Equity Analyst, LightStream Research

Oshadhi Kumarasiri

Equity Analyst

Long-Short Analysis on Japan, Asia and the World

LightStream Research

LightStream conducts quantitatively rigorous and data-driven analysis with a focus on Japan and Asia.

We consistently cover the Tech, Consumer and Industrial sectors, and provide ECM and Events coverage more broadly.

We supplement traditional qualitative insights from company relationships with a robust quantitative foundation that examines as much historical data as is available.
We further refine the accuracy of our insights and calls through the use of alternative data to flesh out current trends, and through a valuation framework that emphasises non-superficial peer group selection and a proper attempt to understand the metrics and changes that have driven security valuations in the past.

Equity Bottom-Up

<a href="https://www.smartkarma.com/entities/fancl-corp" target="_blank" data-smartkarma-citation="entities:15862:1" rel="noopener">Fancl Corp (4921 JP)</a> shares rose 7.3% upon delivering strong 1QFY22 results, which saw operating profit increase by 23.1% YoY to ¥3.0bn (consensus ¥2.3bn). The company’s revenue rose 3.2% YoY to ¥25.2bn (consensus ¥25.4bn). We think the lack of upward revision to guidance is a sign of conservatism by the management due to uncertain business conditions resulting from the spread of the delta variant of the COVID-19 virus. Nevertheless, FANCL cosmetics and nutritional supplements could continue to boost earnings and generate a substantial earnings beat in FY22.

Fancl Corp (4921 JP) shares rose 7.3% upon delivering strong 1QFY22 results, which saw operating profit increase by 23.1% YoY to ¥3.0bn (consensus ¥2.3bn). The company’s revenue rose 3.2% YoY to ¥25.2bn (consensus ¥25.4bn). We think the lack of upward revision to guidance is a sign of conservatism by the management due to uncertain business conditions resulting from the spread of the delta variant of the COVID-19 virus. Nevertheless, FANCL cosmetics and nutritional supplements could continue to boost earnings and generate a substantial earnings beat in FY22.

<a href="https://www.smartkarma.com/entities/kose-corp" target="_blank" data-smartkarma-citation="entities:18009:1" rel="noopener">Kose Corp (4922 JP)</a>’s share price dropped 12.2% today after a disappointing 2Q21 results release on 30th July 2021 (aftermarket) with revenue and OP growth of 2.7% and 210.5% respectively from the same period of the COVID affected previous year.
Quarterly revenue was down 21.9% on a QoQ basis. Yet, the OP increased 57.5% QoQ on cost controls.  Even though there is an impact from seasonality, the entire QoQ revenue decline is not accounted for by seasonal changes (Kose’s 1H21 revenue declined 1.4% YoY).
The company has shifted to a December year-end and therefore quarterly consensus estimates are unavailable. However, the company has maintained its guidance for the 9 months from April-December 2021 at ¥230bn in revenue and ¥20bn in OP, which implies a full-year revenue and OP of ¥313.3bn and ¥22.2bn respectively in CY2021 compared to ¥282.8bn and ¥13.5bn in the COVID affected previous calendar year.
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/221/684/original/image_8875511821627900294641.png?1627900295" class="editor-image img-responsive" data-smartkarma-image-id="221684"></figure>

Kose Corp (4922 JP)’s share price dropped 12.2% today after a disappointing 2Q21 results release on 30th July 2021 (aftermarket) with revenue and OP growth of 2.7% and 210.5% respectively from the same period of the COVID affected previous year.
Quarterly revenue was down 21.9% on a QoQ basis. Yet, the OP increased 57.5% QoQ on cost controls.  Even though there is an impact from seasonality, the entire QoQ revenue decline is not accounted for by seasonal changes (Kose’s 1H21 revenue declined 1.4% YoY).
The company has shifted to a December year-end and therefore quarterly consensus estimates are unavailable. However, the company has maintained its guidance for the 9 months from April-December 2021 at ¥230bn in revenue and ¥20bn in OP, which implies a full-year revenue and OP of ¥313.3bn and ¥22.2bn respectively in CY2021 compared to ¥282.8bn and ¥13.5bn in the COVID affected previous calendar year.


Asia Growth Hits The Breaks, KOSE Tumbles 12.2%

Cosmetics exports grew 32.8% YoY and 15% QoQ in 2Q21 to more than offset the weaknesses in the domestic cosmetics market which remained 26% and 31% below the pre-COVID level in April and May 2021 respectively.
The earnings season of the Japanese cosmetics commences with quarterly results from <a href="https://www.smartkarma.com/entities/pola-orbis-holdings-inc" target="_blank" data-smartkarma-citation="entities:2287:1" rel="noopener">Pola Orbis Holdings (4927 JP)</a> and <a href="https://www.smartkarma.com/entities/kose-corp" target="_blank" data-smartkarma-citation="entities:18009:1" rel="noopener">Kose Corp (4922 JP)</a> on 30th July 2021. <a href="https://www.smartkarma.com/entities/kao-corp" target="_blank" data-smartkarma-citation="entities:12933:1" rel="noopener">Kao Corp (4452 JP)</a>, <a href="https://www.smartkarma.com/entities/fancl-corp" target="_blank" data-smartkarma-citation="entities:15862:1" rel="noopener">Fancl Corp (4921 JP)</a> and <a href="https://www.smartkarma.com/entities/shiseido-company-limited" target="_blank" data-smartkarma-citation="entities:5718:1" rel="noopener">Shiseido Company (4911 JP)</a> are scheduled to report their quarterly results early next week.
We analyse the 2Q21 cosmetic industry statistics, using the monthly data released by the Ministry of Economy, Trade and Industry (METI) and the Ministry of Finance.

Cosmetics exports grew 32.8% YoY and 15% QoQ in 2Q21 to more than offset the weaknesses in the domestic cosmetics market which remained 26% and 31% below the pre-COVID level in April and May 2021 respectively.
The earnings season of the Japanese cosmetics commences with quarterly results from Pola Orbis Holdings (4927 JP) and Kose Corp (4922 JP) on 30th July 2021. Kao Corp (4452 JP), Fancl Corp (4921 JP) and Shiseido Company (4911 JP) are scheduled to report their quarterly results early next week.
We analyse the 2Q21 cosmetic industry statistics, using the monthly data released by the Ministry of Economy, Trade and Industry (METI) and the Ministry of Finance.

Japanese Cosmetics Industry: 2Q21 Statistics Update

<ul>
<li>The company announced last week that it will begin selling POLA products in a duty-free store on Hainan Island, China from July 2021. This is the first step taken by Pola Orbis to tap into the Chinese duty-free market through the company’s flagship brands. Chinese travel retail market offers significant growth potential, especially in the high prestige skincare category.</li>
<li>Meanwhile, <a href="https://www.smartkarma.com/entities/pola-orbis-holdings-inc" target="_blank" data-smartkarma-citation="entities:2287:1" rel="noopener">Pola Orbis Holdings (4927 JP)</a> has broken out of a medium-term downtrend and outperformed <a href="https://www.smartkarma.com/entities/kose-corp" target="_blank" data-smartkarma-citation="entities:18009:1" rel="noopener">Kose Corp (4922 JP)</a> and <a href="https://www.smartkarma.com/entities/shiseido-company-limited" target="_blank" data-smartkarma-citation="entities:5718:1" rel="noopener">Shiseido Company (4911 JP)</a> by around 20% and <a href="https://www.smartkarma.com/entities/kao-corp" target="_blank" data-smartkarma-citation="entities:12933:1" rel="noopener">Kao Corp (4452 JP)</a> and <a href="https://www.smartkarma.com/entities/fancl-corp" target="_blank" data-smartkarma-citation="entities:15862:1" rel="noopener">Fancl Corp (4921 JP)</a> by around 25% since March 2021.</li>
</ul><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/216/284/original/image_98653331221625128553967.png?1625128554" class="editor-image img-responsive" data-smartkarma-image-id="216284"></figure><ul>
<li>Pola Orbis has a relatively small overseas presence compared to peers such as Shiseido and Kose. With the expansion of its domestic flagship brands into the Chinese market, the company is expected to attain an overseas sales ratio of around 25% by 2023 compared to the current 15%. Exposure to the Chinese cosmetics market is highly regarded by investors and they have generally given such companies premium valuations.</li>
<li>Pola Orbis currently trades at a new all-time high FY+2 EV/EBIT of 22.0x. However, it is still around 40-50% lower than Shiseido’s current FY+2 EV/EBIT, and Kose’s peak FY+2 EV/EBIT multiple, indicating plenty of room for multiple expansion.</li>
</ul>


The company announced last week that it will begin selling POLA products in a duty-free store on Hainan Island, China from July 2021. This is the first step taken by Pola Orbis to tap into the Chinese duty-free market through the company’s flagship brands. Chinese travel retail market offers significant growth potential, especially in the high prestige skincare category.
Meanwhile, Pola Orbis Holdings (4927 JP) has broken out of a medium-term downtrend and outperformed Kose Corp (4922 JP) and Shiseido Company (4911 JP) by around 20% and Kao Corp (4452 JP) and Fancl Corp (4921 JP) by around 25% since March 2021.

Pola Orbis has a relatively small overseas presence compared to peers such as Shiseido and Kose. With the expansion of its domestic flagship brands into the Chinese market, the company is expected to attain an overseas sales ratio of around 25% by 2023 compared to the current 15%. Exposure to the Chinese cosmetics market is highly regarded by investors and they have generally given such companies premium valuations.
Pola Orbis currently trades at a new all-time high FY+2 EV/EBIT of 22.0x. However, it is still around 40-50% lower than Shiseido’s current FY+2 EV/EBIT, and Kose’s peak FY+2 EV/EBIT multiple, indicating plenty of room for multiple expansion.


POLA Launched on Hainan Island: Valuation Could Expand As China Becomes POLA’s Center of Attention

China has announced that it will allow couples to have up to three children, after census data showed a steep decline in birth rates. Previously, we analysed the possible impact on the Japanese baby and childcare company <a href="https://www.smartkarma.com/entities/pigeon-corp" target="_blank" data-smartkarma-citation="entities:3294:1" rel="noopener">Pigeon Corp (7956 JP)</a> as a result of the above policy shift. This time around, we analyse the impact on the Japanese personal care company <a href="https://www.smartkarma.com/entities/kao-corp" target="_blank" data-smartkarma-citation="entities:12933:1" rel="noopener">Kao Corp (4452 JP)</a>, whose share price rose 1.5% in the last two trading days.

China has announced that it will allow couples to have up to three children, after census data showed a steep decline in birth rates. Previously, we analysed the possible impact on the Japanese baby and childcare company Pigeon Corp (7956 JP) as a result of the above policy shift. This time around, we analyse the impact on the Japanese personal care company Kao Corp (4452 JP), whose share price rose 1.5% in the last two trading days.

China’s Three Child Policy Beneficiaries Part 2 Kao Corporation: Finally Off The Leash?

Japan

POLA ORBIS HOLDINGS INC. develops, manufactures and markets cosmetic products, centering in skincare  products. Under its multi-brand strategy, the Company holds nine cosmetic brands including POLA, prestige skincare brand, ORBIS, oil-free skincare brand, H2O PLUS and Jurlique.

Rizap Group Inc provides low calorie foods including soy milk cookies, diet drinks, and supplements.  The Company sells its products through mail order.

KOBAYASHI PHARMACEUTICAL CO., LTD. manufactures and wholesales pharmaceuticals and medical equipment.  The Company also develops and manufactures fragrances, deodorant, sanitary products, and ointment for stiff shoulders, as well as exports to Southeast Asia and the US.

Noevir Holdings Co., Ltd. manufactures and sells a variety of cosmetic products. The Company's products include skin care and make-up.  Noevir also manufactures and sells medicines, nutritional supplements and apparel.

Milbon Co., Ltd. manufactures hair care products for beauty salons.  The Company produces chemicals for permanents, hair coloring, shampoos, rinses, and hair growth stimulant products.

euglena Co., Ltd. develops and manufactures euglena based products. The Company uses the unique growing and nutritional properties to produce functional food tablets, jelly, beverages, cookies, noodles, and cosmetics. euglena grows in high carbon dioxide environments which enables it to be used for environmental and outer space applications as well.

KOSE Corporation manufactures, retails, and exports cosmetics including make up, skin care, and hair care products.  The Company sells its products in Hong Kong, China, Singapore, and Malaysia.

MANDOM CORPORATION manufactures and markets a variety of cosmetic products for men and women.  The Company's products include hair care and skin care cosmetics.

COTA CO., LTD. manufactures and sells hair care products.  The Company offers an extensive line of perm, coloring, styling, and treatment products.

YA-MAN LTD. is a manufacturer of home facial equipment, and also sells its facial massager, cosmetics and laundry.

LG H&H Co., Ltd. manufactures and distributes cosmetics. The Company produces whoo, o hui, sum 37, basic cosmetics, color cosmetics, and other related products. LG H&H also produces toothpaste, soap, detergents, healthy, personal care, and refreshing products.

AMOREPACIFIC Group is an investment holding company. The Company, through its subsidiaries, produce cosmetics and toiletries.

Edgewell Personal Care Co., manufactures and markets a diversified range of personal care  products in the wet shave, skin care, feminine care and infant care categories.  The Companies products include shaving systems and disposable razors, feminine care products, sun care products, infant feeding, gloves and moist wipes.

Amorepacific Corporation develops, manufactures, and exports skin care, make-up, and fragrance products. The Company also produces and markets personal care and health-related products, such as shampoos, soaps, toothpastes, and health teas.

Shanghai Flyco Electrical Appliance Co., Ltd. develops, manufactures and sells personal care appliances. Main products include electric shavers and hairdryers.

Shanghai Flyco Electrical Appl (603868 CH)

Shanghai Jahwa United Co., Ltd. develops, manufactures and wholesales skin care and hair care products, cosmetics, perfumes, detergents, and other household chemical products.  The Company also provides technical and food services.

PT Industri Jamu Dan Farmasi Sido Muncul Tbk manufactures and produces herbal products. The Company's products consist of medicinal herbs, energy drinks, sweets and other beverages.

Blackmores Limited manufactures and markets vitamin, herbal, mineral supplements and natural skin and hair treatment products in Australia and New Zealand. These products are supplied to the over the counter retail market and to health care professionals. The Company also has a line of natural beauty and aromatherapy products and its products are distributed in South East Asia.

Cosmax, Inc. is a cosmetics manufacturer. The Company develops and produces a variety of cosmetics for men and women, such as basic and special skin care, makeup, hair care, and other beauty products. Cosmax manufactures its products on original equipment manufacturing (OEM) basis.

Herbalife Ltd. is a global nutrition company that sells weight management, healthy meals and snacks, sports and fitness, energy and targeted nutritional products as well as personal care products. The Company distributes and sells its products through a network of independent distributors, using the direct selling channel.

FANCL CORPORATION produces and sells additive-free skin care cosmetics for both women and men.  The Company's products include cleansing creams, hair care goods such as shampoos and conditioners, and facial make up products.  Fancl also makes and distributes dietary supplements including royal jelly and various tablets with extracted essence from mushrooms, garlic, ginseng, and soy beans.

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Fancl Corp (4921 JP)

FANCL: Downplaying Its Success

It seems like FANCL is trying to play down its earnings potential by keeping the FY22 guidance unchanged amidst uncertain business conditions.

Oshadhi Kumarasiri

Asia Growth Hits The Breaks, KOSE Tumbles 12.2%

Kose's share price dropped 12.2% today after a disappointing 2Q21 results release on 30th July 2021 (aftermarket) with revenue and OP growth of...

Oshadhi Kumarasiri

Japanese Cosmetics Industry: 2Q21 Statistics Update

Cosmetics exports grew 32.8% YoY and 15% QoQ in 2Q21 to more than offset the weaknesses in the domestic cosmetics market which remained 26% and 31%...

Oshadhi Kumarasiri

POLA Launched on Hainan Island: Valuation Could Expand As China Becomes POLA’s Center of Attention

As the China growth story becomes Pola Orbis’ center of attention, we think the stock’s current bull run could continue despite peak valuation...

Oshadhi Kumarasiri

China’s Three Child Policy Beneficiaries Part 2 Kao Corporation: Finally Off The Leash?

While cosmetics is on the path to a steady recovery, the hopes of returning revenue growth in Merries Diapers could help Kao to break the current...

Oshadhi Kumarasiri

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