Korea’s Hwasung Cosmetics shines with Affirma Capital’s Midas touch

Singapore-based private equity firm Affirma Capital has 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.

Color cosmetics manufacturer Hwasung last year posted operating profit and sales of 15.5 billion won ($10.6 million) and 92.9 billion won, respectively. These are almost double the respective numbers in 2019 when it was acquired by Affirma.

Hwasung is expected to improve its earnings further this year thanks to increasing orders from global cosmetics brands, industry sources said.

The South Korean company has focused on R&D to increase its customer base, especially in overseas markets.

TURNING CRISIS INTO OPPORTUNITY

Affirma encountered an unexpected crisis – COVID-19 – only six months after taking over Hwasung.

The ODM suffered the worst catastrophe a cosmetics maker could face during the pandemic 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 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 with Hwasung. This is expected to eventually improve its bottom line.

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 would hurt the ODM if it relied 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.

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 its arms and legs, as well as strengthening its brain power.”

BOLT-ON ACQUISITION

Affirma acquired another cosmetics ODM to boost Hwasung’s value with its bolt-on strategy – a business takeover strategy by which 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 was already enjoying increased orders for various products. A customer who bought its eyebrow pencils, for example, would then ask the company to supply lipstick or other products. 

The ODM is relatively immune to changes in trends, which usually have an impact on beauty brands’ earnings, as the company has about 130 customers. Hwasung is unlikely to be hit by a specific brand's weakness as orders from other customers can offset 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 alongside the emergence of more cosmetics brands without manufacturing facilities.”

Write to Jong-Kwan Park at pjk@hankyung.com
 
Jongwoo Cheon edited this article.