Shiseido’s Japan Swings Back to Profit on Improved Mid-Priced Sales; China Sales Relatively Firm

Narrow-moat Shiseido's third-quarter results, with sales up 15.6% year on year (7.3% growth like-for-like) and core operating profits up 180%, beat our expectation. Improved domestic sales that swung back to profit was the key positive of the quarter. While the zero-COVID-19 policy still undermines China sales and Hainan tourism (travel retail), Shiseido's marketing strategy pivot appears to help avoid a sales slump. While it looks set to beat the full-year profit guidance, given its attempt to reduce dependence on aggressive promotions during key shopping events in China in addition to increased marketing investment budgeted for the fourth quarter, management has maintained its full-year guidance. We will focus on its progress transforming China's business model, rather than the coming-quarter profits. We've made no changes in our forecasts and continue to view shares as modestly undervalued, trading at 15% discount to our fair value estimate of JPY 6,000.