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Rating Action:

Moody's affirms Shiseido's A2 ratings, assigns A2 issuer ratings; outlook stable

 The document has been translated in other languages

29 Nov 2019

Tokyo, November 29, 2019 -- Moody's Japan K.K. has affirmed Shiseido Company, Limited's (Shiseido) A2 senior unsecured ratings, and assigned A2 long-term domestic and foreign currency issuer ratings. The rating outlook remains stable.

RATINGS RATIONALE

"Shiseido's improved leverage metrics provide financial cushion as it seeks to grow outside its dominant home market in Japan," says Akifumi Fukushi, a Moody's Vice President and Senior Analyst.

The rating reflects Shiseido's leading position in the Japanese beauty market and its diverse product portfolio with well recognized brands, especially in the prestige category, that generates stable cash flow.

Growth in Asia, particularly from sales in China and to Chinese visitors to Japan, has resulted in steady rising revenues and a roughly doubling of the company's EBIT margin to about 10% currently from three years ago. Nevertheless, these improved margins remain about half of those of similarly rated global peers, such as The Estee Lauder Companies Inc. (A1 stable) and L'Oreal S.A. (Prime-1).

Shiseido's profit remains concentrated in Japan and reliant on growth from China and other Asian countries, exposing it to a cyclical downturn and changes in consumer preferences in the region. Meanwhile, the company continues to be unprofitable in the US and Europe, despite some major acquisitions and collaborations over the past decade.

Earlier this month, Shiseido acquired Drunk Elephant Holdings, LLC, which has ownership of a US "clean" skincare brand, for approximately US$845 million with a combination of cash on hand and bank borrowings. The acquisition is fully valued, at nearly 10 times revenue, but reflects Shiseido's long-term strategy to double its revenues to JPY2 trillion. Shiseido's leverage, as measured by its debt/EBITDA, will increase to 2.2x in 2019 from 1.3x in 2018, due to the acquisition debt. Still, the ratio will remain well below its downgrade trigger of 3.5x.

Moody's considers environmental, social and governance risks in its analysis. In terms of governance, Shiseido's lack of success in its overseas business in the US and Europe is a weakness, and demonstrating expected profit contribution from Drunk Elephant will be a challenge. Acquisition risk will remain significant as the company seeks to double its revenues, which will raise the associated execution risk of integrating the acquisition and deriving the expected profit from it.

The stable outlook reflects our view that Shiseido will continue to generate stable cash flow from its product portfolio and maintain debt/EBITDA in the 2-3x range.

Moody's will consider upgrading Shiseido's rating if the company turns around its US and European businesses and establishes a more geographically diversified business mix, while improving leverage and profitability, for example, debt/EBITDA sustained below 2.0x and EBIT margin in the high teens.

Downward pressure will likely arise if the company experiences the following: 1) a fall in demand for its products, especially its high-end prestige lines; 2) further deterioration in its US and European operations; 3) significant debt-financed acquisitions, 4) a sustained weakening in its credit metrics, for example, EBIT margin falls below 7-8% or its debt/EBITDA trends toward 3.5x.

The principal methodology used in these ratings was Global Packaged Goods (Japanese) published in February 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Shiseido Company, Limited, headquartered in Tokyo, is a leading Japanese manufacturer of beauty products.

REGULATORY DISCLOSURES

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

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Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

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Akifumi Fukushi
Vice President - Senior Analyst
Corporate Finance Group
Moody's Japan K.K.
Atago Green Hills Mori Tower 20fl
2-5-1 Atago, Minato-ku
Tokyo 105-6220
Japan
JOURNALISTS: 81 3 5408 4110
Client Service: 81 3 5408 4100

Mihoko Manabe
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 81 3 5408 4110
Client Service: 81 3 5408 4100

Releasing Office:
Moody's Japan K.K.
Atago Green Hills Mori Tower 20fl
2-5-1 Atago, Minato-ku
Tokyo 105-6220
Japan
JOURNALISTS: 81 3 5408 4110
Client Service: 81 3 5408 4100

No Related Data.
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