Oshadhi Kumarasiri

Equity Analyst

LightStream Research

Long-Short Analysis on Japan, Asia and the World

Equity Bottom-Up

<ul>
<li>The indication that China is prepared to scrap its strict Zero-COVID policy has gotten <a href="https://www.smartkarma.com/entities/shiseido-co-ltd" target="_blank" data-smartkarma-citation="entities:5718:1" rel="noopener">Shiseido Company (4911 JP)</a> going again after an earnings beat in Q3 saw shares climb almost 20%.</li>
<li>Given that the shares have been range bound throughout the COVID crisis, we think Shiseido could reach near the upper limit of the COVID-range in the near-term to around ¥8,000.</li>
<li>Nevertheless, we would approach this trade with caution and only with a short time horizon as we see a lot of downside risks in the medium to long term.</li>
</ul>

<ul>
<li>The success of domestic brands in the low-cost cosmetics segment seems to be cascading into mid and high-price segments within the Chinese cosmetics market.</li>
<li>This could be bad news for <a href="https://www.smartkarma.com/entities/shiseido-co-ltd" target="_blank" data-smartkarma-citation="entities:5718:1" rel="noopener">Shiseido Company (4911 JP)</a>, whose investors are expecting the company to maintain its historical superiority in the Chinese cosmetics market.</li>
<li>We think that there’s a good chance for FY+2 EV/OP to return to the 12-20x range once the market price-in Shiseido’s weakening competitive position in the mainland China market.</li>
</ul>

<ul>
<li>
<a href="https://www.smartkarma.com/entities/shiseido-co-ltd" target="_blank" data-smartkarma-citation="entities:5718:1" rel="noopener">Shiseido Company (4911 JP)</a>’s valuation multiples have come down a lot over the last year. However, they don’t seem genuinely cheap with FY+2 consensus EV/OP at 25.4x.</li>
<li>Meanwhile, Shiseido’s position in the Chinese market is weakening and there are also risks such as earnings misses and write-offs.</li>
<li>Thus, we think there’s more downside to Shiseido, whose share price may seem cheap after declining by more than 35% during the past 10 months of this year.</li>
</ul>

<ul>
<li>Shiseido’s acquisition of Drunk Elephant for a valuation of $845m was perceived positively, hoping that Shiseido could use Drunk Elephant’s digital marketing expertise to restructure its North America business.</li>
<li>Rather than emulating Drunk Elephant like digital marketing to the company’s other brands, Shiseido has been trying to accommodate all its brands including Drunk Elephant into a hybrid marketing strategy.</li>
<li>This seems to have killed Drunk Elephant’s appeal to its customers. Thus, <a href="https://www.smartkarma.com/entities/shiseido-co-ltd" target="_blank" data-smartkarma-citation="entities:5718:1" rel="noopener">Shiseido Company (4911 JP)</a> could be facing a massive $845m write-off over the next few years.</li>
</ul>

Mark Chadwick

Japan Specialist

<ul>
<li>We turn Bullish on Shiseido. The market has now digested the weak results for 2022 and can look to a recovery over the next year</li>
<li>Recent commentary from Estee Lauder's CEO suggest that China is recovering and that the outlook is bright</li>
<li>Shiseido is one of the key beneficiaries as Japan re-opens its borders to foreign travellers</li>
</ul>

Japan

Shiseido Company, Limited manufactures cosmetic and toiletry products. The Company offers an array of makeup and skin-care products, toiletries, beauty salon, pharmaceuticals, foodstuffs, and fine chemicals.

Shiseido Company - 4911 JP

Description