Kao Earnings: Profits Hit Bottom as Price Hikes Take Effect; Large-Scale Restructuring on the Way

We were dismayed with wide-moat Kao’s downward revisions after we initially took in its earnings, but were encouraged by second-quarter performance after taking a detailed look. The good progress made on the domestic price hikes during the quarter indicate that profits (excluding charges) might have hit bottom, instilling confidence in its ability to return to a growth trajectory. The successful price hikes in Japan demonstrate its moat, underpinned by brand equity and R&D capabilities. We have reduced our fair value estimate to JPY 7,500 from JPY 7,800 after factoring the JPY 60 billion restructuring impacts, but maintained our view that core operating profits will exceed pre-COVID-19 peak levels in 2026, a year before management’s new target. We continue to view shares attractive and would take correction on profit downward revision as opportunities to accumulate shares.