Kao Earnings: Sluggish Cosmetics Sales in China Dragged Margins; Retain Fair Value

Wide-moat Kao Corporation reported third-quarter earnings with revenue slightly below our estimates, but operating profit was better than expected primarily due to gains from the sale of the beverage and pet care businesses. Kao’s earnings in the quarter continued to be compounded by sluggish performance in the Chinese cosmetics market, which we expect to continue through the end of 2024. As a result, we left our full-year operating profit estimates largely unchanged despite the stronger third-quarter numbers. We also retain our fair value estimate at JPY 6,800 per share, which implies 28 times 2025 price/earnings, 12 times enterprise value/EBITDA, and 2.3% dividend yield. We see Kao’s shares as fairly valued.