(News Bulletin 247) – The German bank lowered its advice to “sell” on the cosmetics group against “hold” previously, while reducing its price target. The German bank believes that China will no longer really be the growth engine that it was in the past.

To say that economists are increasingly doubting the Chinese economy is an understatement. Those at Bloomberg recently estimated that China may never overtake the United States to become the world’s leading economic power, due to slower-than-expected growth.

This decline in China’s pace will obviously have repercussions on stocks that depend on the Middle Kingdom for their growth.

This Tuesday, precisely, Deutsche Bank cited the Chinese slowdown to explain its change of recommendation on the French cosmetics and beauty flagship L’Oréal. The German bank went from “hold” to “sell” on the stock, while reducing its price target on the stock to 350 euros from 375 euros previously.

L’Oréal shares, however, held up relatively well to the shock, losing 0.9% around 12:40 p.m., in a market without much direction (the CAC 40 lost 0.25% at the same time).

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Not so dynamic imports

Certainly the group led by Nicolas Hieronimus has a good profile. A “unique company”, “highly innovative” “with attractive gross margins and profitability”, concedes Deutsche Bank.

But now “we fear more and more that China will be a country with slower growth than expected in the medium term”, underlines the establishment. This lower growth will result in slower growth of the middle classes in China. However, according to the German bank, the country represented around 19% of the company’s revenues in 2022, compared to only 8% in 2017. And Deutsche Bank considers that these fears linked to the Chinese economy will not be “short-lived”, which will obviously penalize the cosmetics market.

As it had already done previously, the German bank has also returned to importing beauty products into China.

Conclusion: “imports of beauty products have been significantly lower than the growth in retail sales of cosmetic products, which means that the structural growth of international groups in the country is significantly less, either due to higher demand low, or due to increased local competition.

Growth that would decline in 2024

Deutsche Bank emphasizes, once again, that the growth in the value of imports is in reality explained by a change in consumption. Clearly, Chinese customers buy cosmetic products that are smaller in terms of capacity, with a higher price per mass. This results in both an increase in value and in the number of units sold, even though real demand is not growing or is growing less than it appears at first glance.

“There is a limit to [ce phénomène] and the overall lower consumption of imports means that it is more difficult to recruit new customers and that it will be more difficult to move these new customers up the price ladder”, notes Deutsche Bank. All of these Risks concerning China are not reflected in the share price, considers the establishment.

In addition, Deutsche Bank estimates that L’Oréal should face a slowdown in its momentum in dermatological beauty products (16% of revenues in the first half of 2023, according to the German bank) over the next three years.

More broadly, Deutsche Bank is counting on like-for-like growth of 10.7% for 2023 compared to a consensus of 11.6%, and above all, for next year, on an increase in sales on these same bases of only 2 .5% versus 7% for the consensus.