Unicharm Earnings: Price Hike Benefits and China Rebound Lifts Profits; Deteriorated Mix a Concern

Narrow-moat Unicharm 8113 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.

Sales grew 7.3% year on year (currency-neutral 5.9% growth) with core business profit up 19% (17.1% growth). Gross margins saw a 10-basis-point uptick during the quarter as greater price hike benefits kicked in, more than offsetting the JPY 65 billion cost inflation. Management has maintained the full-year profit guidance but revised its assumptions of growth components. The reduction of price hike benefits and volume growth is offset by additional JPY 5.1 billion cost savings stemming from raw material price correction and a cut in ad spend. Apart from the volume contraction of baby diapers in Thailand and Vietnam, a deteriorated product mix caused by a sizable decline in mask sales in Japan, decreasing weight of more lucrative markets including Thailand and Vietnam, and increasing contribution of lower-margin markets including India and Brazil, are attributable to the downward revision of the volume growth and price hike benefits.