Global Automotive Stocks/EV Focus/Event Driven, SC Capital

SC Capital

SC Capital has over 20 years' experience covering the global automotive industry both on the Sell Side (UBS & Morgan Stanley) and Buy Side (Och-Ziff), along with a wealth of industry contacts. 

Current focus is on electric vehicle stocks & their supply chains. Aim is to identify the winners and losers from a long/short perspective. This includes close coverage of legacy automakers as well.  

From time to time. we cover opportunistic events with stocks in the manufacturing sector, food & beverage, healthcare and tech, where we also have coverage experience.

Global Automotive Stocks/EV Focus/Event Driven

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Over 22 years covering Japanese equities on both the sell side and the buy side. 

Bottom-up Japan Equities Research

Equity Bottom-Up

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Shiseido's New CEO Nearly Quintuples Market Cap: Since CEO Uotani took the helm at Shiseido back in June 2014, the stock has risen by 379%, with 61% of this spike achieved this year alone. Shiseido's operating profit during that time grew by 191% to Y80bn last year and consensus sees FY18 OP growing by another +46% to Y117bn in 2018. The stock rise of 383% is still higher than OP growth of +324% between FY15 and FY18, assuming consensus is on the mark for FY18 OP. </li>
<li>
Shiseido's CEO Makes Far Less than Kose's CEO: During this period where Shiseido saw its OP grow by +191% and its stock price surge by +379%, Shiseido's CEO saw his salary rise by 398% to $3.4m while his stock holdings in Shiseido are valued at only $1.2m at the moment. Kose's CEO (a member of the founder's family) only saw his salary rise by +41% to $1.8m, but his stake in Kose is worth $1.6bn. Kose's leaders have always had a bigger stake in their stock's upside due to Kose being a family-run business. </li>
<li>
Shiseido is the Most Expensive Global Cosmetics Stock but Lags in Profitability: Shiseido's market cap of $30bn is close to that of Estee Lauder's $32bn, but Shiseido sports the highest valuations among the major global cosmetics makers (see Table-1). Despite the extremely rich valuations, Shiseido lags in profitability and returns on investment. It also has the highest PEG ratio when measured by EV/EBITDA versus the 3-year EBITDA CAGR through FY20.  </li>
<li>
Where the Positive Catalysts Lie: There are many positive catalysts that have led to investors bidding up Shiseido to such nose-bleed valuations, including a growing Chinese customer base with increasing spending power; a new anti-wrinkle cream due out in 2020 that could be a blockbuster product (albeit rivals already have similar products coming out); and the potential for removal of big losses in the US and Europe to lead to higher normalized earnings. </li>
<li>
Product Mix is also Among the Best in Class: Shiseido also has a better product mix than most Asian rivals, as its high-end prestige brands are pushing the growth in earnings, which should eventually lead to higher profit margins. But Kose has a more diversified earnings base and product mix, which provides for more upside and stability in earnings growth. Kose should have a valuation premium versus Shiseido because of this, as Shiseido is highly levered to (a) Chinese consumers (both on shore in China and inbound in Korea &amp; Japan) and (b) the high-end market where growth could peter out in the face of an economic downturn.  </li>
<li>
Why Shiseido, at Current High Valuations, is not for Faint-Hearted Investors: Despite its stellar turnaround from a low-growth cosmetics company with its fate linked to the sluggish Japanese economy, there are some undeniable risks at Shiseido that some could argue deserve a valuation discount. First and foremost, over 25% of Shiseido's sales come from Chinese customers, which is much more than any of its major rivals. Any hiccup in Chinese wage growth or anti-Japanese campaigns led by the Chinese government could lead to a massive drop in earnings and the stock price (look at Amorepacific's stock price in 2016 after the Chinese government launched a boycott on most Korean products).  </li>
<li>
High Dependence on Sales to Inbound Tourists in Japan: Secondly, during the January to March quarter, 15.3% of Shiseido's domestic revenues were made up by inbound sales to tourists visiting Japan. Shiseido's domestic operations generated 68% of the company's Q1 (January to March) global profits. Kose only had 8.9% of its domestic revenues made up by inbound sales during the same period, which is a much more reasonable level. Kose's domestic operations only generate around 50% of global OP by our estimates. </li>
<li>
Both Shiseido &amp; Kose's next quarterly results should beat consensus by a Wide Margin: While the consensus estimate for Shiseido's Q2 OP is only Y14.5bn (+37% YoY), our talks with management and analysis of inbound trends, etc. indicate an OP of Y21bn (+99% YoY), which could cause the stock to rally further. Our talks with Kose lead us to estimate its April to June quarter OP to be around Y15.5bn (+20% YoY) versus consensus estimates of Y14bn. We recommend buying Kose now and pairing it up with a short in Shiseido after it releases a blow-out quarter on August 8th. </li>
<li>
From Q3 Onward, Growth Hurdles Become Higher at Shiseido While Accelerating at Kose: OP growth from Q3 (July to September) should see much higher hurdles at Shiseido (Q3 OP in 2017 grew +91% YoY), while Kose (which has a March fiscal year-end versus Shiseido's December fiscal year-end) should probably see higher growth due to low hurdles from last year and the launch of its new anti-wrinkle cream, IP.Shot Advanced, in October. </li>
<li>
Shiseido versus Kose: Shiseido trades at an FY20 EV/EBITDA of 15.8x consensus estimates, while Kose trades at 16.3x. However, as mentioned above, Kose has a much stabler earnings structure (i.e. less dependence on Chinese consumers) and generates higher EBITDA margins, with consensus estimates of an FY20 EBITDA margin of 19.8% versus Shiseido's 16.8%. Furthermore, on an EV/EBITDA relative to EBITDA-growth basis, the ratio is much cheaper at Kose, whose ratio is 0.83x versus 0.94x at Shiseido. While around 20% of earnings upside at Shiseido through FY20 is due to rectifying its loss-making US &amp; EU operations, Kose has no such problems and should see stronger organic growth. </li>
</ul>



Shiseido's New CEO Nearly Quintuples Market Cap: Since CEO Uotani took the helm at Shiseido back in June 2014, the stock has risen by 379%, with 61% of this spike achieved this year alone. Shiseido's operating profit during that time grew by 191% to Y80bn last year and consensus sees FY18 OP growing by another +46% to Y117bn in 2018. The stock rise of 383% is still higher than OP growth of +324% between FY15 and FY18, assuming consensus is on the mark for FY18 OP. 

Shiseido's CEO Makes Far Less than Kose's CEO: During this period where Shiseido saw its OP grow by +191% and its stock price surge by +379%, Shiseido's CEO saw his salary rise by 398% to $3.4m while his stock holdings in Shiseido are valued at only $1.2m at the moment. Kose's CEO (a member of the founder's family) only saw his salary rise by +41% to $1.8m, but his stake in Kose is worth $1.6bn. Kose's leaders have always had a bigger stake in their stock's upside due to Kose being a family-run business. 

Shiseido is the Most Expensive Global Cosmetics Stock but Lags in Profitability: Shiseido's market cap of $30bn is close to that of Estee Lauder's $32bn, but Shiseido sports the highest valuations among the major global cosmetics makers (see Table-1). Despite the extremely rich valuations, Shiseido lags in profitability and returns on investment. It also has the highest PEG ratio when measured by EV/EBITDA versus the 3-year EBITDA CAGR through FY20.  

Where the Positive Catalysts Lie: There are many positive catalysts that have led to investors bidding up Shiseido to such nose-bleed valuations, including a growing Chinese customer base with increasing spending power; a new anti-wrinkle cream due out in 2020 that could be a blockbuster product (albeit rivals already have similar products coming out); and the potential for removal of big losses in the US and Europe to lead to higher normalized earnings. 

Product Mix is also Among the Best in Class: Shiseido also has a better product mix than most Asian rivals, as its high-end prestige brands are pushing the growth in earnings, which should eventually lead to higher profit margins. But Kose has a more diversified earnings base and product mix, which provides for more upside and stability in earnings growth. Kose should have a valuation premium versus Shiseido because of this, as Shiseido is highly levered to (a) Chinese consumers (both on shore in China and inbound in Korea &amp; Japan) and (b) the high-end market where growth could peter out in the face of an economic downturn.  

Why Shiseido, at Current High Valuations, is not for Faint-Hearted Investors: Despite its stellar turnaround from a low-growth cosmetics company with its fate linked to the sluggish Japanese economy, there are some undeniable risks at Shiseido that some could argue deserve a valuation discount. First and foremost, over 25% of Shiseido's sales come from Chinese customers, which is much more than any of its major rivals. Any hiccup in Chinese wage growth or anti-Japanese campaigns led by the Chinese government could lead to a massive drop in earnings and the stock price (look at Amorepacific's stock price in 2016 after the Chinese government launched a boycott on most Korean products).  

High Dependence on Sales to Inbound Tourists in Japan: Secondly, during the January to March quarter, 15.3% of Shiseido's domestic revenues were made up by inbound sales to tourists visiting Japan. Shiseido's domestic operations generated 68% of the company's Q1 (January to March) global profits. Kose only had 8.9% of its domestic revenues made up by inbound sales during the same period, which is a much more reasonable level. Kose's domestic operations only generate around 50% of global OP by our estimates. 

Both Shiseido &amp; Kose's next quarterly results should beat consensus by a Wide Margin: While the consensus estimate for Shiseido's Q2 OP is only Y14.5bn (+37% YoY), our talks with management and analysis of inbound trends, etc. indicate an OP of Y21bn (+99% YoY), which could cause the stock to rally further. Our talks with Kose lead us to estimate its April to June quarter OP to be around Y15.5bn (+20% YoY) versus consensus estimates of Y14bn. We recommend buying Kose now and pairing it up with a short in Shiseido after it releases a blow-out quarter on August 8th. 

From Q3 Onward, Growth Hurdles Become Higher at Shiseido While Accelerating at Kose: OP growth from Q3 (July to September) should see much higher hurdles at Shiseido (Q3 OP in 2017 grew +91% YoY), while Kose (which has a March fiscal year-end versus Shiseido's December fiscal year-end) should probably see higher growth due to low hurdles from last year and the launch of its new anti-wrinkle cream, IP.Shot Advanced, in October. 

Shiseido versus Kose: Shiseido trades at an FY20 EV/EBITDA of 15.8x consensus estimates, while Kose trades at 16.3x. However, as mentioned above, Kose has a much stabler earnings structure (i.e. less dependence on Chinese consumers) and generates higher EBITDA margins, with consensus estimates of an FY20 EBITDA margin of 19.8% versus Shiseido's 16.8%. Furthermore, on an EV/EBITDA relative to EBITDA-growth basis, the ratio is much cheaper at Kose, whose ratio is 0.83x versus 0.94x at Shiseido. While around 20% of earnings upside at Shiseido through FY20 is due to rectifying its loss-making US &amp; EU operations, Kose has no such problems and should see stronger organic growth. 


Shiseido Vs Kose--One of These Two Expensive Cosmetics Makers Is a Buy

Shiseido Company

Shiseido Vs Kose--One of These Two Expensive Cosmetics Makers Is a Buy