Top Japan Cosmetics Analyst Says Street Is Too Bullish on China

(Bloomberg) — The market is overly optimistic about China’s economic recovery and its impact on demand for Japanese cosmetics, according to the top analyst covering the sector.

“China’s consumption sentiment is still weak, income is going to savings,” Wakako Sato, an analyst at Mitsubishi UFJ Morgan Stanley Securities Co., said in an interview. “Even when more tourists travel to Japan, they will likely be spending more on activities than on cosmetics products.”

This view is the key reason why Sato — one of few female Japanese analysts to earn a top ranking in their sector from Institutional Investor — is bearish on the nation’s largest cosmetics maker Shiseido Co. She holds the only sell-equivalent rating among 16 analysts covering the stock.

Shiseido has been a key pick for investors trading the tourism theme over the past decade amid rising Chinese prosperity and efforts by Japan’s government to increase the numbers of inbound visitors. The stock surged sixfold in the seven years through 2019, but has dropped 18% since then on pandemic travel restrictions and concerns over China’s slowing economy. 

While recent data suggest China is recovering more quickly than expected, the analyst says the rise in the nation’s household savings suggests low confidence among consumers. She also argues that with Shiseido and other premium brands now available online and on Hainan Island at lower prices than in the past, there is no longer a reason to travel to Japan just to buy them.

“Japanese people used to be like that, especially during the bubble period,” said the 55-year-old analyst, referring to the period of strong economic growth in Japan in the 1980s. “We were traveling for shopping at first, but gradually it became more about the experience,” added Sato, who also ranks No. 1 among analysts covering Japan’s personal-care sector according to data compiled by Bloomberg.

She downgraded Shiseido to underweight in Oct. 2021 and has lowered her price target three times since then, with her current estimate implying further downside of more than 25%. Sato also rates cosmetics maker Kose Corp. underweight, for similar rationale.

Sell ratings are rare in Japan and most analysts remain positive on Shiseido. Jefferies analyst Mitsuko Miyasako upgraded the stock to buy last month, recommending investors focus on how increased Chinese tourism as Covid restrictions fade will benefit cosmetics makers.

Sato maintains her bearish view. Based on her experience of post-bubble Japan since joining the financial world in 1992 after completing a master’s degree in nuclear physics, she describes herself as “less optimistic about the economy than other analysts.”

©2023 Bloomberg L.P.


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