Why Did Cosmetics Stocks Drop Sharply?

OKOMP Marketing 10 July, 2015

Cosmetics stocks experienced a sharp drop during the recent Chinese and Korean stock crisis.

Formerly Korea’s wealthiest stockholder, Amore Pacific chairman Seo Kyung-bae lost US$1.29 billion in one day on July 7th, due to a 10 percent drop in Amore Pacific’s stock price in the Korean market.

The fluctuations in the Korean cosmetics stock market are influenced by China’s stock market, as China is one of Korea’s largest cosmetics export markets. Some Korean companies, such as Amore Pacific, are hugely dependent on the China market.

China stock market

In the previous 12 months, the Shanghai stock market has soared more than 150% , peaking in mid-June. The market has been fuelled by a switch away from property investment, and largely driven by investors borrowing to buy shares, or margin trading.

However, when the Chinese stock market crashed over the course of 3 weeks, its value dropped by one-third. The main reasons behind the crash are:

  • Stock market growth is detached from Chinese economic growth. The dramatic rise is driven by momentum rather than fundamentals. With China’s GDP growth rate set at around 7%, the over 150% growth rate on stocks is not reasonable
  • In addition, over 80% of investors in the China stock market are small retail investors. These investors are immature. This is a very different situation from other stock markets where most investors are institutions. In China, cab drivers, grandparents, college students and housewives are all using their savings to chao gu, buying whatever is moving and selling whatever is falling
  • There is a big bubble in the stock market, so lots of companies have been overvalued. For example, Quan Tong Education has around RMB 100 million in revenue, but the company’s stock value yielded over RMB 50 billion – 500 times their revenue
  • Intervention by the China stock exchange regulator

With all the industries in China affected by the stock market crisis, a drop in the cosmetics industry is unavoidable. Since Korean cosmetics companies trade extensively in China, they can’t escape the repercussions.