Unicharm Earnings: China Weakness a Drag on Profits, Wiping Out Price Hike Benefits and Cost Savings

Narrow-moat Unicharm 8113 posted weaker-than-expected third-quarter core business profits, down 6.2% year on year. A more than 30% decline in China’s feminine care, a key profit growth driver and highly lucrative market, is attributable to the sluggish performance. The result reaffirms the risks of China feminine care growth we have flagged. While management has maintained the full-year profit guidance, we think the gap is too large to close in the fourth quarter. We have further slashed our core profit estimate for 2023 by nearly 10% but maintained the net profit forecast after factoring in JPY 12 billion insurance proceeds of the factory fire in India. The adjustments leave an immaterial impact on our fair value estimate of JPY 4,400, indicating 15% downside from the close of Nov. 7. Our core profit projection for 2023 is 12% below the company’s target.

Third-quarter sales fell 1.4% (currency neutral, reported 0.2%) year on year with profits declining 7.6% (currency neutral) as the sales slump in China wiped out all the price hike benefits and raw material cost savings. Inventory destocking of China’s feminine care, induced by the economic slowdown and the inventory buildup in the previous quarter (June), triggered a more than 30% decline in the category sales and an estimated JPY 6 billion plunge in profits. Moreover, deceleration in India’s sales growth, down to 7% of the third quarter from 19% recorded in the first half, also raises concerns. It appears sales were particularly weak in the rural areas as price hikes, combined with unfavorable weather, curtailed demand. On the other hand, persistent strength in pet care profits was a surprise. We had expected the price hike benefits would start fading in the third quarter. Cost pressure also eased, with raw material costs decreasing by JPY 2 billion during the quarter, compared with the JPY 12.5 billion increase in the first half.