Unicharm Earnings: Soft Sentiment in China and Competition in Southeast Asia Dragged Profits

Wide-moat Unicharm’s third-quarter results trailed our revenue and operating profit estimates due to soft consumer sentiment in China and intense competition in key markets in Southeast Asia. We have previously noted these as near-term headwinds for the company, but the extent of margin erosion was stronger than our expectations. In the Chinese market, which likely raised investors’ concerns, we think the soft consumer sentiment affects Unicharm and the pricing power of local leading brands. The company increased its marketing spending during the third quarter for new products across key markets, which impaired earnings but should translate into better sales in the fourth quarter. As a result, we only lowered our full-year sales and operating profit forecasts by 1% and 4%, respectively.