Kao: Plan to Unlock Cosmetics and Suncare Global Growth Is Viable, Diversifying Geographic Exposure

We think wide-moat Kao’s 4452 renewed midterm targets for cosmetics and skincare are viable. Kao’s pivot of its cosmetics growth strategies and commitment to doubling down on the suncare growth echo our thesis that recovery of cosmetics sales and margins will boost Kao’s profits, while suncare is an area where Kao stands a good chance to succeed overseas. We have made no changes in our forecasts and continue to view Kao’s shares, trading at 25% discount to our fair value estimate of JPY 7,500, as undervalued, While we are positive about its recent developments, including rising pricing benefits in Japan and restructuring endeavors, China remains a key swing factor to the near-term profit outlook.

Kao is looking at diversifying its geographic exposure by expanding the suncare and Curel skincare businesses in the western markets, while making inroads to Southeast Asia’s prestige personal care markets with Molton Brown. We welcome the initiative as disproportionate geographic exposure, skewed toward East Asia—mainly Japan and China—is a key weakness of Japanese beauty companies compared with their western global peers, whose profits are more evenly distributed by region.

Despite the fact that Kao is a latecomer in the global suncare space, a high entry barrier to the suncare market and fragmentation of the $10.7-billion global suncare industry play in Kao’s favor. We are particularly excited about the category’s growth prospect as we expect rising demand for sun protection, the first and foremost skincare step to antiaging, to bolster the category growth as the importance of suncare continues gaining traction with global consumers.