Weakness in China and Japan Weighing on Shiseido's Profits; Recovery More Likely Into Q3

Narrow-moat Shiseido’s first-quarter profit weakness, specifically in China and Japan, was a negative surprise. While management has maintained full-year guidance amid limited visibility, we are reducing our projection mainly for 2022 and to some degree for 2023 given lockdown impacts in China and slow rebound in Japan's beauty spending. We have accordingly lowered our fair value estimate to JPY 6,600 from JPY 6,900. We anticipate the expansion of the premium skincare market in China will continue to lead Shiseido’s growth but have turned less optimistic about Japan's recovery. After a nearly 30% correction over the past six months, we view the shares as undervalued, indicating 25% upside to our new intrinsic value. Our operating profit estimate for 2022 is 11% below guidance.