China Slowdown Flagging a Risk to Shiseido's Skin Beauty Strategy; Japan Restructuring Welcomed

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.