Shiseido Earnings: China Rebound and Japan Reopening Lift Profits but Travel Retail a Risk to Profit

Narrow-moat Shiseido’s second-quarter results came in above its internal targets thanks to more than 20% growth in China and continued strength in Western markets and Japan. Management has maintained the full-year guidance due to rising uncertainty surrounding tightened daigou regulations of Hainan’s travel retail. We have marginally adjusted our assumptions, which leave an immaterial impact on our profit forecasts and fair value estimate of JPY 6,100. We view shares as fairly valued but acknowledge Hainan travel retail as a downside risk to our near-term forecasts. We reckon the 12% target of core operating profit margin for 2025, boosted by domestic recovery and a ramp-up of domestic cost restructuring, is highly feasible. Yet, a leap to 15% by 2027 looks challenging unless China’s growth momentum returns to the pre-COVID-19 level.