Enterprise for analysis: Yakult Honsha Co., Ltd.

The stocks code: 2267

Stock prices(September 3rd, 2011): ¥ 3350 Rating: “Buy” Target Stock Prices: ¥3817

1. Investment Summary

The target stock price of Yakult Honsha Co., Ltd. was estimated at ¥3817 by using the Discounted Cash

Flow method (hereafter, DCF method). It was 13.94% higher than current stock prices ¥3350. Thus the

investment recommendation of Yakult Honsha is "buy". The core business of Yakult Honsha is lactic acid

bacteria beverages. It can be assumed that their sales volume is going to increase mainly in developing

countries in the near future because of the following factors: the management based on preventive medicine

and the unique sales system called “Yakult Lady”.

2. Company Overview

Yakult Honsha is a Japanese lactic acid bacteria beverage company. Minoru Shiroa, a doctor of medicine,

who wanted to contribute and encourage people’s health all over the world, discovered new lactic acid

bacteria. After his discovery, he founded Yakult Honsha that sells lactic acid bacteria beverages. Their

products help to make bowels condition good using the bacteria Minoru Shirota found. They sell their

products all over the world. Now almost 30 million people drink their product, which is called “Yakult”,

everyday on every corner of the world. The net sales were ¥312,552 and the operating income was ¥20812 in

the end of March 2012.（Exhibit 1）Lactic acid bacteria beverages business comes 57.9% from sales of all

their products.（Exhibit 2） They expand their business to 32 of the countries and the regions. They sell

medical products as well.

3. Trend of lactic acid bacteria beverage market

In Japan, the amount of their production of lactic acid bacteria beverages goes up and down around

500,000 kl after 2004. The market transitions around 80 billion yen. They account for 60 % of the share. It is

easy to assume that newcomers find it difficult to enter the market considering the cost effectiveness.

Furthermore, some might say that this market is going to shrink because of less production and less volume

of sales these years. At the same time, this reduction of sales can make this market less attractive for

companies. However, other might say that there is a great potential for expanding the market as people

become more health conscious in Japan as an aged society. At the same time, it seems that the demand of

those products is going to increase along with the GDP growth in developing countries in the future. All

things considered, this lactic acid bacteria beverage industry has huge potential to expand more.

4. Characteristics of the Business of Yakult Honsha

Yakult Honsha has the unique ideas of preventive medicine and Yakult ladies system. They lead the

company to success.

■Preventive medicine:

Preventive medicine aims at to prevent diseases rather than curing them or treating their symptoms in

order to maintain good health. Yakult Honsha was founded to achieve the idea. Certainly, the idea of

preventive medicine is the most important idea for this company even after 77 years in business. In 1960s,

they started to expand their business out side of Japan. They firstly started selling their products to

developing countries in Asia, not to developed countries in the western world. This is because their main

strategy is to maintain people’s health in the areas hygienic environment has not introduced yet properly.

Also, they have been tying to improve the quality of their products and introduce new drinks, such as Yakult

400, which contains more lactic acid bacteria than before. Those lactic acid bacteria beverages such as

Yakult have been created based on the idea of preventive medicine. As you can see, preventive medicine is

the core idea of this company. Undoubtedly, this forms the trustworthiness and solid image of this company.

■Yakult ladies system:

Yakult ladies system is the unique sales system created by Yakult Honsha. Now, more than 70 thousand of

people are working as a Yakult lady in the world. The system has 3 advantage; Home-delivery system,

recruiting the locals as a Yakult lady and Periodical visit.

■Home-delivery system: Yakult ladies visit customers’ house and sell Yakult directly. This made it possible

to give their proper knowledge about the products to the customers. Recently, the sales volume of their new

products such as Yakult 400, which is relatively expensive, has increased. We consider this is because their

customers understand the effects of Yakult through this home-delivery system.

■Recruiting the locals: People who work as Yakult ladies are the locals live in the area. This system does

not change overseas. The customers feel easy because a local person visits to sale. Simultaneously, it has led

to the reliance for their products. This may be one of the major factors that Yakult have been introduced to

the countries are not familiar with lactic acid bacteria beverages.

■Periodical visits: The Yakult ladies visit customer ’s house periodically. This made it possible for the

customers to drink Yakult everyday. Furthermore, they, Yakult ladies and their customers, often become

close each other. This makes reliable relationship between them so that for customers it becomes a part of

their life to buy some products from their Yakult ladies and chat with them.（Exhibit 3）The Yakult lady's

system was introduced in early the 1960s. This system has become successful not only in Japan but also

overseas. Even after lactic acid bacteria beverages and Yakult have been spread across the world, the Yakult

lady's system still remains. At that time, people in the most of the countries Yakult Honsha started their

business knew almost nothing about lactic acid bacteria. However, currently Yakult Honsha is widely known

a company selling lactic acid bacteria beverages that maintain people’s bowel condition good in the world.

This can be said that Yakult ladies play a very important role in terms of creating their brand image.

5. Future Prospect

■Future Strategy

The idea of preventive medicine and Yakult Ladies system can make customers have the habit of drinking

Yakult everyday. Therefore Yakult Honsha would get much more regular customers from above two factors.

In China, where Yakult Honsha advanced in 2000s, obviously Yakult has been accepted along with the

number of Yakult Ladies increased. We expect that the net sales are going to increase as the economic

growth in China. Moreover, it seems Yakult will be in great demand in the countries like Japan facing aged

society because not only young people but also elder people have a high health consciousness. What is more,

the target of Yakult Honsha is all of the people who wish to be healthy. The wish is the common demand all

over the world, having nothing to do with a culture and a living standard. So all people in the world can be

the target of the company. In this huge market, the company will boost the net sales in near future. Thus if

they introduce their products to the new market have not exploited yet, it can lead them to get a number of

new customers even though it might take some time and efforts.

6. Future Net Sales（Exhibit 4）

■food business：

We compare transition of past sales in Japan, Asia, Europe and Americas with transition of the sum of GDP

of the countries by computing a regression analysis. （Exhibit 5）Then, we compute a reasonable expectation

of sales by using the calculated result and future GDP value predicted by IMF.

■medical products businesses：

We predicted sales transition of the medicine for the colorectal cancer called the Elplat which account for

most sales. This value is computed from the number of future colorectal cancer patient's predicted transition.

（Exhibit 6）

7. Valuation

■DCF(Discounted Cash Flow) Model：

The target stock price was estimated by discounting the future operating free cash flow of ten years and

continuation value with WACC (Weighted Average Cost of Capital: 4.09%). As a result of it, the target stock

price is estimated to be ¥3817. Hence, the target stock price is cheaper than the stock price of ¥3350 and

investment recommendation is “buy”.

8. Risk Factor

■Exchange rate of fluctuations: Yakult converts the financial statements of its overseas subsidiaries and

other foreign domiciled entities into Japanese yen for preparing its consolidated financial statements. The

line items in the financial statements of these subsidiaries and other entities are thus subject to foreign

currency exchange rate fluctuations when converted into Japanese yen.

■Rise raw material costs：Sharp gain of powdered skim milk and sugars which are raw material may bring

about the rise of the cost price. This may become a factor which depresses the operating profit of Yakult.

■Competitor: Although the existence which threatens the market share of Yakult is not found at present

among the countries consisting mainly of Japan, or developing countries, in the European market, the rise of

Danone pose a big threat to Yakult. In the future, it is possible that Yakult compete for the share in the

European market and other areas with Danone.

■Imitation of Yakult ladies system: Though Yakult lady system is an advantage and unique point of Yakult

Honsha. There is a great possibility that other companies introduce the same system as Yakult Honsha has.

For other companies, it is not easy to introduce the Yakult Lady system since know-how, time, and cost

Yakult originally established. However, it can be a strong thread for Yakult Honsha if other companies

introduced the same system as Yakut Honsha has.

APPENDIX

Exhibit 1:

(Yakult Web Site)

Exhibit 2: Sales volume by segment FY2011

(Yakult Web Site)

0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

Sales Amount (millions of Yen)

Exhibit 3:

(Yakult Web Site)

Exhibit4: Trend of Net Sales

0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000

450,000

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

2016

20

17

20

18

20

19

20

20

20

21

20

22

Europe

Asia and Oceania

The Americas

Japan

Exhibit5: Transition of sales by region

Transition of sales (Japan & overseas)

(Yakult Web Site)

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

Americas

Asia & Oceania

Europe

0

50,000

100,000

150,000

200,000

250,000

300,000

Japan

Overseas

Exhibit 6: Colorectal cancer patient's transition

The number of colorectal cancer patients: about 119,000 people (in 2011)

The number of subjects on Elplat: about 51,000 people

※StageⅠ~Ⅳ: Category about the degree of progression and spread of cancer

(Yakult Web Site)

(milions of yen)Condenced Consolidated Balance Sheet 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Condenced Consolidated Balance Sheet

Cush and time deposit 81,985 77,503 67,487 71,940 77,109 81,172 66,352 85,903 88,837 79,119

Funds surplusAcounts receivable trade 35,700 38,122 38,789 45,919 48,426 49,199 48,590 49,280 49,073 52,531

Inventries 22,732 27,022 27,115 28,740 30,548 34,879 31,213 31,102 27,739 31,203

Defferd tax assets 2,955 3,198 3,960 4,166 4,254 6,449 7,588 7,184 9,240 7,470

others 4,248 3,900 5,502 5,076 5,243 12,960 8,659 8,247 7,941 7,271

Total current assets 147,620 149,745 142,853 155,841 165,580 184,659 162,402 181,716 182,830 177,594

Total tangib le assets 85,155 86,634 86,830 92,269 101,590 116,077 131,320 130,391 133,717 136,962

Total intangib le fixed assets 2,768 4,453 4,409 4,932 5,101 4,670 4,375 4,941 5,911 5,903

Total investments and other assets 40,658 45,554 59,829 75,575 82,266 79,161 63,802 72,841 70,369 76,753

(Investment in securities) 15,655 23,027 42,046 62,386 70,053 70,393 51,126 60,739 57,288 65,279

(Long-term loans reciable) 825 666 594 611 875 709 647 447 601

Total f ixed assets 128,581 136,641 151,068 172,776 188,957 199,908 199,497 208,173 209,997 219,618

Total assets 276,201 286,386 293,921 328,617 354,537 384,567 361,899 389,889 392,827 397,212

Liabilities

Accounts payable trade 25,501 25,148 23,840 27,135 26,183 23,791 22,845 21,452 22,167 24,638

Short-term loans payable 13,124 12,693 12,306 8,911 9,026 29,591 36,979 5,106 3,466 5,118

New borrowingIncome tax repayable 3,746 5,052 2,705 4,513 4,310 1,552 1,174 2,257 3,335 1,440

others 19,354 22,122 23,360 24,653 28,254 34,057 32,629 34,098 34,207 40,785

Total current l iab i l ities 61,725 65,015 62,211 65,212 67,773 88,991 93,627 62,913 63,175 71,981

BondsLong-term loans payable 5,206 4,506 1,653 1,573 1,673 4,472 4,388 43,484 42,951 42,342

Reserve for retirement benefits 17,579 17,184 15,741 16,506 16,457 15,970 16,394 17,568 18,855 17,863

Retirement bonuses for directors 799 657 874 763 898 1,053 332 334 389 355

Defferd tax liabilities 1,706 1,677 1,520 1,353 2,156 5,533 2,423 2,581 2,609 1,791

others 943 1,314 1,504 2,937 4,376 2,546 17,771 14,088 13,877 10,638

Total f ixed l iab ik ities 26,233 25,338 21,292 23,132 25,560 29,574 41,308 78,055 78,681 72,989

Total l iab i l ities 87,958 90,353 83,503 88,344 93,333 118,565 134,935 140,968 141,856 144,970

Net assetsCommon stock 31,117 31,117 31,117 31,117 31,117 31,117 31,117 31,117 31,117 31,117

Capital surplus 40,660 40,739 40,768 40,955 40,955 40,955 41,135 41,229 41,192 41,290

Legal reserve of retained earnings 109,345 121,770 133,602 145,745 158,053 172,273 178,214 187,991 200,996 210,536

Treasury stocks -326 -2,354 -2,528 -2,549 -2,744 -7,581 -8,953 -8,431 -9,050 -8,697

Owner's equity 180,796 191,272 202,959 215,268 227,381 236,764 241,513 251,906 264,255 274,246

Accumulated other comprehensive profit -5,970 -8,508 -6,937 5,431 8,906 516 -35,866 -28,040 -38,369 -45,621

Minority stockholder's equity 13,417 13,268 14,395 19,572 24,916 28,721 21,317 25,055 25,085 23,616

Total net assets 188,243 196,032 210,417 240,271 261,203 266,001 226,964 248,921 250,971 252,241

Total l iab i l ities and net assets 276,201 286,385 293,920 328,615 354,536 384,566 361,899 389,889 392,827 397,211

(milions of yen)Consolidated profit and loss statement 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Net sales 242,740 238,847 247,506 267,707 273,099 317,335 293,490 290,678 305,944 312,552Cost of sales 112,005 108,695 110,641 123,126 125,096 148,140 138,632 133,102 138,403 142,521

Gross prof it 130,735 130,152 136,865 144,581 148,003 169,195 154,858 157,576 167,541 170,031

Depliciation 7523 6322 7668 6212 7465 14486 12724 20908 20643 21762

Others 101,594 107,436 111,072 116,616 116,645 132,207 125,391 117,678 126,497 127,452Selling, general and administrative expenses 109117 113758 118740 122828 124110 146693 138115 138586 147140 149214

Operating income 21,618 16,394 18,125 21,753 23,893 22,502 16,743 18,990 20,401 20,817

Interest incom 990 1,093 1,135 2,320 2,647 3,352 3,048 1,786 1,934 2,436Dividends received 65 33 180 504 425 576 605 571 618 655others 8,886 7,421 8,130 9,421 8,568 7,835 6,631 5,101 4,588 5,774

Non-operating income 9,941 8,547 9,445 12,245 11,640 11,763 10,284 7,458 7,140 8,865Interest payed 468 327 229 163 122 305 920 807 811 695others 1,710 1,471 1,550 2,049 1,805 2,484 756 917 942 1,002

Non-operating expenses 2,178 1,798 1,779 2,212 1,927 2,789 1,676 1,724 1,753 1,697

Ordinary income 29,381 23,143 25,791 31,786 33,606 31,476 25,351 24,724 25,788 27,985

Extraordinary profit 1,952 6,405 3,953 2,346 1,901 4,414 661 606 503 2,348Extraordinary loss 5,393 3,953 4,685 4,781 3,830 1,846 12,868 3,712 4,888 4,384

Net income before income tax 25,940 25,595 25,059 29,351 31,677 34,044 13,144 21,618 21,403 25,949

Total income, inhabitant and business tax 9,697 9,079 9,511 12,161 13,189 15,507 -2,642 5,685 5,267 8,568

Net income before minor ity stockholder 's prof it16,243 16,516 15,548 17,190 18,488 18,537 15,786 15,933 16,136 17,381

Minority stockholder's profit 1,858 1,430 1,441 2,743 3,681 4,220 4,464 2,684 2,966 4,087

Net income 14,385 15,086 14,107 14,447 14,807 14,317 11,322 13,249 13,170 13,294

(milions of yen)Cash flow　statement 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Net income 14,385 15,086 14,107 14,447 14,807 14,317 11,322 13,249 13,170 13,294

Depliciation 7523 6,322 7,668 6,212 7,465 14,486 12,724 20,908 20,643 21,762

Accounts recievable trade -2,422 -667 -7,130 -2,507 -773 609 -690 207 -3,458

Inventries -4,290 -93 -1,625 -1,808 -4,331 3,666 111 3,363 -3,464

Defferd tax assets -243 -762 -206 -88 -2,195 -1,139 404 -2,056 1,770

Others(current assets) 348 -1,602 426 -167 -7,717 4,301 412 306 670

Dffered tax liabilities -29 -157 -167 803 3,377 -3,110 158 28 -818

Accounts payable trade -353 -1,308 3,295 -952 -2,392 -946 -1,393 715 2,471

Income tax repayable 1,306 -2,347 1,808 -203 -2,758 -378 1,083 1,078 -1,895

Operat ing cash flow 15,725 14,839 17,060 17,350 12,014 27,049 34,242 37,454 30,332

Total current assets -1479 -196 -5439 -9321 -14487 -15243 929 -3326 -3245

Total intangible fixed assets -1685 44 -523 -169 431 295 -566 -970 8

Total investments and other assets -4896 -14275 -15746 -6691 3105 15359 -9039 2472 -6384

Depliciation -6,322 -7,668 -6,212 -7,465 -14,486 -12,724 -20,908 -20,643 -21,762

Investment cash flow -14,382 -22,095 -27,920 -23,646 -25,437 -12,313 -29,584 -22,467 -31,383

FCF 1,343 -7,256 -10,860 -6,296 -13,423 14,736 4,658 14,987 -1,051

Short-term loans payable -431 -387 -3,395 115 20,565 7,388 -31,873 -1,640 1,652

Others(current liabolities) 2,768 1,238 1,293 3,601 5,803 -1,428 1,469 109 6,578

Bonds 0 0 0 0 0 0 0 0 0

Convertible bonds 0 0 0 0 0 0 0 0 0

Long-term loans payable -700 -2,853 -80 100 2,799 -84 39,096 -533 -609

Reserve for retirement benefits -395 -1,443 765 -49 -487 424 1,174 1,287 -992

Reserve for retirement benefits for officers -142 217 -111 135 155 -721 2 55 -34

Others(fixed liabolities) 371 190 1,433 1,439 -1,830 15,225 -3,683 -211 -3,239

Common stock 0 0 0 0 0 0 0 0 0

Capital surplus 79 29 187 0 0 180 94 -37 98

Legal reserve of retained earnings -35 341 747 640 3,367 -1,929 -20 3,632 42

Treasury stocks -2,028 -174 -21 -195 -4,837 -1,372 522 -619 353

Accumulated other comprehensive profit -2,538 1,571 12,368 3,475 -8,390 -36,382 7,826 -10,329 -7,252

Minority stockholder's equity -149 1,127 5,177 5,344 3,805 -7,404 3,738 30 -1,469

Divident paid -2626 -2616 -3051 -3139 -3464 -3452 -3452 -3797 -3796

Financial cash flow -5,826 -2,760 15,312 11,466 17,486 -29,555 14,893 -12,053 -8,668

Decrease and increase in cash and t ime deposit -4,483 -10,016 4,452 5,170 4,063 -14,819 19,551 2,934 -9,719

Cash and time deposit at beginning of year 81,985 77,503 67,487 71,940 77,109 81,172 66,352 85,903 88,837

Cash and t ime deposit at end of year 77,502 67,487 71,939 77,110 81,172 66,353 85,903 88,837 79,118