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

<a href="https://www.smartkarma.com/entities/kose-corp" target="_blank" data-smartkarma-citation="entities:18009:1" rel="noopener">Kose Corp (4922 JP)</a>’s share price dropped 12.2% today after a disappointing 2Q21 results release on 30th July 2021 (aftermarket) with revenue and OP growth of 2.7% and 210.5% respectively from the same period of the COVID affected previous year.
Quarterly revenue was down 21.9% on a QoQ basis. Yet, the OP increased 57.5% QoQ on cost controls.  Even though there is an impact from seasonality, the entire QoQ revenue decline is not accounted for by seasonal changes (Kose’s 1H21 revenue declined 1.4% YoY).
The company has shifted to a December year-end and therefore quarterly consensus estimates are unavailable. However, the company has maintained its guidance for the 9 months from April-December 2021 at ¥230bn in revenue and ¥20bn in OP, which implies a full-year revenue and OP of ¥313.3bn and ¥22.2bn respectively in CY2021 compared to ¥282.8bn and ¥13.5bn in the COVID affected previous calendar year.
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/221/684/original/image_8875511821627900294641.png?1627900295" class="editor-image img-responsive" data-smartkarma-image-id="221684"></figure>

Kose Corp (4922 JP)’s share price dropped 12.2% today after a disappointing 2Q21 results release on 30th July 2021 (aftermarket) with revenue and OP growth of 2.7% and 210.5% respectively from the same period of the COVID affected previous year.
Quarterly revenue was down 21.9% on a QoQ basis. Yet, the OP increased 57.5% QoQ on cost controls.  Even though there is an impact from seasonality, the entire QoQ revenue decline is not accounted for by seasonal changes (Kose’s 1H21 revenue declined 1.4% YoY).
The company has shifted to a December year-end and therefore quarterly consensus estimates are unavailable. However, the company has maintained its guidance for the 9 months from April-December 2021 at ¥230bn in revenue and ¥20bn in OP, which implies a full-year revenue and OP of ¥313.3bn and ¥22.2bn respectively in CY2021 compared to ¥282.8bn and ¥13.5bn in the COVID affected previous calendar year.


Asia Growth Hits The Breaks, KOSE Tumbles 12.2%

Cosmetics exports grew 32.8% YoY and 15% QoQ in 2Q21 to more than offset the weaknesses in the domestic cosmetics market which remained 26% and 31% below the pre-COVID level in April and May 2021 respectively.
The earnings season of the Japanese cosmetics commences with quarterly results from <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> and <a href="https://www.smartkarma.com/entities/kose-corp" target="_blank" data-smartkarma-citation="entities:18009:1" rel="noopener">Kose Corp (4922 JP)</a> on 30th July 2021. <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> are scheduled to report their quarterly results early next week.
We analyse the 2Q21 cosmetic industry statistics, using the monthly data released by the Ministry of Economy, Trade and Industry (METI) and the Ministry of Finance.

Cosmetics exports grew 32.8% YoY and 15% QoQ in 2Q21 to more than offset the weaknesses in the domestic cosmetics market which remained 26% and 31% below the pre-COVID level in April and May 2021 respectively.
The earnings season of the Japanese cosmetics commences with quarterly results from Pola Orbis Holdings (4927 JP) and Kose Corp (4922 JP) on 30th July 2021. Kao Corp (4452 JP), Fancl Corp (4921 JP) and Shiseido Company (4911 JP) are scheduled to report their quarterly results early next week.
We analyse the 2Q21 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: 2Q21 Statistics Update

<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

Japan

Kao Corporation is a manufacturer of household and chemical products. The company produces cosmetics, laundry and cleaning products, hygiene products, fatty chemicals, edible oils, and specialty chemicals.

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Kao Corp (4452 JP)

Asia Growth Hits The Breaks, KOSE Tumbles 12.2%

Kose's share price dropped 12.2% today after a disappointing 2Q21 results release on 30th July 2021 (aftermarket) with revenue and OP growth of...

Oshadhi Kumarasiri

Japanese Cosmetics Industry: 2Q21 Statistics Update

Cosmetics exports grew 32.8% YoY and 15% QoQ in 2Q21 to more than offset the weaknesses in the domestic cosmetics market which remained 26% and 31%...

Oshadhi Kumarasiri

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

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