EUR 850.00 For Business Accounts Only

Morningstar | Lowering Unicharm Profit Outlook on Cost Inflation; China Growth Slowing and Shares Fairly Valued

Unicharm is one of the largest personal hygiene manufacturers in the world, with a focus on Asian markets. We believe its personal hygiene products (87% of sales)--including disposable baby diapers, feminine care and adult incontinence care--and pet care (12% of sales) align well with demand throughout consumers’ life stages, and it benefits from rising demand and premiumization of disposable personal hygiene in the region.With the continuous introduction of new products that target the mass-to-premium market and expansion into more cities and channels, Unicharm has increased its market share and retained the number-one position in the tissue and hygiene space in emerging Asia. Asian sales (44% of sales in 2018) have been mainly driven by China and Indonesia in the past decade, which together contributed about 60% of the regional sales. Unicharm has also raised its profile by cultivating consumers in India and Vietnam, where favorable demographics and growing disposable incomes offer multiyear opportunities for growth. In 2016, it had accumulated around 34% share in the Indian baby diaper market, and 45% share in the baby and feminine care markets in Vietnam. These two countries now generate around 15% of regional sales. Although Unicharm’s operating margins in emerging Asia have been falling in the past few years due to intensified competition in the baby diaper space from both global and local peers, we believe they are on track to recover as the firm improves its product mix and leverages fixed costs, with sales growing in the high single digits. Feminine care will remain the cash cow business, as consumer loyalty is high, and the adult diaper business offers long-term upside under the aging trend in the region.Unicharm’s pet care business mainly sells pet food and toiletries in Japan (around 75% of divisional sales) and the U.S. (under the Hartz brand it acquired in 2011). While Hartz’s scale is marginal in the USD 67 billion American pet market (based on APPA’s statistics), Unicharm has been transferring its know-how to Hartz and expanding its product lines into the premium category. Low-teen operating margins look achievable in the medium term.