Mao Geping's Hong Kong IPO Gets Lift From Regulatory Nod

Key Takeaways:

• Mao Geping’s Hong Kong IPO has been cleared by the China Securities Regulatory Commission, but must still be approved by the Hong Kong Stock Exchange
• The leading cosmetics maker’s profit and revenue both rose about 40% in the first half of this year, as the company reportedly plans to raise up to $300 million in its listing

By Edith Terry

In the Sichuan variant of classical Chinese opera, the art of bianlian, or “face changing,” is a stunning trick that sees an actor’s painted mask seemly change with just a twist of the head. Now, one of China’s best-known makeup artists, Mao Geping, himself a former star of the craft, is moving closer to changing the face of his company, Mao Geping Cosmetics Co. Ltd with a transformative IPO that Chinese media say could raise as much as $300 million.

Leading Chinese investment bank CICC is the deal’s sole sponsor, suggesting it will be targeted mostly at Chinese and regional Asian investors who may be familiar with Mao’s work, both as a makeup artist and cosmetics entrepreneur.

Mao Geping cleared the latest hurdle in its long march to market on Nov. 7, when the China Securities and Regulatory Commission (CSRC), the Mainland’s securities regulator, officially registered the listing on its website. The Mainland regulator must clear all such overseas listings by Chinese companies, and in this case the company must also still pass its Hong Kong listing hearing.

The Hong Kong listing is a sort of “Act 2” for Mao Geping, which tried but failed twice to list on China’s domestic A-share market in Shanghai in 2016 and 2021. The company later shifted its sights to Hong Kong with its filing of an IPO application in April, which it updated with a new filing on Oct. 9.

Despite China’s “consumption downgrade,” which is disproportionately hitting discretionary products like cosmetics, Mao Geping seems to have a good story to tell in its latest filing that includes financial information for the first half of this year.

Its revenues for the six-month period increased 41% to 1.97 billion yuan ($272 million) from 1.4 billion yuan in the year-ago period. Its profit rose by an identical amount to 492.5 million yuan from 349.3 million yuan over the same period, boosted by fat gross profit margins of about 85% and net margins of about 24%.

As the only domestic name among China’s top 10 premium beauty brands, with 1.8% of the market, and the second-leading color cosmetics company among the top five domestic brands, with 6% of the market, Mao Geping is sitting pretty. The company operates in a Chinese beauty market that was worth 579.8 billion yuan in 2023, according to third-party market data in the latest listing document.

The premium segment, where Mao Geping sits, has been growing faster than the mass market, worth an estimated 194.2 billion yuan in 2023. In terms of product type, China’s color cosmetics market was worth 116.8 billion yuan in 2023, while skincare products was far larger at 463 billion. Within Mao Geping’s own product portfolio, color cosmetics accounted for nearly three-quarters of its total revenue in the first half of this year, while most of the rest came from skincare products.

Domestic Shift

China’s cosmetics industry has been shifting toward domestic brands in recent years, driven both by nationalistic sentiment and growing demand for lower-priced products, which is playing to famous local names like Mao Geping. That trend could continue, boding well for the company, as Chinese consumers grow increasingly cautious with the nation’s slowing economy.

As we noted earlier, Mao Geping himself is a master at the art of face changing in the real world. After a long career in the opera business, he has transformed himself at age 60 into an industry icon. His more recent achievements include overseeing the makeup for Chinese athletes at the Paris Olympics as their official beauty service provider, and serving as the makeup artist for Jacque Rogge, president of the Olympic Committee at the Beijing Olympics in 2008.

His earlier career dates back to the 1980s after he graduated from the Zhejiang Vocational Academy of Art in 1983 and worked as an opera performer with the Zhejiang Yue Opera Troupe, as well as an occasional film actor, until 1998. When he set up the predecessor to what would eventually become his namesake company, he also established an Institute of Makeup Artistry, run by his wife, Wang Liqun, an actress in Mao’s troupe.

His company’s biggest asset is arguably Mao himself, including his name, personality and product design expertise that are key factors behind the company’s success. That could become a potential risk factor later if he and his company later become involved in any disputes, or if Mao’s reputation suffers any future damage.

The company’s fast growth appears to be putting some strain on its finances. Its cash fell from 1.14 billion yuan at the end of last year to 552.9 million yuan at the end of June, primarily due to the payment of a dividend. Meantime, the company’s marketing and promotion expenses have been escalating, nearly doubling from 29.2% of its selling and distribution costs in 2021 to 46.5% in the first six months of 2024.

In addition to relying on Mao himself, his company is also a very family affair. Its board and major shareholders consist largely of his family members. And the company could face challenges as Mao himself moves closer to retirement, which could deprive the company of his personal touch, together with his 6 billion interactions on Weibo and 4.8 billion interactions on Douyin, China’s equivalent of TikTok.

While most of its peers do their own product development and spend heavily on R&D to keep up with ever-changing market fads, Mao Geping doesn’t report any consolidated expenditures for R&D. That said, some of its subsidiaries appear to be R&D service providers, and the company says it guides “overall direction while engaging third-party ODM providers to conduct detailed R&D and product design work,” according to the listing document.

In fact, the company appears to be getting set to become more active in its own product development and production, saying it plans to use IPO proceeds to build an R&D center in Hangzhou as well as overseas. It also plans to use some funds to build a 100 million yuan production facility in Hangzhou, its headquarters, to reduce dependence on its ODM and OEM suppliers.

“This approach allows us to ensure production flexibility and scalability while we develop our own manufacturing expertise,” the company said.

In a maturing and highly competitive market, both Mao Geping and his company may need some luck and good timing to take advantage of recent positive market sentiment for the IPO. Price-to-sales (P/S) ratios for cosmetics providers vary widely, from just 0.61 and 1.91 for domestic peers Yatsen YSG and Shanghai Chicmax (2145.HK), respectively, to as much as 4.23 for global giant L’Oréal (OR.PA).

A P/S of about 2, putting the company at the head of its Chinese class but behind the global giants, would value Mao Geping at about 8 billion yuan, or just over $1 billion. That would be lower than Chicmax’s $1.6 billion but ahead of the $400 million for the struggling Yatsen.

This article is from an unpaid external contributor. It does not represent Benzinga's reporting and has not been edited for content or accuracy.