Shiseido’s Beef-Up of Investments to Curtail 2023 Profits; Japan and China Sales to Pick Up

Narrow-moat Shiseido’s profit guidance of JPY 60 billion or 17% growth in core operating profit for 2023 is somewhat disappointing, as management again plans to beef up investment to reinvigorate midterm top-line growth. It also issued 2025 targets, guiding for 8% CAGR in sales and 12% core operating profit margin (indicating JPY 136 billion in core operating profit for 2025). We think the margin target looks feasible once Japan and China markets normalize from the pandemic. However, the leap to 15% profit margin by 2027 seems unwarranted. It appears that the market also shares the same concern that investments may not deliver desired returns, as the last investment endeavors were short-lived in part due to COVID-19 disruption. We have marginally lifted our fair value estimate to JPY 6,100 from JPY 6,000 to reflect updated forecasts and increased time value of money.

While we anticipate demand to pick up in Japan and China from March, and our net profit forecast for 2023 is about 14% above the guidance, we view shares as fairly valued. The development of the restructuring in Japan is critical to instilling confidence in the market as to the effectiveness of increased investments.