Strong Pricing Trends Boosted Fast Retailing's Earnings; Raising Fair Value Estimate to JPY 66,000

Narrow-moat Fast Retailing reported solid first-quarter (three months ending November 2020) results featuring minimal revenue dip (less than 1%) while operating profit grew 23% year over year. Despite delivering stronger than expected first-quarter numbers, management has maintained its fiscal 2021 guidance, presumably because it does not expect the current strong pricing trends to continue. Despite facing strong competition, Uniqlo’s performance in Mainland China continues to remain robust, and for this reason, we lift our revenue growth assumption for the region. As a result, our fair value estimate is increased to JPY 66,000 from JPY 53,000. According to consensus data from Pitchbook, the firm is trading at 52 times forward earnings on just mid-single-digit percentage long-term earnings growth. We believe the past year's 40% rally in share price was driven predominantly by rising sentiment, instead of business fundamentals. While we are convinced that Uniqlo's cost advantage and intangible assets will sustain group growth, fueled by the potential in Asia, we view Fast Retailing's shares as overvalued, trading at a 40% premium to our fair value estimate, in part because of its low free float and its sizable weight in the Nikkei Index.