Morgan Stanley: Behind Proya’s growth: pressure on the flagship brand and the rising profit cost of defending market share

Revenue rose 30%: why is the flagship brand a concern?

In the third quarter of 2026, Proya Group’s sales rose 30% year over year; Morgan Stanley estimates sales fell approximately 2% excluding the newly consolidated Flower Knows. Skincare sales, consisting mainly of the flagship Proya brand, fell 8% year over year.
Ruby Cream 4.0 launched during the quarter with substantial marketing support, yet overall skincare sales weakened. The bank believes the Double Anti, Yuanli and Energy lines may have grown weakly, and the Ruby line alone was insufficient to offset weakness in other products.
Some products sold out quickly during the Double 11 opening-day livestream, and some third-quarter promotional spending was in preparation for Double 11. Nevertheless, Morgan Stanley expects the flagship Proya brand’s revenue to fall approximately 3% year over year in the fourth quarter of 2026, and 8% in 2027, assuming intensifying competition and an adjustment by the company to its balance between market share and profitability.

Group gross margin fell 4.9 percentage points year over year to 69.8% in the third quarter. The consolidation of lower-margin Flower Knows, samples included with the upgraded Ruby Cream, and a higher share of offline channels collectively affected gross margin.
Assuming Flower Knows’ third-quarter gross margin remained at its first-quarter 2026 level of 61%, Morgan Stanley estimates the gross margin of the existing business at 72.6%, down approximately 2 percentage points year over year; a weaker skincare mix and samples accompanying new launches may be the reasons.
Third-quarter group operating profit fell approximately 100 million yuan year over year to 156 million yuan, with an operating margin of 6.9%. The bank estimates Flower Knows contributed more than 50 million yuan in incremental operating profit, implying a larger decline in the existing business. The smaller scale of the third quarter amplifies profit fluctuations, but also shows that marketing investment and sales returns need to be rebalanced.

Morgan Stanley expects group revenue to grow 11% and 13% in 2026 and 2027, respectively, driven mainly by the consolidation of Flower Knows and emerging brands. The flagship Proya brand accounted for less than half of group revenue in the third quarter of 2026, and the multi-brand portfolio is expanding the group’s scale.
But investment needs constrain new brands’ profit contributions. The bank estimates Flower Knows’ third-quarter revenue at 500 million to 600 million yuan, with a net margin of approximately 8%, below the more than 20% recorded in the first quarter of 2026; this may be related to preparations for Double 11 and increased marketing investment in new products.
Off&Relax revenue growth slowed from more than 70% in the first half of 2026 to 20%–30% in the third quarter. The bank expects group gross margin to fall from 71.8% in 2026 to 69.7% in 2027, and recurring net margin from 10.4% to 8.9%; continued brand investment, online traffic costs and thinner margins at new brands are the main pressures.

Morgan Stanley cut its recurring net profit forecasts for 2026 through 2028 by 17%, 33% and 31%, respectively. The bank remains optimistic about the long-term potential of the multi-brand, all-category strategy, but believes weak core-brand growth and increased marketing investment in new brands have reduced visibility into a sustained earnings recovery.
The bank downgraded its rating to equal-weight, cut its price target from 78 yuan to 48 yuan, and reduced its target price-to-earnings multiple based on expected 2027 earnings from 18 times to 16 times.