The author is an analyst of NH Investment & Securities. She can be reached at jiyoony@nhqv.com. -- Ed.

In line with recovering demand for color makeup, orders for C&C International’s lip makeup products have been expanding. The firm is expected to book relatively sound earnings in 2Q22 thanks to: 1) its low reliance on China sales and production; and 2) a rising sales portion of high-margin prestige products. We recommend a dip-buying strategy, anticipating strong earnings momentum. ODM specialized in lip and eye makeup C&C International is an ODM specialized in lip and eye makeup. It supplies products to top domestic makeup brands, including 3CE, Clio, Rom&nd, and Peripera. The firm’s technical expertise has also proven solid, passing audits by all four major global brands (L'Oréal, Estée Lauder, LVMH, and Coty). Quality margin growth is likely on the back of an increasing sales portion to high-margin prestige brands, including YSL and Dior. Since its listing in May 2021, C&C International has been performing sluggishly in terms of both earnings and share price movement, due to: 1) sales decline affected by the resurgence of Covid-19 and worsening operating conditions; 2) fixed cost burden stemming from the operation of the new Green County factory in Yongin; and 3) a turn to loss owing to a rise in one-off financial costs following the exercise of CBs. But, given likely demand recovery for makeup this year and capacity expansion in China scheduled for 2H22, we expect the firm to display solid performance. Drawing attention to future earnings momentum, we see a bargain buying opportunity. 2Q22 preview: Earnings to bounce back C&C International is set to post consolidated 2Q22 sales of W30.4bn (+31% y-y) and OP of W4.1bn (TTP y-y). On a non-consolidated basis, sales are projected to jump 33% y-y to W28.3bn, given that with orders increasing on both an uptick in demand for color cosmetics and new product launches at global customers, the portion of exports to North America and Europe is climbing, though consumption remains sluggish in China. Versus last year’s figure of 3.75mn units, monthly average orders expanded 1.7x over Feb~Mar 2022. In addition, since March, when Omicron infection cases peaked out, domestic customers have been placing more orders, driving up lead time to about 45 days. Against this backdrop, an earnings rebound is likely in 2Q22.   The Chinese subsidiary is likely to report earnings deterioration for 2Q22 due to operation suspension at its Shanghai factory during Covid-19 lockdowns imposed on Shanghai over April to May. That said, the subsidiary’s sales contribution amounts to only 10% of the firm’s overall sales. In addition, with Shanghai plant #2 set to start operations from 2H22, strong inventory buildup should be possible moving ahead, assuming that China’s Covid-19 woes stabilize.