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Strong in Asia, Await Recovery in Japan Market Cap 28 August 2014 Asia Pacific/Japan Equity Research Personal Products (Personal Products (Japan)) / MARKET WEIGHT Rohto Pharma (4527 / 4527 JP) Rating NEUTRAL* Price (27 Aug 14, ¥) 1,479 INITIATION Target price (¥) 1,520¹ Chg to TP (%) 2.8 Strong in Asia, await recovery in Japan Market cap. (¥ bn) 168.48 (US$ 1.62) Enterprise value (¥ bn) 149.85 ■ Initiate coverage: We initiate coverage of Rohto Pharmaceutical with a Number of shares (mn) 113.91 NEUTRAL rating and ¥1,520 target price (potential return 2.8%). Rohto has Free float (%) 60.0 52-week price range 1,846 - 1,320 investment appeal because of the potential for strong growth by four categories *Stock ratings are relative to the coverage universe in each of household and personal care (HPC) products in Asia. The company reported analyst's or each team's respective sector. record-breaking OP in FY3/14, but earnings may slow in FY3/15 as Japanese ¹Target price is for 12 months. costs rise. We see good growth potential in Asia and await an earnings recovery Research Analysts in Japan. Masashi Mori ■ Investment themes: The Asian business generates 30% of total profits. In 81 3 4550 9695 China, the mainstay Mentholatum brand is penetrating the market due to its [email protected] positioning as a value-added product amongst younger customer segments. Rohto is steadily generating demand in new fields, such as men’s skincare. In Southeast Asia, Rohto supplies value-added products in the eye drops, sunblock, and lipcare categories. In regions where eye drops are not commonly used, Rohto is organizing a grass-roots movement to raise awareness of eyecare, running educational programs at elementary/middle schools. Rohto has already captured the top market share in some regions. Over the past few years, Rohto has developed the Hada Labo range of functional skin lotions that have become a hit in Japan and are now expanding in Asia. The company focuses on niche areas where there is little competition and it can capture high market shares. ■ Catalysts/Risks: Rohto lowered its full-FY3/15 guidance at the 1Q results announcement. Japanese sales may slump in 2Q because of weather- related factors in some areas. The shares appear undervalued, but catalysts are lacking until the 2Q results. We await an earnings recovery in Japan. Downside risks include increasing competition in Japan, while upside risks include strong sales momentum in Asia (incl. China and Southeast Asia) ■ Valuation: We calculated our TP using an average EV/EBITDA for the past ten years (6.9x) applied to our FY3/16 forecast. We apply the company average because Rohto is less profitable than sector peers. Share price performance Financial and valuation metrics Year 3/14A 3/15E 3/16E 3/17E Price (LHS) Rebased Rel (RHS) Revenue (¥ bn) 143.8 151.0 157.0 163.5 120 1800 Operating profit (¥ bn) 16.8 15.8 16.9 18.0 100 Recurring profit (¥ bn) 17.1 16.3 17.4 18.5 1300 80 Net income (¥ bn) 8.9 10.0 10.6 11.3 EPS (¥) 77.1 88.2 93.5 99.7 800 60 Aug-12 Dec-12 Apr-13 Aug-13 Dec-13 Apr-14 Change from previous EPS (%) n.a. IBES Consensus EPS (¥) n.a. 92.2 98.0 102.3 The price relative chart measures performance against the EPS growth (%) 12.2 14.3 6.0 6.6 TOPIX which closed at 1285.92 on 27/08/14 P/E (x) 23.6 16.8 15.8 14.8 On 27/08/14 the spot exchange rate was ¥103.91/US$1 Dividend yield (%) 1.0 1.2 1.3 1.4 EV/EBITDA(x) 8.6 7.0 6.4 5.9 Performance Over 1M 3M 12M P/B (x) 2.1 1.6 1.5 1.4 Absolute (%) -7.4 -4.8 6.8 ROE(%) 9.4 9.8 9.6 9.5 Relative (%) -7.4 -11.9 -6.6 Net debt/equity (%) net cash net cash net cash net cash Source: Company data, Thomson Reuters, IFIS, Credit Suisse estimates. DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS BEYOND INFORMATION® Client-Driven Solutions, Insights, and Access 28 August 2014 (1) Investment themes Initiate coverage with NEUTRAL rating and ¥1,520 TP We initiate coverage of Rohto Pharmaceutical with a NEUTRAL rating and ¥1,520 TP. Rohto has investment appeal because of the potential for strong growth by four categories of HPC products in Asia. The company reported record-breaking OP in FY3/14, but earnings may slow in FY3/15 as Japanese costs rise. We see good growth potential in Asia and await an earnings recovery in Japan. Rohto has expanded its skincare business across Asia, such that it now generates 30% of total profits. Rohto moved into China in 1991 by establishing the joint venture Mentholatum (China) Pharmaceuticals. The mainstay Mentholatum brand is penetrating the market due to its positioning as a value-added product amongst younger customer segments. Rohto is also generating demand in new fields, such as men’s skincare. Sales territories have expanded from coastal regions into the interior, and we see significant growth potential over the longer term. In Southeast Asia, Rohto began local manufacturing in Indonesia and Vietnam in the late 1990s. The company supplies value-added products in the eye drop and lipcare categories. In regions where eye drops are not commonly used, Rohto is organizing a grass-roots movement to raise awareness of eyecare, running educational programs at elementary/middle schools. The company has already captured the top market share in some regions. Rohto is focusing on the men’s skincare, sunblock, and eye-drop markets where there is relatively little competition and its products can capture high market shares. Over the past few years, Rohto has developed the Hada Labo range of functional skin lotions that have become a hit in Japan and are now expanding in Asia. We expect stable growth in China and Southeast Asia. Figure 1: OP hit a record-high in FY3/14, but may slow in Figure 2: Profit contributions from Asia steadily FY3/15 increasing (Y mn) 100% 20,000 80% 15,000 Other 60% Asia Asia 10,000 Europe Europe 40% USA 5,000 USA 20% Japan Japan 0 0% -5,000 -20% Note: OP percentage breakdown by region Note: OP percentage breakdown by region Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse Catalysts: See growth potential in Asia, await recovery in domestic earnings In 2H 2013, Rohto announced a share buyback and raised its full-year guidance, so the shares outperformed the market. Growing profit momentum in Asia also gave a positive impression. The shares have since underperformed due to market disappointment in FY3/15 guidance, outlining only slight earnings growth, released in May 2014 and the reduced full-year guidance announced at the 1Q results. We see growth potential in Asia and think the share price could rally once the market recognizes the prospects for an improvement in domestic profit momentum. We await the best entry timing for investment, due to the various uncertainties at present. Rohto Pharma (4527 / 4527 JP) 2 28 August 2014 Figure 3: Rohto Pharmaceutical – share price and catalysts (Index) FY3/14 OP +17%, (Yen) Versus TOPIX (LHS) 120 FY3/15 CoF OP +1% 1,900 Share price (RHS) 115 1,800 1,700 110 1,600 105 1,500 100 1,400 announced 1,300 95 share buy back announced 1,200 upward revision 90 1Q OP -76%, of full-yr NP made downward 1,100 FY3/13 OP +6%、 announced upward forecast 85 revision on full-yr 1,000 FY3/14 CoF OP +11% revision of full-yr OP forecast 80 OP forecast 900 Dec-12 Feb-13 Apr-13 Jun-13 Aug-13 Oct-13 Dec-13 Feb-14 Apr-14 Jun-14 Aug-14 Source: Bloomberg, Credit Suisse Valuation We base our TP on average EV/EBITDA for the past ten years (6.9x), using FY3/16 as the base year. While Rohto exhibits high growth potential in Asia, we apply the company historical average rather than the Japanese industry average (10x) to reflect the fact that (1) earnings from the domestic business are susceptible to changes in SG&A expenses and (2) Rohto compares unfavorably with HPC sector peers in terms of expectations for medium-term profit growth, profitability, shareholder returns, and ROE. In FY3/14, Rohto had good earnings momentum and OP rose 17%, so the multiple approached +1 standard deviation from the mean. We expect earnings to decline in FY3/15 and then rise by around 7%. We use the company’s average multiple to reflect this profit momentum over the next two years. Figure 4: P/E (12-month forward basis) Figure 5: EV/EBITDA (12-month forward basis) (x) (x) 27 12 +2σ 25.7 +2σ 10.9 24 11 10 21 +1σ 21.0 9 +1σ 8.9 18 8 Ave. 16.3 15 7 Ave. 6.9 12 -1σ 11.6 6 -1σ 4.9 5 9 4 6 -2σ 6.8 3 -2σ 2.9 3 2 04/1 05/1 06/1 07/1 08/1 09/1 10/1 11/1 12/1 13/1 14/1 04/1 05/1 06/1 07/1 08/1 09/1 10/1 11/1 12/1 13/1 14/1 Source: Bloomberg, Credit Suisse estimates Source: Bloomberg, Credit Suisse estimates Risks (1) Accelerating sales momentum in Asia Rohto is developing its businesses in China and Southeast Asia.
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