Executive Director, Metrical Inc

Aki Matsumoto

Executive Director

Independent Leading Corporate Governance Research

Metrical Inc

METRICAL INC. is an independent leading Corporate Governance research firm in Japan where Corporate Governance is increasingly recognized as an important element on corporate management in these days. Thus, CG research and solutions would become an essential component of global capital markets and play important to contribute to transparency of the markets and maximize shareholders’ value in Japan. 

METRICAL INC. provides Corporate Governance research and analysis including rating services, and  also offers investment research and IR services with solutions and customized profound research on CG and IR issues.

Corporate Governance Research: POLA ORBIS HOLDINGS (4927)SUMMARY:POLA ORBIS HOLDINGS' corporate governance is slightly above average*. Although it may be a bit out of corporate governance, its financial performance in ROA and ROA remains lacking due to inefficiencies such as asset efficiency. On the other hand, we can say that Tobin's Q is over 3x and the share price is highly valued for its high profit margin on sales, such as maintaining 7.8% OP margin even in FY12/2020, which was affected by COVID-19 pandemic.The corporate governance of the Company cannot be described without mentioning that it is, after all, a founding family company. In terms of corporate governance practices, the following are commendable: no anti-takeover provisions, no policy holdings, strong board evaluation and board training policies, clear dividend policy, capital allocation and growth policy, and strong shareholder returns. On the other hand, what I do not appreciate are the matters related to human resources. The term of office for directors is two years instead of one year, the majority of the Board of Directors is composed of internal directors, the President chairs the Board of Directors meetings, the committees are advisory committees and are chaired by an internal director (probably the President), there is insufficient disclosure of compensation incentives, and the ratio of variable compensation to fixed compensation and the objectivity of the linkage to medium-term business performance are lacking. There is room for improvement in terms of the ratio of variable to fixed remuneration and objectivity regarding the linkage with medium-term business performance, and there is no disclosure of ex-CEO advisors.As mentioned in the text below, it is questionable whether the Board of Directors and committees, where the founder family holds the majority of the Company's outstanding shares and the second generation founder is the president, can make decisions that are not in line with the president's wishes. The company manufactures cosmetics, which are widely used by women, and aims to expand its sales both domestically and internationally. As such, the company has to be sensitive to consumer trends, and it is necessary to foster a corporate culture that is supported by consumers. This is the reason why corporate governance practices in the company have progressed in the areas mentioned above in the criteria On the other hand, the criteria that cannot be evaluated have much to do with the fact that the founding family company controls the management. This is because personnel matters are non-negotiable in order for the founding family to maintain control in the future. Whether or not governance practices improve in these matters is related to whether or not the founding family will maintain control in the future. In this sense, if the founding family does not make concessions, I do not see any further progress in governance in the immediate future. Even if some progress is made in these matters, we should be careful to see if it is an inherent improvement. Even if progress is made in any of these matters, will the president, who is the chairman of the Personnel and Compensation Committee and controls personnel and compensation, really make a decision that is not in line with the president's wishes when he chairs a board meeting with many internal directors? Even if such a decision is made, can it really be made in a situation where the founding family, which holds the majority of voting rights at the shareholders' meeting, can overturn the decision? Concerns always remain as to whether essential improvements in governance practices will be made in such an environment. Whether we can dispel such concerns and ensure the objectivity and transparency of our Board of Directors and practices is a serious challenge for the Company.*Pora Orbis Holdings has a METRICAL CG Score of 62.78 (versus an average of 53.77 for the 1,722 companies in the universe as of July 2020). The company's score is above average in the universe.

Corporate Governance Research: POLA ORBIS HOLDINGS (4927)SUMMARY:POLA ORBIS HOLDINGS' corporate governance is slightly above average*. Although it may be a bit out of corporate governance, its financial performance in ROA and ROA remains lacking due to inefficiencies such as asset efficiency. On the other hand, we can say that Tobin's Q is over 3x and the share price is highly valued for its high profit margin on sales, such as maintaining 7.8% OP margin even in FY12/2020, which was affected by COVID-19 pandemic.The corporate governance of the Company cannot be described without mentioning that it is, after all, a founding family company. In terms of corporate governance practices, the following are commendable: no anti-takeover provisions, no policy holdings, strong board evaluation and board training policies, clear dividend policy, capital allocation and growth policy, and strong shareholder returns. On the other hand, what I do not appreciate are the matters related to human resources. The term of office for directors is two years instead of one year, the majority of the Board of Directors is composed of internal directors, the President chairs the Board of Directors meetings, the committees are advisory committees and are chaired by an internal director (probably the President), there is insufficient disclosure of compensation incentives, and the ratio of variable compensation to fixed compensation and the objectivity of the linkage to medium-term business performance are lacking. There is room for improvement in terms of the ratio of variable to fixed remuneration and objectivity regarding the linkage with medium-term business performance, and there is no disclosure of ex-CEO advisors.As mentioned in the text below, it is questionable whether the Board of Directors and committees, where the founder family holds the majority of the Company's outstanding shares and the second generation founder is the president, can make decisions that are not in line with the president's wishes. The company manufactures cosmetics, which are widely used by women, and aims to expand its sales both domestically and internationally. As such, the company has to be sensitive to consumer trends, and it is necessary to foster a corporate culture that is supported by consumers. This is the reason why corporate governance practices in the company have progressed in the areas mentioned above in the criteria On the other hand, the criteria that cannot be evaluated have much to do with the fact that the founding family company controls the management. This is because personnel matters are non-negotiable in order for the founding family to maintain control in the future. Whether or not governance practices improve in these matters is related to whether or not the founding family will maintain control in the future. In this sense, if the founding family does not make concessions, I do not see any further progress in governance in the immediate future. Even if some progress is made in these matters, we should be careful to see if it is an inherent improvement. Even if progress is made in any of these matters, will the president, who is the chairman of the Personnel and Compensation Committee and controls personnel and compensation, really make a decision that is not in line with the president's wishes when he chairs a board meeting with many internal directors? Even if such a decision is made, can it really be made in a situation where the founding family, which holds the majority of voting rights at the shareholders' meeting, can overturn the decision? Concerns always remain as to whether essential improvements in governance practices will be made in such an environment. Whether we can dispel such concerns and ensure the objectivity and transparency of our Board of Directors and practices is a serious challenge for the Company.*Pora Orbis Holdings has a METRICAL CG Score of 62.78 (versus an average of 53.77 for the 1,722 companies in the universe as of July 2020). The company's score is above average in the universe.

Japan's Governance: POLA ORBIS HOLDINGS (4927)

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.

Event-Driven

<a href="https://www.smartkarma.com/entities/shiseido-co-ltd" target="_blank" data-smartkarma-citation="entities:5718:1" rel="noopener">Shiseido Company (4911 JP)</a>, Japan’s biggest cosmetics company with annual revenue of around ¥1,000bn, said that they agreed to sell its bareMinerals, BUXOM and Laura Mercier brands along with their related assets to the PE firm Advent International for US$700.0m. The transaction is expected to close on or before 31st December 2021. The sale comes as a part of Shiseido’s “Win 2023 and Beyond” transformation plan which targets a 15% operating margin (an increase of 5 percentage points from the 2019 level) by 2023 and global leadership in skincare by 2030.

Shiseido Company (4911 JP), Japan’s biggest cosmetics company with annual revenue of around ¥1,000bn, said that they agreed to sell its bareMinerals, BUXOM and Laura Mercier brands along with their related assets to the PE firm Advent International for US$700.0m. The transaction is expected to close on or before 31st December 2021. The sale comes as a part of Shiseido’s “Win 2023 and Beyond” transformation plan which targets a 15% operating margin (an increase of 5 percentage points from the 2019 level) by 2023 and global leadership in skincare by 2030.

Shiseido: Offloads BareMinerals, BUXOM and Laura Mercier at a Bargain But Future Looks Bright

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

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.

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Pola Orbis Holdings (4927 JP)

Japan's Governance: POLA ORBIS HOLDINGS (4927)

The corporate governance of the Company can't be described without mentioning that it is a founding family company. Some criteria are commendable...

Metrical Inc

Shiseido: Offloads BareMinerals, BUXOM and Laura Mercier at a Bargain But Future Looks Bright

Shiseido, Japan’s biggest cosmetics company with annual revenue of around ¥1,000bn, said that they agreed to sell its bareMinerals & Laura Mercier...

Oshadhi Kumarasiri

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

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