Affirma Capital, a Singapore-based private equity firm, turned Hwasung Cosmetics into an emerging original design manufacturer (ODM) for global beauty product brands through aggressive investment in research and development during the COVID-19 period and active marketing to overseas customers.
Hwasung, a color cosmetics manufacturer, almost doubled its operating profit and sales to 15.5 billion won ($10.6 million) and 92.9 billion won, respectively, last year from those in 2019 when it was acquired by Affirma.
Hwasung is expected to improve its earnings further this year thanks to the increasing orders from global cosmetics brands, industry sources said.
The South Korean company has focused on R&D to increase customer base, especially in overseas markets.
TURNING CRISIS INTO OPPORTUNITY
Affirma encountered an unexpected crisis – COVID-19 – in only six months after taking over Hwasung.
The ODM suffered the worst catastrophe since its foundation as people wore masks and were reluctant to go out and meet others. Its earnings before interest, taxes, depreciation and amortization (EBITDA) tumbled 40% one year after the pandemic’s outbreak.
Affirma concentrated on R&D during the COVID-19 period by more than tripling the number of research staff of the ODM, which handles not only production but also development.
The buyout firm also tried to attract new customers, especially emerging brands worldwide because the more they grow, the more orders they will place orders with Hwasung, which is expected to improve its bottom line eventually.
Affirma focused on overseas makeup product brands as customers to accelerate Hwasung’s business expansion.
The emerging-market targeted private equity firm sought to hedge risks as any slowdown in the South Korean cosmetics industry is predicted to hurt the ODM if it relies only on local clients.
The strategy allowed Hwasung to sign supply contracts with global emerging brands such as Rhode and Makeup By Mario, popular US cosmetics brands among the young generations.
Hwasung increased its customer base to about 130 brands in two years, up from around 100 before it was acquired by Affirma. Foreign cosmetics brands currently account for about 70% of Hwasung’s total customers.
“For an ODM, R&D is the head of humans and marketing is the arms and legs,” said Affirma Executive Director Lee Jaewon, who manages Hwasung. “During the unexpected crisis of COVID-19, Hwasung improved fundamentals by training the muscles of the arms and legs, as well as strengthening the brain power.”
BOLT-ON ACQUISITION
Affirma acquired another cosmetic ODM to boost Hwasung’s value with its bolt-on strategy – a business takeover strategy where a larger company acquires a smaller company to enhance its existing capabilities.
The mid-cap-focused investment firm bought Nowcos Co., a South Korean ODM for basic skincare products in 2022.
That came as Hwasung was requested to manufacture basic skincare items and Nowcos was asked to produce color cosmetics.
Hwasung already enjoyed orders for various products. Customers, who have bought its eyebrow pencils, asked the company to supply lipsticks and other products, for example.
The ODM is relatively immune to changes in trends, which usually have impacts on beauty brands’ earnings, as the company has about 130 customers. Hwasung is unlikely to be hit by a weakness in a specific brand as orders from other customers can cover it, Affirma said.
“The investment in Hwasung is similar to diversified investments in 130 cosmetics brands,” Lee said. “The ODM is expected to significantly grow if more cosmetics brands without manufacturing facilities emerge.”
By Jong-Kwan Park
pjk@hankyung.com
Jongwoo Cheon edited this article.
