Company Reports

Narrow-moat Shiseido is off to a good start thanks to healthy growth achieved in Japan and Western markets as well as cost savings extracted from restructuring. A 20% sales growth achieved in Japan was particularly impressive. While core operating profits are well ahead of its internal target, Chinese consumers remain the key swing factor to its profit outlook. Given nearly 1,500 job cuts on the way, we are confident that Shiseido’s attempts to rebuild domestic margins will bear fruit. Yet, we anticipate little change in Chinese consumers’ cautious spending behavior and retailers’ tight inventory control, capping China and travel retail’s growth in 2024. We have fine-tuned our Japan and China assumptions, which leave an immaterial impact on our fair value estimate of JPY 5,600. We continue to view shares, trading at a 20% discount to its intrinsic value, as undervalued.

Regaining growth momentum in Japan and China, the largest two markets, is on the top of Shiseido’s agenda post COVID-19. The strategic shift of its focus to prestige skincare has enabled Shiseido to channel resources to its core competence. Yet, the bet on China has taken its toll after a notable slowdown in China’s consumption and thus beauty spending. Shiseido plans to beef up marketing investment through 2025, preparing for growth acceleration and margin expansion through 2027. The recovery of Japan’s premium (midpriced) cosmetic sales and normalization of margins in China play the most critical roles to attaining its profit margin target of 12% by 2025, in our opinion.

Narrow-moat-rated Shiseido beat its profit guidance as we had expected. Still, the core operating profits came in 10% above our expectations thanks to solid growth in Europe and rigorous cost control, as well as improved sales in China. While we have reduced our fair value estimate to JPY 5,600 from JPY 5,800 after adjusting assumptions and rolling the model, we predict management will beat the JPY 55 billion core operating profit guidance for 2024. We continue to view shares, trading at a 24% discount to our fair value estimate, as undervalued. Apart from China and the travel retail recovery, whether management can rebuild its domestic margins by rightsizing its cost structure in 2024 will be the key to turning around the struggling luxury beauty firm.

Narrow-moat Shiseido’s downward profit revision is no surprise given the impact of Hainan’s daigou crackdown on rivals’ profits and Chinese consumers’ boycott of Japanese products after the release of wastewater from Fukushima. We have slashed our net profit forecasts, particularly for 2023 and 2024, to reflect impacts of boycotts and the daigo crackdown as well as additional restructuring charges for China, which lead to a new fair value estimate of JPY 5,800, reduced from JPY 6,100. After more than 25% correcting since mid-August, we view shares, trading at a 16% discount to our intrinsic value, as undervalued. We anticipate a V-shape profit recovery in 2025 when sales rebound in China and the restructuring plans for Japan and China are executed.

Regaining growth momentum in Japan and China, the largest two markets, is on the top of Shiseido’s agenda post COVID-19. The strategic shift of its focus to prestige skincare has enabled Shiseido to channel resources to its core competence. Yet, the bet on China has taken its toll after a notable slowdown in China’s consumption and thus beauty spending. Shiseido plans to beef up marketing investment through 2025, preparing for growth acceleration and margin expansion through 2027. The recovery of Japan’s premium (midpriced) cosmetic sales and normalization of margins in China play the most critical roles to attaining its profit margin target of 12% by 2025, in our opinion.

Narrow-moat Shiseido’s second-quarter results came in above its internal targets thanks to more than 20% growth in China and continued strength in Western markets and Japan. Management has maintained the full-year guidance due to rising uncertainty surrounding tightened daigou regulations of Hainan’s travel retail. We have marginally adjusted our assumptions, which leave an immaterial impact on our profit forecasts and fair value estimate of JPY 6,100. We view shares as fairly valued but acknowledge Hainan travel retail as a downside risk to our near-term forecasts. We reckon the 12% target of core operating profit margin for 2025, boosted by domestic recovery and a ramp-up of domestic cost restructuring, is highly feasible. Yet, a leap to 15% by 2027 looks challenging unless China’s growth momentum returns to the pre-COVID-19 level.

Regaining growth momentum in Japan and China, the largest two markets, is on the top of Shiseido’s agenda post COVID-19. The strategic shift of its focus to prestige skincare has enabled Shiseido to channel resources to its core competence. Yet, the bet on China has taken its toll after a notable slowdown in China’s consumption and thus beauty spending. Shiseido plans to beef up marketing investment through 2025, preparing for growth acceleration and margin expansion through 2027. The recovery of Japan’s premium (midpriced) cosmetic sales and normalization of margins in China play the most critical roles to attaining its profit margin target of 12% by 2025, in our opinion.

Narrow-moat Shiseido’s first-quarter profit rebound seemed strong, but the amount of profits remains significantly below the 2019 level, estimated at around 25%, despite the fact that the top line has fully recovered. Sales grew 6.6% year on year (like-for-like, reported 2.6% growth) while core operating profits nearly tripled from a fairly low base, boosted by strong top-line growth in Western markets and narrowed losses in Japan and China. Given increased marketing investment from the second quarter to capture China and Japan’s reopening demand, we have maintained our forecasts and fair value estimate of JPY 6,100. As a step-up of investment will weigh on profits in 2023, we will focus on tracking its sales progress, especially in the once-lucrative China and Japan markets. We view shares as modestly overvalued, indicating 7% downside to our intrinsic value.

Narrow-moat Shiseido’s profit guidance of JPY 60 billion of or 17% growth in core operating profit for 2023 is somewhat disappointing, as management again plans to beef up investment to reinvigorate midterm top-line growth. It also issued the targets for 2025, guiding for 8% CAGR in sales and 12% core operating profit margin (indicating JPY 136 billion in core operating profit for 2025). We think the margin target looks feasible once Japan and China markets normalize from the pandemic. However, the leap to 15% profit margin by 2027 seems unwarranted. It appears that the market also shares the same concern that investments may not deliver desired returns, as the last investment endeavors were short-lived in part due to COVID-19 disruption. We have marginally lifted our fair value estimate to JPY 6,100 from JPY 6,000 to reflect updated forecasts and increased time value of money.

Rationalizing the business/brand portfolio with a priority centered on prestige skincare and China is the key strategy of the midterm plan ending 2023. Skincare innovations, Shiseido’s core competence, will remain a key driving force to fulfill its ambitions of achieving JPY 2 trillion in sales with an 18% operating margin by 2030. Acceleration of China’s premium skincare growth, alongside divestitures of noncore or unprofitable businesses, will lead the margin expansion, with an interim target set at 15% by 2023.

Narrow-moat Shiseido's third-quarter results, with sales up 15.6% year on year (7.3% growth like-for-like) and core operating profits up 180%, beat our expectation. Improved domestic sales that swung back to profit was the key positive of the quarter. While the zero-COVID-19 policy still undermines China sales and Hainan tourism (travel retail), Shiseido's marketing strategy pivot appears to help avoid a sales slump. While it looks set to beat the full-year profit guidance, given its attempt to reduce dependence on aggressive promotions during key shopping events in China in addition to increased marketing investment budgeted for the fourth quarter, management has maintained its full-year guidance. We will focus on its progress transforming China's business model, rather than the coming-quarter profits. We've made no changes in our forecasts and continue to view shares as modestly undervalued, trading at 15% discount to our fair value estimate of JPY 6,000.

We are reducing Shiseido’s fair value estimate to JPY 6,000 from JPY 6,600 to reflect our updated expectation of a delayed recovery in China cosmetics sales following no easing of the zero COVID-19 policy after the 20th Party Congress. We have lowered our net profit estimates by an average of 9% for 2023 and onward. We assume a gradual easing through the next few months, but more notable relaxation of restrictions in the second half of 2023. Chinese consumers’ changing spending attitudes amid uncertainty surrounding the zero COVID-19 policy and wealth security suggest that the slowdown in prestige cosmetics growth will become permanent, although China still offers above-market growth fueled by premiumization. We continue to view shares as undervalued, trading at a 13% discount to our new intrinsic value.

Rationalizing the business/brand portfolio with a priority centered on prestige skincare and China is the key strategy of the midterm plan ending 2023. Skincare innovations, Shiseido’s core competence, will remain a key driving force to fulfill its ambitions of achieving JPY 2 trillion in sales with an 18% operating margin by 2030. Acceleration of China’s premium skincare growth, alongside divestitures of noncore or unprofitable businesses, will lead the margin expansion, with an interim target set at 15% by 2023.

It is no surprise that narrow-moat Shiseido lowered its full-year guidance (dividends maintained) given lockdowns in China, slow recovery in Japan, and suspended shipment to Russia. The degree of the downward revision for profit was greater than our expectation due to an additional JPY 10 billion for strategic investment in brand-building and talent development—which we deem necessary for strengthening its brand equity, a key moat source, and generating profitable growth over the long term. We have accordingly lowered our profit forecasts mainly for 2022, which, offset by increased time value of money, leaves an immaterial impact on our fair value estimate of JPY 6,600. We continue to view shares as undervalued but acknowledge that China remains a key downside risk to our midterm forecasts.

The global beauty market has realized 4%-5% annual growth over the past decade (excluding the pandemic), and we expect a modest acceleration to 5% in the next 10 years as China becomes a bigger portion of the mix (from 19% of the global market in 2021 to 29% in 2031 by our estimate) and as makeup continues to recover post-pandemic. China should continue to be a driving force of growth for years to come, as consumers in this region are just beginning to expand into makeup, fragrance, and haircare, although the skincare market is more developed. Further, as other emerging markets (Brazil, India, Mexico) experience rising incomes, this should boost their per capita consumption of beauty, providing additional growth potential beyond China.

Narrow-moat Shiseido’s first-quarter profit weakness, specifically in China and Japan, was a negative surprise. While management has maintained full-year guidance amid limited visibility, we are reducing our projection mainly for 2022 and to some degree for 2023 given lockdown impacts in China and slow rebound in Japan's beauty spending. We have accordingly lowered our fair value estimate to JPY 6,600 from JPY 6,900. We anticipate the expansion of the premium skincare market in China will continue to lead Shiseido’s growth but have turned less optimistic about Japan's recovery. After a nearly 30% correction over the past six months, we view the shares as undervalued, indicating 25% upside to our new intrinsic value. Our operating profit estimate for 2022 is 11% below guidance.

Rationalizing the business/brand portfolio with a priority centered on prestige skincare and China is the key strategy of the midterm plan ending 2023. Skincare innovations, Shiseido’s core competence, will remain a key driving force to fulfill its ambitions of achieving JPY 2 trillion in sales with an 18% operating margin by 2030. Acceleration of China’s premium skincare growth, alongside divestitures of noncore or unprofitable businesses, will lead the margin expansion, with an interim target set at 15% by 2023.

Narrow-moat Shiseido guides encouraging 14% top-line growth (excluding divestiture impacts) in 2022 in anticipation of a pickup in domestic demand from the second half. Yet, the guidance of 44% growth in 2022 operating profit was 35% below our estimate. Management has decided to take a conservative stance given uncertainty surrounding the omicron surge. While the degree of profit rebound hinges on the development of COVID-19, we think profit upward revision looks likely.

It is no surprise that Shiseido’s third-quarter results were not pretty given the prolonged lockdown in Japan, but an apparent growth deceleration in China, a risk we have flagged to its China-centered strategy, surfaced during the quarter. In contrast, robust rebound in western markets, particularly makeup and fragrance, along with strength in travel retail, continued to lift the group’s profits. The awaited profit upward revision, raised by JPY 5 billion or 18.5%, was somewhat disappointing. We have lowered our profit estimates for 2021 by 10% to reflect management’s plan to boost marketing investment during the fourth quarter, in preparation for a rebound in 2022 once COVID-19 social restrictions ease. The adjustment was largely offset by the impact of the time value of money, leaving an immaterial impact on our fair value estimate of JPY 6,900. We think Shiseido’s underperformance relative to its global peers echoes our concern that Shiseido’s heavy dependence on China heightens its profit volatility and our thesis that building a diversified brand portfolio and geographic presence is crucial to sustain Shishido’s long-term growth. We view the shares as being overvalued, trading at a 10% premium to our fair value estimate. Our full-year profit estimate remains JPY 10 billion above the renewed guidance of JPY 32 billion.

We are raising narrow-moat Shiseido’s fair value estimate to JPY 6,900 from JPY 6,800 after taking a detailed look into the divestiture benefits of U.S. makeup brands BareMinerals, Buxom, and Laura Mercier (about 5+% of group sales as of the first half of 2021, sold to the private equity fund Advent). The divestiture benefits, likely to add more than JPY 10 billion to the firm’s operating profits, had been mostly factored into our assumption of a JPY 18 billion increase in North America profits in 2022. We had highlighted Bare Escentuals as a top divestiture candidate as management’s turnaround attempts made little progress, while COVID-19 has exacerbated the challenges. Given the recent rally, we view shares as overvalued with a 16% downside to our fair value estimate. Despite Shiseido’s moat in prestige skincare, we are wary of its heavy dependence on the China market, which exhibits greater political risk and sales volatility, and we prefer to wait for attractive entry points.