Equity Analyst, LightStream Research

Oshadhi Kumarasiri

Equity Analyst

Long-Short Analysis on Japan, Asia and the World

LightStream Research

LightStream conducts quantitatively rigorous and data-driven analysis with a focus on Japan and Asia.

We consistently cover the Tech, Consumer and Industrial sectors, and provide ECM and Events coverage more broadly.

We supplement traditional qualitative insights from company relationships with a robust quantitative foundation that examines as much historical data as is available.
We further refine the accuracy of our insights and calls through the use of alternative data to flesh out current trends, and through a valuation framework that emphasises non-superficial peer group selection and a proper attempt to understand the metrics and changes that have driven security valuations in the past.

Equity Bottom-Up

<ul>
<li>The company announced last week that it will begin selling POLA products in a duty-free store on Hainan Island, China from July 2021. This is the first step taken by Pola Orbis to tap into the Chinese duty-free market through the company’s flagship brands. Chinese travel retail market offers significant growth potential, especially in the high prestige skincare category.</li>
<li>Meanwhile, <a href="https://www.smartkarma.com/entities/pola-orbis-holdings-inc" target="_blank" data-smartkarma-citation="entities:2287:1" rel="noopener">Pola Orbis Holdings (4927 JP)</a> has broken out of a medium-term downtrend and outperformed <a href="https://www.smartkarma.com/entities/kose-corp" target="_blank" data-smartkarma-citation="entities:18009:1" rel="noopener">Kose Corp (4922 JP)</a> and <a href="https://www.smartkarma.com/entities/shiseido-company-limited" target="_blank" data-smartkarma-citation="entities:5718:1" rel="noopener">Shiseido Company (4911 JP)</a> by around 20% and <a href="https://www.smartkarma.com/entities/kao-corp" target="_blank" data-smartkarma-citation="entities:12933:1" rel="noopener">Kao Corp (4452 JP)</a> and <a href="https://www.smartkarma.com/entities/fancl-corp" target="_blank" data-smartkarma-citation="entities:15862:1" rel="noopener">Fancl Corp (4921 JP)</a> by around 25% since March 2021.</li>
</ul><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/216/284/original/image_98653331221625128553967.png?1625128554" class="editor-image img-responsive" data-smartkarma-image-id="216284"></figure><ul>
<li>Pola Orbis has a relatively small overseas presence compared to peers such as Shiseido and Kose. With the expansion of its domestic flagship brands into the Chinese market, the company is expected to attain an overseas sales ratio of around 25% by 2023 compared to the current 15%. Exposure to the Chinese cosmetics market is highly regarded by investors and they have generally given such companies premium valuations.</li>
<li>Pola Orbis currently trades at a new all-time high FY+2 EV/EBIT of 22.0x. However, it is still around 40-50% lower than Shiseido’s current FY+2 EV/EBIT, and Kose’s peak FY+2 EV/EBIT multiple, indicating plenty of room for multiple expansion.</li>
</ul>


The company announced last week that it will begin selling POLA products in a duty-free store on Hainan Island, China from July 2021. This is the first step taken by Pola Orbis to tap into the Chinese duty-free market through the company’s flagship brands. Chinese travel retail market offers significant growth potential, especially in the high prestige skincare category.
Meanwhile, Pola Orbis Holdings (4927 JP) has broken out of a medium-term downtrend and outperformed Kose Corp (4922 JP) and Shiseido Company (4911 JP) by around 20% and Kao Corp (4452 JP) and Fancl Corp (4921 JP) by around 25% since March 2021.

Pola Orbis has a relatively small overseas presence compared to peers such as Shiseido and Kose. With the expansion of its domestic flagship brands into the Chinese market, the company is expected to attain an overseas sales ratio of around 25% by 2023 compared to the current 15%. Exposure to the Chinese cosmetics market is highly regarded by investors and they have generally given such companies premium valuations.
Pola Orbis currently trades at a new all-time high FY+2 EV/EBIT of 22.0x. However, it is still around 40-50% lower than Shiseido’s current FY+2 EV/EBIT, and Kose’s peak FY+2 EV/EBIT multiple, indicating plenty of room for multiple expansion.


POLA Launched on Hainan Island: Valuation Could Expand As China Becomes POLA’s Center of Attention

China has announced that it will allow couples to have up to three children, after census data showed a steep decline in birth rates. Previously, we analysed the possible impact on the Japanese baby and childcare company <a href="https://www.smartkarma.com/entities/pigeon-corp" target="_blank" data-smartkarma-citation="entities:3294:1" rel="noopener">Pigeon Corp (7956 JP)</a> as a result of the above policy shift. This time around, we analyse the impact on the Japanese personal care company <a href="https://www.smartkarma.com/entities/kao-corp" target="_blank" data-smartkarma-citation="entities:12933:1" rel="noopener">Kao Corp (4452 JP)</a>, whose share price rose 1.5% in the last two trading days.

China has announced that it will allow couples to have up to three children, after census data showed a steep decline in birth rates. Previously, we analysed the possible impact on the Japanese baby and childcare company Pigeon Corp (7956 JP) as a result of the above policy shift. This time around, we analyse the impact on the Japanese personal care company Kao Corp (4452 JP), whose share price rose 1.5% in the last two trading days.

China’s Three Child Policy Beneficiaries Part 2 Kao Corporation: Finally Off The Leash?

<a href="https://www.smartkarma.com/entities/shiseido-company-limited" target="_blank" data-smartkarma-citation="entities:5718:1" rel="noopener">Shiseido Company (4911 JP)</a> delivered strong 1Q21 results today with revenue and operating profit surpassing consensus estimates by ¥16.7bn and ¥4.6bn respectively.The company’s revenue grew 7.5% YoY (6.0% YoY excluding the FX impact) in 1Q21, compared to -17.1%, -34.4% and -16.3% and -6.2% in 1Q20, 2Q20, 3Q20 and 4Q20 respectively.There is a margin story at play in the Japanese cosmetics sector through moving to an online-focused business model and Shiseido remains our number one pick to get exposed to the margin growth theme.Please refer, <a href="https://www.smartkarma.com/insights/long-shiseido-short-kose-as-japanese-cosmetics-shift-focus-to-margin-expansion" target="_blank" rel="noopener">Long Shiseido/​Short KOSE As Japanese Cosmetics Shift Focus to Margin Expansion</a> and <a href="https://www.smartkarma.com/insights/shiseido-s-2023-transformation-plan-kicks-into-gear-with-the-proposed-sale-of-the-personal-care-unit" target="_blank" rel="noopener">Shiseido’s 2023 Transformation Plan Kicks Into Gear With The Proposed Sale of The Personal-Care Unit</a> for more details.

Shiseido Company (4911 JP) delivered strong 1Q21 results today with revenue and operating profit surpassing consensus estimates by ¥16.7bn and ¥4.6bn respectively.The company’s revenue grew 7.5% YoY (6.0% YoY excluding the FX impact) in 1Q21, compared to -17.1%, -34.4% and -16.3% and -6.2% in 1Q20, 2Q20, 3Q20 and 4Q20 respectively.There is a margin story at play in the Japanese cosmetics sector through moving to an online-focused business model and Shiseido remains our number one pick to get exposed to the margin growth theme.Please refer, Long Shiseido/​Short KOSE As Japanese Cosmetics Shift Focus to Margin Expansion and Shiseido’s 2023 Transformation Plan Kicks Into Gear With The Proposed Sale of The Personal-Care Unit for more details.

Shiseido's 1Q21 Results Beat Consensus But Try to Play Safe With Conservative 2021 Guidance

<a href="https://www.smartkarma.com/entities/fancl-corp" target="_blank" data-smartkarma-citation="entities:15862:1" rel="noopener">Fancl Corp (4921 JP)</a> delivered 4QFY21 results today, which saw operating profit increase by 74.8% YoY to ¥2.9bn (consensus ¥3.4bn). The company’s revenue grew 2.6% YoY, compared to the consensus estimated growth rate of 8.3% YoY.With 3.7% YoY projected revenue and OP growth in FY22, FANCL’s guidance is quite disappointing (considering the low-base set in FY21 due to COVID-19). However, it seems like FANCL could be playing safe by lowballing FY22 guidance amidst uncertainties relating to COVID.<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/205/281/original/image_515953276131620648943397.png?1620648944" class="editor-image img-responsive" data-smartkarma-image-id="205281"></figure>Since we said that we favor FANCL over the popular and bigger Japanese cosmetics names in early 2019, FANCL has outperformed <a href="https://www.smartkarma.com/entities/shiseido-company-limited" target="_blank" data-smartkarma-citation="entities:5718:1" rel="noopener">Shiseido Company (4911 JP)</a>, <a href="https://www.smartkarma.com/entities/kao-corp" target="_blank" data-smartkarma-citation="entities:12933:1" rel="noopener">Kao Corp (4452 JP)</a>, <a href="https://www.smartkarma.com/entities/kose-corp" target="_blank" data-smartkarma-citation="entities:18009:1" rel="noopener">Kose Corp (4922 JP)</a> and <a href="https://www.smartkarma.com/entities/pola-orbis-holdings-inc" target="_blank" data-smartkarma-citation="entities:2287:1" rel="noopener">Pola Orbis Holdings (4927 JP)</a> by 42%, 64%, 58% and 65% respectively.Our long thesis for FANCL remains intact and would therefore buy any weakness resulting from the less than impressive FY22 guidance.

Fancl Corp (4921 JP) delivered 4QFY21 results today, which saw operating profit increase by 74.8% YoY to ¥2.9bn (consensus ¥3.4bn). The company’s revenue grew 2.6% YoY, compared to the consensus estimated growth rate of 8.3% YoY.With 3.7% YoY projected revenue and OP growth in FY22, FANCL’s guidance is quite disappointing (considering the low-base set in FY21 due to COVID-19). However, it seems like FANCL could be playing safe by lowballing FY22 guidance amidst uncertainties relating to COVID.Since we said that we favor FANCL over the popular and bigger Japanese cosmetics names in early 2019, FANCL has outperformed Shiseido Company (4911 JP), Kao Corp (4452 JP), Kose Corp (4922 JP) and Pola Orbis Holdings (4927 JP) by 42%, 64%, 58% and 65% respectively.Our long thesis for FANCL remains intact and would therefore buy any weakness resulting from the less than impressive FY22 guidance.

FANCL: Conservative Guidance Could Form an Opening on The Long Side

With 36.7% YoY growth in 1Q21, cosmetics exports continue to drive the recovery of the Japanese cosmetics sector. However, the out-of-control COVID-19 situation in the domestic market continues to offset the resurgence of exports with 19.9% YoY decline in January and February 2021.The earnings season of the Japanese cosmetics commenced yesterday with <a href="https://www.smartkarma.com/entities/pola-orbis-holdings-inc" target="_blank" data-smartkarma-citation="entities:2287:1" rel="noopener">Pola Orbis Holdings (4927 JP)</a> generating a modest 0.6% YoY revenue growth in 1Q21, the company’s first YoY revenue growth since June 2018. <a href="https://www.smartkarma.com/entities/kose-corp" target="_blank" data-smartkarma-citation="entities:18009:1" rel="noopener">Kose Corp (4922 JP)</a> reports tomorrow (30th April 2021).Before earnings go into full swing with <a href="https://www.smartkarma.com/entities/kao-corp" target="_blank" data-smartkarma-citation="entities:12933:1" rel="noopener">Kao Corp (4452 JP)</a>, <a href="https://www.smartkarma.com/entities/fancl-corp" target="_blank" data-smartkarma-citation="entities:15862:1" rel="noopener">Fancl Corp (4921 JP)</a> and <a href="https://www.smartkarma.com/entities/shiseido-company-limited" target="_blank" data-smartkarma-citation="entities:5718:1" rel="noopener">Shiseido Company (4911 JP)</a> scheduled to report on 7th, 10th and 12th of May 2021 respectively, we analyze the 1Q21 cosmetic industry statistics, using the monthly data released by the Ministry of Economy, Trade and Industry (METI) and the Ministry of Finance.

With 36.7% YoY growth in 1Q21, cosmetics exports continue to drive the recovery of the Japanese cosmetics sector. However, the out-of-control COVID-19 situation in the domestic market continues to offset the resurgence of exports with 19.9% YoY decline in January and February 2021.The earnings season of the Japanese cosmetics commenced yesterday with Pola Orbis Holdings (4927 JP) generating a modest 0.6% YoY revenue growth in 1Q21, the company’s first YoY revenue growth since June 2018. Kose Corp (4922 JP) reports tomorrow (30th April 2021).Before earnings go into full swing with Kao Corp (4452 JP), Fancl Corp (4921 JP) and Shiseido Company (4911 JP) scheduled to report on 7th, 10th and 12th of May 2021 respectively, we analyze the 1Q21 cosmetic industry statistics, using the monthly data released by the Ministry of Economy, Trade and Industry (METI) and the Ministry of Finance.

Japanese Cosmetics Industry: 1Q21 Statistics Update

Japan

FANCL CORPORATION produces and sells additive-free skin care cosmetics for both women and men.  The Company's products include cleansing creams, hair care goods such as shampoos and conditioners, and facial make up products.  Fancl also makes and distributes dietary supplements including royal jelly and various tablets with extracted essence from mushrooms, garlic, ginseng, and soy beans.

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Fancl Corp (4921 JP)

POLA Launched on Hainan Island: Valuation Could Expand As China Becomes POLA’s Center of Attention

As the China growth story becomes Pola Orbis’ center of attention, we think the stock’s current bull run could continue despite peak valuation...

Oshadhi Kumarasiri

China’s Three Child Policy Beneficiaries Part 2 Kao Corporation: Finally Off The Leash?

While cosmetics is on the path to a steady recovery, the hopes of returning revenue growth in Merries Diapers could help Kao to break the current...

Oshadhi Kumarasiri

Shiseido's 1Q21 Results Beat Consensus But Try to Play Safe With Conservative 2021 Guidance

There is a margin story at play in the Japanese cosmetics sector through moving to an online-focused business model and Shiseido remains our number...

Oshadhi Kumarasiri

FANCL: Conservative Guidance Could Form an Opening on The Long Side

With 3.7% YoY projected revenue and OP growth in FY22, FANCL’s guidance is quite disappointing. However, it seems like FANCL could be playing safe...

Oshadhi Kumarasiri

Japanese Cosmetics Industry: 1Q21 Statistics Update

With 36.7% YoY growth in 1Q21, cosmetics exports continue to drive the recovery of the Japanese cosmetics sector. However, the out-of-control COVID...

Oshadhi Kumarasiri

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