T&L Co Ltd 340570
April 20, 2023 - 2:44pm EST by
2023 2024
Price: 46,900.00 EPS 3852 4941
Shares Out. (in M): 8 P/E 12.3 9.6
Market Cap (in $M): 288 P/FCF 49 28
Net Debt (in $M): -18 EBIT 28 36
TEV (in $M): 270 TEV/EBIT 9.7 7.5

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Summary: T&L is an off-the-radar Korean small cap original design manufacturer of acne patches that should double earnings in the next two years on the back of expanding overseas sales and growth in the acne patch product category.

Background:  T&L (http://www.tnl.co.kr/?lang=EN) is the leading wound care dressing manufacturer (ODM) in Korea with more than 50% domestic market share.  Founded in 1999, the company IPOed in 2020 with the Founder/CEO still owning 35% of the company post-IPO.  The company generated LTM sales of $63m with $19m of operating profit.  T&L has a c.$300 million market cap and trades at LTM 18x P/E, 14x EV/EBIT, while generating a 22% ROE.  Sales growth of the company has averaged 38% over the past 3 years.   We believe the company is trading at 9.5x 2024e P/E with earnings set to nearly double in two years.

T&L’s products include:

  • Polyurethane Foam dressings

  • Vacuum negative pressure dressings

  • Orthopedic Fixatives - splints hard and soft

  • Hydrocolloid wound dressings, Acne patches

Domestic wound care players:

Hydrocolloid Market

The company’s recent growth has been primarily driven by its Hydrocolloid (HC) acne patches business. HC represents 60% of T&L’s sales and exports to the US represent 70% of this category's sales. The HC category has averaged 60% sales growth and exports of this product have averaged 140% growth over the past 3 years (please see appendix 1 for segment sales breakdown). In the domestic market, T&L has its own branded HC patch that accounts for more than 70% market share in South Korea.  In the US market, T&L sells HC on an ODM (original design manufacturer) basis to Hero Cosmetics, a company which markets the #1 acne patch product "The Mighty Patch".  Hero represents 45% of consolidated sales for T&L. Hero is the #1 acne patch company in the US with over 65% market share.

T&L was the first ODM partner for Hero (founded in 2018) and currently designs and supplies 100% of the company's patches.  In September 2022 US consumer products conglomerate Church and Dwight (CHD US) acquired 100% of Hero Cosmetics for $630M, which at the time had trailing sales of $114M with 40% EBITDA margins.  Church and Dwight is $20bn market cap consumer discretionary products company with $5bn of sales that owns brands including Arm and Hammer, Trojan,  Orajel, Oxi Clean, Nair, and Batiste.  They have a long history of growth through acquisitions of consumer products.

Hydrocolloid branded companies include

  • Starface - startup founded in 2019 in Connecticut

  • COSRX - Korean startup founded in 2013, $33m of sales in 2019

  • Rael - founded in Los Angeles in 2017; $100m in sales in 2022, closed Series B in 5/22

  • Zitsticka – US startup founded in 2017, 2019 Series A $5M

  • Peace Out – Founded in San Francisco in 2017

  • Avarelle  - US startup

  • Nexcare/3M - US

Investment Thesis:

We believe that T&L sales will greatly benefit from CHD’s acquisition of Hero cosmetics. Our view is that Hero is the established leader in this product category, the category is still in its infancy, and CHD is highly focused on expanding this brand into its sales network.  We believe that T&L is responding with meaningfully larger capacity and increasing product offerings to Hero.  We also believe that other branded cosmetic companies are eager to engage T&L in a similar ODM relationship.  The net effect is that we expect revenues and profits to meaningfully increase over the next 24 months.

T&L relationship with Hero Cosmetics:

Hero Cosmetics was founded in 2018 in the US by a well-respected Korean American K-Beauty industry specialist.  In 2018 she approached T&L to ODM for her new skin care start-up after seeing and using T&L’s domestic branded HC acne patch.  In Korea, T&L is the product category leader and has over 50% market share.  T&L provided her with the product and she branded it for US distribution as “The Mighty Patch”.  She first entered into the US through a few small specialty retailers and then into Amazon.  Due to its success on Amazon, it subsequently gained a foothold at Target and Ulta Beauty. T&L disclosed to us that they are the sole owners of the product IP and sole manufacturer of Hero’s HC products.

Hero is the category leader by a wide margin:

In our initial due diligence, we spoke with the COO of Hero’s largest competitor and a merchandiser for a large off-line retailer.  They both confirmed that Hero is the industry leader, was the first mover, and “won the Amazon game.”  A simple Amazon search shows that they have almost 2x the number of reviews (120k) than their next closest category top seller.

Other supporting datapoints from CHD’s acquisition call transcript:

  • Mighty Patch is the #1 patch with 63% share of acne patch category and is 5x its next closest competitor

  • In span of 4 years, Hero became the #2 acne care category brand in the US.

  • Prior to Hero creating the category in the US, the acne treatment market in the US was a $500m market.  The total treatment market is now over $800m per year, largely due to growth of the acne patch category.

  • Hero has a Net Promotor Score of 90%: 90% of consumers will recommend it to a friend

  • Over a 12-month period, households will purchase it 3.6x, almost once a quarter

Source: Church and Dwight 

The category is still in its infancy, and CHD will be aggressively expanding distribution of Hero cosmetic products into its channels:

  • Low household penetration

    • CHD’s market research showed that Acne patches have only 4% household penetration vs. 23% for acne lotions and cream

  • Point of sale upside:

    • Neutragena has 34x more points of distribution than Hero, Clearasil has 6x more points of distribution.

    • Hero only has 8% of total All Commodities Value (ACV) in CHDs network vs. 99% ACV for the broader acne treatment category.  Management has a target of getting that to 80-90%.

    • Hero is only sold in the US.  CHD will begin distribution into international markets in 2H 2023 as disclosed in their latest quarterly results call in February.

Hero’s commitment to T&L:

It is our understanding that prior to the acquisition of Hero by CHD, there used to be only a short three-month notice period for partnership termination between the two companies, with production lead times of about 3 months.  To ensure continuity of supply post-acquisition, it was broadly described to us by T&L that there are now multi-year contracts in place with minimum annual production value guarantees.

Capacity expansion by T&L:

  • Given the new demand visibility, T&L has increased its production capacity materially:

    • In the fall of 2022, HC nameplate production capacity was W50 billion ($38m).

    • By January 2023, capacity increased to W75 billion ($58m), or W100 billion ($77m) if line shifts are increased with overtime workers

    • By June 2023, capacity will increase to W100 billion ($77m), or W150 billion ($115m) with overtime.

    • T&L has guided that by YE2023, utilization of capacity will be running at W100 billion ($77m).

    • As a frame of reference, FY2022 sales of HC was W49 billion ($38m)

    • In our latest conversation with the company, it appears that T&L is already considering additional capacity for 2024.

  • Potential additional ODM relationships: 

    • Our discussions with T&L suggest that management is currently pre-occupied with their new capacity expansion and increased demand from CHD.  On the other hand, the company recognizes the risks of customer concentration and has fielded inquiries from several European brands for a similar relationship.  The company disclosed that at this point they need to focus on the business at hand and make sure they can meet the near-term demand and ramp up production.  We understand that Hero will be entering Europe soon, so these potentially competitive discussions will have to be managed carefully.

Margin upside:

  • T&L is providing Hero with a strong pipeline of new products beyond the original small format Mighty Patch.  These include larger surface area patches as well as patches with additional features such as Micro-Needles.  Both of these trends (size and functionality), help to push up ASP. Trend in GM is positive with new product development.  We have verified this trend by reviewing the latest patch product offerings on Hero’s website.

  • As T&L increases utilization of the new production lines and sales ramp-up, management confirms that gross margins will benefit. 

Risk of price pressure for T&L:

  • Stable product pricing:

    • Current Amazon retail pricing on a per unit basis is $0.31/patch.  The price range of competitors ranges from $0.03/patch for low-end knockoffs to $0.68/patch for medicated patches. 

    • Since we started investigating this industry in early Fall 2022, pricing for Hero’s patches has not changed, despite new lower priced players entering the market. 

    • Our discussions with an executive from a Hero competitor suggests that because Hero have established over 120k reviews on Amazon and they are now a trusted brand.  This executive also noted that Hero’s patches have very good adhesive properties because they are well manufactured and designed. This is a very strong differentiator.  The executive also noted that the much cheaper knockoffs have poor hydrocolloid and adhesive properties.

    • Anecdotally our research team also discussed the range of products on the market with their teenage daughters who are active users of Hero’s patches.  We asked them why they prefer The Mighty Patch, and their responses echoed the executive feedback we received. “The stickers don’t stay on with the cheap ones, they fall off my face by the time I wake up”, “the cheap ones are very noticeable if you wear it during the day”, “the cheap ones only work when the pimple is very noticeable and big, it doesn’t work when I first get a pimple”.

  • Hero is a profitable business with a mid-priced product: 

  • CHD disclosed that at the time of acquisition, 85% of Hero’s sales were patch-related and the business has 40% EBITDA margins.

  • Our discussions with T&L suggest that they charge Hero only c.10% of the retail price of a standard package of 36 patches.  For example, a standard box of 36 patches retails on Amazon for $11.97 and T&L charges Hero c.$1.20 for the box.  This is a 90% gross margin product for Hero.

Risk of Hero changing ODM’s

  •  T&L noted that their relationship with Hero only strengthened post-acquisition by CHD.  As mentioned earlier, Hero agreed to production value guarantees with T&L.

  • When we posed the question of potential termination of the relationship, T&L responded by suggesting that they are the sole supplier of the design and R&D of the products to Hero.  Hero does a great job marketing, but T&L is providing a proven product at a very low cost.  T&L is also adding and guaranteeing meaningful capacity expansion for Hero.  They believe that it’s unlikely that Hero would switch suppliers based simply on price considering these factors.  T&L believes they have the best product on the market and CHD seems to agree.

Management aligned and product focused:

  • The Founder is the CEO

  • Management collectively owns 40% of the shares

  • All C-level executives have scientific backgrounds

Negatives and Risks:

  • While T&L appears to have the best product in the market, our research suggests that the technological barriers for producing HC patches are not particularly high.  Inevitably, there will be price erosion and more competition.  But we believe that the growth runway in the next 18-24 months is substantial, and T&L’s earnings will be meaningfully higher in the medium-term even if there is eventually some margin erosion.

  • Korean ODM non-branded product manufacturers will not get the same multiple as a branded player. We expect a mid-teens P/E valuation multiple is likely when growth begins to moderate, although a higher multiple during the rapid growth phase seems very possible.


Appendix 1:



I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.


Earnings growth, increased sell-side coverage

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