Reducing Shiseido's FVE on Delayed Easing of Zero COVID-19 and China Slowdown; Remains Undervalued

We are reducing Shiseido’s fair value estimate to JPY 6,000 from JPY 6,600 to reflect our updated expectation of a delayed recovery in China cosmetics sales following no easing of the zero COVID-19 policy after the 20th Party Congress. We have lowered our net profit estimates by an average of 9% for 2023 and onward. We assume a gradual easing through the next few months, but more notable relaxation of restrictions in the second half of 2023. Chinese consumers’ changing spending attitudes amid uncertainty surrounding the zero COVID-19 policy and wealth security suggest that the slowdown in prestige cosmetics growth will become permanent, although China still offers above-market growth fueled by premiumization. We continue to view shares as undervalued, trading at a 13% discount to our new intrinsic value.