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KFC Holdings Japan / 9873 R KFC Holdings Japan / 9873 COVERAGE INITIATED ON: 2016.10.31 LAST UPDATE: 2018.12.07 Shared Research Inc. has produced this report by request from the company discussed in the report. The aim is to provide an “owner’s manual” to investors. We at Shared Research Inc. make every effort to provide an accurate, objective, and neutral analysis. In order to highlight any biases, we clearly attribute our data and findings. We will always present opinions from company management as such. Our views are ours where stated. We do not try to convince or influence, only inform. We appreciate your suggestions and feedback. Write to us at [email protected] or find us on Bloomberg. Research Coverage Report by Shared Research Inc. KFC Holdings Japan / 9873 RCoverage LAST UPDATE: 2018.12.07 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp INDEX How to read a Shared Research report: This report begins with the trends and outlook section, which discusses the company’s most recent earnings. First-time readers should start at the business section later in the report. Executive summary ----------------------------------------------------------------------------------------------------------------------------------- 3 Key financial data ------------------------------------------------------------------------------------------------------------------------------------- 5 Recent updates ---------------------------------------------------------------------------------------------------------------------------------------- 6 Highlights ------------------------------------------------------------------------------------------------------------------------------------------------------------6 Trends and outlook ----------------------------------------------------------------------------------------------------------------------------------- 8 Monthly trends -----------------------------------------------------------------------------------------------------------------------------------------------------8 Quarterly trends and results -----------------------------------------------------------------------------------------------------------------------------------9 Outlook------------------------------------------------------------------------------------------------------------------------------------------------- 21 Business ------------------------------------------------------------------------------------------------------------------------------------------------ 24 Overview ----------------------------------------------------------------------------------------------------------------------------------------------------------- 24 KFC business ------------------------------------------------------------------------------------------------------------------------------------------------------ 26 Other business --------------------------------------------------------------------------------------------------------------------------------------------------- 31 Earnings structure ----------------------------------------------------------------------------------------------------------------------------------------------- 32 Market and value chain ---------------------------------------------------------------------------------------------------------------------------------------- 34 Strengths and weaknesses ------------------------------------------------------------------------------------------------------------------------------------ 38 Financial statements-------------------------------------------------------------------------------------------------------------------------------- 39 Income statement ----------------------------------------------------------------------------------------------------------------------------------------------- 39 Balance sheet ----------------------------------------------------------------------------------------------------------------------------------------------------- 40 Cash flow statement -------------------------------------------------------------------------------------------------------------------------------------------- 41 ROE, ROA, ROIC ------------------------------------------------------------------------------------------------------------------------------------------------- 42 Historical performance ---------------------------------------------------------------------------------------------------------------------------- 43 News and topics ------------------------------------------------------------------------------------------------------------------------------------------------- 47 Other information ---------------------------------------------------------------------------------------------------------------------------------- 48 History -------------------------------------------------------------------------------------------------------------------------------------------------------------- 48 Corporate governance and top management --------------------------------------------------------------------------------------------------------- 49 Dividend policy -------------------------------------------------------------------------------------------------------------------------------------------------- 50 Major shareholders (As of March 31, 2018) ------------------------------------------------------------------------------------------------------------ 50 Principal group companies (as of March 2018) ------------------------------------------------------------------------------------------------------- 50 Employees --------------------------------------------------------------------------------------------------------------------------------------------------------- 51 By the way --------------------------------------------------------------------------------------------------------------------------------------------------------- 51 Profile ---------------------------------------------------------------------------------------------------------------------------------------------------------------- 52 02/53 KFC Holdings Japan / 9873 RCoverage LAST UPDATE: 2018.12.07 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp Executive summary Core businesses Under a master franchise agreement with Yum! Brands Inc., KFC Holdings Japan operates KFC brand restaurants in Japan. The company also acts as a franchisor in Japan for the KFC brand, earning royalties and other revenues. The company says the KFC business had a leading domestic share of the fried chicken market, at 37% in 2015. As of end March 2018 the company had 329 directly operated restaurants primarily in Greater Tokyo, and 824 restaurants run by franchisees mainly in regional areas. Japan’s fried chicken market has been relatively flat since 2000, and in 2003 major convenience stores began entering the fried chicken market. KFC is distinctive due to the brand power of its “original chicken,” which it has cultivated since its launch in Japan in 1970, and procurement arrangements with major trading company Mitsubishi Corporation (TSE1: 8058) for high-quality chicken. Convenience stores primarily use imported frozen chicken 50 days old or older, while KFC uses only Japan-raised chickens (about 40 days old), which are more tender but make stable procurement difficult. Trends and outlook Total revenues have been in the JPY70–90bn region since FY03/11. The company’s restaurant sales are sensitive to consumer trends because its meals are higher priced than other fast food and often purchased for special occasions, rather than as casual dining options. Operating profit declined from a peak of JPY3.5bn in FY03/11 to JPY700mn in FY03/15 due in part to deterioration of the Pizza Hut business, but recovered to JPY2.6bn in FY03/17 (+27.2% YoY) on cost cuts in the Pizza Hut business. Then in FY03/18, the company sold the Pizza Hut business, and operating profit fell to JPY500mn due to increases in ingredient and personnel costs and falling customer count in the KFC business. Company forecasts for FY03/19 For FY03/19, the company forecasts revenues of JPY73.0bn (-0.6% YoY), operating profit of JPY1.0bn (2.1x YoY), recurring profit of JPY1.1bn (+75.4% YoY), and net income of JPY700mn (+21.1% YoY). Excluding the impact of the sale of the Pizza Hut business, this represents a 3.2% increase in revenues, effectively meaning forecasts of both higher revenues and higher profits. As the company works to achieve this plan, Shared Research is watching the following initiatives in particular: a) To increase revenues, the company is strengthening efforts related to the robust delivery and proxy delivery services (diversifying sales formats); b) To increase revenues, it is revising its marketing strategy; c) To reduce costs, it is revamping store operations and some products; and d) To increase net income, it is promoting the shift of directly operated restaurants to a franchise format. In addition, the company plans to have 1,159 stores (with fewer directly operated restaurants and more franchises) by end-FY03/19, a net increase of six (31 openings and 25 closings), with 119 renovations. It aims to increase comparable store sales by 4.9% primarily through a recovery in customer count. The hurdle is high for the comparable store sales target, but the company expects the effects of new marketing measures and the steady progress of delivery stores (about 120 as of May 2018, of which 28 use proxy delivery) to accumulate toward 2H. It will be worth watching M&A initiatives as well. Risk factors include
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