Description

Shiseido Company, Limited (TSE:4911), Short Thesis, 2023/10/28

Executive Summary

Shiseido Company, Limited (“Shiseido”), the Japanese cosmetics company, is facing headwinds in its biggest market – China. Historically, the company’s ~40% of revenue and ~40% of OP are contributed by Chinese consumers. China used to be the fastest growing market for Shiseido.

However, after the Japanese government approved the release of nuclear waste water in July, Chinese customers stopped buying immediately.

• According to the online GMV tracker, Shiseido China online GMV growth was -9% yoy in 3Q23 (vs. consensus +4% yoy). The decline mainly kicked in from late August (Jul-Sept yoy: +12% / -6% / -29%), after the actual release took place
• The situation continued to worsen in October: Shiseido posted -74% yoy in Tmall Double11 presale GMV

TP and valuation: In the next 6 months, we think the stock has 18% downside from China slowdown as base case, and bear case of >30% downside considering both valuation contraction and China slowdown.

• Revenue and profit: At least 18% downside from revenue and profit downward revision (40% of revenue facing revenue growth revise-down from +4% to -40%) => 18% downside from China revenue drag starting 4Q23
• Valuation multiple: assuming no multiple contraction, the company’s NTM EV/EBITDA, NTM P/E remains at 15x and 40x. However, it is more likely that Shiseido’s NTM EV/EBITDA, NTM P/E will contract to 10-15x range, and 30-35x => that’s additional 15-20% downside from valuation contraction

Short Thesis

Large China exposure: Chinese consumption contributes ~40% of revenue and ~40% of OP to Shiseido.

Chinese consumption revenue contribution: ~40%.

• China business (as reported by Shiseido): ~25%
• Travel retail: 10% (60-65% of Shiseido’s Travel Retail segment sales are from China travel retail channels)
• China Daigou in Japan/Korea: 3% (10% of Japan and APAC sales are from Chinese Daigou)
• From sellside model:
• 

Chinese consumption OP contribution: ~40%. Noting that the Travel Retail segment has been Shiseido's core OP contributor, accounting for ~50% of overall OP.

• From sellside model:
• 

Shiseido’s China growth is severely impacted by nuclear waste water release.

Shiseido China online GMV growth (Tmall + JD + Douyin + Kuaishou).

• July: +12% yoy
• Aug: -6% yoy
• Sept: -29% yoy

Source: Yipitdata

Double-11 presale GMV growth: Chinese brands are taking share from global brands. Japanese brands are the worst-performing group.

Source: Taosj

Valuation: Shiseido valuation is highly correlated to overall sales growth and China sales growth

• Revenue and profit: At least 18% downside from revenue and profit downward revision (40% of revenue facing revenue growth revise-down from +4% to -40%) => 18% downside from China revenue drag starting 4Q23
• Valuation multiple:
  • If we conservatively assume no multiple contraction, the company’s NTM EV/EBITDA, NTM P/E remains at 15x and 40x
  • However, it’s more likely that Shiseido’s NTM EV/EBITDA, NTM P/E will contract to 10-15x range, and 30-35x => 15-20% downside from valuation contraction
•  

Upside risk: Japan domestic sales recovery

Japan domestic retail saw some recovery this year. Upside risk for Shiseido is their domestic market to regain growth. Japan market accounts for 25% of the Group’s revenue. Market consensus expects Japan sales growth around +11~12% yoy in 2H23 (1H23 / 2022 / 2021 Japan sales was +8% / -8% / -15%).

We don’t track Shiseido Japan retail sales, but if we look at Japan department store sales of cosmetics, we do see some recovery. Below sets out the Japan department store sales yoy growth vs. Shiseido Japan revenue growth. However the department store sales data is not 100% accurate to represent Shiseido domestics sales. The gap between cosmetics tracker and Shiseido actual sales was ~8ppt historically.

• 3Q22: Department cosmetics sales +16% vs. Shiseido +8%
• 4Q22: Department cosmetics sales +5% vs. Shiseido -3%
• 1Q23: Department cosmetics sales +16% vs. Shiseido +8%
• 2Q23: Department cosmetics sales +16% vs. Shiseido +8%
• 3Q23: Department cosmetics sales +20%; Shiseido results is yet to release
• If we consider the 8ppt gap, Shiseido 3Q23E revenue growth would be +12% vs. +11% consensus. => This is largely in line with consensus, no major upside surprise

Catalyst

Shiseido earnings for the next two quarters.