Opal Cosmetics wary of Brexit uncertainty

Overseas Property | Tereza Cai 26 Aug 2019

Huizhou-based personal care provider Opal Cosmetics, known for its proprietary brand Opal, seeks to list in Hong Kong.

Guotai Junan Capital is the sole sponsor.

A Frost & Sullivan report says that Opal body care products, in terms of retail sales by brand in 2018, ranked fourth in Hong Kong with a market share of 5.8 percent, and were ninth in the mainland with mere 0.9 percent market share, as compared with the top brand of 10.3 percent market share.

Before the establishment of the investment holding company, Opal Cosmetics, in 2019, the company's history could be traced back to 1993 when Old Huizhou Zhaoting was set up.

It has developed its original brand manufacturing products, or OBM, under the Opal brand since the mid-1990s, and meanwhile, began its original equipment manufacturer business, or OEM, where the products are made for brand owners.

Its OEM customer base comprises brand owners such as Walgreens Boots Alliance, Wuhan Watsons Personal Care Stores, Shanghai Pehchaolin Daily Chemical, and Oba Cosmetics (Xiamen).

The OEM business accounted for 75.8 percent of its total revenue in the financial year ended March 31, 2019, while the OBM business made up the remainder.

All manufacturing is at two plants in Huizhou, Guangdong province, with an aggregate gross floor area of about 106,000 square meters.

Opal Cosmetics' target markets are the mainland, Hong Kong, Macau, Taiwan, and a few overseas markets.

For the OBM business, domestic sales accounted for 66.6 percent of the revenue in the financial year 2019, wherein Guangdong province made up 89.5 percent. Non-mainland revenue comprised the rest of 33.4 percent.

As for the OEM business, 57.6 percent of the revenue was from the mainland.

Frost & Sullivan estimates the retail sales value of personal care and beauty products in the mainland during the past three years grew by 18.12 percent to 419 billion yuan (HK$463.36 billion) in 2018 at a compound annual growth rate of 8.7 percent, while the company's domestic sales experienced a CAGR of 15.5 percent.

Opal Cosmetics says sales to the United Kingdom and other European countries amounted to 27 percent of total revenue in the financial year 2019, so the fluctuation of the currency exchange rate may affect sales. Moreover, its strategy to expand the OEM customer base in foreign markets may be impacted by Brexit.

Opal Cosmetics' total revenue grew by 14.6 percent to HK$784.7 million for the financial year 2018, and climbed by 20.54 percent to HK$945.9 million in the financial year 2019, representing a CAGR of 17.5 percent.

In particular, revenue from e-commerce platforms recorded a CAGR of about 46.5 percent during the three years.

Sales to the five largest customers accounted for 51 percent of total revenue, and the largest customer accounted for 20.7 percent in the financial year 2019.

Opal Cosmetics warns that if key customers were to substantially reduce orders, or were to terminate its business relationship, it may fail to obtain orders from other customers to replace any such loss.

Meanwhile, net profit fell by 14.99 percent to HK$119.73 million for the financial year 2018, due to a one-off gain on disposal of its interest in Opal Yi fang Industry in 2017, and an exchange loss of HK$6.2 million in 2018 with the appreciation of yuan.

Net profit jumped by 57.22 percent to HK$188.25 million for 2019, as its net non-core income increased by 234.7 percent from a year ago to HK$50.2 million in 2019. The income is mainly from non-recurring gain on transfer of trademarks of HK$15.6 million to an independent third party, and exchange gains of HK$11.8 million in 2019, resulting from the yuan's depreciation.

Opal Cosmetics plans to use the net proceeds to expand its two production facilities, and establish a new plant in eastern China. A part of the net proceeds will be used for promotion and marketing, while some will be for upgrading information technology structure. The rest will be for working capital and general corporate purposes.

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