Kose Earnings: Continued Strength in Japan and Tarte Brand Offsets China Weakness and Lifts Profits

Narrow-moat Kose's profit resilience, bolstered by the domestic strength, was a surprise. In contrast with Shiseido's profit slump and downward revision, Kose saw sales rise 6.2% year on year, with operating profits up 6.4% in the third quarter. Despite better-than-expected profits, the 40% decline in China's sales is largely in line with our projection. Given the greater impact of China's sales decline on profits in the fourth quarter, we have maintained our profit forecasts, in which our operating profit estimate is 5.5% above the 2023 guidance. As we noted in the recent initiation report, prestige cosmetics in Japan, the key source of Kose's moat, alongside the recovery of midprice cosmetics, will serve as a near-term growth driver and offset the weakness in China and travel retail. Despite our projection of a 36% decline in operating profits in the fourth quarter, a 27% upside to our fair value estimate of JPY 12,600 indicates limited downside risk and attractive valuations.