(News Bulletin 247) – The German bank has sharply reduced its target on the cosmetics group, while maintaining its advice to “keep”.

China has been L’Oréal’s major growth driver in recent years. Still in 2022, and despite a hardly obvious health context, the cosmetics group explained that it had achieved double-digit growth in its online revenues and recorded market share gains across all distribution channels.

But this Tuesday Deutsche Bank came to put a stone in the garden of the company, significantly slashing its target price on the action, to 380 euros against 425 euros previously, or 10.5% less. The bank nevertheless remains to “keep” on the title. This decision weighs on the stock market, L’Oréal losing 1.7% at the end of the session, to 407 euros, within a CAC 40 which rose by 0.4%.

In an in-depth note, the German bank is more cautious about the group’s growth in China, following a detailed analysis of imports of beauty products in the world’s second largest economy.

This while China has a significant weight in the group’s revenues. Deutsche Bank points out that revenues made in yuan represented 18.8% of total sales in 2022 compared to 8.3% in 2017. To this must be added revenues from China but made in dollars, which the German bank estimates around 2-3% of total sales.

>> Access our exclusive graphic analyses, and enter into the confidence of the Trading Portfolio

Consumption not increasing so strongly

“China remains firmly a long-term growth market, however import data suggests a lower level of structural growth for importers than might be expected,” she said.

China’s cosmetics imports have declined since 2020, as a proportion of total imports. Deutsche Bank recognizes that this can be explained by the temporary impact of the pandemic, by the increase in local production and underlines that there are differences between exporting countries.

“However, we are increasingly concerned that Chinese consumption of cosmetics and personal care products is not growing structurally at the rate implied by the valuation of L’Oréal,” she adds.

The bank notes in particular that imported cosmetic products have sizes (in millilitres) which have been structurally decreasing since 2015, in particular for products imported from France.

“Chinese consumers are generally considered to be less brand loyal and therefore will be less likely to purchase larger sized units. This drives demand for smaller sizes as consumers ‘try’ more brands, but it also requires a larger number of promotional/trial-sized products, which are smaller in size,” Deutsche Bank explains.

“Premiumization”

This suggests that the growth in volumes (in number of products sold) is not synonymous with growth in consumption, warns Deutsche Bank. The establishment also notes that since 2019, imports of beauty products into China have not increased in weight.

The bank deduces from this that the growth of the sector in the country was mainly explained, in value, by a “premiumisation”, i.e. a direction of sales towards more expensive products, itself based in part on this drop in size. products (the smaller a cosmetic product, the more expensive it is per millilitre). And less, therefore, by an increase in the consumption of cosmetics.

Deutsche Bank nevertheless praises L’Oréal’s management, culture and business model, as well as the defensive nature of its results. Which leads him to stay “hold” on the title and not sell.

But it has revised down its long-term growth forecast for the company from 4.25% to 4% and expects the stock to underperform its sector on the stock market, which are the “staples”. , or consumer goods, in the near future.