Kose Earnings: China's Sales Slump Led to Profit Loss, Take the Pain to Fix China’s Business Model

We reiterate our long-term view that Kose's prestige beauty strength, a key moat source, will shore up its profit growth and cash flow, although the greater-than-expected China headwinds have prompted us to cut our estimates. We have lowered our fair value estimate to JPY 12,000 from JPY 12,500. We welcome management's endeavors to correct China’s business model relying on discounting, specifically online, and focus on migrating consumers to its more premium lines. Management appears to have taken a more cautious stance on the profit guidance but given a business model of high operating leverage and thus high marginal profits, we believe margins will recover once inventory correction ends. We continue to view shares, trading at 32% discount to our new intrinsic value, as undervalued. Our operating profit for 2024 is 13% above the guidance.