Unicharm Earnings: Pet Care Price Hikes Offset Asia Weakness Led by Decline in China and Thailand

Narrow-moat Unicharm’s 8113 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.

We reckon product premiumization, sales momentum in China, and shrinking demand for COVID-19 protection products in Japan, apart from the cost decline and currency movement, are key swing factors to its near-term profits. Specifically, the decrease in input costs, likely to take place from August or September, could be an upside risk to our core profit forecast, which is about 2% below the guidance. Management has guided for a JPY 1.5 billion cost decrease in the second half, but given the current crude oil price trading below $80 per barrel, the amount may rise to several billion yen if demand for naphtha is negatively affected by a recession in major global economies. Nevertheless, whether Unicharm will be able to continue raising prices through product premiumization amid an operating environment of easing commodity pressure and intensifying competition in some core markets will be most critical to meeting its 2023 profit targets.