Weak Yen and Price Hikes Halting Unicharm's Profit Decline but Q4 Guidance Too Ambitious to Meet

Narrow-moat Unicharm’s third-quarter core business profit, up 1.7% (currency neutral 7.6% decline), was largely in line with our expectation. The results again reaffirm our concerns that management’s guidance for profits driven by an improved product mix seems overly optimistic and China’s feminine care sales might be showing a sign of deceleration. While management has maintained full-year profit guidance, we think the gap is too large to close in the fourth quarter. While we recognize Unicharm’s moat underpinned by its product development capability and brand equity, execution of its premiumization strategy amid weakening consumer sentiment in China and emerging markets look challenging. We have maintained our forecasts and fair value estimate of JPY 4,100, indicating 8% downside from the close of Nov. 7. Our core profit projection for 2022 is 5.5% below the company’s target.