COSMOS CHEMICAL(300856)1H23 EARNINGS REVIEW：EARNINGS BEAT HIGH-VALUE SUNSCREENS DRIVING STRONG GROWTH

　　In 2Q23, Cosmos Chemical achieved a YoY revenue growth of approximately 48%, also realizing the first positive QoQ growth in 2Q since 2020. The attributable net profit (ANP) surged by 114% YoY and 19% QoQ in the quarter, extending the trend of consecutive QoQ growth for seven quarters since 4Q21. The gross profit margin (GPM) reached a historic peak at 49.67%. The Company has established a solid performance foundation through its traditional sunscreens, while also experiencing growth by gradually expanding the production capacity of new high-value sunscreen agents. Furthermore, its expansion into the personal care raw materials, such as amino acid surfactants and the anti-dandruff agent PO, is progressing as planned, enriching the product pipeline. The continuous and rapid expansion of the research and development (R&D) investment and team fuels the Company's long-term development through innovation.We assign 30x 2023E PE, raise the TP to Rmb117 (from Rmb90), and reiterate the “BUY” rating.
　　Continuous surge in high-value product volumes drives revenue and profits; sequential growth in 2Q validates strong growth trajectory.
　　In 1H23, Cosmos Chemical achieved operating revenue of Rmb1.19bn (+45.09% YoY). The GPM surged by 19.24ppts YoY to 49.36%. The ANP soared by 138.69% YoY to Rmb351mn, and the NPM reached 29.45% (+11.55ppts YoY). Additionally, the Company generated operational cash flow of Rmb401mn (+207.16% YoY). In 2Q23, it attained operating revenue of Rmb602mn, reflecting a YoY increase of 47.89% and a sequential growth of 2.50%. The GPM stood at 49.67%, marking a YoY ascent of 15.63ppts and a sequential gain of 0.63ppts. The 2Q23 ANP reached Rmb190mn, exhibiting a YoY surge of 114.23% and a sequential increase of 18.77%. The NPM was 31.59%, showing a YoY growth of 9.78ppts and a sequential uptick of 4.33ppts. The quarterly operational cash flow amounted to Rmb229mn, a YoY growth of 58.37% and a sequential rise of 32.97%. The Company achieved positive 2Q revenue growth on a sequential basis for the first time since 2020, and its GPM reached an all-time high. The net profit has shown continuous sequential growth for seven consecutive quarters since 4Q21, primarily driven by increased sales of cosmetic ingredients and their raw materials. The sustained growth in quarterly revenue is attributed to the elevated sales of high-margin, new-generation sunscreen products, propelling the sequential increase in GPM.
　　Ascending production capacity of sunscreens contributes to core increment; personal care materials expansion unveils growth potential.
　　In 1H23, Cosmos Chemical's revenue from cosmetic ingredients and raw materials business reached Rmb1.045bn, exhibiting a substantial growth of 60.33% YoY. The GPM stood at 53.35%, marking a rise of 21.12ppts YoY.
　　1) Rising high-value product capacity usage: The Company's cosmetic ingredients and raw materials business witnessed a remarkable YoY surge in GPM, surpassing the 50% mark. This underscores the continuous enhancement of production capacity utilization rates and ample profit potential for high-value products like P-S, PA, EHT, and others. The sustained surge in new-generation sunscreen agents will further propel the Company's revenue growth.
　　2) Expanding personal care domain as scheduled: Cosmos Chemical's 12,800t/a amino acid surfactant project and 3,000t/a anti-dandruff agent PO project have entered their concluding stages in 1H23. According to the Company's convertible bond prospectus, the annual output value of amino acid surfactants after achieving full capacity could reach approximately Rmb255mn. As per calculations in our prior report “Cosmos Chemical (300856.SZ) In-depth Tracking Report_To be a world-leading personal care material provider” (May 3, 2023) on the new anti-dandruff agent PO, the output value could approach Rmb600mn post full production. With the gradual commissioning of new product lines, the Company's product portfolio will diversify, offering new growth opportunities for future development.
　　3) Overall steady outlook for the fragrance business: In 1H23, the Company's fragrance business achieved operating revenue of Rmb137mn, witnessing a slight decline of 6.82% YoY. The GPM was 21.88%, reflecting a decrease of 3.27ppts YoY. In recent years, the Company's core capital expenditures have primarily focused on high-value sunscreen projects, resulting in relatively lower investment in the fragrance business. Given the concentrated downstream landscape and stable competitive environment of the fragrance products, the overall outlook may to remain stable.
　　4) Marginal GPM benefit from cost reduction: From the beginning of 2023 to the middle of the year, crude oil prices dropped by approximately 8%. According to sensitivity calculations in our prior report “Cosmos Chemical (300856.SZ) In-depth Tracking Report_To be a world-leading personal care material provider” (May 3, 2023), assuming other factors remain constant, an 8% drop in crude oil prices could lead to a slight increase of around 1% in the GPM.
　　Core growth driven by overseas markets, and direct sales + distribution dual sales channels expansion:
　　1) Overseas markets spearhead core growth, and domestic business shows steady improvement: In 1H23, Cosmos Chemical's overseas revenue amounted to Rmb1.075bn, showing a YoY increase of 52.24%.The GPM reached 50.83%, marking a rise of 20.02ppts YoY. Concurrently, domestic business revenue reached Rmb116mn, reflecting a modest growth of 1.01% YoY. The GPM stood at 35.69%, indicating an increase of 9.78ppts YoY.
　　2) Direct sales + distribution co-driving momentum: In 1H23, the Company achieved direct sales revenue of Rmb1.062bn, witnessing a notable YoY growth of 43.92%, while distribution revenue reached Rmb128mn, presenting a substantial surge of 55.54% YoY. The Company employs a direct sales model for large and sizable end customers, while adopting a distribution model for customer groups with smaller individual demands. Historically, Cosmos Chemical prioritized large clients and entered the supply systems of major multinational cosmetic corporations like Procter & Gamble, L'Oréal, and Johnson & Johnson. As the Company's industry position and global recognition continue to rise, it swiftly harnesses the potential for downstream penetration. The Company rapidly expands its market share among medium and small-sized clients, propelling revenue growth and a continuous optimization of GPMs.
　　Commitment to R&D driving growth, R&D team expansion, and light increase in sales and administrative expense ratios.
　　1) Sustained investment in R&D, continuous expansion of R&D personnel: The Company consistently enhances its R&D capabilities, focusing on existing core technologies and strategic development to conduct market-oriented exploration of new products and processes. In 1H23, the Company's R&D expense ratio reached 5.06%, marking a slight increase of 0.82ppts from a year ago. In 2Q23, the R&D expense ratio stood at 4.80%, a minor decrease of 0.07ppts YoY. Assuming an average salary per R&D personnel maintained at the 2022 level, calculated based on the R&D personnel compensation within the 1H23 R&D expenses, the number of R&D personnel could be around 400, reflecting a rise of approximately 128 personnel compared to the end of 2022.
　　2)Slight uptick in expense ratios due to factors like employee compensation and stock-based payments: In 1H23, the Company's sales expense ratio was 1.63%, experiencing a marginal YoY increase of 0.76ppts. The administrative expense ratio reached 7.51%, +1.55ppts YoY. In 2Q23, the sales expense ratio was 1.30%, +0.45ppts YoY. The administrative expense ratio was 7.71%, +1.42ppts YoY. Overall, the slight increase in the sales expense ratio can be attributed to rising employee compensation and increased marketing expenditures. Similarly, the marginal increase in the administrative expense ratio can be linked to employee compensation and stock-based payment factors.
　　Potential risks: Fluctuations in product prices; slower-than-expected release of production capacity; less-than-expected new product sales; intensified industry competition; fluctuations in raw material prices; fluctuations in exchange rates.
　　Profit forecast, valuation, and rating: In 2Q23, Cosmos Chemical achieved a YoY revenue growth of approximately 48%, also realizing the first positive QoQ growth in 2Q since 2020. The ANP surged by 114% YoY in the quarter and 19% QoQ, extending the trend of consecutive QoQ growth for seven quarters since 4Q21. The GPM reached a historic peak at 49.67%. The Company has established a solid performance foundation through its traditional sunscreens, while also experiencing growth by gradually expanding the production capacity of new high-value sunscreen agents. Furthermore, its expansion into the personal care sector's raw materials, such as amino acid surfactants and the anti-dandruff agent PO, is progressing as planned, enriching the product pipeline. The continuous and rapid expansion of the R&D investment and team fuels the Company's long-term development through innovation. Considering the scale and profit growth driven by the Company's new sunscreen agents, we maintain our revenue forecasts for 2023E/24E/25E at Rmb2.532bn/3.419bn/4.440bn, while raising the net profit forecasts to Rmb663mn/932mn/1,205mn (previously at Rmb601mn/848mn/1,149mn). Taking into account comparable overseas companies, with Symrise (SY1.DE) trading at 32x 2023E PE (Bloomberg consensus), and domestic counterparts, with Bloomage Biotech (688363.SH) at 37x 2023E PE (Wind consensus), we assign Cosmos Chemical 30x 2023E PE and revise the target price to Rmb117 (previously Rmb90). Reiterate the "BUY" rating.
【免责声明】本文仅代表第三方观点，不代表和讯网立场。投资者据此操作，风险请自担。

   【免责声明】本文仅代表第三方观点，不代表和讯网立场。投资者据此操作，风险请自担。