Short-term earnings under pressure, but emerging brands and shareholder returns support maintaining OW

Overview

The report is J.P. Morgan’s earnings review of Proya Cosmetics Co., Ltd. (603605.SS). In 1Q26, the company’s revenue fell 2% YoY and earnings fell 6% YoY, remaining weak, but the revenue decline narrowed compared with previous quarters. The report believes short-term pressure mainly comes from slowing sales of the core Proya brand, especially due to a high base and intensified competition on the Tmall channel; however, ramp-up of emerging brands, recovery in offline channels, supply chain and formulation optimization that cushion cost pressure, and more proactive dividends and buybacks still support maintaining the OW rating.

Core views

The core view is that short-term earnings forecasts need to be revised down, but the medium- to long-term investment thesis remains intact. J.P. Morgan believes Proya is well positioned to continue gaining market share through its hero-product-driven strategy, its ability to adapt quickly to channel and marketing changes, and its diversified brand portfolio spanning skincare, color cosmetics, and hair and body care. The report forecasts 2025-2028 revenue and earnings CAGR of 9% and 11%, respectively, with operating margin rising from 16.9% in 2025 to 17.9% in 2028E.

Analysis framework

The report analyzes quarterly results, annual financial data, brand and channel performance, shareholder return plans, and a DCF valuation framework. On earnings, it focuses on comparing changes in revenue, margins, expense ratios, and net profit across 1Q26, 4Q25, and FY25; on operations, it focuses on recovery of the core brand, growth of emerging brands, optimization of Tmall and Douyin channels, and offline recovery; on valuation, it uses DCF and references 12-month forward P/E.

Methodology notes

• Valuation methodsDCF

  Discounted cash flow valuation

  The Rmb130 target price is based on DCF valuation, assuming WACC of 10.6%, a risk-free rate of 4.0%, an equity risk premium of 6.0%, a cost of equity of 12.6%, and a terminal growth rate of 2.5%.

• Earnings analysisYoY growth and margin breakdown

  Changes in revenue, expense ratios, and margins

  The report uses changes in revenue, gross margin, operating margin, net margin, and selling expense ratio in 1Q26, 4Q25, and FY25 to assess sources of earnings pressure and signs of recovery.

• Investment thesisBrand portfolio and channel strategy analysis

  Hero products, emerging brands, and channel adaptability

  The report breaks down the company’s growth drivers into recovery of the core Proya brand, ramp-up of emerging brands, optimization of operations on Douyin and Tmall, offline recovery, and overseas expansion, among other factors.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Proya (603605.SS)

  Research target

  Strengths

  A leading domestic cosmetics company with a hero-product-driven strategy, rapid channel adaptability, a diversified brand portfolio, and relatively high shareholder returns.

  Weaknesses

  The core Proya brand is under short-term pressure, the Tmall channel is affected by a high base and intensified competition, and a higher selling expense ratio is suppressing margins.

  Comparison

  The report believes the 1Q26 revenue decline narrowed versus 4Q25 and 3Q25, showing marginal trend improvement; however, performance was still weaker than previous expectations, so earnings forecasts were cut.

  Risks

  Higher-than-expected selling expenses, unsuccessful launches of new star products, weaker-than-expected brand strength improvement, and a weaker-than-expected retail environment.

• Emerging brand portfolio

  Growth driver

  Strengths

  Brands such as Off & Relax, Insbaha, and Awaken Seeds are growing rapidly, contributing more than 10% of 2025 sales, with some brands doubling or nearly doubling sales in 2025 or 1Q26.

  Weaknesses

  Emerging brands are still in the investment and scaling stage and remain highly dependent on marketing, channel expansion, and the pace of new product launches.

  Comparison

  Compared with the slowdown of the core Proya brand, emerging brands provide a second growth curve at the portfolio level.

  Risks

  Underperformance in brand upgrading, new product launches, or channel breakthroughs could weaken their growth contribution.

• Tmall and Douyin channels

  Key variables for operational recovery

  Strengths

  Tmall is focused on the 618 campaign, new product launches, and improving operating efficiency; Douyin reaches younger consumers through stronger content, optimization of mid-tier and long-tail KOL and KOC livestreaming, and new product promotion.

  Weaknesses

  The high base on Tmall and intensified competition remain the core sources of pressure.

  Comparison

  Douyin and content e-commerce are viewed as upside catalysts from channel innovation, while Tmall is more of a recovery variable.

  Risks

  Rising platform traffic costs, weaker-than-expected livestream conversion, or lower marketing efficiency.

Key data

• 1Q26 revenueRmb2,305mn, YoY -2%The decline narrowed compared with 4Q25 revenue YoY of -8%.
• 1Q26 attributable net profitRmb367mn, YoY -6%Core net profit fell 10% YoY, with a higher selling expense ratio dragging on earnings.
• FY25 revenueRmb10,597mn, YoY -2%FY25 attributable net profit was Rmb1,498mn, down 3% YoY.
• 2026/2027 earnings forecast revisionRevised EPS lowered from Rmb5.09/Rmb5.72 to Rmb4.09/Rmb4.65, respectivelyThe cuts of 19.6% and 18.7%, respectively, reflect intensified competition and long-term investment.
• Target priceRmb130, previous Rmb154Based on DCF valuation, implying about 28x 12-month forward P/E.
• Current priceRmb60.76As of the close on April 23, 2026.
• 2025 payout ratioabout 53%Higher than 30% in 2024; the company also announced an Rmb80-150mn buyback plan and has already executed more than Rmb100mn.
• 2025 to 2028E growth outlookRevenue CAGR 9%, earnings CAGR 11%Operating margin is expected to improve from 16.9% to 17.9%.
• 2024 market share4.0%The company is one of the leading domestic brands in China’s mass beauty market.

Impact & implications

The investment implication conveyed by the report is that the market needs to digest short-term pressure on the core brand and main online channels, but if emerging brands, Douyin content and livestream optimization, offline recovery, and the hero-product strategy deliver, the company may still re-enter a steady growth trajectory. The target price cut indicates a slower pace of earnings recovery, but maintaining OW shows the analyst believes the current valuation already fairly reflects short-term pressure.

Risks

• Selling expenses are higher than expected, leading to weaker profitability.
• New star products or the hero-product strategy fail to deliver successfully.
• Brand strength improvement falls short of expectations.
• The overall retail environment is weaker than expected.
• Recovery of the core Proya brand is slower than expected, especially if competitive pressure on the Tmall channel persists.
• Scaling emerging brands requires continued investment, and if expense efficiency declines it may drag on margins.

What to watch

• Progress toward the 2026 equity incentive targets of 5% YoY growth in revenue and earnings.
• Recovery performance of the core Proya brand during Tmall 618 and subsequent major promotions.
• Conversion efficiency of Douyin content marketing, mid-tier and long-tail KOL/KOC livestreaming, and new product promotion.
• Sales growth and profit contribution of emerging brands such as Off & Relax, Insbaha, Awaken Seeds, Timage, and Correctors.
• Whether offline channels can sustain the 29% YoY recovery trend seen in 1Q26.
• Dividend payout ratio, execution progress of share buybacks, and sustainability of shareholder returns.
• Whether the selling expense ratio declines and whether gross margin improvement can offset pressure from marketing investment.