Leading Independent Investment Research, Morningstar, Inc.

Morningstar

Leading Independent Investment Research

Morningstar, Inc.

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Equity Bottom-Up

We initiate coverage of <a href="https://www.smartkarma.com/entities/6246" target="_blank" data-smartkarma-citation="entities:6246:1">Unicharm Corp (8113 JP)</a>, one of the largest personal hygiene manufacturers in Asia, and believe the stock price is attractive, with shares trading at a 15% discount to our fair value estimate of JPY 3,500. Unicharm’s stock price has underperformed the index over the past year, as the market has been concerned about intensifying competition in the baby diaper space in emerging Asia, but we are upbeat with regard to its margin recovery story. As a firm with entrenched retailer relationships and brands in Asia, Unicharm’s margin is on track to improve as the company improves its product mix and leverages its fixed costs with growing sales growing at high-single-digit rates. We assign the company a narrow moat rating, underpinned by intangible assets, which primarily include its brand equity around personal-care products, as well as the entrenched retailer relationships as a tier-one maker in the feminine care, healthcare (adult incontinence care products), and baby care space in Asia.Unicharm’s brand equity is evidenced by 1) dominant market share in Japan and other Asian countries spanning multiple product categories; 2) expansion of gross margin, which suggests an improving product mix; and 3) strong pricing power in feminine care products and modest pricing power in adult incontinence care products. With a proven track record of large sales volume and high velocity products, Unicharm has been entrenched in retailers’ supply chain, enabling it to secure more shelf space than smaller players. The company has generated an average return on invested capital of 21% over the past 10 years, well above its weighted average cost of capital of 5.5%, and we believe it will continue to enjoy ROICs of around 22% over the next five years, similar to its American peer Kimberly-Clark.Our base case forecasts Unicharm’s organic top-line growth in local-currency terms to slow down to around 6% over the next five years from 9% over the past 10 years, partly because of a higher base effect. We expect Japan and overseas business to grow by around 4% and 7%, respectively. Growing demand for disposable personal hygiene in emerging countries should allow the company to deliver a 6% compounded growth rate for its personal care business. The pet care business is likely to grow at mid single-digit rates versus 10% over the past 10 years, as the company focuses more on high-margin products in the U.S. than on merely pursuing volume. The company’s target of JPY 800 billion in sales by 2020 looks largely achievable.Analyst: Shanshan Wei, CFA

We initiate coverage of Unicharm Corp (8113 JP), one of the largest personal hygiene manufacturers in Asia, and believe the stock price is attractive, with shares trading at a 15% discount to our fair value estimate of JPY 3,500. Unicharm’s stock price has underperformed the index over the past year, as the market has been concerned about intensifying competition in the baby diaper space in emerging Asia, but we are upbeat with regard to its margin recovery story. As a firm with entrenched retailer relationships and brands in Asia, Unicharm’s margin is on track to improve as the company improves its product mix and leverages its fixed costs with growing sales growing at high-single-digit rates. We assign the company a narrow moat rating, underpinned by intangible assets, which primarily include its brand equity around personal-care products, as well as the entrenched retailer relationships as a tier-one maker in the feminine care, healthcare (adult incontinence care products), and baby care space in Asia.Unicharm’s brand equity is evidenced by 1) dominant market share in Japan and other Asian countries spanning multiple product categories; 2) expansion of gross margin, which suggests an improving product mix; and 3) strong pricing power in feminine care products and modest pricing power in adult incontinence care products. With a proven track record of large sales volume and high velocity products, Unicharm has been entrenched in retailers’ supply chain, enabling it to secure more shelf space than smaller players. The company has generated an average return on invested capital of 21% over the past 10 years, well above its weighted average cost of capital of 5.5%, and we believe it will continue to enjoy ROICs of around 22% over the next five years, similar to its American peer Kimberly-Clark.Our base case forecasts Unicharm’s organic top-line growth in local-currency terms to slow down to around 6% over the next five years from 9% over the past 10 years, partly because of a higher base effect. We expect Japan and overseas business to grow by around 4% and 7%, respectively. Growing demand for disposable personal hygiene in emerging countries should allow the company to deliver a 6% compounded growth rate for its personal care business. The pet care business is likely to grow at mid single-digit rates versus 10% over the past 10 years, as the company focuses more on high-margin products in the U.S. than on merely pursuing volume. The company’s target of JPY 800 billion in sales by 2020 looks largely achievable.Analyst: Shanshan Wei, CFA

Initiating Coverage of Unicharm With JPY 3,500 FVE and Narrow Moat Rating