Investors worn down by volatility in semiconductor shares are turning to cosmetics stocks, drawn by exports and earnings growth that show up in the numbers and by an export market that is shifting rapidly from China toward the United States and Europe. Analysts say the move goes beyond a simple rotation of money out of chips and into cosmetics, and that cosmetics stocks are establishing themselves as a new group of growth shares.
Samsung Electronics (005930.KS) and SK hynix (000660.KS) fell 2.1% and 2.5% respectively this month, while cosmetics makers Kolmar Korea rose 57.5% and Cosmax gained 55.1%, according to the Korea Exchange on the 25th.
Rapid earnings growth is the main driver. Cosmax topped 500 billion won in quarterly revenue for the first time, while Kolmar Korea became the first South Korean original development manufacturer to post more than 100 billion won in quarterly operating profit.
Behind the record results is steep export growth. Cosmetics exports came to $7 billion, or about 9.71 trillion won, in the first half of this year, up 27.3% from a year earlier and the highest on record. South Korea has become the world's second-largest cosmetics exporter after France.
Brokerages have been raising target prices one after another to reflect the growth outlook. BNK Investment & Securities lifted its target for Kolmar Korea (161890.KS) by 27% to 175,000 won. It raised Cosmax (192820.KS) by 22.8% to 320,000 won, APR (278470.KS) by 29.5% to 500,000 won and D'Alba Global (483650.KS) by 55.6% to 350,000 won. Expectations have risen for established cosmetics leaders as well as smaller brands, with the target for LG H&H (051900.KS) raised 21.5% to 370,000 won.
Interest in K-beauty is spreading beyond cosmetics to companies tied to skin care procedures and medical devices, a segment known as "K-procedures." Pharma Research (214450.KS), a leading stock in the aesthetic medicine field, has gained 22.3% this month.
Demand is also growing for exposure to the industry as a whole rather than individual names. Cosmetics-related funds took several of the top five spots among all exchange-traded funds by returns over the past month, from July 27 to August 25. With trend cycles short and the fortunes of individual brands hard to predict, ETFs that hold a basket of cosmetics companies have emerged as an alternative. SOL Cosmetics TOP3 Plus rose 34.63% over the past month, the highest return among all ETFs. The fund concentrates its holdings in companies that have led the recent K-beauty rally, including Silicon2 (21.5%), Kolmar Korea (19.5%) and APR (17.0%).
Funds built around diversification are also posting strong returns. TIGER Cosmetics rose 29.78% over the past month, ranking fourth among all ETFs. Its top 10 holdings, including Cosmax, Silicon2 (257720.KQ), Pharma Research, Kolmar Korea and LG H&H, are weighted relatively evenly, leaving less concentration in any single company. HANARO K-Beauty returned 23.20% over the same period, fifth among all ETFs. The fund holds aesthetic medicine companies such as Pharma Research and Hugel (145020.KS) alongside cosmetics brands including APR and Amorepacific (090430.KS).
Market participants are watching whether the strength in cosmetics shares proves more than a rotation and instead makes the sector a new leader in the stock market. "This year looks set to be a landmark one for ODM, and with the entire cosmetics industry positioned for a stronger second half, there is a strong chance the sector takes market leadership," said Park Jong-dae, an analyst at Hana Securities.
