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

Since lifting the state of emergency towards the end of May 2020, Japan relied on mask-wearing and social distancing to curtail the spread of COVID-19. It was successful for about five months as Japan’s new COVID cases remained under control until the end of October 2020. Since then, COVID cases have spiralled out of control due to cold weather and pandemic fatigue. In November 2020, the seven-day average of COVID cases rose from about 500-600 cases per day at the beginning of November to over 2,000 cases per day by the end of the month. Seven-day average of COVID cases rose to around 6,500 cases per day by early January 2020, just before Japan declared a state of emergency in the capital Tokyo and three surrounding prefectures.<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/183/876/original/image_56442858141611229982276.png?1611229987" class="editor-image img-responsive" data-smartkarma-image-id="183876"></figure>COVID-19 has a significant impact on the domestic cosmetics market. The domestic cosmetics sector earnings declined by 68% and shares underperformed TOPIX by 10 percentage points during the last 12 months due to the ongoing COVID-19 crisis.In this insight, we analyse Japan’s cosmetic industry performance during the first two months of 4Q20, using the monthly data released by the Ministry of Economy, Trade and Industry (METI) and the Ministry of Finance.

Since lifting the state of emergency towards the end of May 2020, Japan relied on mask-wearing and social distancing to curtail the spread of COVID-19. It was successful for about five months as Japan’s new COVID cases remained under control until the end of October 2020. Since then, COVID cases have spiralled out of control due to cold weather and pandemic fatigue. In November 2020, the seven-day average of COVID cases rose from about 500-600 cases per day at the beginning of November to over 2,000 cases per day by the end of the month. Seven-day average of COVID cases rose to around 6,500 cases per day by early January 2020, just before Japan declared a state of emergency in the capital Tokyo and three surrounding prefectures.COVID-19 has a significant impact on the domestic cosmetics market. The domestic cosmetics sector earnings declined by 68% and shares underperformed TOPIX by 10 percentage points during the last 12 months due to the ongoing COVID-19 crisis.In this insight, we analyse Japan’s cosmetic industry performance during the first two months of 4Q20, using the monthly data released by the Ministry of Economy, Trade and Industry (METI) and the Ministry of Finance.

Japanese Cosmetics Industry: Statistics Update – October & November 2020

By using a tool usually associated with social media influencers, Japanese cosmetics makers have put a twist on advertising, especially for China’s largest shopping event of the year.<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> has been livestreaming almost every day since late October, when marketing campaigns for China’s Singles’ Day sale held every year on November 11 accelerated. More than 400,000 viewers tuned in to Shiseido’s livestreams from its Tokyo headquarters and a studio in the Chinese city of Hangzhou.In Japan, such advertising campaigns were usually carried out by social media influencers. However, Shiseido is relying on its own employees instead of social media influencers to promote its products. Shiseido started using “Miss SHISEIDO” to promote its products as early as 1934, which later evolved to beauty consultants. The consultants have been trained to use technology advancements, and c. 7,400 people have enrolled at the Shiseido Digital Academy. We believe that the trend towards live e-commerce and livestreaming events will continue to accelerate post-pandemic, not just with Shiseido but also with other Japanese cosmetic companies.

By using a tool usually associated with social media influencers, Japanese cosmetics makers have put a twist on advertising, especially for China’s largest shopping event of the year.Shiseido Company (4911 JP) has been livestreaming almost every day since late October, when marketing campaigns for China’s Singles’ Day sale held every year on November 11 accelerated. More than 400,000 viewers tuned in to Shiseido’s livestreams from its Tokyo headquarters and a studio in the Chinese city of Hangzhou.In Japan, such advertising campaigns were usually carried out by social media influencers. However, Shiseido is relying on its own employees instead of social media influencers to promote its products. Shiseido started using “Miss SHISEIDO” to promote its products as early as 1934, which later evolved to beauty consultants. The consultants have been trained to use technology advancements, and c. 7,400 people have enrolled at the Shiseido Digital Academy. We believe that the trend towards live e-commerce and livestreaming events will continue to accelerate post-pandemic, not just with Shiseido but also with other Japanese cosmetic companies.

How Livestreaming, The Latest Trend in E-Commerce Is Revolutionising Cosmetics Retail

Although <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> beat consensus OP comprehensively in Q3, the company lowered its full-year revenue and OP guidance citing weaker than expected demand in Japan and worsening COVID-19 health crisis in Europe and the US. However, Shiseido shares were up 4.7% yesterday following the release of positive COVID-19 vaccine update by Pfizer. With the 2021 EV/OP multiple at an all-time high of 52.0x, it appears that the post-pandemic recovery is already priced in.

Although Shiseido Company (4911 JP) beat consensus OP comprehensively in Q3, the company lowered its full-year revenue and OP guidance citing weaker than expected demand in Japan and worsening COVID-19 health crisis in Europe and the US. However, Shiseido shares were up 4.7% yesterday following the release of positive COVID-19 vaccine update by Pfizer. With the 2021 EV/OP multiple at an all-time high of 52.0x, it appears that the post-pandemic recovery is already priced in.

Shiseido: Departing From Cost Discipline or Playing Safe?

<a href="https://www.smartkarma.com/entities/fancl-corp" target="_blank" data-smartkarma-citation="entities:15862:1" rel="noopener">Fancl Corp (4921 JP)</a>’s second-quarter revenue and operating income fell short of consensus estimates by 0.3% and 14.5%, respectively, but 1HFY21 revenue was broadly in line with the interim revenue guidance, while 1HFY21 OP beat guidance by 13.5%. Cosmetics revenue and operating profit declined by 23.3% and 58.7%, while the Nutritional Supplements segment saw revenue declined 10.4%, but operating profit grew by 3.4% year-on-year.Fancl eventually admitted that inbound demand is unlikely to recover in the second half of the year. Therefore, the company decided to lower its full-year revenue and OP guidance by ¥7.0 billion and ¥1.5 billion, respectively. However, the revised full-year revenue guidance is just 5.4% lower than the previous year, which is significantly lower compared to 15.8% and 12.5% for <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> 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> respectively. The relative performance difference of Fancl was substantially better at the OP level.

Fancl Corp (4921 JP)’s second-quarter revenue and operating income fell short of consensus estimates by 0.3% and 14.5%, respectively, but 1HFY21 revenue was broadly in line with the interim revenue guidance, while 1HFY21 OP beat guidance by 13.5%. Cosmetics revenue and operating profit declined by 23.3% and 58.7%, while the Nutritional Supplements segment saw revenue declined 10.4%, but operating profit grew by 3.4% year-on-year.Fancl eventually admitted that inbound demand is unlikely to recover in the second half of the year. Therefore, the company decided to lower its full-year revenue and OP guidance by ¥7.0 billion and ¥1.5 billion, respectively. However, the revised full-year revenue guidance is just 5.4% lower than the previous year, which is significantly lower compared to 15.8% and 12.5% for Shiseido Company (4911 JP) and Kose Corp (4922 JP) respectively. The relative performance difference of Fancl was substantially better at the OP level.

The Market Is Yet to Price Fancl’s China Expansion

Event-Driven

In <a href="https://www.smartkarma.com/insights/japan-cosmetics-pair-trade-long-kose-short-shiseido" target="_blank" rel="noopener">Japan Cosmetics Pair Trade: Long Kose/​​Short Shiseido</a>, we suggested that <a href="https://www.smartkarma.com/entities/kose-corp" target="_blank" data-smartkarma-citation="entities:18009:1" rel="noopener">Kose Corp (4922 JP)</a> could outperform <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> and the rest of the Japanese cosmetics peers. Since then, Kose’s share price increased by 20.2%, while Shiseido’s price decreased by 2.3%.
As the earnings season approaches, we suggest that investors consider closing the Long Kose/Short Shiseido trade and reversing the same, but this time with <a href="https://www.smartkarma.com/entities/fancl-corp" target="_blank" data-smartkarma-citation="entities:15862:1" rel="noopener">Fancl Corp (4921 JP)</a> as the hedge.

In Japan Cosmetics Pair Trade: Long Kose/​​Short Shiseido, we suggested that Kose Corp (4922 JP) could outperform Shiseido Company (4911 JP) and the rest of the Japanese cosmetics peers. Since then, Kose’s share price increased by 20.2%, while Shiseido’s price decreased by 2.3%.
As the earnings season approaches, we suggest that investors consider closing the Long Kose/Short Shiseido trade and reversing the same, but this time with Fancl Corp (4921 JP) as the hedge.

Japan Cosmetics Pair Trade: Long Fancl/Short Kose

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.

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Shiseido Company (4911 JP)

Japanese Cosmetics Industry: Statistics Update – October & November 2020

We analyse Japan’s cosmetic industry performance during the first two months of 4Q20, using the monthly data released by the Ministry of Economy,...

Oshadhi Kumarasiri

How Livestreaming, The Latest Trend in E-Commerce Is Revolutionising Cosmetics Retail

By using a tool usually associated with social media influencers, Japanese cosmetics makers have put a twist on advertising, especially for China’s...

Oshadhi Kumarasiri

Shiseido: Departing From Cost Discipline or Playing Safe?

Although Shiseido beat consensus OP comprehensively in Q3, the company lowered its full-year revenue and OP guidance citing weaker than expected...

Oshadhi Kumarasiri

The Market Is Yet to Price Fancl’s China Expansion

Fancl’s second-quarter revenue and operating income fell short of consensus estimates by 0.3% and 14.5%, respectively, but 1HFY21 revenue was...

Oshadhi Kumarasiri

Japan Cosmetics Pair Trade: Long Fancl/Short Kose

As the earnings season approaches, we suggest that investors consider closing the Long Kose/Short Shiseido trade and reversing the same, but this...

Oshadhi Kumarasiri

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