Giant Biogene IPO: A Collagen Queen, or Saggy-Skinned Stepsister?

The fast-growing skin-care products maker has filed for a Hong Kong listing that could value it at about $8.5 billion

Key Takeaways:

• Giant Biogene has filed for a Hong Kong IPO, thriving on growing popularity of skin care products from China’s growing middle class
• The company’s gross margin has improved steadily over the last three years on strong sales for more expensive professional skin-care products

By Molly Wen

As China’s “beauty economy” takes off, aesthetic medicines are developing by leaps and bounds, fueled by growing demand for facials, skin boosters and other products to improve the way people look. The boom is spawning a group of companies worth billions of dollars like Giant Biogene Holding Co. Ltd., which hopes stock buyers will see its upcoming Hong Kong IPO as a way to pretty up their portfolios.

Hailing from the Northwest Chinese city of Xi’an, Giant Biogene is the biggest company specializing in beauty products based on collagen, a natural substance that gives skin its elasticity. Known for their anti-aging properties, collagen and hyaluronic acid, another natural substance that acts as a cushion in joints, are the two leading products in the industry.

There are more than 10 public Chinese hyaluronic acid-focused companies worth 50 billion yuan ($7.4 billion) or more, including Bloomage Biotechnology (688363.SH), Imeik Technology Development (300896.SZ) and Shanghai Haohai Biological Technology (6826.HK; 688366.SH). But some might consider companies specializing in collagen as the industry’s ugly stepsisters, having made much slower progress in capital markets.

Giant Biogene is hoping to become a trendsetter to change that with its IPO that would make it the first company in the collagen field to go public. Founder Fan Daidi started out developing proprietary technology to produce recombinant collagens in 2000, and obtained the sector’s first such patent five years later. The company makes 105 products in three categories, including functional skin care products, medical dressings and functional food products, according to its prospectus filed May 5.

It struts atop a comprehensive collagen industry chain that covers the production of collagen ingredients to end products like functional skin-care products. According to industry data cited in the prospectus, the company has been China’s biggest collagen-focused skin-care products maker for the last three years and is the second biggest specialized skin-care products maker based on retail sales.

High gross margins

Despite its more than two decades of history, the company’s business didn’t really start to take off until far more recently. Its revenue jumped 24.4% from 957 million yuan ($143 million) in 2019 to 1.19 billion yuan in 2020. It grew another 30.4% in 2021 to 1.55 billion yuan. Its net profit increased from 575 million yuan in 2019 to 828 million yuan in 2021. As sales of its more profitable professional skin-care products grew, its gross margin blossomed from 83.3% in 2019 to 87.2% in 2021.

That improvement is being driven growing demand for aesthetic medicine and functional skin-care therapies from increasingly affluent Chinese consumers. Collagen-based products can be used for skin water preservation, whitening and nourishment. The company’s functional skin-care products and medical dressings are among its most popular. Its two leading sub-brands, Comfy and Collgene, contributed 90% of its revenue in 2021 and accounted for 85% of its products.

Giant Biogene is coming to market during a period of strong growth for facial mask-types of recuperative medical dressings, according to Essence Securities. Sales jumped from 160 million pieces in 2017 to 340 million pieces in 2019, representing annual growth of 44.6%.

Comfy’s collagen dressing is the industry’s most expensive, selling for 37.6 yuan, much higher than the 25.2 yuan for a similar product from industry peer Guangzhou Trauer Biotechnology. That shows Giant Biogene can command a premium for its products by virtue of its better technology. The Essence report foresees continued strong growth for the market given rising demand for skin care products.

The company has also become adept at online promotions, using livestreaming sales and key opinion leaders (KOLs) to turn its products into internet celebrities. During last year’s “Singles Day” promotion, one of the world’s biggest shopping extravaganzas, Giant Biogene’s sales on the popular Tmall e-commerce platform owned by Alibaba (BABA.US; 9988.HK) breached the 100 million yuan mark in a single day.

The “internet celebrity” strategy is paying off quite handsomely, creating a major new growth driver. Online sales have ballooned for the company in the last three years, rising from just 16.5% in 2019 to 41.5% last year. That was accompanied by a corresponding increase in the cost of those sales, which more than tripled from 93.78 million yuan in 2019 to 346 million yuan in 2021.

Regulatory Risks

Despite being a medical company, giant Biogene’s investment in R&D is rather limited, with only 84 people on its product development team. Its R&D investment rose from 11.4 million yuan in 2019 to 24.95 million yuan last year, accounting for a miniscule 1.2% and 1.6% of total revenue in those two years, respectively. That shows that rather than product development, the company’s efforts are far more focused on sales and marketing.

The company’s specialized medical dressing products are listed in the nationally published “Medical Devices Classification Catalogue,” meaning they are subject to rigorous government requirements for online marketing and sales. As early as January 2020, China’s National Medical Products Administration stated that medical devices could not use the term “facial mask” in their names, and that medical dressings should be used only under a doctor’s guidance and not on a regular basis as skin-care products. With the rapid growth of the aesthetic medicine sector, the national authority is likely to strengthen its oversight on products like medical dressings, which could pose a future risk for companies like Giant Biogene.

That said, institutional investors appear to be welcoming this particular company into their fold. It completed its one and only pre-IPO fundraising in 2021 and secured funding from established private equity funds like Hillhouse Capital and CICC. Hillhouse contributed 776 million yuan for 4% of the company, pushing its valuation to over 19.3 billion yuan.

We can use numbers from the company’s peers to calculate Giant Biogene’s likely valuation. Mainland China-listed Bloomage Biotechnology, Imeik Technology Development and Shanghai Haohai Biological Technology currently have price-to-earnings (P/E) ratios of 73 times, 95 times and 43 times, respectively, averaging 70 times. Such a multiple would value Giant Biogene at 57.9 billion yuan. But the P/E ratio for Hong Kong-listed Shanghai Haohai Biological Technology is much lower at 14 times, implying a lack of interest in that type of company. Investors will ultimately decide whether Giant Biogene is the belle of the ball, or just another ugly stepsister.

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