Kao: Plan to Unlock Cosmetics and Suncare Global Growth Is Viable, Diversifying Geographic Exposure

We think wide-moat Kao’s renewed midterm targets for cosmetics and skincare are viable. Kao’s pivot of its cosmetics growth strategies and commitment to doubling down on the suncare growth echo our thesis that recovery of cosmetics sales and margins will boost Kao’s profits, while suncare is an area where Kao stands a good chance to succeed overseas. We have made no changes in our forecasts and continue to view Kao’s shares, trading at 25% discount to our fair value estimate of JPY 7,500, as undervalued, While we are positive about its recent developments, including rising pricing benefits in Japan and restructuring endeavors, China remains a key swing factor to the near-term profit outlook.