

Taking Proya as an example, its frequent product launches, alignment with the trend of "functional skincare", and strong connection to the "Morning C, Evening A" skincare trend have driven its impressive performance over the past two years. During this year's Tmall 618 event, Proya was the only domestic cosmetics brand to enter the Top 5 brands. According to Proya's financial report for the first half of the year, its R&D expenditure was approximately 92 million yuan, a year-on-year increase of 49.87%, with an absolute increase of 30.45 million yuan. The R&D expenditure ratio increased from 2% at the end of 2022 to the current 2.52%.

 

In comparison, Shanghai Jahwa lags behind both in R&D investment and the market performance of its brands than Proya.

 

On the other hand, while Shanghai Jahwa's brand matrix has distinct positioning, it lacks the strength to break through to a higher-end market and compete directly with international brands. In the mid-to-high-end market, Shanghai Jahwa's brands’ states face the awkward situation of being "neither here nor there".

 

Currently, Shanghai Jahwa has 9 brands, with seven of them in the skincare sector, including the mid-to-high-end Herborist and Vive, the efficacy-focused Dr. Yu, gf targeting the men's market, and the baby skincare brand Giving.

 

 

According to a previous report by S&P Consulting, in the domestic mass cosmetics market, Procter & Gamble (P&G) has the largest market share at 12.1%, followed by L'Oréal Group at approximately 8.9%. Domestic brands Pechoin, Jialan Group, Shanghai Jahwa, and Shanghai Shangmei have a certain market share, accounting for 3.9%, 3.7%, 2.3%, and 1.9%, respectively. S&P Consulting also pointed out that China's mid-to-high-end cosmetics market is expected to reach around 180 billion yuan this year, with a growth rate of 20%. Consequently, domestic brand market share is expected to continue rising.

 

This means that, at present, Shanghai Jahwa has the opportunity to make a comeback in a market where its mid-to-high-end cosmetics market share lags behind that of companies like Proya, Marumi Group, and Syoung Group. During the first quarter of this year, at Shanghai Jahwa's 2023 strategic conference, its senior executives stated that they would drive brand value through professionalism, high-end positioning, and an experiential approach.

 

 

In addition to gaining attention from the mid-to-high-end market, Shanghai Jahwa needs to move further toward the luxury market. Although the domestic cosmetics industry overall had a weak recovery in the first half of this year, particularly in the luxury beauty market, the overall consumption trend of the domestic cosmetics market is still moving toward higher-end products.

 

According to the "2023 China Consumption Trends" report, China's beauty and cosmetics consumer market will continue to maintain a high-end trend. With stable income growth, luxury beauty brands will have more significant development opportunities. Therefore, how Shanghai Jahwa can encourage its brands to introduce more appealing star products and establish a high-end market image is currently the company's main challenge, and it will determine whether it can seize the opportunities for domestic brands.

 

In the past few years, domestic brands have gradually established a competitive advantage through the improvement of product research and development capabilities and brand image building in recent years, making them increasingly preferred by consumers. The combination of high-end and mass-market skincare products is becoming the new norm for young consumers.

 

Domestic brands are experiencing their best times. Whether Shanghai Jahwa can seize this opportunity and win the fierce domestic brand war depends on its subsequent efforts in research and development and reputation accumulation.

 

As of the closing on the 30th, Shanghai Jahwa's share price decreased by 0.02% to 26.54 yuan per share, with a market value of approximately 18 billion yuan. In contrast, following several securities firms giving "buy in" ratings after the release of its first-half financial report, Proya’s share price increased by over 8%, with a current market capitalization of approximately 42.63 billion yuan, more than twice of Shanghai Jahwa.