High growth from emerging brands, but the Proya flagship brand and marketing spending weigh on near-term performance

Overview

This report is Morgan Stanley's earnings review of Proya Cosmetics Co., Ltd. (603605.SS). The title emphasizes that “emerging brands are the bright spot, but the flagship brand is under pressure.” The company's revenue in 2025 and 1Q26 both declined slightly year over year, mainly because the Proya flagship brand faced pressure on Tmall, in online distribution, and in traditional offline channels; at the same time, the company is seeking supplemental growth through emerging brands, color cosmetics, and hair care.

Core views

The core view is that near-term fundamentals are diverging: on the one hand, the Proya flagship brand/skincare business is still facing sales pressure, with 2Q26 expected to remain down by a high-single-digit to about 10% year over year; on the other hand, emerging brands such as OR, Ins Baha, Hapsode, and Correctors are growing rapidly, and new color cosmetics launches and the hair care business are expected to become growth drivers for the rest of 2026. Gross margin hit a high, supported by pricing discipline, supply chain optimization, and the mix uplift from emerging brands, but rising A&P investment is weighing on operating profit, with operating profit down 16% in 4Q25 and down 22% in 1Q26.

Analysis framework

The report assesses the company based on its 2025 and 1Q26 financial results, quarterly operating data, brand and channel performance, changes in expense ratios, management's 2026 targets, and the Morgan Stanley ModelWare forecasting framework; valuation uses 21x 2026E P/E as the base-case scenario.

Methodology notes

• Valuation methodP/E

  Base-case valuation

  The base case uses 21x 2026E P/E; the report forecasts 2025-2027 sales and earnings CAGR of 10% and 9%, respectively.

• Financial forecastingMorgan Stanley ModelWare

  Earnings forecasting framework

  Unless otherwise specified, the main financial metrics in the report are based on the Morgan Stanley ModelWare framework.

• Market consensus expectationsRefinitiv Estimates

  Consensus expectation data

  The report notes that consensus expectation data is provided by Refinitiv Estimates, and some metrics are based on consensus methodologies.

Asset mapping & comparison

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

• Proya Cosmetics Co., Ltd. (603605.SS)

  Covered name; A-share beauty and personal care company

  Strengths

  Strong growth in emerging brands, with record-high gross margin in 2025; new color cosmetics launches and the hair care business have the potential for accelerating growth; the target price implies substantial upside relative to the current share price.

  Weaknesses

  The Proya flagship brand is under pressure on Tmall, in online distribution, and in traditional offline channels; rising A&P investment has increased the operating expense ratio and dragged down near-term operating profit.

  Comparison

  The report's sector view is In-Line and the stock rating is Overweight, implying better expected returns than the average across covered names, while the overall sector is expected to perform broadly in line with the benchmark.

  Risks

  Intensifying industry competition, market share loss, declining marketing ROI, unstable management, and new product ramp-up falling short of expectations.

Key data

• 2025 revenueRmb10.6bnDown 2% year over year and 5% below Morgan Stanley's estimate, mainly due to weak 4Q Proya sales.
• 1Q26 revenueRmb2.3bnDown 2% year over year and broadly in line with expectations.
• 2025 gross margin73.3%A record high, driven by disciplined pricing, supply chain optimization, and the high-margin mix of emerging brands.
• 2025 operating expense ratio56.4%Up 2.4 percentage points year over year, with A&P investment broadly increasing across brands.
• 2025 net margin14.1%Basically flat year over year; management's target is to keep net margin stable in 2026.
• 4Q25 operating profit change-16% y/yAffected by weak sales and increased marketing investment.
• 1Q26 operating profit change-22% y/ySales pressure and marketing investment continued to weigh on operating profit.
• OR sales growth2025年+102%，1Q26超过+100%Two new product lines launched in September 2025 and early 2026 performed well, contributing more than 30% and 10% of brand revenue, respectively.
• Target priceRmb90.00Equivalent to about 49% upside versus the closing price of Rmb60.35 on April 21, 2026.

Impact & implications

The investment implication is that Proya still has medium-term room to improve its brand portfolio and margins, so Overweight is maintained; however, in the near term investors need to watch whether flagship brand sales stabilize and whether higher A&P investment can translate into effective growth. If emerging brands continue to scale up, gross margin remains high, and expense ratios are controlled, valuation support will strengthen; otherwise, industry competition, flagship brand share loss, or management instability could weigh on earnings and the target multiple.

Risks

• Intensifying industry competition may limit the company's goal of improving operating margin.
• The rise of emerging players in the mass-market price segment could lead to market share loss for the Proya flagship brand.
• Management instability could affect the acceleration of sales and earnings growth in 2026-2027.
• Continued increases in A&P investment with insufficient conversion efficiency could weigh on margins.
• If declines in Proya/skincare sales persist longer than expected, the offsetting effect of emerging brand growth on the group will weaken.

What to watch

• Whether 2Q26 group sales are roughly flat as expected, and whether the decline in Proya/skincare sales narrows.
• Whether the skincare business can stabilize year over year in 2H26 on a low base.
• Whether emerging brands such as OR, Ins Baha, Hapsode, and Correctors can sustain high growth.
• Sales acceleration after new color cosmetics launches, and whether the hair care business maintains exponential growth.
• Changes in A&P expense ratio and marketing ROI, especially in Douyin self-operated livestreaming, high-ticket bundled sets, reduced reliance on top influencers, and the effectiveness of new product launches.
• Whether the high gross margin can be sustained, and whether supply chain optimization and selective price increases continue to contribute to margins.