Company Reports

Narrow-moat Unicharm’s first-quarter profit rebound, with core business profits up 32% year on year (23% growth currency neutral), was above the company’s internal target and our expectation thanks to impressive price hike benefits in Japan. The domestic strength may bode well for Kao, our top pick of the Japan consumer coverage, which will report on May 9. On the other hand, persistent weakness in China and a steep sales decline triggered by intensified price competition in Southeast Asia are concerning. As we have project profit growth skewing toward the first half of 2024 given the timing of price hikes and a decrease in input costs, we have maintained our profit forecasts of which our net profit estimate is 6% above the 2024 guidance. Our fair value estimate of JPY 4,600 indicates that shares are fairly valued. Whether it will be able to regain sales momentum, particularly in Asia, after the price hike benefits start diminishing in the second half and whether price competition spreads to the feminine care category will be our focus.

Unicharm is the third-largest global personal hygiene manufacturer with a focus in Asia comprising 47% (ex-Japan) of the group's sales. Its disposable hygiene products are built on the application of nonwoven fabrics and super-absorbent polymer and designed to support various life stages. Tapping into populated Asian markets as an early entrant and establishing a meaningful presence through constant product and marketing innovations has been its winning formula over the past two decades. Increased disposable income and improved standards of living have fueled demand for disposable hygiene products in its core markets. Moreover, premiumization, specifically prevailing in the region’s feminine care, has been a recent growth driver. Likewise, adult incontinence, emerging as a meaningful growth contributor, has the potential to outgrow baby diapers as the region’s population ages.

Narrow-moat Unicharm missed its profit guidance as we had expected. The full-year core business profit came in slightly higher than our expectation but was 9% below its guidance. The results echo two concerns that we have raised: slowing feminine care premiumization in China and fierce competition in Southeast Asia. We have reduced our core profit forecasts for the period between 2024 and 2027 by around 3% after revising some assumptions, including foreign exchange rates, but raised net profits by 1%-2% after lowering tax rates. The adjustments, along with increased time value of money, lifted our fair value estimate to JPY 4,600 from JPY 4,400. The guidance for 2024 looks somewhat optimistic as price hike benefits are likely to abate while currency may turn into a headwind. We continue to view shares, trading at 14% premium to our intrinsic value, as overvalued.

Unicharm is the third-largest global personal hygiene manufacturer with a focus in Asia comprising 47% (ex-Japan) of the group's sales. Its disposable hygiene products are built on the application of nonwoven fabrics and super-absorbent polymer, or SAP, and designed to support various life stages. Tapping into populated Asian markets as an early entrant and establishing a meaningful presence through constant product and marketing innovations has been its winning formula over the past two decades. Increased disposable income and improved standards of living have fueled demand for disposable hygiene products in its core markets. Moreover, premiumization, specifically prevailing in the region’s feminine care, has been a recent growth driver. Likewise, adult incontinence, emerging as a meaningful growth contributor, has the potential to outgrow baby diapers as the region’s population ages.

Narrow-moat Unicharm posted weaker-than-expected third-quarter core business profits, down 6.2% year on year. A more than 30% decline in China’s feminine care, a key profit growth driver and highly lucrative market, is attributable to the sluggish performance. The result reaffirms the risks of China feminine care growth we have flagged. While management has maintained the full-year profit guidance, we think the gap is too large to close in the fourth quarter. We have further slashed our core profit estimate for 2023 by nearly 10% but maintained the net profit forecast after factoring in JPY 12 billion insurance proceeds of the factory fire in India. The adjustments leave an immaterial impact on our fair value estimate of JPY 4,400, indicating 15% downside from the close of Nov. 7. Our core profit projection for 2023 is 12% below the company’s target.

Narrow-moat Unicharm posted mixed second-quarter results. While profits rebounded nearly 20% year on year from a low base, the price hike benefits and volume growth fell short of its targets. The domestic pet care business remains the key profit growth engine of the quarter. With diminishing pet care price hike benefits and foreign exchange tailwinds, the implied second-half guidance of a more than 28% increase in business profits looks somewhat challenging even after we take additional JPY 5.1 billion savings from lowered input costs into account. We have maintained our profit forecasts, about 2% below the guidance, and fair value estimate of JPY 4,400, indicating 16% downside from the close price of Aug. 4. We think the market has overvalued the overseas growth of which some core markets have shown signs of slowing.

Narrow-moat Unicharm’s first-quarter profits came in largely in line with our expectation despite uneven results with robust growth in petcare but 20% profit decline (currency neutral) in Asia. Sales grew 3% year on year (currency neutral, reported 8.1% growth) with core business profit down 9% (reported 5.1% decline). While management painted an optimistic outlook for the rest of 2023, we are wary of slow momentum of China’s feminine care sales, a key risk we have highlighted, and gradual price-hike progress of the personal care products. We have maintained our profit forecasts and fair value estimate of JPY 4,400, indicating 20% downside from the close price of May 8.

Narrow-moat-rated Unicharm missed its profit guidance as we had expected. The core business profit was largely in line with our expectation which was 6% below its guidance and 4% below the Bloomberg consensus. The results echo two concerns that we have raised: challenging targets of price hike benefits and slowing feminine care premiumization in China.

Unicharm is the third-largest global personal hygiene manufacturer with a focus in Asia comprising 47% (ex-Japan) of the group's sales. Its disposable hygiene products are built on the application of nonwoven fabrics and super-absorbent polymer, or SAP, and designed to support various life stages. Tapping into populated Asian markets as an early entrant and establishing a meaningful presence through constant product and marketing innovations has been its winning formula over the past two decades. Increased disposable income and improved standards of living have fueled demand for disposable hygiene products in its core markets. Moreover, premiumization, specifically prevailing in the region’s feminine care, has been a recent growth driver. Likewise, adult incontinence, emerging as a meaningful growth contributor, has the potential to outgrow baby diapers as the region’s population ages.

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.

Unicharm is the third-largest global personal hygiene manufacturer with a focus in Asia comprising 47% (ex-Japan) of the group's sales. Its disposable hygiene products are built on the application of nonwoven fabrics and super-absorbent polymer, or SAP, and designed to support various life stages. Tapping into populated Asian markets as an early entrant and establishing a meaningful presence through constant product and marketing innovations has been its winning formula over the past two decades. Increased disposable income and improved standards of living have fueled demand for disposable hygiene products in its core markets. Moreover, premiumization, specifically prevailing in the region’s feminine care, has been a recent growth driver. Likewise, adult incontinence, emerging as a meaningful growth contributor, has the potential to outgrow baby diapers as the region’s population ages.

Narrow-moat Unicharm’s second-quarter core operating profits, falling more than 16% (currency neutral 22% decline), were somewhat below our expectation due to greater-than-expected input cost inflation and swelling selling expenses. While the degree of the cost increases for the second half is much greater than what management suggested in May,

We are raising narrow-moat Unicharm’s fair value estimate to JPY 4,100 from JPY 3,750 to reflect the recent rapid depreciation of the Japanese yen, the benefit of price hikes, and eased cost pressure. We anticipate the benefits of yen weakness will alleviate a substantial portion of additional cost increases from the second quarter although our forecast of core operating profits for 2022 remains 5.5% below the guidance. We are wary that the impact of China’s zero COVID-19 policy on lucrative feminine care sales may dent the near-term profits. Despite the profit upside potential induced by a trend reversal in the crude oil prices, we anticipate slower feminine care premiumization, coupled with increased investment in adult incontinence and pet care products for geographic expansion, will curtail China’s midterm profit growth after markets fully recover from COVID-19. As the share price has gained 16% alongside the oil price correction since mid-June, we continue to view Unicharm’s shares as overvalued, trading at a 16% premium to our new intrinsic value.

Unicharm is the third-largest global personal hygiene manufacturer with a focus in Asia comprising 47% (ex-Japan) of the group's sales. Its disposable hygiene products are built on the application of nonwoven fabrics and super-absorbent polymer, or SAP, and designed to support various life stages. Tapping into populated Asian markets as an early entrant and establishing a meaningful presence through constant product and marketing innovations has been its winning formula over the past two decades. Increased disposable income and improved standards of living have fueled demand for disposable hygiene products in its core markets. Moreover, premiumization, specifically prevailing in the region’s feminine care, has been a recent growth driver. Likewise, adult incontinence, emerging as a meaningful growth contributor, has the potential to outgrow baby diapers as the region’s population ages.

Narrow-moat Unicharm’s first-quarter results echo our key concerns, including 1) input cost surge significantly above the company’s guidance,2) limited profit growth driven by an improved product mix, and 3) slowdown in China’s feminine care growth. While management has maintained its full-year guidance, anticipating continued premiumization and partial price hikes, as well as favorable exchange rates, to offset high costs, we are skeptical that premiumization would last under a broad-based inflationary environment in which consumers’ disposable income has shrunk in most of its core markets. We have maintained our forecasts and fair value estimate of JPY 3,750, indicating 11% downside to our intrinsic value. We continue to view shares as overvalued but have acknowledged currency as an upside risk to our forecasts of which our 2022 core operating profit is 14% below the guidance.

Unicharm is the third-largest global personal hygiene manufacturer, with a focus on Asian markets comprising 46% (ex-Japan) of the group's sales. Its disposable hygiene products are built on the application of nonwoven fabrics and super-absorbent polymer, or SAP, and designed to support various life stages. Tapping into populated Asian markets as an early entrant and establishing a meaningful presence through consistent product and marketing innovations has been Unicharm’s winning formula over the past two decades. Increased disposable income and improved standards of living have fueled demand for disposable hygiene products in its core markets. Moreover, premiumization, specifically prevailing in the region’s feminine care and China’s baby-diaper products, has been a recent growth driver. Likewise, adult incontinence, emerging as a meaningful growth contributor, has the potential to outgrow baby diapers as the region’s population ages.

Narrow-moat Unicharm beat its full-year profit guidance as expected, but to our surprise guides 3% growth in core business profits (gross profits minus SG&A) despite skyrocketing cost inflation. We found the assumption that an improved product mix will boost sizable profits shaky, given growth deceleration spotted in some high-margin categories during the fourth quarter. We have fine tuned our estimates, projecting more than 10% decline in business profits for 2022. We consider downtrading a risk to emerging markets when retail prices rise. We have maintained our fair value estimate of JPY 3,750 and continue to view shares as overvalued, trading at a 14% premium to our intrinsic value.

Unicharm is the third-largest global personal hygiene manufacturer, with a focus on Asian markets comprising 46% (ex-Japan) of the group's sales. Its disposable hygiene products are built on the application of nonwoven fabrics and super-absorbent polymer, or SAP, and designed to support various life stages. Tapping into populated Asian markets as an early entrant and establishing a meaningful presence through consistent product and marketing innovations has been Unicharm’s winning formula over the past two decades. Increased disposable income and improved standards of living have fueled demand for disposable hygiene products in its core markets. Moreover, premiumization, specifically prevailing in the region’s feminine care and China’s baby-diaper products, has been a recent growth driver. Likewise, adult incontinence, emerging as a meaningful growth contributor, has the potential to outgrow baby diapers as the region’s population ages.

Narrow-moat Unicharm’s third-quarter results were ahead or our expectations thanks to a greater-than-expected currency tailwind as well as limited impact of the delta variant surge in Southeast Asia. Despite a sizable cost increase from the second half, we anticipate that Unicharm will beat its full-year profit guidance although the profit upside will depend on the size of marketing investment in the fourth quarter. We have raised the growth assumption of Asia business by 3% to reflect more favorable currency movement for 2021 but also adjusted the minority interest and tax rate accordingly. Meanwhile, management hints at a JPY 10 billion-JPY 15 billion cost increase for 2022, in line with our expectation. The assumption adjustments, combined with increased time value of money, lead to a modest increase in our fair value estimate of JPY 3,750 from JPY 3,650. While Unicharm’s moats, underpinned by product development and marketing capabilities, will enable share gains in the faster growing emerging markets, the potential seems to have been mostly priced in. We view shares as overvalued, trading at an 18% premium to our fair value estimate.

Narrow-moat Unicharm’s second-quarter profits were slightly ahead of our expectation because of greater-than-expected currency tailwinds. Continued expansion in the gross margin was a surprise although the upward trend is set to reverse in the second half given JPY 6 billion additional costs stemming from the surge in crude oil prices. We have fine-tuned our assumptions to reflect more favorable currency movement and pet care strength for 2021, but higher input costs for 2022. The adjustments have an immaterial impact on our fair value estimate of JPY 3,650, indicating a 19% downside from the current share price. While Unicharm’s moat will allow it to gain shares in the faster-growing emerging markets, the upside seems to have been priced in. We prefer rival Kao, which offers more attractive valuations and growth upside fueled by expansion its product lineups in Asia.