Uni-Charm Indonesia (UCID IJ)

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Uni-Charm Indonesia (UCID IJ) is a local subsidiary of Japan’s Unicharm Corporation - one of the largest baby diaper manufacturers in the world.

The Indonesian subsidiary was set up as a JV between Unicharm Corporation and local conglomerate Sinar Mas, which is run by the Widjaja family.

Uni-Charm Indonesia is an illiquid stock. It’s only suitable for personal accounts at the present point in time. Trading volumes were decent after the IPO in 2019 but unfortunately, they have slowed to a trickle.

It’s a growth company though. Indonesian penetration rates for baby diapers and feminine care products are only ~20% of those in Japan. So growth could continue at Euromonitor’s projected 10% rate for years to come - if not for decades to come. That’s why you should pay attention.

The company’s main business is selling baby diapers and wet wipes under the “MamyPoko” brand name. It also sells feminine care products such as sanitary napkins under the “Charm” brand name. In the adult diaper segment, it uses the brand name “Lifree”. The company has a 40-50% market share in Indonesia across its key segments.

In 2020, Kimberly-Clark acquired Uni-Charm Indonesia’s competitor “Softex” for US$1.2 billion. At the time, Softex had total revenues of US$420 million, which means that the sales transaction multiple was roughly 2.9x.

Compare that with Uni-Charm Indonesia, which today trades at only 0.5x EV/Sales. It’s true that the company’s operating margins are low at just 6-7%. But even adjusting for the low profitability, the stock still trades at just 13.9x P/E and 8.0x EV/EBIT on 2022e numbers.

The low return on equity could signal problems with corporate governance. However, I don’t think that’s the case here. Parent Unicharm is a highly reputable organisation. It is in full control of its Indonesian subsidiary. For example. it is unlikely to accept its Indonesian partner Sinar Mas stealing from the cookie jar.

Japan’s Unicharm corporation does own the key brand names and the intellectual property related to the company’s IT system and manufacturing processes. The Indonesian subsidiary pays a 3% royalty fee to the parent for access to that intellectual property, and that could partly explain why the margins have been low.

Another explanation could be that competitor Softex has been engaging in a price war. Before the pandemic, Softex used to sell products at a 15% discount to those of Unicharm. Since Softex was acquired by Kimberly-Clark, however, it has started to raise its prices. While Kimberly-Clark is a formidable competitor, the fact that Softex has started to raise prices should ease the pressure off Uni-Charm Indonesia’s margins.

I take comfort from the fact that neither Unicharm nor Sinar Mas sold shares in the IPO. Nor have they sold any shares since the IPO. In a 2020 call with investors, CEO Yuji Ishii said outright that he thinks Unicharm Indonesia’s share price “is too low”. He also said that the company planned to grant stock options to its senior management team, which could provide them with an incentive to reach out to investment banks for greater coverage.

It’s also encouraging to hear that the company plans to continue its regular product price increases after the pandemic.

The bottom line is that Uni-Charm Indonesia is a high-quality company that’s likely to grow steadily for decades to come. There does seem to be some upside to margins. The valuation multiples are roughly half those of its global peers. It’s just a challenge dealing with the stock’s poor liquidity.

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