Raising Unicharm's FVE to Reflect Foreign Exchange Tailwinds; Slower Growth of China Sales a Risk

We are raising narrow-moat Unicharm’s fair value estimate to JPY 4,100 from JPY 3,750 to reflect the recent rapid depreciation of the Japanese yen, the benefit of price hikes, and eased cost pressure. We anticipate the benefits of yen weakness will alleviate a substantial portion of additional cost increases from the second quarter although our forecast of core operating profits for 2022 remains 5.5% below the guidance. We are wary that the impact of China’s zero COVID-19 policy on lucrative feminine care sales may dent the near-term profits. Despite the profit upside potential induced by a trend reversal in the crude oil prices, we anticipate slower feminine care premiumization, coupled with increased investment in adult incontinence and pet care products for geographic expansion, will curtail China’s midterm profit growth after markets fully recover from COVID-19. As the share price has gained 16% alongside the oil price correction since mid-June, we continue to view Unicharm’s shares as overvalued, trading at a 16% premium to our new intrinsic value.