Unicharm Earnings: Price Hike Benefits and China Rebound Lifts Profits; Deteriorated Mix a Concern

Narrow-moat Unicharm posted mixed second-quarter results. While profits rebounded nearly 20% year on year from a low base, the price hike benefits and volume growth fell short of its targets. The domestic pet care business remains the key profit growth engine of the quarter. With diminishing pet care price hike benefits and foreign exchange tailwinds, the implied second-half guidance of a more than 28% increase in business profits looks somewhat challenging even after we take additional JPY 5.1 billion savings from lowered input costs into account. We have maintained our profit forecasts, about 2% below the guidance, and fair value estimate of JPY 4,400, indicating 16% downside from the close price of Aug. 4. We think the market has overvalued the overseas growth of which some core markets have shown signs of slowing.