1H26 earnings boosted by one-off gain; organic momentum still soft

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE MORE REPORTS FROM BLOOMBERG: RESP CMBR <GO> OR http://www.cmbi.com.hk 1 MN 26 Aug 2026 CMB International Global Markets | Equity Research | Company Update Proya Cosmetics (603605 CH) Proya Cosmetics (603605 CH) - 1H26 earnings boosted by one-off gain; organic momentum still soft 1H26 earnings boosted by one-off gain; organic momentum still soft Proya's 1H26 revenue was broadly flat at RMB5,375mn (+0.2% YoY), while attributable NP rose 46% YoY to RMB1,168mn. The increase was due to a one-off investment gain of RMB445mn on the step-up of consolidation of FlowerKnows (花知晓). Excluding the one-off gain, recurring NP fell 14% YoY to RMB664mn, with underlying net margin down to 13.9% from 15.4% in 1H25. Declining flagship-brand sales and a higher selling-expense ratio suggest the core business is still bottoming. We maintain our BUY rating and keep our 30x target P/E multiple unchanged, yet cut our TP by 31% to HK$89.58, mainly as we switch to recurring core EPS to remove one-off distortions and roll over our valuation base year to 2026E.  Soft top line and rising online traffic costs dampen organic profitability. In 1H26, Proya brand and TIMAGE, accounting for nearly 80% of revenue, fell 7% and 22% YoY, respectively. Group revenue held flat only on fast-growing but sub-scale brands (OR +71%, INSBAHA +222%). Gross margin lifted 0.9ppts YoY to 74.3% on dual sourcing, but the selling-expense ratio rose 3.5ppts to 53.1% on a higher mix of high-spend incubation brands and rising Douyin traffic costs. Compounded by a 1.1ppt rise in the admin-expense ratio, core net margin fell 2.0ppts YoY, and organic profitability has yet to trough. In the near term, a flagship recovery depends on delivery of the Ruby Cream 4.0 relaunch and the September upgrade of the Yuanli series, in our view.  FlowerKnows: strategic value beyond the one-off gain. Post-consolidation, the group's online make-up share ranks behind only L'Oréal and Estée Lauder, widening its lead over domestic peers. As Proya's first controlling acquisition, the deal also adds previously untested M&A and post-deal integration capability. We view M&A as the necessary route for single-brand-reliant Chinese beauty companies to evolve into international multi-brand groups — a path on which Proya is among the front-runners. Longer term, smooth integration and portfolio build-out could support a valuation re-rating toward multi-brand groups level.  Valuation. We maintain BUY and keep our 30x target P/E multiple unchanged, but cut our TP by 31% to HK$89.58, on 1) switching of the earnings anchor from attributable to recurring core EPS, removing large non-recurring items such as consolidation gain so that valuation tracks the company's organic earnings power, 2)roll-over of the valuation base year to 2026E; . The stock trades at 20x 2026E P/E, with the payout ratio at around 50%. Risks: slower core-brand recovery, traffic-