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Conference Call: China Beauty – Skin in the Game, [email protected] Th +81 3 6836-5421 on September 12 at 8:30AM ET

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Conference Call: China Beauty – Skin in the Game, Haruka.Miyake@Morganstanley.Com Th +81 3 6836-5421 on September 12 at 8:30AM ET September 12, 2019 10:00 AM GMT September 12th, 2019 M O R G A N S T A N L E Y R E S E A R C H MS Conference Call Slide Deck: Dara Mohsenian, CFA [email protected] +1 212 761 6575 China Beauty – Skin in the Game on 9/12 Kelly Kim, CFA [email protected] +82 2 399 4837 at 8:30AM ET Richard Taylor [email protected] +44 20 7425-7922 Haruka Miyake We are hosting a Morgan Stanley Conference Call: China Beauty – Skin in the Game, [email protected] th +81 3 6836-5421 on September 12 at 8:30AM ET. Edouard Aubin Toll-Free Dial-In: (877) 266-4808 [email protected] +44 20 7425-3160 International Dial-In: (706) 679-8534 Dustin Wei Conference ID: 4975194 [email protected] +852 2239-7823 Related Report: Daniel Oh China Beauty – Skin in the Game (here) [email protected] +82 2 399-4938 Morgan Stanley does and seeks to do business with companies covered in Morgan Stanley Research. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of Morgan Stanley Research. Investors should consider Morgan Stanley Research as only a single factor in making their investment decision. For analyst certification and other important disclosures, refer to the Disclosure Section, located at the end of this report. += Analysts employed by non-U.S. affiliates are not registered with FINRA, may not be associated persons of the member and may not be subject to NASD/NYSE restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account. M O R G A N S T A N L E Y R E S E A R C H China Beauty: Skin in the Game September 12th Proprietary AlphaWise China Beauty Industry Survey Takeaways 1. Demand Sustainability Greater than the Market Perceives Based on Consumer Intentions 2. Diverse Sources of Increased Spending Provide Sustainability Comfort 3. Breadth of Demand by Consumer Groups is Encouraging 4. Premiumization Trends Remain Strong 5. Brand Fragmentation is Reversing 6. Macroeconomic Risk Appears Manageable Between April and May 2019, AlphaWise conducted the third edition of the China Beauty Industry Survey among 1,547 beauty product users from Tier 1-3 cities using online methodology. 2 M O R G A N S T A N L E Y R E S E A R C H China Beauty: Skin in the Game September 12th Key Point #1: Demand Sustainability Greater than the Market Perceives 3 M O R G A N S T A N L E Y R E S E A R C H China Beauty: Skin in the Game September 12th China Beauty Sales Growth Has Rapidly Accelerated China Beauty Euromonitor Retail Sales Growth 35% 29% 30% 26% 25% 23% 19% 20% 18% 16% 16% 14% 15% 15% 13% 13% 12% 12% 12% 9% 10% 10% 10% 14% 9% 8% 10% 13% 7% 11% 11% 6% 10% 9% 8% 8% 5% 7% 7% 5% 0% 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Overall Premium Mass Source: Euromonitor, Morgan Stanley Research 4 M O R G A N S T A N L E Y R E S E A R C H China Beauty: Skin in the Game September 12th Proportion of Consumers Expecting to Spend More on Beauty in the NTM is Comparable to LTM % of Respondents Spending More on Beauty Products 80% 70% 68% 62% 62% 60% 52% 50% 40% 30% 20% 10% 0% Skin Care Today vs. Skin Care N12M Make-Up Today vs. Make-Up N12M L12M L12M Source: AlphaWise, Morgan Stanley Research 5 M O R G A N S T A N L E Y R E S E A R C H China Beauty: Skin in the Game September 12th Half of Consumers Intend to Increase Travel Spend in the Next Year N12M Travel Spending Expectations 60% 53% 50% 40% 34% 30% 20% 11% 10% 0% Spending more Spending about the Spending less same Source: AlphaWise, Morgan Stanley Research 6 M O R G A N S T A N L E Y R E S E A R C H China Beauty: Skin in the Game September 12th Key Point #2: Diverse Sources of Increased Spending Provide Sustainability Comfort 1. Expanded Beauty Routines 2. Engagement of Younger Consumers 3. Social Media and E-Commerce Proliferation 4. Increasing Number of Beauty Consumers 7 M O R G A N S T A N L E Y R E S E A R C H China Beauty: Skin in the Game September 12th Expanded Routines Were a Major Reason for Increased Beauty Spend Reason For Higher Category Spending Vs. 12 Months Ago I added steps in my routine so I bought more 48 51 products in the category 34 There are more new brands or products in 44 46 the market that I wanted to try 45 I bought more expensive brands for the 40 33 same items I used 41 36 I have more money to spend 34 36 There are more brands or products available 29 33 via online channels 34 Skin care Make-up Fragrances Source: AlphaWise, Morgan Stanley Research 8 M O R G A N S T A N L E Y R E S E A R C H China Beauty: Skin in the Game September 12th Social Media Has Encouraged Premiumization and Greater Spending on Beauty Products Social Media Usage On Beauty Product Purchases (Selected "Strongly Agree" or "Somewhat Agree") I have begun to try new or niche brands 76% since using social media I have bought a greater number of cosmetic 74% products since using social media I have bought more expensive cosmetic 73% products since using social media Product reviews or beauty tips on social 70% media are most trustworthy Social media will be the biggest influencer on my purchase decision around cosmetic 66% products in near future Source: AlphaWise, Morgan Stanley Research 9 M O R G A N S T A N L E Y R E S E A R C H China Beauty: Skin in the Game September 12th 89% of Respondents Recently Purchased Beauty Products Online % Having Purchased Beauty Products Online In P12M 89% +2000 bps 69% +3800 bps 31% 2014 2016 2019 Source: AlphaWise, Morgan Stanley Research 10 M O R G A N S T A N L E Y R E S E A R C H China Beauty: Skin in the Game September 12th Online Sales Have Significantly Increased as a Proportion of Total Beauty Sales in China Source: Euromonitor, Morgan Stanley Research 11 M O R G A N S T A N L E Y R E S E A R C H China Beauty: Skin in the Game September 12th Key Point #3: Breadth of Demand by Consumer Groups is Encouraging 12 M O R G A N S T A N L E Y R E S E A R C H China Beauty: Skin in the Game September 12th Skin Care Spending Was Strong Across Age Groups, Income Levels, and City Tiers Source: AlphaWise, Morgan Stanley Research 13 M O R G A N S T A N L E Y R E S E A R C H China Beauty: Skin in the Game September 12th Demand Was Also Strong Across Makeup Source: AlphaWise, Morgan Stanley Research 14 M O R G A N S T A N L E Y R E S E A R C H China Beauty: Skin in the Game September 12th Key Point #4: Premiumization Trends Remain Strong 15 M O R G A N S T A N L E Y R E S E A R C H China Beauty: Skin in the Game September 12th Premiumization to Continue • The sustainability of premiumization is a key investor debate, with China premium beauty share rapidly expanding from 23% a decade ago to 36% in 2018. • With major prestige brands’ embracing online channel, improving brand recognition as well as consumer reach should drive further strong growth for premium segment. A majority of consumers plans to buy similar or Premium mix to increase continuously more expensive brands going forward… Product/Brand Mix over L12M and N12M (% of total beauty demand) China onshore mass Skin Care Make-Up 60% 80% 80% China onshore premium 77% 80% 50% Outbound cosmetics spending 40% 30% 20% 10% Bought more Will buy more Bought more Will buy more expensive or similarexpensive or similarexpensive or similarexpensive or similar level brands in the level brands in the level brands in the level brands in the 0% past 12 months next 12 months past 12 months next 12 months 2015 2016 2017 2018 2019E 2020E 2021E 2022E 2023E Source: AlphaWise, Morgan Stanley Research Source: AlphaWise, Morgan Stanley Research 16 M O R G A N S T A N L E Y R E S E A R C H China Beauty: Skin in the Game September 12th Consumers Expressed Interest in More Premium Products Net Score (% Buying Expensive Products/Brands minus % Buying Cheaper Products/Brands N12M) 2014 2016 2019 15 14 14 12 5 4 Skin care Make-up Source: AlphaWise, Morgan Stanley Research 17 M O R G A N S T A N L E Y R E S E A R C H China Beauty: Skin in the Game September 12th Large Growth Opportunity in Emerging Markets as PCC Rises, Particularly in Beauty Per Capita Category Consumption Total Beauty 160 Singapore UK USA 140 120 Germany Personal Care (ex Oral Care) 100 Pet Care 80 Tissue and Hygiene Brazil Home Care 60 40 Russia China Oral Care 20 India 0 0 5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000 45,000 Per Capita Disposable Income Source: Euromonitor, Morgan Stanley Research 18 M O R G A N S T A N L E Y R E S E A R C H China Beauty: Skin in the Game September 12th Key Point #5: Brand Fragmentation is Reversing 19 M O R G A N S T A N L E Y R E S E A R C H China Beauty: Skin in the Game September 12th Larger Companies Gaining Market Share • Perhaps counterintuitively, larger companies are winning in China beauty, gaining share vs.
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