Kose Earnings: Profits Surprise to the Upside on Robust Domestic Recovery Despite China Headwinds

Narrow-moat Kose’s robust first-quarter profit growth, with operating profits up more than 35% year on year, was a surprise. Despite ongoing China and travel retail headwinds, solid domestic recovery coupled with continued strength in Tarte, a US makeup brand, lifted the top line and profits, but growth was inflated by favorable currency movement and delayed timing of marketing spending. Our expectation that destocking in China’s retail channels and Hainan’s travel retail will end in the second quarter is unchanged. The results echo our view that Kose's prestige beauty strength, a key moat source, will shore up its profit growth and cash flow. We marginally adjusted our assumptions, which are largely offset by increased time value of money. We continue to view shares, trading at 30% discount to out fair value estimate of JPY 12,000, as undervalued. Our operating and net profit estimates for 2024 are 13% and 25%, respectively, above the guidance.