KFC Holdings Japan / 9873

COVERAGE INITIATED ON: 2016.10.31 LAST UPDATE: 2019.10.07

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: 2019.10.07 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 ------4 Recent updates ------5 Highlights ------5 Trends and outlook ------6 Monthly trends ------6 Quarterly trends and results ------7 Medium-term management plan ------13 Business ------15 Overview ------15 KFC business ------17 Earnings structure ------24 Market and value chain ------26 Strengths and weaknesses ------29 Financial statements ------30 Income statement ------30 Balance sheet ------31 Cash flow statement ------32 ROE, ROA, ROIC ------33 Historical performance ------34 News and topics ------42 Other information ------42 History ------42 Corporate governance and top management ------43 Major shareholders (As of March 31, 2019) ------44 Principal group companies (as of March 2019) ------44 Dividend policy ------44 Employees ------45 By the way ------45 Profile ------46

02/47 KFC Holdings Japan / 9873 RCoverage LAST UPDATE: 2019.10.07 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 2019 the company had 306 directly operated restaurants primarily in Greater Tokyo, and 826 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-recipe 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.

In FY03/19 the company posted consolidated revenues of JPY74.3bn (+1.2% YoY), operating profit of JPY2.2bn (4.6x higher YoY), and net income of JPY2.1bn (3.6x higher YoY). Excluding the effect of selling the Pizza Hut business (sold in June 2017), revenues increased 5.1% YoY, and operating profit was 4.6x higher YoY. The implementation of measures to increase customer numbers, such as the introduction of value meals aimed at promoting customer visits on regular days and the addition of new menu items to prevent customer boredom, has been successful, though. As of the end of FY03/19, the total number of KFC stores in operation was 1,132, down 21 versus the end of FY03/18 (directly operated stores down by 23 and franchise stores up by two); however, customer traffic was up 4.3% YoY, and spending per customer up 0.4% YoY, leading to improved results.

On September 12, 2018, the company unveiled its medium-term management plan “Toward Our 50th Anniversary.” Under the brand slogan, Why not make it KFC today? introduced in FY03/19, the company is positioning FY03/19–FY03/21 as a period to rebuild the foundations of the KFC business to support sustainable brand growth. Key medium-term policies for the KFC business are 1) getting back to the roots of the business, 2) customer orientation (focus on frontline operations), and 3) the cultivation of human resources. For FY03/21, the company targets revenues of JPY75.0bn, operating profit of JPY2.4bn, an operating profit margin of 3.2%, and net income of JPY1.6bn.

Strengths and weaknesses

Shared Research thinks the company’s strengths are brand power cultivated since its founding; a business model built on a relationship with Mitsubishi; and economies of scale. We think its weaknesses are constraints imposed by franchise agreements with Yum! Brands and constraints on KFC sales promotions due to using 100% domestically raised chicken.

03/47 KFC Holdings Japan / 9873 RCoverage LAST UPDATE: 2019.10.07 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp

Key financial data

Income statement FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 FY03/19 FY03/20 (JPYmn) Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Est. Total revenues 88,823 88,124 85,864 83,436 84,605 88,180 88,032 73,457 74,344 74,400 YoY - -0.8% -2.6% -2.8% 1.4% 4.2% -0.2% -16.6% 1.2% 0.1% Gross profit 41,108 39,683 39,656 38,460 38,206 39,364 39,887 31,604 32,037 GPM 46.3% 45.0% 46.2% 46.1% 45.2% 44.6% 45.3% 43.0% 43.1% SG&A expenses 37,576 37,293 37,261 36,638 37,536 37,352 37,328 31,127 29,831 YoY -30.2% -0.8% -0.1% -1.7% 2.5% -0.5% -0.1% -16.6% -4.2% SG&A ratio 42.3% 42.3% 43.4% 43.9% 44.4% 42.4% 42.4% 42.4% 40.1% Operating profit 3,531 2,390 2,395 1,822 670 2,011 2,558 477 2,206 1,500 YoY -32.8% -32.3% 0.2% -23.9% -63.2% 200.1% 27.2% -81.4% 362.5% -32.0% OPM 4.0% 2.7% 2.8% 2.2% 0.8% 2.3% 2.9% 0.6% 3.0% 2.0% Recurring profit 3,708 2,469 2,506 1,856 667 1,866 2,425 627 2,975 1,400 YoY -32.1% -33.4% 1.5% -25.9% -64.1% 179.8% 30.0% -74.1% 374.5% -52.9% RPM 4.2% 2.8% 2.9% 2.2% 0.8% 2.1% 2.8% 0.9% 4.0% 1.9%

Net in co me attributable to parent company shareholders 1,891 1,102 1,203 441 -524 730 1,365 578 2,055 1,000 YoY -26.4% -41.7% 9.2% -63.3% --86.9%-57.8% 255.4% -51.4% Net margin 2.1% 1.3% 1.4% 0.5% -0.6% 0.8% 1.6% 0.8% 2.8% 1.3% Per share data (split-adjusted; JPY) Shares issued (year-end; '000) 22,783 22,783 22,783 22,783 22,783 22,783 22,783 22,783 22,783 EPS 83.21 49.09 53.64 19.69 -23.38 32.59 60.90 25.83 91.99 44.74 EPS (fully diluted) ------Dividend per share 100.0 50.0 50.0 50.0 50.0 50.0 50.0 50.0 50.0 50.0 Book value per share 1,035.25 1,031.31 1,034.60 1,002.93 946.18 932.24944.43922.83956.80 - Balance sheet (JPYmn) Current assets 22,549 23,500 23,340 21,682 22,332 21,390 20,721 14,952 19,196 Cash and cash equivalents 15,808 13,058 13,502 16,146 16,804 15,339 14,571 9,757 13,267 Accounts receivable 2,947 3,729 3,544 3,701 3,546 3,855 4,007 3,562 4,269 Inventories 671 733 729 518 397 697 450 414 486 Other 3,123 5,980 5,565 1,317 1,585 1,499 1,693 1,219 1,174 Fixed assets 18,461 17,882 16,968 16,301 16,085 17,902 18,762 20,793 19,223 Tangible fixed assets 7,228 6,681 6,184 5,703 6,093 7,178 8,506 7,734 6,474 Intangible fixed assets 2,555 3,128 2,950 2,924 2,874 2,828 2,206 1,704 1,091 Investments and other assets 8,678 8,073 7,834 7,674 7,118 7,896 8,050 11,354 11,658 Total assets 41,011 41,383 40,308 37,984 38,418 39,292 39,484 35,746 38,420 Current liabilit ies 13,046 13,837 13,029 11,203 13,166 13,070 13,033 10,929 13,222 Accounts payable 5,680 7,603 6,568 5,754 5,978 6,232 5,824 5,735 6,664 Short-term debt 140 193 211 193 187 531 618 531 519 Ot her current liabilit ies 7,226 6,041 6,250 5,256 7,001 6,307 6,591 4,663 6,039 Fixed liabilit ies 4,648 4,392 4,065 4,283 4,031 5,317 5,272 4,190 3,812 Long-term debt 359 359 207 188 432 1,533 1,142 666 189 Other 4,289 4,033 3,858 4,095 3,599 3,784 4,130 3,524 3,623 Net assets 23,317 23,153 23,214 22,497 21,219 20,904 21,178 20,626 21,385 Capital stock 7,297 7,297 7,297 7,297 7,297 7,297 7,297 7,297 7,297 Capital surplus 10,430 10,430 10,430 10,430 10,430 10,430 10,430 10,430 10,430 Retained earnings 6,105 6,083 6,165 5,485 4,228 3,837 4,082 3,539 4,473 Treasury stock -531 -683 -710 -722 -733 -739 -739 -887 -887 Accum. other comprehensive income 16 25 31 7 -2 79 108 246 71 Share subscription rights ------Minority interests ------T ot al liabilit ies and capit al 41,011 41,383 40,308 37,984 38,418 39,292 39,484 35,746 38,420 Statement of cash flows (JPYmn) Cash flows from operating activities 4,186 3,814 3,370 1,717 4,574 1,519 4,424 1,928 5,436 Cash flow s from invest ing act ivit ies 1,869 -5,108 -1,558 2,287 -1,556 -298 -3,679 -4,863 -265 Cash flows from financing activities -3,343 -1,456 -1,367 -1,360 -1,360 -1,686 -1,512 -1,878 -1,660 Financial ratios Interest-bearing debt 499 552 418 381 619 2,064 1,760 1,197 708 Net cash 15,309 12,506 13,084 15,765 16,185 13,275 12,811 8,560 12,559 ROA (RP-based) 8.9% 6.0% 6.1% 4.7% 1.7% 4.8% 6.2% 1.7% 8.0% ROE 7.9% 4.7% 5.2% 1.9% -2.4% 3.5% 6.5% 2.8% 9.8% Current ratio 173% 170% 179% 194% 170% 164% 159% 137% 145% Fixed ratio 79.2% 77.2% 73.1% 72.5% 75.8% 85.6% 88.6% 100.8% 89.9% Equity ratio 56.9% 55.9% 57.6% 59.2% 55.2% 53.2% 53.6% 57.7% 55.7% Source: Shared Research based on company data Note: Accounts receivable figures are after deducting bad debt provisions. Note: Figures may differ from company materials due to differences in rounding methods.

04/47 KFC Holdings Japan / 9873 RCoverage LAST UPDATE: 2019.10.07 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp

Recent updates

Highlights

On October 7, 2019, KFC Holdings Japan, Ltd. announced monthly sales data for September 2019; see the monthly trends section for details.

On September 6, 2019, the company announced monthly sales data for August 2019.

On September 2, 2019, Shared Research updated the report following interviews with the company.

On August 8, 2019, the company announced earnings results for Q1 FY03/20; see the results section for details.

On August 7, 2019, the company announced monthly sales data for July 2019.

For previous releases and developments, please refer to the News and topics section.

05/47 KFC Holdings Japan / 9873 RCoverage LAST UPDATE: 2019.10.07 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp

Trends and outlook

Monthly trends

FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 FY03/19 Average system sales per store 5.7% -2.6% -5.0% -3.3% 3.5% 7.4% -0.9% -1.7% 5.2% Sales at directly operated comparable stores 4.2% -3.5% -4.1% -3.4% 2.9% 8.8% -0.8% -1.4% 3.7% Customer count 3.7% -2.5% -1.5% -4.0% 0.2% 1.6% -2.5% -4.2% 2.3% Spend per customer 0.5% -0.9% -2.7% 0.6% 2.6% 7.1% 1.7% 3.0% 1.4% FY03/14 (JPYmn) Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar FY Average All stores 7.37 6.69 6.86 7.23 8.23 7.86 6.89 6.87 12.35 7.95 6.81 7.95 7.75 monthly salesDirectly operated stores 8.067.477.618.088.878.597.817.8813.688.667.768.818.60 Franchised stores 7.116.406.596.917.997.606.566.5111.877.706.467.64 7.45 Y oY All stores -7.3% -9.7% -8.9% -11.3% -6.3% -2.8% -5.4% -0.5% 1.0% 1.0% -1.0% 5.9% -3.3% Directly operated comp. stores -8.6% -9.1% -10.4% -12.1% -7.0% -3.0% -3.0% 0.8% 1.5% 0.4% 1.1% 8.6% -3.4% Customer count -6.5% -11.2% -7.5% -9.3% -7.4% -1.3% 0.5% 0.8% -4.6% -3.1% -3.4% 8.7% -4.0% Spend per customer -2.2% 2.3% -3.1% -3.1% 0.4% -1.7% -3.4% 0.0% 6.4% 3.5% 4.6% -0.1% 0.6% FY03/15 (JPYmn) Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar FY Average All stores 7.29 6.81 7.30 7.45 8.29 8.34 6.89 7.98 12.78 8.50 6.94 8.02 8.05 monthly salesDirectly operated stores 8.197.738.128.468.839.077.878.8214.108.237.778.728.91 Franchised stores 6.976.497.027.108.108.086.557.6912.318.236.657.77 7.74 Y oY All stores -1.0% 2.1% 6.4% 3.1% 0.8% 5.7% -0.6% 15.2% 2.8% 6.1% 1.6% 0.6% 3.5% Directly operated comp. stores 0.8% 3.1% 6.2% 4.1% -1.4% 5.1% 0.2% 11.0% 2.6% 5.8% -0.5% -1.7% 2.9% Customer count 1.1% -0.5% 1.6% 2.3% -1.3% 1.7% -2.3% 6.3% 1.5% 1.2% -5.1% -3.9% 0.2% Spend per customer -0.3% 3.6% 4.6% 1.8% 0.0% 3.4% 2.6% 4.4% 1.0% 4.6% 4.8% 2.2% 2.6% FY03/16 (JPYmn) Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar FY Average All stores 6.77 8.26 8.05 8.60 9.77 7.51 7.74 8.61 13.29 9.07 7.36 8.85 8.66 monthly salesDirectly operated stores 7.829.278.889.6910.678.628.989.7015.1110.258.609.909.79 Franchised stores 6.397.897.768.209.457.127.308.2312.658.656.938.49 8.26 Y oY All stores -7.8% 20.2% 9.5% 14.5% 16.9% -10.1% 12.1% 7.9% 4.5% 7.3% 6.6% 10.6% 7.4% Directly operated comp. stores -5.6% 18.4% 8.3% 13.3% 19.6% -5.8% 13.5% 9.2% 6.7% 10.7% 6.7% 13.1% 8.8% Customer count -9.4% 6.6% -1.2% 3.9% 10.1% -7.2% 6.6% 0.3% 0.2% 3.5% 2.9% 4.0% 1.6% Spend per customer 4.2% 11.1% 9.6% 9.1% 8.6% 1.5% 6.5% 8.8% 6.4% 7.0% 3.7% 8.8% 7.1% FY03/17 (JPYmn) Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar FY Average All stores 7.14 7.53 7.21 9.34 8.66 8.21 8.34 8.58 13.57 8.84 6.89 8.21 8.55 monthly sales Directly operated stores 8.34 8.64 8.29 10.60 9.69 9.18 9.50 9.83 15.52 9.89 7.92 9.14 9.72 Franchised stores 6.737.166.848.918.317.887.958.1612.918.486.557.90 8.15 YoY All stores 6.2% -8.1% -9.9% 9.1% -10.7% 9.8% 8.2% -0.2% 2.1% -2.7% -6.3% -7.2% -0.9% Directly operated comp. stores 6.4% -7.0% -7.2% 8.8% -9.6% 6.0% 6.3% 1.4% 2.2% -3.9% -4.9% -7.9% -0.8% Customer count 3.1% -5.2% -3.9% 3.7% -8.5% 0.6% 0.1% -1.4% -1.7% -6.2% -5.6% -4.6% -2.5% Spend per customer 3.3% -1.9% -3.4% 4.8% -1.3% 5.4% 6.2% 2.8% 4.0% 2.5% 0.7% -3.5% 1.7% FY03/18 (JPYmn) Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar FY Average All stores 7.43 7.24 7.81 8.44 8.49 8.75 8.00 8.23 13.45 8.54 6.38 7.93 8.40 monthly salesDirectly operated stores 8.548.358.859.709.429.849.199.4515.339.667.579.089.61 Franchised stores 7.056.877.478.038.178.387.577.7912.768.145.977.55 7.99 YoY All stores 4.3% -3.7% 8.2% -9.5% -2.1% 6.5% -4.0% -4.0% -0.9% -3.4% -7.5% -3.4% -1.7% Directly operated comp. stores 2.6% -2.8% 6.9% -8.3% -2.8% 6.6% -3.7% -4.1% -1.3% -2.5% -4.4% -0.9% -1.4% Customer count 0.7% -4.5% 0.5% -11.2% -7.1% 3.2% -6.2% -4.4% -4.7% -4.6% -6.2% -4.9% -4.2% Spend per customer 1.9% 1.8% 6.3% 3.3% 4.6% 3.3% 2.6% 0.3% 3.6% 2.2% 1.9% 4.1% 3.0% FY03/19 (JPYmn) Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar FY Average All stores 7.03 6.94 7.58 9.28 9.86 9.14 8.38 8.09 14.28 9.04 7.58 9.04 8.84 monthly sales Directly operated stores 8.19 8.11 8.68 10.56 10.62 10.26 9.64 9.23 16.18 10.13 8.77 10.13 10.04 Franchised stores 6.606.517.198.839.608.757.957.6913.628.667.188.68 8.44 Y oY All stores -6.4% -5.1% -3.5% 9.0% 15.4% 3.3% 4.8% -1.5% 6.1% 5.9% 19.3% 14.5% 5.2% Directly operated comp. stores -5.5% -4.2% -2.7% 7.6% 11.4% 3.6% 3.8% -3.0% 4.7% 4.2% 14.7% 10.7% 3.7% Customer count -8.5% -8.1% -5.5% 4.8% 9.0% 1.0% 5.1% -2.0% 4.3% 6.4% 16.7% 6.6% 2.3% Spend per customer 3.4% 4.2% 2.9% 2.7% 2.1% 2.6% -1.2% -1.0% 0.4% -2.1% -1.7% 3.9% 1.4% FY03/20 (JPYmn) Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar FY* Average All stores 7.98 8.02 9.31 9.57 10.44 9.59 9.75 YoY All stores 13.6% 15.7% 22.8% 3.2% 5.9% 5.0% 10.3% Comparable stores 15.1% 16.5% 24.1% 3.6% 6.9% 4.8% 11.0% Customer count 16.2% 18.4% 24.4% 5.1% 6.1% 8.0% 12.2% Spend per customer -1.0% -1.6% -0.2% -1.4% 0.8% -3.0% -1.1% Source: Shared Research based on company data Note: FY* growth is on a year-to-date basis from April. Note: Figures may differ from company materials due to differences in rounding methods.

06/47 KFC Holdings Japan / 9873 RCoverage LAST UPDATE: 2019.10.07 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp

Quarterly trends and results

Cumulative FY03/18 FY03/19 FY03/20 FY03/20 (JPYmn) Q1Q2Q3Q4Q1Q2Q3Q4Q1% of FYFY Est. Revenues 18,968 36,858 57,753 73,457 15,420 35,070 56,738 74,344 17,717 23.8% 74,400 YoY -1.2% -11.7% -14.7% -16.6% -18.7% -4.9% -1.8% 1.2% 14.9% 0.1% Gross profit 8,391 15,976 24,818 31,604 6,560 14,954 24,299 32,037 7,777 YoY -3.1% -15.2% -18.9% -20.8% -21.8% -6.4% -2.1% 1.4% 18.6% GPM 44.2% 43.3% 43.0% 43.0% 42.5% 42.6% 42.8% 43.1% 43.9% SG&A expenses 8,501 15,848 23,815 31,127 7,075 14,468 22,147 29,831 6,826 YoY -3.0% -12.0% -15.1% -16.6% -16.8% -8.7% -7.0% -4.2% -3.5% SG&A ratio 44.8% 43.0% 41.2% 42.4% 45.9% 41.3% 39.0% 40.1% 38.5% Operating profit -109 127 1,003 477 -515 485 2,151 2,206 951 63.4% 1,500 YoY - -84.8% -60.3% -81.4% - 281.9% 114.5% 362.5% - -32.0% OPM -0.6% 0.3% 1.7% 0.6% -3.3% 1.4% 3.8% 3.0% 5.4% 2.0% Recurring profit -65 229 1,181 627 -447 547 2,250 2,975 1,039 74.2% 1,400 YoY - -70.8% -51.9% -74.1% - 138.9% 90.5% 374.5% - -52.9% RPM -0.3% 0.6% 2.0% 0.9% -2.9% 1.6% 4.0% 4.0% 5.9% 1.9% Net income 639 844 1,430 578 -324 367 1,470 2,055 701 70.1% 1,000 YoY - 102.4% -2.1% -57.7% --56.5% 2.8% 255.5% - -51.3% Net margin 3.4% 2.3% 2.5% 0.8% -2.1% 1.0% 2.6% 2.8% 4.0% 1.3% Quarterly FY03/18 FY03/19 FY03/20 (JPYmn) Q1Q2Q3Q4Q1Q2Q3Q4Q1 Revenues 18,968 17,890 20,895 15,704 15,420 19,650 21,668 17,606 17,717 YoY -1.2% -20.6% -19.6% -22.6% -18.7% 9.8% 3.7% 12.1% 14.9% Gross profit 8,391 7,585 8,842 6,786 6,560 8,394 9,345 7,738 7,777 YoY -3.1% -25.5% -24.7% -27.0% -21.8% 10.7% 5.7% 14.0% 18.6% GPM 44.2% 42.4% 42.3% 43.2% 42.5% 42.7% 43.1% 44.0% 43.9% SG&A expenses 8,501 7,347 7,967 7,312 7,075 7,393 7,679 7,684 6,826 YoY -3.0% -20.5% -20.8% -21.1% -16.8% 0.6% -3.6% 5.1% -3.5% # 44.8% 41.1% 38.1% 46.6% 45.9% 37.6% 35.4% 43.6% 38.5% Operating profit -109 236 876 -526 -515 1,000 1,666 55 951 YoY - -74.9% -48.3% - - 323.7% 90.2% - - OPM -0.6% 1.3% 4.2% -3.3% -3.3% 5.1% 7.7% 0.3% 5.4% Recurring profit -65 294 952 -554 -447 994 1,703 725 1,039 YoY - -67.6% -43.1% - - 238.1% 78.9% - - RPM -0.3% 1.6% 4.6% -3.5% -2.9% 5.1% 7.9% 4.1% 5.9% Net income 639 205 586 -852 -324 691 1,103 585 701 YoY - -62.1% -43.8% - - 237.1% 88.2% - - Net margin 3.4% 1.1% 2.8% -5.4% -2.1% 3.5% 5.1% 3.3% 4.0%

By segment FY03/18 FY03/19 FY03/20 Quarterly (JPYmn) Q1Q2Q3Q4Q1Q2Q3Q4Q1 Revenues 18,968 17,890 20,895 15,704 15,420 19,650 21,668 17,606 17,717 YoY -1.2% -20.6% -19.6% -22.6% -18.7% 9.8% 3.7% 12.1% 14.9% KFC 15,449 17,057 19,761 15,114 YoY 3.8%-5.1%-3.5%-5.0% Pizza Hut 2,721 - - - YoY -22.6% - - - Other 2,515 2,410 2,912 2,130 YoY -5.8% -16.3% -16.2% -19.1% Operating profit -109 236 876 -526 -515 1,000 1,666 55 951 YoY - -74.9% -48.3% - - 323.7% 90.2% - - OPM -0.6% 1.3% 4.2% -3.3% -3.3% 5.1% 7.7% 0.3% 5.4% KFC -273 -84 679 -821 YoY - - -52.2% - OPM -1.8%-0.5%3.4%-5.4% Pizza Hut -000-0 YoY ---- OPM Other 137 294 172 279 YoY -54.2% -6.7% 212.7% 14.3% OPM 5.4% 12.2% 5.9% 13.1%

Store count FY03/18 FY03/19 FY03/20 FY 03/ 20 Quarterly Q1Q2Q3Q4Q1Q2Q3Q4Q1 FY Est. Store count (year-end) 1,150 1,153 1,157 1,153 1,147 1,146 1,141 1,132 1,132 1,133 Directly operated stores - 323 - 329 325 319 316 306 305 300 Franchised stores - 830 - 824 822 827 825 826 827 833 Openings 51187510437 19 Directly operated stores2222231 -2 - Franchised stores 396537335 - Closures -4 -8 -4 -11 -11 -11 -9 -12 -7 -18 Directly operated stores--6--10----13- - Franchised stores - -6--17- - --30- - Transfers - Directly operated stores--1-5--11--16- - Franchised stores -1--5-11-16- - Renovations 374651851816303642 120 Directly operated stores917121352778 - Franchised stores 282939721314232934 - Source: Shared Research based on company data Note: Figures may differ from company materials due to differences in rounding methods. Note: Revenues and operating profit tend to peak in Q3, which includes Christmas. Note: As of Q1 FY03/19, KFC consists of a single segment and segment information disclosures have been omitted accordingly.

07/47 KFC Holdings Japan / 9873 RCoverage LAST UPDATE: 2019.10.07 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp

Q1 FY03/20 results (out August 8, 2019) Results summary

▷ Q1 results: For Q1 FY03/20, the company reported consolidated revenues of JPY17.7bn (+14.9% YoY), operating profit of JPY951mn (versus JPY515mn loss in Q1 FY03/19), and net income attributable to owners of the parent of JPY701mn (versus loss of JPY324mn). This represents a major turnaround for the company, as it is the first time Q1 earnings have been in the black since FY03/13. The company made no changes to its full-year FY03/20 forecast calling for consolidated revenues of JPY74.4bn, operating profit of JPY1.5bn, and net income of JPY1.0bn. ▷ Progress versus full-year forecasts: The rate of progress against the full-year forecast was 23.8% for revenues (versus 20.7% in Q1 FY03/19 versus full-year results), 63.4% for operating profit, and 70.1% for net income. Considering the fact that the busy Christmas season is still ahead, the current rate of progress is quite high. (During the five-day period surrounding Christmas in 2018, KFC stores generated a total of roughly JPY6.9bn in sales, or 5.8% of total sales by the chain during all of FY03/19.) ▷ Increase in customer numbers: System sales (including franchises) for Q1 (April–June) increased significantly by 17.5% YoY. Sales at existing stores increased by 18.7% YoY, owing to increased customer traffic (+19.8% YoY) despite a decline in spending per customer (-0.9% YoY). In Q1, the company opened two directly operated stores and five franchise stores, bringing the total number of stores at the end of the quarter to 1,132 stores (-1.2% YoY). ▷ Two-tiered approach with everyday value meals and periodic rollouts of new menu items: Value promotions aimed at encouraging regular visits were well received. These included the JPY500 lunch menu, suggestions as side dishes for dinner,

and the “Commemoration pack” commemorating the 49th anniversary of the founding of the company. Among new products, the company saw noticeable contributions from Pari-Pari Salty Crispy Chicken, Chicken Sliders, Chicken Fillet Sandwiches, and also from changes to standard menu items such as French fries and buns. With last year's switch to its new brand slogan, Why not make it KFC today?, the company has been working to lessen its dependence on sales during those days considered "special occasions" and promote more store visits on regular days. According to the company's own analysis, its new approach has visibly increased visits by consumers that used to visit KFC stores only on special occasions or when the stores were running limited-time promotions. ▷ Customer convenience: The company’s ordering process via smartphones and online orders was updated in April to make pre-ordering easier. Because the updated app allows customers to indicate their expected pickup times and pay in advance with credit cards, the company says it has seen a marked increase in sales during evening hours by people who liked the idea

of bringing home freshly made fried chicken without spending time waiting in the store. Also boosting store customer counts were expanded delivery services, which as of the end of June were available from 196 store locations. ▷ Improved profitability: Gross profit of JPY7.8bn was up18.6% YoY. Although average spending per customer declined as a result of its JPY500 lunch set menu, the gross profit margin rose to 43.9% (from 42.5% in Q1 FY03/19) on rising customer counts and sales, which made it possible to reduce losses of food disposal and increase store-level productivity. Also adding to earnings were a 3.5% YoY decline in SG&A spending to JPY6.8bn, a sharp jump in earnings from equity method subsidiaries (which came in at JPY67mn versus only JPY2mn in Q1 FY03/19), and larger contributions from its growing KFC business in Thailand. ▷ Full-year forecast unchanged: The company made no changes to its full-year forecast (including its assumption of flat sales at existing stores) despite what in our estimation were above-plan results in Q1. Shared Research believes the company's reluctance to raise its full-year forecast stems from a number of factors, including 1) tough comparisons with elevated sales levels last year from July 2019, 2) the difficulty of predicting changes in demand after the consumption tax rate is hiked in October 2019, 3) the difficulty of projecting demand around the busy Christmas season since December 23rd, which for the past 30 years has been a national holiday (in observance of the now-retired Emperor's birthday) will no longer be an official

08/47 KFC Holdings Japan / 9873 RCoverage LAST UPDATE: 2019.10.07 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp

holiday, and 4) the expected rise in SG&A expenses during 2H as the company draws closer to its 50-year anniversary in FY03/21. In this relation, we would also note that same store sales (including franchisee stores) are still logging solid gains even though the growth rate has slowed, rising 3.6% YoY in July with store traffic up 5.1% YoY and spending per customer down 1.4% YoY; system sales were also up 3.2% YoY.

Company initiatives to reduce the impact of consumption tax hike (and reduced consumption tax rate for basic foodstuffs): Tax-inclusive prices at KFC stores will be the same regardless of whether the purchase is for consumption at the store or takeout (to which lower tax rate is applied). For example, one piece of original recipe chicken will have a tax-inclusive price of JPY250 even though this means the effective pre-tax price will differ depending on whether it is for in-store consumption or takeout, with the pre-tax price for in-store consumption coming to JPY227 (as it is taxed at a 10% tax rate) and the pre-tax price for takeout coming to JPY231 (as it is taxed at 8% tax rate). Because for the roughly 30% of store sales that are consumed in-store the use of a uniform tax-inclusive pricing represents a de facto discount at the pre-tax level, the company will need to adjust its pricing of limited-time campaign offers if it is to maintain profit margins at current levels.

Quarterly performance

(JPYbn) (JPYbn) Revenues YoY (left axis) Operating profit OPM (left axis) 20% 32 8% 2.0 1.7 1.7 15% 26.0 28 1.4 25.2 6% 1.5 10% 22.4 22.5 24 20.9 21.7 1.0 1.0 20.0 20.6 20.3 0.9 0.9 0.9 5% 19.2 19.0 19.7 4% 1.0 17.9 17.6 17.7 20 0% 15.7 15.4 16 2% 0.2 0.5 -5% 0.1 12 0.0 0.0 -10% 0% 0.0 -15% 8 -0.1 -0.1 -2% -0.3 -0.5 -20% 4 -0.5 -0.5 -25% 0 -4% -1.0 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 FY03/16 FY03/17 FY03/18 FY03/19 FY03/20 FY03/16 FY03/17 FY03/18 FY03/19 FY03/20 Source: Shared Research based on company data

KFC business monthly sales

All stores Directly operated comp. stores Customer count Customer spend 25% 30% 20% 25% 15% 20% 15% 10% 10% 5% 5% 0% 0% -5% -5% -10% -10% -15% -15% Apr Oct Apr Oct Apr Oct Apr Oct Apr Oct Apr Oct Apr Oct Apr Oct Apr Oct Apr Oct FY03/16 FY03/17 FY03/18 FY03/19 FY03/20 FY03/16 FY03/17 FY03/18 FY03/19 FY03/20 Source: Shared Research based on company data

GPM and meat prices

(JPY/kg) (JPY/kg) Chicken breast meat (JPY/kg) GPM (right axis) Chicken breast meat (JPY/kg) GPM (right axis) 400 41% 350 42% 350 43.1% 42% 300 43% 300 43.0% 43% 250 44.6% 44% 250 45.0% 45.2% 45.3% 200 44% 200 45% 46.2% 46.1% 150 150 46.3% 46% 45% 100 100 47% 46% 50 50 48% - 47% Q1 Q1 Q1 Q1 Q1 Q1 - 49% FY03/15 FY03/16 FY03/17 FY03/18 FY03/19 FY03/20 FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 FY03/19

Source: Shared Research based on company data

For details on previous results, please refer to the Historical performance section.

09/47 KFC Holdings Japan / 9873 RCoverage LAST UPDATE: 2019.10.07 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp

Full-year company forecasts

Earnings FY03/18 FY03/19 FY03/20 Est. (JPYmn) 1H2HFY1H2HFYFY Total revenues 36,858 36,599 73,457 35,070 39,274 74,344 74,400 YoY -11.7% -20.9% -16.6% -4.9% 7.3% 1.2% 0.1% Operating profit 127 350 477 485 1,721 2,206 1,500 YoY -84.8% -79.7% -81.4% 281.9% 391.7% 362.5% -32.0% OPM 0.3% 1.0% 0.6% 1.4% 4.4% 3.0% 2.0% Recurring profit 229 398 627 547 2,428 2,975 1,400 YoY -70.8% -75.8% -74.1% 138.9% 510.1% 374.5% -52.9% RPM 0.6% 1.1% 0.9% 1.6% 6.2% 4.0% 1.9%

Net in co me attributable to parent company shareholders 844 -266 578 367 1,688 2,055 1,000 YoY 102.4% - -57.8% -56.5% - 255.4% -51.4% Net margin 2.3% -0.7% 0.8% 1.0% 4.3% 2.8% 1.3% Source: Shared Research based on company data Note: Figures may differ from company materials due to differences in rounding methods.

For FY03/20, the company is forecasting consolidated revenues of JPY74.4bn (+0.1% YoY), an operating profit of JPY1.5bn (-32.0% YoY), and net income attributable to owners of the parent of JPY1.0bn (-51.4% YoY).

The company is forecasting system sales of JPY120.0bn (+1.6% YoY), expecting the total number of KFC stores in operation at end of FY03/20 to increase by one, to 1,133 (with 19 new openings, and 18 closures). The number of directly operated stores is expected to decline by six to 300, and the number of franchise stores to increase by seven to 833. The company is forecasting an increase of 1.2% YoY to sales at existing stores. Plans call for remodeling 120 stores.

In terms of product strategy, the company will run with the two-tiered campaign calendar that has been in place since FY03/19. Throughout the year, in addition to providing everyday value set menus aimed at promoting increased consumption on regular basis, the company will also periodically add new menu items to avoid consumer boredom. As of May, the company offered a Chicken Slider Set for JPY500 at lunchtime only (10:00–16:00), and Pari-Pari Salty Crispy Chicken as a limited-time item. April saw the introduction of Pari-Pari Salty Crispy Chicken and the Nanban Tartar Twister, as well as the return of French fries, and May saw the introduction of Corn Pie, Chicken Sliders, and new buns for burgers, as the company expanded its product lineup.

FY03/20: product lineup expansion

Pari-Pari Salty Crispy Chicken Tartar Twister Corn Pie

April April May

Chicken Slider Potato (comeback) New buns

May Late April May Source: Shared research based on company data

10/47 KFC Holdings Japan / 9873 RCoverage LAST UPDATE: 2019.10.07 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp

Other sales strategies include enhancing customer convenience by expanding the number of stores offering home delivery (both by the company and in cooperation with other companies), and supporting cashless payments and enhancing foreign language menus for inbound tourists.

Factors giving rise to uncertainty include: 1) whether the two-layered campaign structure, whose effects have been evident since July 2018, will be able to be more effective in FY03/20 than in FY03/19; 2) how changes to consumer sentiment following increased consumption tax will affect visits to the company’s stores (because approximately 70% of customers visiting company stores use take-away services and so will experience no change to tax rates, only the remaining 30% will be directly affected by the increased tax rates); and 3) the effect of December 23—the previous emperor’s birthday, and hence a national holiday until 2018—no longer being a holiday on the Christmas sales season.

It seems that the GPM is expected to remain at a similar level to FY03/19 (43.1%). However, the company expects SG&A expenses to increase. It is possible that higher personnel expenses (due in part to the introduction of five days of mandatory paid leave per year), IT-related upfront spending, and expenses relating to brand-enhancement measures with an eye to the company’s 50th anniversary will lead to increased overall expenses.

SG&A expenses

(JPYbn) Personnel-related Rents Advertising Depreciation and amortization Other Personnel Rents Advertising 40 37.6 37.3 37.3 37.5 37.4 37.3 Dep. And amortization Other SG&A expenses (right axis) 36.6 25% 50% 43.9% 44.4% 35 42.3% 42.3% 43.4% 42.4% 42.4% 42.4% 31.1 40.1% 29.8 19.3% 10.4 10.5 10.6 10.4 10.9 11.0 11.2 18.7% 20% 18.2% 18.5% 18.5% 17.9% 40% 30 17.8% 17.2% 16.3% 2.3 9.6 25 2.2 2.2 2.2 2.3 2.3 2.4 9.4 3.8 15% 12.9% 13.1% 30% 4.2 4.4 3.8 4.6 4.3 3.7 12.3% 12.5% 12.4% 12.7% 12.6% 2.0 11.7% 11.9% 20 2.0 4.4 4.3 4.2 4.3 4.2 4.1 4.3 3.1 2.8 10% 20% 15 3.7 3.6 5.1% 5.4% 4.8% 10 4.3% 4.8% 4.5% 4.2% 4.3% 16.7 16.0 15.9 16.1 15.6 15.7 15.8 5% 3.7% 10% 12.6 12.1 5 5.0% 4.9% 5.0% 5.0% 4.9% 4.7% 4.9% 5.0% 4.8% 2.6% 2.6% 2.7% 2.6% 2.7% 2.8% 2.7% 0 0% 2.5% 2.6% 0% FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 FY03/19 FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 FY03/19 Source: Shared Research based on company data

The company also hopes to see accelerated growth in its investees. The company has invested in Bamboo Holding Pte. Ltd. and BYO Co., Ltd. (which operates Japanese restaurants including Obon de Gohan in Japan and Taiwan). It is worth noting how the company can accelerate growth of these companies by leveraging the operational know-how it has cultivated with Kentucky Fried Chicken in Japan.

For FY03/20, the company forecasts net income attributable to parent company shareholders of JPY1.0bn (-51.4% YoY) and EPS of JPY44.74. The company plans to maintain its annual dividend of JPY50.0 per share, which exceeds its forecast for EPS.

Investees

Bamboo Holding Pte. Ltd. (Bamboo): The company invested in Bamboo (Thailand) in 2016, through the investment holding company Fast Restaurant International Pte. Ltd. (FRI). Restaurants Development Co., Ltd. (RDCL), in the Bamboo group, operates Kentucky Fried Chicken franchises in Thailand. There are more than 700 KFC stores in Thailand, of which RDCL operates 169 stores (as of March 2019) in the suburbs of Bangkok, and the southern and northeastern regions. Kentucky Fried Chicken is compatible with Thailand’s culture of eating chicken, and has penetrated further than other foreign food chains such as McDonald’s (approximately 250 stores at the end of September 2018) and Starbucks (approximately 350 stores as of February 2019); it also has much room for growth.

BYO Co., Ltd. (BYO): Since its foundation in 1991, BYO, which positions itself as a “creative company that passes on Japanese culture through gastronomy,” has created unique restaurants under brand names such as washoku sake EN, Obon de Gohan, and Dashichazuke EN. It operates 122 restaurants (as of end March 2019), of which 115 are in Japan and seven in Taiwan. KFC Holdings and BYO share the same business philosophy that focuses on hand-made products using select ingredients, and provision of enriching food. In March 2018, the two companies entered into a capital and business alliance thinking that the partnership will allow them to create new business opportunities and generate synergies that would increase the corporate value of both companies in the medium to long term. The company holds a 25% stake in BYO.

11/47 KFC Holdings Japan / 9873 RCoverage LAST UPDATE: 2019.10.07 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp

Historical results vs. estimates

Results vs. Initial Est. FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 FY03/19 (JPYmn) Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Total revenues (Initial Est.) 90,000 92,000 89,100 85,000 90,000 92,000 77,400 73,000 Total revenues (Results) 88,124 85,864 83,436 84,605 88,180 88,032 73,457 74,344 Result s vs. Init ial Est . -2.1% -6.7% -6.4% -0.5% -2.0% -4.3% -5.1% 1.8% Operating profit (Initial Est.) 2,600 2,800 2,410 1,600 1,500 2,500 1,200 1,000 Operating profit (Results) 2,390 2,395 1,822 670 2,011 2,558 477 2,206 Result s vs. Init ial Est . -8.1% -14.5% -24.4% -58.1% 34.1% 2.3% -60.3% 120.6% Recurring profit (Initial Est.) 2,700 2,900 2,550 1,700 1,600 2,400 1,000 1,100 Recurring profit (Results) 2,469 2,506 1,856 667 1,866 2,425 627 2,975 Result s vs. Init ial Est . -8.6% -13.6% -27.2% -60.8% 16.6% 1.0% -37.3% 170.5% Net income at t ribut able t o ow ners of parent (Init ial Est .) 1,400 1,600 1,350 700 600 1,300 1,500 700 Net income attributable to owners of parent (Results) 1,102 1,203 441 -524 730 1,365 578 2,055 Result s vs. Init ial Est . -21.3% -24.8% -67.3% - 21.7% 5.0% -61.5% 193.6% Source: Source: Shared Research based on company data Note: Figures may differ from company materials due to differences in rounding methods.

12/47 KFC Holdings Japan / 9873 RCoverage LAST UPDATE: 2019.10.07 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp

Medium-term management plan

Medium-term management plan

On September 12, 2018, the company unveiled its “Toward Our 50th Anniversary” medium-term management plan, which calls for FY03/21 revenues of JPY75.0bn, operating profit of JPY2.4bn, OPM of 3.2%, and net income of JPY1.6bn. The plan factors in new M&A activity in Japan and overseas, and targets 2,000 restaurants across the group over the medium to long term. An overview of the plan is shown below.

Medium-term management plan FY03/18 FY03/21 (JPYmn) Act. MTP Change KFC Holdings Total revenues 70,800 75,000 +4,200 Japan Operating profit 480 2,400 +1,920 OPM 0.6% 3.2% +2.6pp Net income 580 1,600 +1,020 KFC business System sales 113,200 125,000 +11,800 System store count 1,153 1,180 +27 Source: Shared Research based on company data Note: FY03/18 excludes results for the Pizza Hut business (April 1, 2017 to June 11, 2017).

Japan KFC Holdings Under its corporate philosophy of “creating delicious meals and happiness,” the company will establish a structure focused on the mainstay KFC business, and aims to become a comprehensive food services group by building up its portfolio through new M&A deals. The key themes of the medium-term management plan are the development of a structure to support all businesses and business expansion through M&A activity.

Development of a structure to support all businesses

▷ Development of holding company structure: The company will review the structure of its group companies, and develop a structure that facilitates rapid and effective business support. ▷ Rationalization of headquarter costs: The company aims to consolidate and enhance efficiency of its operations as a holding company (e.g., improving company-wide productivity and reviewing administration costs, including IT-related costs) to

establish a foundation conducive to sustainable growth from 2020 and with an eye toward group-wide business expansion.

Business expansion through M&A activity

▷ Increase corporate value of capital and business partners: Invested in Restaurants Development Co., Ltd. (2016), which operates part of the KFC restaurants in Thailand; entered capital and business alliance with BYO Co., Ltd. (2018), which operates several Japanese-food restaurant brands such as washoku sake EN, Obon de Gohan. The aim is to utilize the franchise business expertise the company has garnered in Japan to accelerate growth at its partners operating KFC restaurants overseas and other formats in Japan. ▷ Pursue new M&A deals: 1) strengthen foundation in Japan: invest in food-related businesses in which KFC Holdings Japan can leverage its strengths (expertise in operating restaurant chains, franchise network), attract premium overseas brands to Japan; 2) make inroads in overseas growth markets: invest in brands (businesses) expected to become competitive forces in Asian and other growth markets, develop new businesses, and expand existing brands overseas ▷ Target 2,000 restaurants across the group over the medium to long term, factoring in business expansion through M&A activity (the company held 1,146 restaurants in the KFC business alone as of September 30, 2018)

13/47 KFC Holdings Japan / 9873 RCoverage LAST UPDATE: 2019.10.07 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp

KFC business With the switch to the new brand slogan, Why not make it KFC today?, in FY03/19, the medium-term plan positions the years through FY03/21, which coincides with the 50th anniversary of KFC, as a period to rebuild the foundations of the KFC business and support sustainable brand growth. Key medium-term themes for the KFC business are 1) getting back to the roots of the business, 2) customer orientation (focus on frontline operations), and 3) the cultivation of human resources.

Getting back to the roots Brand power While leveraging the brand power of Kentucky Fried Chicken, built up in Japan over roughly half a century, the company plans to refine it further. It aims to boost customer recognition as it lags behind other fast food outlets in surveys, to become the brand that customers think of first when they hear “fast food” or “fried chicken.”

Safety and peace of mind KFC Holdings plans to redouble its efforts in safety and peace of mind, the fundamentals of the restaurant business. It has long based its business on offerings that are from Japan, hand-made, and cooked on premises from the viewpoint of food safety and peace of mind. The company plans to redouble such efforts and make customers more aware of them, and thinks that would further improve its brand power. By once again invoking the philosophy of founder Colonel Sanders to provide tastiness none can imitate in a spirit of hospitality, the company hopes to increase the attractiveness of its back-to-the-roots focus.

Customer orientation (focus on frontline operations) The KFC business has identified the following conditions as its present challenges: 1) it is strongly associated with special occasions such as Christmas by many customers, who therefore do not visit KFC restaurants on regular days; and 2) it is perceived as a takeout restaurant, and not as a place where customers can enjoy food or drinks or relax inside a restaurant. To address these challenges, the business will adopt a two-pronged strategy of optimizing operations by targeting customer visits on regular days (generating opportunities for visits on regular days and promoting visits on days other than special occasions) and improving experiential value (focusing on safety and peace of mind, delicious food, and comfort).

To optimize operations (targeting customer visits on regular days), KFC Holdings plans to drive a recovery in the comparable-store customer count (secure new customers and increase frequency of customer visits) by 1) increasing convenience via strengthened KFC online orders, 2) promoting restaurant visits on regular days through the introduction of weekly and monthly value menus, and 3) moving into areas with demand through expansion of home delivery services (stepping up home delivery through Otodoke Kentucky and UberEats) and KFC Stations (takeout stands located inside train stations).

To increase experiential value, KFC Holdings intends to foster customer loyalty through various initiatives. It will 1) strengthen its digital strategy by revamping its KFC app (over 10mn downloads as of September 30, 2018) and expanding its mileage program; 2) offer delicious food and happiness by continuing to commit to high-quality “original-recipe chicken” and hospitality; and 3) provide comfortable spaces for customers by adopting a no-smoking policy for its restaurants (all seats) scheduled to be complete by March 2019, introducing digital signage, and installing separate counters for order payment and pickup.

Personnel training As competition to hire workers intensifies, the company sees its KFC business as a people business where people play the lead role, and is focused on training its human resources. The company thinks long-term personnel training will create managers of the future. Initiatives include: 1) a “limited-employment” system (where employees are assigned exclusively to a particular work location or time-band, introduced in 2016); 2) flextime (introduced in headquarters divisions in 2017); 3) diversity initiatives; and 4) mass hiring of part-timers by head office (taking applications at a call center).

14/47 KFC Holdings Japan / 9873 RCoverage LAST UPDATE: 2019.10.07 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp

Business Overview

Under a franchise agreement with Yum! Brands Inc., KFC Holdings Japan operates KFC restaurants in Japan. It also acts as a franchisor for the KFC brand and earns royalties and other revenues.

Yum! Brands Inc. Yum! Brands Inc. is a major global fast food chain operator, with the restaurant brands including Kentucky Fried Chicken (KFC), Pizza Hut, and Taco Bell. The company was established via a spinoff from major soft drink manufacturer PepsiCo in 1997 (at that time the company name was Tricon Global Restaurants, Inc.). The KFC brand was acquired by PepsiCo Inc. in 1986 after a series of M&A deals following the sale of franchise rights by its founder, Colonel Harland Sanders in 1964.

Master franchises and sublicenses KFC Holdings Japan has both master franchisee and sublicense agreements. It is a master franchisee of KFC Restaurants Asia Pte Ltd. (member of the Yum Brands Inc. group). The company pays initial setup fees to the Yum! Brands group for opening restaurants, as well as renewal fees and ongoing royalties.

In turn, KFC Holdings Japan provides sublicensing rights to franchisees in Japan and receives initial setup payments when restaurants are opened, as well as renewal payments and ongoing royalties. (For details refer to discussion of business models for KFC).

Two layers of franchise agreements

Master franchise contract Sublicense contract

Master license agreement Sublicense agreement

Yum! Initial set-up fee Initial (store opening) fee Franchise KFC Holdings Brands, restaurants Japan, Ltd. Inc. Renewal fee Renewal fee

Continuing fee (royalty) Continuing fee (royalty)

Source: Shared Research based on company data

Since FY11/05 (excluding the 16-month period of FY03/10 due to a change in balance date), the company has received royalties of JPY1.8–2.0bn and paid royalties of JPY1.2–1.3bn annually, for steady net royalty revenues of JPY0.5–1.0bn.

Net royalty revenues Royalty FY11/05 FY11/06 FY11/07 FY11/08 FY03/10 FY03/11 FY03/12 FY03/13 FY03/14 (JPYmn) Par. Par. Par. Par. Par. Par. Par. Par. Par. Royalty received 2,153 2,063 2,042 1,931 2,639 1,958 1,889 1,812 1,761 Royalty paid 1,186 1,270 1,364 1,333 1,858 1,303 1,280 1,268 1,291 Net royalty revenue 967 793 678 598 781 655 609 544 470 Source: Shared Research based on company data Note: FY03/10 was a 16-month period due to balance date change. Data not disclosed for FY03/15 onward.

In April 2014, KFC Holdings Japan moved to a holding company structure to maximize the corporate value of the group. Under the management of KFC Holdings Japan, restaurants are managed by Kentucky Fried Chicken Japan, Ltd. Advertising for each company is handled by K Ad, Ltd.

15/47 KFC Holdings Japan / 9873 RCoverage LAST UPDATE: 2019.10.07 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp

Business organization

Yum! Brands, KFC Holdings Japan, ltd. Inc. group K Ad Ltd. (Contract advertising services) Kentucky Fried Chicken Grant sublicense; supply ingredients Japan Limited and materials Franchisees Provide food Grant master license Pay royalty; pay for ingredients Consumers KFC Restaurants Directly operated and materials Asia Pte. Ltd. stores Provide food

Pay royalty

K Foods Ltd. Provide food

Source: Shared Research based on company data

Japan’s restaurant market (dining out plus prepared meals) has shown steady annual average growth of 1.4% since 2010, due to the shift to nuclear families and increasing female participation in the labor force (Japan Food Service Association survey).

Yet total revenues for KFC Holdings Japan have trended sideways since FY03/11. Shared Research thinks this is because the company’s revenues tend to be affected by economic fluctuations rather than structural shifts in society. Revenues track the Total Cash Earnings Index published by the Ministry of Health, Labour and Welfare.

KFC Japan’s operating profit declined from a peak of JPY3.5bn in FY03/11 to JPY700mn in FY03/15 due to increases in ingredient and personnel costs, but recovered to JPY2.6bn in FY03/17 (+27.2% YoY) due to cost cutting in the Pizza Hut business. The company was able to generate steady operating profit and avoid losses despite tough operating conditions. This is partly due to its efforts to cut fixed costs by shifting the emphasis from directly operated restaurants to franchises.

Consolidated results

(JPYmn) (JPYmn) Revenues Operating profit 100,000 5,000 88,823 88,124 88,180 88,032 85,864 83,436 84,605 80,000 3,531 73,457 74,344 4,000

60,000 2,558 3,000 2,390 2,395 2,206 2,011 1,822 40,000 2,000

670 20,000 477 1,000

0 0 FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 FY03/19

Source: Shared Research based on company data

16/47 KFC Holdings Japan / 9873 RCoverage LAST UPDATE: 2019.10.07 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp

KFC business

Business model

Overview Under a holding company structure, Kentucky Fried Chicken Japan runs the KFC business. The company estimates it has a 35– 40% share of the fried chicken market in Japan. It had 306 directly operated restaurants primarily in Greater Tokyo, and 826 franchises, mainly in regional areas (as of the end of March 2019).

Breakdown of system sales Out of total system sales of JPY118.1bn in FY03/19, JPY34.6bn came from directly managed stores and JPY83.6bn came from franchisee stores. At this level, sales of directly managed stores account for a little less than 50% of consolidated revenues, while roughly 45% of consolidated revenues comes from sales of ingredients and materials to franchisees and 5% comes from equipment rentals to franchisees and franchise royalty payments.

Franchise agreement The master license agreement between the company and KFC Restaurants Asia Pte. Ltd. covers the following:

1) Use trademarks relating to the KFC business in restaurants.

2) Selling products using methods and trade secrets disclosed by the licensor that meet the licensor’s quality standards.

3) The above rights and conditions may be sublicensed to restaurants.

Compensation under the master franchise and sublicense agreements with franchisees is as shown below.

Compensation under franchise agreements in KFC business

Master franchise agreement Sublicense agreement

Initial (store opening) fee JPY1.5mn/store* JPY2.5mn/store*

Renewal fee Per store renewed Per store renewed July 11, 2004–November 30, 2014 JPY250,000 No charge December 1, 2014–November 30, 2019 JPY360,000 JPY180,000 December 1, 2019–November 30, 2024 JPY180,000 JPY180,000

Continuing fee Share of total sales Share of total sales July 11, 2004–November 30, 2005 2.3％ 4.0％ December 1, 2005–November 30, 2011 +0.1pp p.a. from Dec. 1, 2005 4.0％ December 1, 2011–November 30, 2014 3.0％ 4.0％ December 1, 2014–November 30, 2019 5.0％ 5.0％ December 1, 2019–November 30, 2024 6.0％ 6.0％

Store certification period For directly operated stores For franchise stores July 11, 2004–November 30, 2014 Seven-year contract period Two-year contract period December 1, 2014–November 30, 2019 Ten-year contract period Five-year contract period December 1, 2019–November 30, 2024 Five-year contract period Five-year contract period

Contributions for advertising Contributions of a minimum of 4% of total sales to the KFC Advertising Association, an organization formed by the company and franchisees, (outsourced to 100% subsidiary K Ad) to create nationwide ad campaigns Source: Shared Research based on company data Note: Adjusted for inflation starting from December 1, 2014 Note: Continuing fee under sublicense agreements (% share of total sales) includes portion retained by KFC Japan.

The approval of the master franchisor, Yum! Brands, is required for all aspects of franchise agreements including products, ingredients, restaurants, and equipment.

Mainstay product: “original chicken” KFC’s mainstay “original chicken” is made from chicken raised in Japan on feed mixed with herbs that mask certain chicken odors, and accounts for roughly 40% of KFC’s system sales (FY03/17).

17/47 KFC Holdings Japan / 9873 RCoverage LAST UPDATE: 2019.10.07 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp

Once a chick has hatched and has undergone a health check, the chicken is raised at one of 200 KFC-registered farms nationwide, which all meet strict standards for equipment, animal breeding methods, feed, and health management. The chickens are slaughtered and cut into nine pieces using KFC’s original nine-cut method when they are 38–42 days old. They are slaughtered in the morning and shipped to individual stores on the same afternoon.

KFC’s original nine-cut chicken cutting method

Source: Shared Research based on company data

Employees conduct further quality checks of the meat in the restaurants, assessing temperature, freshness, and whether any feathers remain, preparing only the chickens that meet stringent standards. “Original chicken” is prepared by staff accredited as “chicken specialists” under the company’s certification system.

Distribution chart for “original chicken” chickens

Direct delivery to stores KFC Factories Directly-operated registered accredited to Hatcheries stores and Consumers breeding produce KFC Chicken franchise stores farms cut chicken distribution centers

Number of farms: 200 Number of factories: 7 Number of centers: 10 Breeding period: 38–42 days (nationwide)

Hatching and selection Raise chicks feeding Ensure safety and quality Herb-fed chickens cut in the - Check temperature, freshness, cut Check the health of herbal raw materials maintenance based on the morning are shipped out in conditions, and weight chicks STAR standards the afternoon - Hand-cooked by staffs supervised by "Chicken Specialist" title holders Source: Shared Research based on company data

STAR (Supplier Tracking Assessment & Recognition) standards: Global food safety and quality management standards for KFC and Pizza Hut set by the US headquarters of Yum! Brands Inc. In Japan, factories accredited to produce KFC cut chicken must reach a certain level of STAR standards to fulfill the company’s safety and quality maintenance requirements. The standards cover a wide scope, including facility equipment, machinery, and surrounding environment, conditions, organization, and management structure.

Customer demographic Some 70% of KFC’s customers are women in their 30s through 50s. Around 70% of customers order takeout such as “original chicken” meals, and the remaining 30% dine in, ordering sets such as chicken fillet sandwiches or chicken cutlet sandwiches that come with a soft drink. Customers in their 40s and 50s are familiar with the taste of KFC since their younger days, and tend to be big KFC fans. Since 2013, when convenience stores entered the fried chicken market, it appears that customers in their 20s, who are more accustomed to convenience stores, have become less frequent at KFC. The company plans to capture this younger generation by opening KFC cafes and other new formats.

18/47 KFC Holdings Japan / 9873 RCoverage LAST UPDATE: 2019.10.07 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp

Spending per customer At directly operated restaurants in Greater Tokyo, average spending per customer is JPY900–1,000, whereas in regional areas it is JPY1,200–1,300. Average spending per customer is lower in the Tokyo area due to the trend toward smaller, nuclear families. The all-store average figure is around JPY1,000. Around lunchtime, the average customer spends less than JPY900 due to value sets of JPY500–700 featuring items such as chicken fillet sandwiches and chicken cutlet sandwiches. At dinnertime, many people purchase larger meals such as “chicken buckets” to take home to their families for dinner, so sales per customer average JPY1,200–1,500. Although for most of the year spending per customer averages JPY1,000, Q3 is the peak season with spending per customer reaching nearly JPY1,200, as it includes Christmas (when it has become common in Japan to eat fried chicken).

Restaurant openings and closures Directly operated restaurants Store openings are primarily in the Kanto and Kansai regions, and consider the scope for new openings and trends in commercial areas. Locations also take into account profit and loss simulations based on restaurant format, i.e. stores in busy shopping areas, drive-through stores, or shopping center stores.

Restaurants with negative operating cash flow are designated as closure candidates. For restaurants where performance does not recover, the closure method and timing are based on overall expenses, such as the costs of restoring premises to their original condition.

Franchise restaurants The company makes recommendations regarding franchise restaurant openings based on the scope for new openings and trends in commercial areas. The final decision is made by individual franchisees, who receive support from KFC Holdings Japan.

Regarding closures, supervisors who are part of the company’s sales division provide management advice for underperforming restaurants, with the final decision left up to the franchisee.

Core strategy of KFC business

There are three key elements of the core strategy in the KFC business (see below for details):

▷ Further strengthen the KFC brand ▷ Analyze consumer needs and plan initiatives ▷ Develop systems to strengthen on-site capabilities

The company wants to strengthen the KFC brand and establish its position as an operator of unique fast-food restaurants that combine both sit-down and takeout restaurant elements. As convenience stores increase the proportion of food prepared on site and shift to higher value-added products, the company plans to work harder to differentiate and provide products that better appeal to its target customers.

19/47 KFC Holdings Japan / 9873 RCoverage LAST UPDATE: 2019.10.07 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp

KFC direction

Source: Shared Research based on company data

The company’s strategy to differentiate itself entails providing a safe and tasty product not available anywhere else by maintaining high standards for its raw materials, ingredients, and handmade food, and enhancing product development. It is also tailoring restaurant services to each location, and developing different formats with various product lineups such as cafes, buffet restaurants, and café-bars. It plans to meet the growing demand for prepared meals by actively rolling out takeout-only restaurants, bicycle delivery, food carts, and drive-through restaurants in shopping centers.

New format 1: Café New format 2: Restaurant

New format 3: Café-bar

Source: Shared Research based on company data

In analyzing customer needs and creating business strategies, the company plans to use data taken from Ponta, a loyalty-point network shared by various businesses in Japan, as well as point-of-sales information from its nationwide stores. The company also plans to create databases for each of its restaurants. Further, to strengthen on-site capabilities, it plans to reorganize toward smaller operating areas and implement monitoring and control systems.

20/47 KFC Holdings Japan / 9873 RCoverage LAST UPDATE: 2019.10.07 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp

Distinctive elements of KFC business

Brand power underpinned by tasty food prepared on-site KFC is a global brand, with a presence in more than 130 countries worldwide and roughly 21,000 restaurants as of August 2019. The KFC brand is sustained by its mainstay product, “original-recipe chicken,” developed by Colonel Harland Sanders in 1939. It is prepared using 11 secret herbs and spices, and fried with pure vegetable oil in a pressure cooker.

The 11 secret herbs and spices are shrouded in mystery and attract much attention. The Chicago Tribune in August 2016 published an article stating that a memo with the secret recipe had been discovered. According to the company, even internally information on the 11 herbs and spices is closely guarded so that no individual knows the secret combination.

First mover advantage gives KFC high market share KFC was established in Japan in 1970 and opened its first location in Nagoya, one year before McDonald’s Corporation established McDonald's Japan. Subsequently, the KFC brand spread, along with statues of Colonel Sanders. In much of the world the custom is to eat turkey at Christmas, but in Japan chicken is the typical Christmas dinner. The company’s successful marketing has established a culture of eating fried chicken at Christmas. KFC Holdings Japan is the only company that has succeeded in establishing a fast food chain specialized in fried chicken. KFC leads the domestic fried chicken market, with a market share of 37% in 2015, according to a company survey.

Steady, large-volume supplies of chicken raised in Japan All of the company’s chicken is raised in Japan. At about 40 days old, these young birds are juicy, tender, and indispensable for making KFC’s “original chicken.” In contrast, convenience stores primarily use frozen imported chicken over 50 days old for their fried chicken.

The company is able to obtain a steady, large (more than 200mn pieces per annum) supply of chicken by virtue of the feed and livestock value chain created by Mitsubishi Corporation, its major shareholder. The company obtains roughly half of the chicken used in its meals from Mitsubishi Corporation. Mitsubishi was the first company in Japan to introduce the end-to-end chicken farming system prevalent in the US that encompasses production, treatment, processing, and sales. Mitsubishi also built a value chain for chicken feed from procuring the grains used such as corn.

In the Mitsubishi Corporation group, Agrex Inc. procures grain and Nosan Corporation uses the grain to make formula feed. Japan Farm (the first factory accredited to produce KFC cut chicken) and Tokimeki farm produce chicken. The processed chicken produced by these two companies is sold to KFC Japan via Foodlink Corporation. In this manner the feed and livestock value chain run by the Mitsubishi group supports KFC’s restaurants.

Mitsubishi group’s feed and livestock value chain

Mitsubishi Corporation Group

Japan Farm Kentucky Fried AGREX INC. Nosan Corporation Foodlink Corporation Chicken Japan Tokimeki Farm Limited

Trading of grains Manufacture and sales of Production and Sales of foodstuff mixed feed processing of chicken

Source: Shared Research based on Nikkei Business materials Takeout accounts for 70% Around 70% of sales of the company’s mainstay “original chicken” is takeout, reflecting growth in prepared meal demand accompanying the trend toward nuclear families.

21/47 KFC Holdings Japan / 9873 RCoverage LAST UPDATE: 2019.10.07 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp

KFC earnings

For FY03/19, the company reported consolidated revenues of JPY74.3bn (+5.1% YoY) and consolidated operating profit of JPY2.2bn (+362.5% YoY). System sales of JPY118.1bn were up 4.3% YoY, with directly managed stores generating sales of JPY34.6bn (+2.4% YoY) and franchisee stores generating sales of JPY83.6bn (+5.2% YoY).

System sales System sales (directly operated store sales plus at franchises) for KFC declined continuously from FY03/12 to FY03/14. This was due to the impact of economic stagnation such as declining wages on KFC’s customer base and the launch of fried chicken prepared on-site by convenience stores. However, sales rose for two consecutive fiscal years starting in FY03/15 due to a recovery in wages and a 4.2% price bump for “original chicken” on March 25, 2015 (from JPY240 to JPY250 including tax.) In both FY03/17 and FY03/18 the company saw increases in average spending per customer but sales still finished down in both years due to a drop in store traffic. The increase in store sales in FY03/19 was driven in large part by the jump in traffic sparked by the company's successful two-tiered marketing approach that made use of everyday value set menus and the periodic addition of new menu items.

The proportion of sales accounted for by directly managed stores has been slowly declining for some time, slipping 1.7pp from 31.0% in FY03/11 to 29.3% in FY03/19. The company attributed the decline in the relative weight of its directly managed stores to its decision to make operations outside of major cities more efficient by letting more franchisees who knew their local markets well become store owners/managers at a time when it was already struggling with sluggish sales and rising personnel costs.

Operating profit The consolidated operating profit margin of 3.0% in FY03/19 was the highest the company has recorded since FY03/11. The improvement reflects the sale of its low-margin Pizza Hut business and, at its mainstay KFC business, the success of its marketing campaign aimed at increasing customer visits on a regular basis to KFC. The improvement notwithstanding, margins at KFC are still low relative to competitors and the company continues to work toward improving its margins further.

KFC business KPIs KFC business KPI FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 FY03/19 FY03/20 Act. Act. Act. Act. Act. Act. Act. Act. Act. Act. System sales (JPYmn) 116,943 115,487 111,405 107,618 109,860 116,150 114,854 113,210 118,129 120,000 Directly operated store sales 36,195 34,752 33,072 31,809 32,197 34,279 33,762 33,762 34,561 34,000 Franchised store sales 80,747 80,735 78,333 75,809 77,663 81,871 81,091 79,447 83,568 86,000 System sales (YoY) -24.6% -1.2% -3.5% -3.4% 2.1% 5.7% -1.1% -1.4% 4.3% 1.6% Directly operated store sales (YoY) -30.0% -4.0% -4.8% -3.8% 1.2% 6.5% -1.5% 0.0% 2.4% -1.6% Franchised store sales (YoY) -21.8% -0.0% -3.0% -3.2% 2.4% 5.4% -1.0% -2.0% 5.2% 2.9% % of system sales 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Directly operated store sales 31.0% 30.1% 29.7% 29.6% 29.3% 29.5% 29.4% 29.8% 29.3% 28.3% Franchised store sales 69.0% 69.9% 70.3% 70.4% 70.7% 70.5% 70.6% 70.2% 70.7% 71.7% Number of stores 1,150 1,166 1,180 1,171 1,155 1,144 1,149 1,153 1,132 1,133 Number of directly operated store 334 330 329 329 330 316 326 329 306 300 Number of franchised store 816 836 851 842 825 828 823 824 826 833 Number of stores (YoY) 2.0% 1.4% 1.2% -0.8% -1.4% -1.0% 0.4% 0.3% -1.8% 0.1% Number of directly operated stores (YoY) -1.5% -1.2% -0.3% 0.0% 0.3% -4.2% 3.2% 0.9% -7.0% -2.0% Number of franchised stores (YoY) 3.6% 2.5% 1.8% -1.1% -2.0% 0.4% -0.6% 0.1% 0.2% 0.8% Sales per store (JPYmn) 102 99 94 92 95 102 100 98 104 106 Directly operated stores 108 105 101 97 98 108 104 103 113 113 Franchised stores 9997929094999996101103 Sales per store (YoY) -26.1% -2.6% -4.7% -2.7% 3.5% 6.7% -1.5% -1.8% 6.3% 1.5% Directly operated stores (YoY) -28.9% -2.8% -4.5% -3.8% 0.9% 11.2% -4.5% -0.9% 10.1% 0.3% Franchised stores (YoY) -24.5% -2.4% -4.7% -2.2% 4.6% 5.0% -0.4% -2.1% 4.9% 2.0% Source: Shared Research based on company materials Note: “System sales” refers to directly operated restaurant sales plus franchise restaurant sales. Note: Figures may differ from company materials due to differences in rounding methods.

22/47 KFC Holdings Japan / 9873 RCoverage LAST UPDATE: 2019.10.07 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp

Breakdown of revenues and earnings by segment By segment FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 FY03/19 Cumulative (JPYmn) Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Revenues 88,823 88,124 85,864 83,436 84,605 88,180 88,032 73,457 74,344 YoY - -0.8% -2.6% -2.8% 1.4% 4.2% -0.2% -16.6% 1.2% KFC 72,521 71,544 69,199 67,056 64,566 68,410 69,251 67,381 - YoY - -1.3% -3.3% -3.1% - 6.0% 1.2% -2.7% - Pizza Hut 15,850 16,086 16,126 15,890 15,525 15,425 14,922 2,721 - YoY - 1.5% 0.2% -1.5% - -0.6% -3.3% -81.8% - Other 450 493 538 489 12,038 12,393 11,654 9,967 - YoY - 9.6% 9.1% -9.1% - 2.9% -6.0% -14.5% - Adjustments 2 1 1 1 -7,524 -8,049 -7,796 -6,613 - Operating profit 568 1,987 2,011 1,822 670 2,011 2,558 477 2,206 YoY - 249.8% 1.2% -9.4% -63.2% 200.1% 27.2% -81.4% 362.5% OPM 0.6% 2.3% 2.3% 2.2% 0.8% 2.3% 2.9% 0.6% 3.0% KFC 7,493 6,213 6,595 6,221 1,849 2,020 1,539 -499 - YoY - -17.1% 6.1% -5.7% - 9.2% -23.8% - - Profit margin 10.3% 8.7% 9.5% 9.3% 2.9% 3.0% 2.2% -0.7% - Pizza Hut -33 57 -2 -36 -1,477 -351 153 -0 - YoY ------Profit margin -0.2% 0.4% 0.0% -0.2% -9.5% -2.3% 1.0% 0.0% - Other -158 -71 -73 -133 697 239 913 882 - YoY ------65.7%282.0%-3.4%- Profit margin -35.1% -14.4% -13.6% -27.2% 5.8% 1.9% 7.8% 8.8% - Adjustments -3,769 -3,809 -4,124 -4,229 -399 102 -49 94 - Source: Shared Research, based on company materials Notes: Figures may differ from company materials due to differences in rounding methods. FY03/10 is 16 months long due to a change in the company's fiscal year end. A change in the company's segmentation scheme starting in FY03/15 moved revenues and earnings from KFC Holdings Japan and subsidiary K Ad that had been included under the KFC and Pizza Hut segment under the Other segment.

23/47 KFC Holdings Japan / 9873 RCoverage LAST UPDATE: 2019.10.07 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp

Earnings structure

Earnings structure (consolidated) FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 FY03/19 FY03/20 (JPYmn) Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Total revenues 88,823 88,124 85,864 83,436 84,605 88,180 88,032 73,457 74,344 74,400 YoY -28.8% -0.8% -2.6% -2.8% 1.4% 4.2% -0.2% -16.6% 1.2% 0.1% Sales 81,421 80,370 78,010 75,937 77,138 80,254 79,962 66,565 67,695 - YoY -28.9% -1.3% -2.9% -2.7% 1.6% 4.0% -0.4% -16.8% 1.7% - % of total revenues 91.7% 91.2% 90.9% 91.0% 91.2% 91.0% 90.8% 90.6% 91.1%- Other revenues 7,401 7,753 7,853 7,499 7,467 7,925 8,069 6,891 6,649 - YoY -28.2% 4.8% 1.3% -4.5% -0.4% 6.1% 1.8% -14.6% -3.5% - % of total revenues 8.3% 8.8% 9.1% 9.0% 8.8% 9.0% 9.2% 9.4% 8.9% - Cost of revenues 47,715 48,441 46,207 44,976 46,399 48,816 48,144 41,852 42,306 - YoY -27.4% 1.5% -4.6% -2.7% 3.2% 5.2% -1.4% -13.1% 1.1% - % of total revenues 53.7% 55.0% 53.8% 53.9% 54.8% 55.4% 54.7% 57.0% 56.9%- Cost of sales 42,063 42,185 40,457 39,753 41,234 43,418 42,717 37,250 38,111 - YoY -27.0% 0.3% -4.1% -1.7% 3.7% 5.3% -1.6% -12.8% 2.3% - % of total revenues 47.4% 47.9% 47.1% 47.6% 48.7% 49.2% 48.5% 50.7% 51.3%- Cost of other revenues 5,651 6,256 5,750 5,222 5,165 5,397 5,427 4,602 4,195 - YoY -29.8% 10.7% -8.1% -9.2% -1.1% 4.5% 0.6% -15.2% -8.8% - % of total revenues 6.4% 7.1% 6.7% 6.3% 6.1% 6.1% 6.2% 6.3% 5.6% - Gross profit 41,108 39,683 39,656 38,460 38,206 39,364 39,887 31,604 32,037 - YoY -30.5% -3.5% -0.1% -3.0% -0.7% 3.0% 1.3% -20.8% 1.4% - GPM 46.3% 45.0% 46.2% 46.1% 45.2% 44.6% 45.3% 43.0% 43.1% - SG&A expenses 37,576 37,293 37,261 36,638 37,536 37,352 37,328 31,127 29,831 - YoY -30.2% -0.8% -0.1% -1.7% 2.5% -0.5% -0.1% -16.6% -4.2% - SG&A ratio 42.3% 42.3% 43.4% 43.9% 44.4% 42.4% 42.4% 42.4% 40.1% - Salaries and allowances 15,257 15,043 14,941 15,098 14,879 14,767 14,799 12,022 11,246 YoY -35.2% -1.4% -0.7% 1.1% -1.5% -0.8% 0.2% -18.8% -6.5% - % of total revenues 17.2% 17.1% 17.4% 18.1% 17.6% 16.7% 16.8% 16.4% 15.1%- Rents 4,408 4,315 4,255 4,181 4,151 4,130 4,274 3,680 3,565 YoY -30.5% -2.1% -1.4% -1.7% -0.7% -0.5% 3.5% -13.9% -3.1% - % of total revenues 5.0% 4.9% 5.0% 5.0% 4.9% 4.7% 4.9% 5.0% 4.8% - Advertising 3,843 4,192 4,373 3,779 4,558 4,254 3,681 3,128 2,782 YoY -29.8% 9.1% 4.3% -13.6% 20.6% -6.7% -13.5% -15.0% -11.1% - % of total revenues 4.3% 4.8% 5.1% 4.5% 5.4% 4.8% 4.2% 4.3% 3.7% - Depreciation 2,116 2,044 2,106 2,088 2,206 2,226 2,288 1,929 1,889 YoY -18.4% -3.4% 3.0% -0.9% 5.7% 0.9% 2.8% -15.7% -2.1% - % of total revenues 2.4% 2.3% 2.5% 2.5% 2.6% 2.5% 2.6% 2.6% 2.5% - Other SG&A expenses 11,952 11,699 11,586 11,492 11,742 11,975 12,286 10,368 10,349 YoY -24.8% -2.1% -1.0% -0.8% 2.2% 2.0% 2.6% -15.6% -0.2% - % of total revenues 13.5% 13.3% 13.5% 13.8% 13.9% 13.6% 14.0% 14.1% 13.9%- Operating profit 3,532 2,390 2,395 1,822 670 2,011 2,558 477 2,206 1,500 YoY -32.8% -32.3% 0.2% -23.9% -63.2% 200.1% 27.2% -81.4% 362.5% -32.0% OPM 4.0% 2.7% 2.8% 2.2% 0.8% 2.3% 2.9% 0.6% 3.0% 2.0% Source: Source: Shared Research based on company data Revenues About 90% of the company’s consolidated revenues come from directly operated restaurants and sales of ingredients to franchisees. The remaining 10% comes from royalties for sublicensing to franchisees, rental revenues from POS systems and other restaurant fixtures, and ad revenues from franchisees.

Cost of revenues The total cost of revenues ratio (broadly defined) in FY03/19 was 56.9%, consisting of the cost of sales (narrowly defined) and other costs of revenues. The cost of sales was 51.3%, comprising ingredients and materials such as 100% made-in-Japan chicken and flour. The remaining 5.6% under other cost of revenues was the cost of procuring POS systems and other store fixtures.

The cost of sales ratio (narrowly defined) rose 3.9pp from 47.4% in FY03/11to 51.3% in FY03/18. This was due in large part to the increase in the cost of imported chicken stemming from the depreciation of the yen against the dollar, which pushed up the price the company had to pay for domestic chicken.

24/47 KFC Holdings Japan / 9873 RCoverage LAST UPDATE: 2019.10.07 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp

Cost of sales ratio (material costs and personnel expenses) and Japanese broiler prices (breast meat)

(JPY/kg) (JPY/kg) Chicken breast meat (JPY/kg) GPM (right axis) Chicken breast meat (JPY/kg) GPM (right axis) 400 41% 350 42% 43.1% 350 42% 300 43% 300 43% 43.0% 250 44.6% 44% 250 44% 45.0% 45.2% 45.3% 200 45% 200 45% 46.2% 46.1% 150 46% 150 46.3% 46%

100 47% 100 47% 50 48% 50 48% - 49% Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 - 49% FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 FY03/19 FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 FY03/19

Source: Shared Research based on JACC and company materials

SG&A expenses The SG&A expenses were 40.1% of consolidated revenues in FY03/19, and consisting mainly of salaries (15.1% of sales), rents (4.8%), and advertising expenditures (3.7%). By limiting new hiring, the company reduced employee numbers, so the ratio of salaries to revenues declined from 17.2% in FY03/11 to 15.1% in FY03/19.

Ratio of salaries to revenues, consolidated employee numbers

1,200 No. of employees (consolidated) Salaries and allowances as % of revenues (right axis) 19% 18.1% 1,000 17.6% 18% 17.4% 17.2% 17.1% 16.8% 800 16.7% 17% 16.4%

600 16% 1,127 1,086 1,083 1,045 1,071 1,048 1,063 15.1% 400 827 15% 883

200 14%

0 13% FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 FY03/19 Source: Shared Research based on company materials

25/47 KFC Holdings Japan / 9873 RCoverage LAST UPDATE: 2019.10.07 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp

Market and value chain

Trends in restaurant and prepared meals market

Restaurant market (broad definition) According to the Japan Food Service Association, in the broadly defined restaurant market, which includes both dining out and prepared meal markets, was worth JPY33.1tn (+0.8% YoY) in 2018. After peaking at JPY32.9tn in 1998, it shrank to JPY28.6tn in 2011, and grew for seven consecutive years through 2018.

Within the restaurant market, the other food and beverage industry, which includes the fast-food market where KFC operates, grew by 3.9% YoY in 2018 to JPY13.3tn.

Japan’s dining-out and prepared meal markets

（JPYtn） Dining out Prepared meals YoY (right axis) 40 9%

32.7 32.9 32.3 32.5 32.8 33.1 31.0 31.9 32.0 31.0 32.0 29.8 30.5 30.7 30.7 30.6 29.8 29.8 29.9 30.2 30.2 30.0 30.0 30.9 29.2 29.2 28.6 29.2 30 28.0 6%

20 3%

27.7 27.8 27.7 27.9 28.7 29.1 28.5 25.7 27.2 27.4 27.0 25.9 25.4 25.4 25.4 25.7 25.8 24.6 24.5 24.4 24.6 24.6 24.5 23.7 23.5 22.8 23.2 24.0 24.6 10 0%

0 -3% CY1990 CY1995 CY2000 CY2005 CY2010 CY2015 Source: Japan Food Service Association

Prepared meal market The prepared meal market, which includes takeout and delivery food and beverage services, grew by 2.3% YoY to JPY7.3tn. Excluding a 2.2% fall in 2008, it has grown every year since 1976. Driving the continued growth has been a rise in people eating alone due to an increase in single-person households and households where both partners work owing to increased participation of women in the workforce, and the trend toward nuclear families.

Japan’s prepared meal market

（JPYtn） Prepared meals YoY (right axis) 9 25%

20% 7.3 7.0 7.2 6 6.6 15% 6.2 5.8 5.9 6.0 5.5 5.6 5.7 5.5 5.6 5.7 5.2 5.3 5.3 4.9 5.0 5.1 10% 4.4 3 3.6 5% 3.3 2.9 3.0 3.1 2.6 2.8 2.3 0%

0 -5% CY1990 CY1995 CY2000 CY2005 CY2010 CY2015 Source: Shared Research based on Teikoku Databank materials

Restaurant meal price comparison According to FY2017 data from Recruit Lifestyle, spending per customer in fast food restaurants averaged JPY756, and family restaurants, JPY1,419, with KFC in the middle at JPY1,000.

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Average spending per customer by restaurant format and KFC Holdings Japan meal prices (Greater Tokyo, Kansai, and Tokai regions: FY2017)

5,000

4,000

3,000

4,252 2,000 3,868 3,437 2,797 1,000 2,253 1,419 1,000 756 699 0 French and Italian Japanese (incl. sushi) Barbeque and steak Asian Chinese (excl. Family restaurants, KFC Fast food Beef bowl, noodle shops) conveyor sushi and curry and rice (JPY) Source: Shared Research based on Recruit Lifestyle and company materials

Japan’s fried chicken market

The company estimates its share of the domestic fried chicken market at some 35% to 40%, which puts it in the No. 1 spot. Competitors include hamburger chains such as McDonald’s and Mos Burger as well as supermarkets and convenience stores that offer prepared meals. Convenience stores have been particularly active in the fried chicken market since 2003 when Circle K Sunkus first started selling fried chicken.

According to the company, the KFC brand has the image of being more delicious, family-oriented, and suitable as a special occasion meal than its competitors. However, as shown in the data on average spending per customer by format, it is more expensive than other fast food such as hamburgers.

Entrants in the domestic fried chicken market

2003 Circle K Sunkus

2004 Family Mart

2005 Lawson

2007 Seven-Eleven

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Source: Shared Research based on company materials

Peer group

KFC Holdings Japan operates fried chicken chains, and no competitor has the same portfolio. In the KFC business, there is no fast food competitor who specializes in fried chicken.

Below are overviews of listed companies that are similar to KFC Holdings Japan as well as unlisted companies that compete with Pizza Hut.

McDonald’s Holdings Company Japan Ltd. (TSE JASDAQ: 2702) McDonald’s is a global hamburger chain with a presence in over 100 countries and over 37,000 restaurants. The Japanese subsidiary was established in 1971, and McDonald’s is the leading hamburger chain in Japan. Using chicken patties imported from Thailand (as of September 2016), it sells Chicken Filet-O sandwiches, Chicken Crisp sandwiches, Shaka Chicken and other products in addition to hamburgers. The company posted a double-digit revenue decline and operating losses in FY12/14 and FY12/15. Its financial woes stemmed from a 2014 scandal involving expired meat imported from China, as well as a 2015 incident involving foreign objects found in food. After mounting a turnaround in FY12/16, McDonald’s Japan managed to get results in FY12/18 back up to same level as in FY12/12.

27/47 KFC Holdings Japan / 9873 RCoverage LAST UPDATE: 2019.10.07 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp

Mos Food Services, Inc. (TSE1: 8153) Specialist hamburger franchise chain established in 1972, it has the second-largest market share in Japan after McDonald’s. The company has produced unique hit products using Japanese flavors including teriyaki burgers using miso and soy sauce and the rice-based Mos Rice Burger. The side menu features Mos Chicken with the price set at JPY270, similar to KFC’s JPY250 for its original chicken. Chicken used in Mos Chicken is produced in China (as of August 2019). During the three-year period ending in FY03/18, Mos Food Services reported an operating profit margin of more than 5%, giving it one of the highest operating profit margins in Japan's fast food industry. In FY03/19 sales and earnings took a sharp turn for the worse with sales dropping 7.2% YoY following a food poisoning incident in August 2018.

Royal Holdings Co., Ltd. (TSE1: 8179) Established in 1951. Business got its start providing in-flight catering and tea services for domestic Japan Airlines routes at Fukuoka Airport. Key current businesses are The Royal Host (family restaurant) and Tendon Tenya (tempura rice bowl restaurant) chains. Also operates Shakey’s Pizza restaurants. In FY12/18, domestic sales of JPY13.2bn at its Tendon Tenya business were down 3.2% YoY and operating profit of JPY404mn was up 4.4%.

Comparison with similar listed companies Comparison of key financial data FY09-10 FY10-11 FY11-12 FY12-13 FY13-14 FY14-15 FY15-16 FY16-17 FY17-18 (JPYmn) KFC Holdings Japan (9873) FY03/11 Cons. FY03/12 Cons. FY03/13 Cons. FY03/14 Cons. FY03/15 Cons. FY03/16 Cons. FY03/17 Cons. FY03/18 Cons. FY03/19 Cons. Total revenues 88,823 88,124 85,864 83,436 84,605 88,180 88,032 73,457 74,344 YoY -28.8% -0.8% -2.6% -2.8% 1.4% 4.2% -0.2% -16.6% 1.2% Gross profit 41,108 39,683 39,656 38,460 38,206 39,364 39,887 31,604 32,037 GPM 46.3% 45.0% 46.2% 46.1% 45.2% 44.6% 45.3% 43.0% 43.1% Operating profit 3,531 2,390 2,395 1,822 670 2,011 2,558 477 2,206 OPM 4.0% 2.7% 2.8% 2.2% 0.8% 2.3% 2.9% 0.6% 3.0% Net income attrib. to parent company shareholders 1,891 1,102 1,203 441 -524 730 1,365 578 2,055 Shareholders' equity 23,317 23,153 23,214 22,497 21,219 20,904 21,178 20,626 21,385 ROE 7.9% 4.7% 5.2% 1.9% -2.4% 3.5% 6.5% 2.8% 9.8% Number of employees 1,127 1,086 1,083 1,045 1,071 1,048 1,063 827 883 Revenues per employee 79 81 79 80 79 84 83 89 84 McDonald's Holdings Japan (2702) FY12/10 Cons. FY12/11 Cons. FY12/12 Cons. FY12/13 Cons. FY12/14 Cons. FY12/15 Cons. FY12/16 Cons. FY12/17 Cons. FY12/18 Cons. Revenue 323,799 302,339 294,710 260,441 222,319 189,473 226,646 253,640 272,257 YoY -10.6% -6.6% -2.5% -11.6% -14.6% -14.8% 19.6% 11.9% 7.3% Gross profit 67,686 63,629 60,117 38,188 19,834 1,807 31,348 45,528 53,198 GPM 20.9% 21.0% 20.4% 14.7% 8.9% 1.0% 13.8% 17.9% 19.5% Operating profit 28,135 28,182 24,780 11,524 -6,714 -23,440 6,930 18,912 25,045 OPM 8.7% 9.3% 8.4% 4.4% -3.0% -12.4% 3.1% 7.5% 9.2% Net income attrib. to parent company shareholders 7,864 13,298 12,870 5,138 -21,843 -34,951 5,366 24,024 21,939 Shareholders' equity 152,321 161,631 170,571 171,720 147,559 108,666 110,000 129,690 146,226 ROE 5.2% 8.5% 7.7% 3.0% -13.7% -27.3% 4.9% 20.0% 15.9% Number of employees 3,419 3,128 2,775 2,764 2,679 2,419 2,239 2,194 2,145 Revenue per employee 95 97 106 94 83 78 101 116 127 MOS FOOD SERVICES (8153) FY03/11 Cons. FY03/12 Cons. FY03/13 Cons. FY03/14 Cons. FY03/15 Cons. FY03/16 Cons. FY03/17 Cons. FY03/18 Cons. FY03/19 Cons. Sales 63,175 62,672 62,371 65,330 66,310 71,114 70,929 71,387 66,264 YoY 5.3% -0.8% -0.5% 4.7% 1.5% 7.2% -0.3% 0.6% -7.2% Gross profit 29,795 29,419 29,869 31,400 31,653 35,362 36,318 35,592 32,665 GPM 47.2% 46.9% 47.9% 48.1% 47.7% 49.7% 51.2% 49.9% 49.3% Operating profit 3,223 2,087 1,889 2,157 1,555 3,824 4,664 3,734 517 OPM 5.1% 3.3% 3.0% 3.3% 2.3% 5.4% 6.6% 5.2% 0.8% Net income attrib. to parent company shareholders 1,854 1,823 1,521 1,744 673 2,285 3,050 2,385 -907 Shareholders' equity 36,973 38,152 39,690 41,242 42,295 43,714 45,969 47,767 45,294 ROE 5.1% 4.9% 3.9% 4.3% 1.6% 5.3% 6.8% 5.1% -1.9% Number of employees 1,122 1,170 1,166 1,250 1,319 1,375 1,335 1,372 1,384 Sales per employee 56 54 53 52 50 52 53 52 48 ROYAL HOLDINGS (8179) FY12/10 Cons. FY12/11 Cons. FY12/12 Cons. FY12/13 Cons. FY12/14 Cons. FY12/15 Cons. FY12/16 Cons. FY12/17 Cons. FY12/18 Cons. Sales 110,440 109,260 114,957 120,730 124,857 130,327 133,025 132,070 133,896 YoY -1.3% -1.1% 5.2% 5.0% 3.4% 4.4% 2.1% -0.7% 1.4% Gross profit 74,573 73,763 77,081 80,282 82,455 85,461 87,972 89,820 91,311 GPM 67.5% 67.5% 67.1% 66.5% 66.0% 65.6% 66.1% 68.0% 68.2% Operating profit 2,054 2,153 2,623 3,498 4,417 4,899 5,222 5,952 5,709 OPM 1.9% 2.0% 2.3% 2.9% 3.5% 3.8% 3.9% 4.5% 4.3% Net income attrib. to parent company shareholders 901 -3,177 1,137 1,663 1,866 2,728 2,377 3,533 2,791 Shareholders' equity 43,111 39,243 40,135 42,729 43,904 45,846 47,353 50,990 49,889 ROE 2.1% -7.7% 2.9% 4.0% 4.3% 6.1% 5.1% 7.2% 5.5% Number of employees 2,353 2,324 2,381 2,386 2,437 2,538 2,617 2,646 2,686 Sales per employee 47 47 48 51 51 51 51 50 50 Source: Shared Research based on company materials

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Strengths and weaknesses

Strengths Brand power nurtured since establishment The company opened its first restaurant in Nagoya in 1970. Since then, the KFC brand with its statues of Colonel Sanders and secret fried chicken recipe using 11 herbs and spices, and Pizza Hut offering pizzas hand-made on site, have spread throughout Japan. KFC Holdings Japan is the only fast food company to succeed as a fried chicken specialist. Even as convenience stores come to the fore, the company still had a 37% share of the fried chicken market in 2015 (KFC Holdings Japan survey) thanks to its brand power.

Business model built on support from Mitsubishi The company’s establishment was the fruit of four years of negotiations between Mitsubishi Corporation (stake: 34.56% as of March 31, 2016) and KFC founder Colonel Harland Sanders. The base for the original chicken is meat from 40-day-old chickens raised in Japan (convenience stores use frozen imported meat). KFC Japan obtains a steady supply through Mitsubishi using a value chain that extends from the corn and other grains for chicken feed through delivery of the pre-cut meat. In this manner, the company’s operations are built on the support by Mitsubishi. Shared Research thinks that it would be difficult for other companies to create a similar business model offering fast food that matches the quality of KFC Japan.

Scale economies Because KFC Japan’s “original chicken” uses 40-day-old chickens raised in Japan, procurement costs are relatively high compared with imported frozen roasters (which are older). Still, the company is able to keep costs low by obtaining volume discounts due to bulk procurements, leveraging its leading 37% share of the domestic fried chicken market. Shared Research thinks that this is a barrier to entry for competitors, especially convenience stores, which use imported frozen roasters. We think economies of scale in obtaining materials and advertising are another barrier to entry for companies attempting to enter the market as fast food chicken specialists.

Weaknesses Constraints imposed by the franchise agreements with Yum! Brands Approval from master franchisor Yum! Brands is needed for all aspects of the business under the franchise agreement, including products, ingredients, restaurants, and equipment. Shared Research thinks that constraints under the franchise agreement hinder the company’s ability to nimbly respond to changes in consumer demand.

Constraints on sales promotion due to using domestically raised chicken KFC Japan uses 100% domestically raised chicken. When conducting an intensive sales campaign, other fast food companies and convenience stores can adjust their schedules quickly because they use frozen imported poultry. However, KFC must take into account long lead times from the chicken feed stage through procuring the pre-cut chicken––over half a year. Shared Research thinks that this limitation is one of the company’s weaknesses.

29/47 KFC Holdings Japan / 9873 RCoverage LAST UPDATE: 2019.10.07 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp

Financial statements

Income statement

Income statement FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 FY03/19 (JPYmn) Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Total revenues 88,823 88,124 85,864 83,436 84,605 88,180 88,032 73,457 74,344 YoY -28.8% -0.8% -2.6% -2.8% 1.4% 4.2% -0.2% -16.6% 1.2% Cost of revenue 47,715 48,441 46,208 44,976 46,399 48,816 48,144 41,852 42,306 Cost ratio 53.7% 55.0% 53.8% 53.9% 54.8% 55.4% 54.7% 57.0% 56.9% Gross profit 41,108 39,683 39,656 38,460 38,206 39,364 39,887 31,604 32,037 YoY -30.5% -3.5% -0.1% -3.0% -0.7% 3.0% 1.3% -20.8% 1.4% GPM 46.3% 45.0% 46.2% 46.1% 45.2% 44.6% 45.3% 43.0% 43.1% SG&A expenses 37,576 37,293 37,261 36,638 37,536 37,352 37,328 31,127 29,831 YoY -30.2% -0.8% -0.1% -1.7% 2.5% -0.5% -0.1% -16.6% -4.2% SG&A ratio 42.3% 42.3% 43.4% 43.9% 44.4% 42.4% 42.4% 42.4% 40.1% Operating profit 3,531 2,390 2,395 1,822 670 2,011 2,558 477 2,206 YoY -32.8% -32.3% 0.2% -23.9% -63.2% 200.1% 27.2% -81.4% 362.5% OPM 4.0%2.7%2.8%2.2%0.8%2.3%2.9%0.6%3.0% Non-operating income 177 79 111 34 -3 -145 -133 150 769 Rents income 226 228 222 143 177 148 161 227 241 Rents expenses - 108 99 73 145 161 169 184 15 Other -49 -41 -12 -36 -35 -132 -125 107 543 Recurring profit 3,708 2,469 2,506 1,856 667 1,866 2,425 627 2,975 YoY -32.1% -33.4% 1.5% -25.9% -64.1% 179.8% 30.0% -74.1% 374.5% RPM 4.2%2.8%2.9%2.2%0.8%2.1%2.8%0.9%4.0% Extraordinary gains (losses) -596 26 -164 -588 -512 -391 -96 840 173 Income taxes 1,220 1,392 1,138 826 680 744 964 889 1,092 Implied tax rate 39.2% 55.8% 48.6% 65.1% 438.7% 50.4% 41.4% 60.6% 34.7% Minority interests ------Net in co me attributable to parent company shareholders 1,891 1,102 1,203 441 -524 730 1,365 578 2,055 YoY -26.4% -41.7% 9.2% -63.3% --87.0%-57.7% 255.5% Net margin 2.1% 1.3% 1.4% 0.5% -0.6% 0.8% 1.6% 0.8% 2.8% Source: Shared Research based on company data Note: Figures may differ from company materials due to differences in rounding methods.

30/47 KFC Holdings Japan / 9873 RCoverage LAST UPDATE: 2019.10.07 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp

Balance sheet

Balance sheet FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 FY03/19 (JPYmn) Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Current assets 22,549 23,500 23,340 21,682 22,332 21,390 20,721 14,952 19,196 Cash and deposits 15,808 13,058 13,502 16,146 16,804 15,339 14,571 9,757 13,267 Accounts receivable 2,947 3,729 3,544 3,701 3,546 3,855 4,007 3,562 4,269 Inventory assets 671 733 729 518 397 697 450 414 486 Others 3,123 5,980 5,565 1,317 1,585 1,499 1,693 1,219 1,174 Noncurrent assets 18,461 17,882 16,968 16,301 16,085 17,902 18,762 20,793 19,223 Tangible fixed assets 7,228 6,681 6,184 5,703 6,093 7,178 8,506 7,734 6,474 Intangible fixed assets 2,555 3,128 2,950 2,924 2,874 2,828 2,206 1,704 1,091 Investments and other assets 8,678 8,073 7,834 7,674 7,118 7,896 8,050 11,354 11,658 Total assets 41,011 41,383 40,308 37,984 38,418 39,292 39,484 35,746 38,420 Current liabilit ies 13,046 13,837 13,029 11,203 13,166 13,070 13,033 10,929 13,222 Accounts payable 5,680 7,603 6,568 5,754 5,978 6,232 5,824 5,735 6,664 Short-term debt 140 193 211 193 187 531 618 531 519 Other current liabilities 7,226 6,041 6,250 5,256 7,001 6,307 6,591 4,663 6,039 Fixed liabilities 4,648 4,392 4,065 4,283 4,031 5,317 5,272 4,190 3,812 Long-term debt 359 359 207 188 432 1,533 1,142 666 189 Others 4,289 4,033 3,858 4,095 3,599 3,784 4,130 3,524 3,623 Total liabilities 17,694 18,229 17,094 15,486 17,197 18,387 18,305 15,120 17,034 Net assets 23,317 23,153 23,214 22,497 21,219 20,904 21,178 20,626 21,385 Capital stock 7,297 7,297 7,297 7,297 7,297 7,297 7,297 7,297 7,297 Capital surplus 10,430 10,430 10,430 10,430 10,430 10,430 10,430 10,430 10,430 Retained earnings 6,105 6,083 6,165 5,485 4,228 3,837 4,082 3,539 4,473 Treasury stock -531 -683 -710 -722 -733 -739 -739 -887 -887 Accum. other comprehensive income 16 25 31 7 -2 79 108 246 71 Minority interests ------Tot al capit al and liabilit ies 41,011 41,383 40,308 37,984 38,418 39,292 39,484 35,746 38,420 Working capital -2,062 -3,141 -2,295 -1,535 -2,035 -1,680 -1,367 -1,759 -1,909 Total interest-bearing debt 499 552 418 381 619 2,064 1,760 1,197 708 Net cash 15,309 12,506 13,084 15,765 16,185 13,275 12,811 8,560 12,559 Days in accounts receivable 121415161615161919 Days in inventory 556544444 Days in accounts payable 44 50 56 50 46 46 46 50 53 Working capital cycle -26-31-35-29-27-26-25-28-30 Current ratio 173% 170% 179% 194% 170% 164% 159% 137% 145% Fixed ratio 79.2% 77.2% 73.1% 72.5% 75.8% 85.6% 88.6% 100.8% 89.9% Equity ratio 56.9% 55.9% 57.6% 59.2% 55.2% 53.2% 53.6% 57.7% 55.7% Source: Source: Shared Research based on company data Note: Accounts receivable figures are after deducting bad debt provisions. Note: Figures may differ from company materials due to differences in rounding methods.

Cash and deposits Cash and deposits were the largest component of the company’s total assets. The share of cash and deposits increased to 34.5% in FY03/19. The increase in investment and other assets in FY03/17 and FY03/18 can be seen as coming from the acquisition of shares in Bamboo Holding Pte. Ltd. and BYO Co., Ltd.

Working capital Working capital was negative because accounts payable were greater than the combined total of accounts receivable and inventories. Accounts receivable rose with growth in franchisee sales.

Net assets and shareholders’ equity Company net assets decreased from JPY23.3bn in FY03/11 to JPY21.4bn in FY03/19, as the company continued to pay a stable dividend even in periods of poorer performance in order to give back to shareholders.

31/47 KFC Holdings Japan / 9873 RCoverage LAST UPDATE: 2019.10.07 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp

Cash flow statement

Cash flow statement FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 FY03/19 (JPYmn) Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cash flows from operating activities (1) 4,186 3,814 3,370 1,717 4,574 1,519 4,424 1,928 5,436 Pre-tax profit 3,111 2,495 2,342 1,268 155 1,475 2,330 1,467 3,148 Depreciation 2,358 2,404 2,394 2,325 2,404 2,649 2,747 2,355 2,291 Impairment losses 232 89 209 609 599 243 125 197 335 Amortization of goodwill ------Change in working capital 63 999 -786 -550 487 -403 -186 779 117 Income taxes -868 -1,609 -584 -1,228 -519 -695 -978 -675 -199 Other -710 -564 -205 -707 1,448 -1,750 386 -2,195 -256 Cash flows from investing activities (2) 1,869 -5,108 -1,558 2,287 -1,556 -298 -3,679 -4,863 -265 Acquisition of tangible/intangible fixed assets -2,383 -2,927 -1,783 -1,932 -2,938 -2,057 -2,641 -2,257 -1,291 Proceeds from sale of tangible/intangible fixed assets 420 194 - - - 404 10 3 543 Payments for lease and guarantee deposits -135 -132 -106 -107 -219 -127 -405 -211 -51 Proceeds from collection of lease and guarantee deposits 460 232 238 268 565 242 190 364 257 Proceeds from sale of stores - 314 127 128 200 316 93 93 510 Other 3,507 -2,789 -34 3,930 836 924 -926 -2,855 -233 FCF (1+2) 6,055 -1,294 1,812 4,004 3,018 1,221 745 -2,935 5,171 Cash flows from financing activities -3,343 -1,456 -1,367 -1,360 -1,360 -1,686 -1,512 -1,878 -1,660 Change in short-term borrowings ------80 -80 - Change in long-term borrowings ------Issuance and redemption of corporate bonds ------Acquisition of treasury stock -490 -151 -26 -12 -10 - - -147 - Dividends paid -2,724 -1,133 -1,127 -1,126 -1,124 -1,123 -1,116 -1,119 -1,122 Other -619 -323 -240 -234 -236 -563 -476 -679 -538 Cash and cash equivalents 2,712 -2,750 444 2,644 1,657 -465 -767 -4,813 3,510 Cash and cash equivalents (year-end) 13,808 11,058 11,502 14,146 15,804 1,539 14,571 9,757 13,267 Depreciation (A) 2,358 2,404 2,394 2,325 2,404 2,649 2,747 2,355 2,291 Capital expenditures (B) -1,963 -2,733 -1,783 -1,932 -2,938 -1,653 -2,631 -2,254 -748 Change in working capital (C) 63 999 -786 -550 487 -403 -186 779 117 Simple FCF (NI+A+B-C) 3,443 1,167 3,739 2,211 -866 2,874 2,632 789 4,574 Source: Shared Research based on company data Figures may differ from company materials due to differences in rounding methods

Cash flows from operating activities In FY03/19, operating cash inflows were JPY5.4bn. This was mainly because of JPY3.1bn in pre-tax income and JPY2.3bn in depreciation expenses.

Cash flows from investing activities In FY03/19, cash outflows from investing activities were JPY265mn. Although a large amount (JPY1.0bn) was spent for the acquisition of tangible fixed assets including investment in stores, JPY543mn was recorded with the sale of tangible fixed assets and JPY510mn as income from store transfers. In FY03/17 there were outlays of JPY831mn, and in FY03/18 outlays of JPY4.0bn, for the acquisition of investment securities.

Cash flows from financing activities In FY03/19, cash outflows from financing activities were JPY1.7bn. This was primarily due to JPY1.1bn in dividend payments.

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ROE, ROA, ROIC

FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 FY03/19 (JPYmn) Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. ROE 7.9% 4.7% 5.2% 1.9% -2.4% 3.5% 6.5% 2.8% 9.8% Net margin 2.1% 1.3% 1.4% 0.5% -0.6% 0.8% 1.6% 0.8% 2.8% Total asset turnover 2.13 2.14 2.10 2.13 2.21 2.27 2.23 1.95 2.00 Financial leverage (equity multiplier) 1.74 1.77 1.76 1.71 1.75 1.84 1.87 1.80 1.77 ROA (RP-based) 8.9% 6.0% 6.1% 4.7% 1.7% 4.8% 6.2% 1.7% 8.0% ROIC 8.6% 6.0% 6.3% 4.9% 1.9% 6.0% 7.7% 1.5% 7.0% NOPAT 2,094 1,418 1,485 1,129 431 1,346 1,769 330 1,531 Net assets + Interest-bearing debt 24,230 23,761 23,669 23,255 22,358 22,403 22,953 22,381 21,958 ROIC (before tax) 14.6% 10.1% 10.1% 7.8% 3.0% 9.0% 11.1% 2.1% 10.0% OPM 4.0% 2.7% 2.8% 2.2% 0.8% 2.3% 2.9% 0.6% 3.0% Revenues / Invested capital 3.67 3.71 3.63 3.59 3.78 3.94 3.84 3.28 3.39 ROE

12% ROE ROA ROIC 10% 9.8%

8% 7.9% 6% 6.5% 2.8% 5.2% 4% 4.7% 2% 3.5% 1.9% 0%

-2% -2.4% -4% FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 FY03/19 12% 4 ROE Net margin Total asset turnover (right axis) Financial leverage (equity multiplier; right axis) 10%

8% 3

6%

4% 2

1.8 1.9 2% 1.7 1.8 1.8 1.7 1.7 1.8 1.8 0% 1

-2%

-4% 0 FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 FY03/19

ROIC

ROIC (before tax) OPM Revenues / Invested capital (right axis) 16% 5 14% 3.9 3.8 12% 3.7 3.8 4 3.7 3.6 3.6 3.4 10% 3.3 8% 3 6% 4.0% 4% 2.7% 2.8% 2.9% 3.0% 2 2.2% 2.3% 2% 0.8% 0.6% 0% 1 FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 FY03/19 (JPYbn) (JPYbn) Net assets Interest-bearing debt Operating profit (right axis) 25 6

24 5 0.5 0.6 0.4 23 4 0.4 3.5 2.4 22 2.1 1.8 3 2.4 0.7 0.6 1.8 2.6 1.2 21 23.3 23.2 23.2 2.2 2 22.5 2.0 0.5 20 21.2 21.2 21.4 1 20.9 20.6 0.7 19 0 FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 FY03/19 Source: Shared Research based on company data

33/47 KFC Holdings Japan / 9873 RCoverage LAST UPDATE: 2019.10.07 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp

Historical performance

Full-year FY03/19 (out May 8, 2019) Results summary

▷ FY03/19: The company reported full-year consolidated revenues of JPY74.3bn (+1.2% YoY), an operating profit of JPY2.2bn (4.6x higher YoY), and net income attributable to parent company shareholders of JPY2.1bn (3.6x higher YoY). While this is ahead of the company's forecast (revenues of JPY73.0bn, operating profit of JPY1.0bn, and net income of JPY700mn), it can be considered in line with expectations since the company was running well ahead of plan as of Q3.  Higher revenues boost earnings: Excluding the impact of the sale of its Pizza Hut business, revenues were up 5.1% YoY and operating profit was 4.6x higher YoY.  KFC system sales: KFC system sales of JPY118.1bn were up 4.3% YoY, with customer traffic up 4.3% YoY and spending per customer up 0.4% YoY. As of the end of FY03/19, the total number of KFC stores in operation was 1,132, down 21 versus the end of FY03/18 (with the number of directly operated stores down by 23 and franchise stores up by two).  Value meals plus new menu items: Value meals introduced to help bring in more traffic on weekdays (such as a nine-piece chicken value meal for JPY1,500 on Wednesdays only, JPY500 lunch menu, and JPY1,000 and JPY1,500 value packs with both KFC's original recipe and extra crispy chicken) led to increased traffic during lunch hour and repeat

customers. Store sales were further aided by new menu items that kept customers from growing bored (such as crispy boneless chicken strips and spicy honey chicken). Record-high sales during the Christmas sales season, which falls in Q3 (October–December) also contributed.  Q4: Sales are normally slow during the January–March quarter, but this year the company saw revenues rise 12.1% YoY to JPY17.6bn and finished in the black with a quarterly operating profit of JPY55mn versus a loss of JPY526mn in Q4 FY03/18. KFC system sales in Q4 were up 11.7% YoY, with customer traffic up 12.5% YoY and spending per customer

down 0.8% YoY. ▷ FY03/20 forecast: For FY03/20, the company forecasts revenues of JPY74.4bn (+0.1% YoY), an operating profit of JPY1.5bn (-32.0% YoY), net income attributable to parent company shareholders of JPY1.0bn (-51.4% YoY), and EPS of JPY44.74.  Key performance indicators: For its key performance indicators, the company is targeting KFC system sales of JPY120bn (+1.6% YoY), with sales at existing stores up 1.2% YoY and a total of 1,133 stores in operation (a net increase of one store). Store plans call for 19 new openings, 18 closures, and 120 remodelings.  Major initiatives: Major initiatives planned for the year include 1) the continuation of its promotional campaign calendar featuring a two-layer structure that interlocks product campaigns with value promotions throughout the year; 2) increased digital media presence, including expansion of app content and other measures aimed at building customer loyalty; 3) expansion of product lineup (such as the recently introduced salty crispy chicken, Nanban Tartar Twister, and chicken sliders); 4) branding initiatives; and 5) expanded home delivery services and additional measures to attract foreign tourists.  Dividend: The company plans to maintain its annual dividend of JPY50.0 per share, which exceeds its forecast for EPS. ▷ Medium-term business plan: The current medium-term plan (Towards our 50th Anniversary) covers the three-year period starting in FY03/19. Under the plan, the company is targeting revenues of JPY75.0bn, operating profit of JPY2.4bn, and net income of JPY1.6bn in FY03/21. It appears to require a new growth strategy, one based on the success it saw in FY03/19.

It has revised its segments, paring down the original KFC, Pizza Hut, and Other segments to a single KFC segment as of Q1 FY03/19. Accordingly, segment information disclosures have been omitted.

34/47 KFC Holdings Japan / 9873 RCoverage LAST UPDATE: 2019.10.07 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp

FY03/19 results The company reported full-year consolidated revenues of JPY74.3bn (+1.2% YoY), an operating profit of JPY2.2bn (4.6x higher YoY), and net income attributable to parent company shareholders of JPY2.1bn (3.6x higher YoY). Excluding the impact of the sale of its Pizza Hut business in June 2017, revenues were up 5.1% YoY and operating profit was 4.6x higher YoY.

Decreased store count As of the end of FY03/19, the total number of KFC stores in operation was 1,132, down 21 versus the end of FY03/18. This includes 306 directly operated stores (-23 YoY), and 826 franchise stores (+two YoY). While the closure of stores continued, centered on stores that continue to operate in the red and for which a short-term recovery is unlikely, the company also actively opened stores in promising locations and made progress with a scrap-and-build strategy. Remodeling was undertaken at 21 directly operated stores and at 79 franchise stores. The company took efforts to improve customer experience, such as the implementation of a no-smoking policy at all restaurants (all seats) by December 2018.

Increased revenues at existing stores The recovery of revenues at existing stores made a significant contribution to the company’s improved performance. In FY03/19, revenues at existing stores increased by 4.7% YoY, by 3.7% YoY at directly operated stores, and by 5.2% at franchise stores. The 4.3% increase YoY to customer traffic had a large impact, and spending per customer increased by 0.4% YoY. As a result, system sales increased by 4.3% YoY to JPY118.1bn (+2.4% YoY to JPY34.6bn at directly operated stores, and +5.2% YoY to JPY83.6bn at franchise stores)

Campaigns: concurrent appeal through value promotions and new menu items Increased customer traffic was the result of successful concurrent implementation of value promotions targeting visits on regular days (i.e., weekdays), and the introduction of new menu items to prevent consumer boredom. Value meals introduced to help bring in more traffic on weekdays (such as a nine-piece chicken value meal for JPY1,500 on Wednesdays only, JPY500 lunch menu, and JPY1,000 and JPY1,500 value packs with both KFC's original recipe and extra crispy chicken) led to increased traffic during lunch hour and repeat customers. Store sales were further aided by new menu items that kept customers from growing bored (such as crispy boneless chicken strips and spicy honey chicken).

When the company asked consumers for their opinions, many responded that KFC was a place where people gather to eat in large numbers, and that it was difficult to go alone, which the company had not expected; accordingly, the company felt that there was a need for measures aimed at promoting visits on regular days.

In terms of advertising, it appears that television commercials in which the actress Mitsuki Takahata suggests “Let’s have KFC today” contributed to improving brand image of KFC as a casual, everyday restaurant. The television commercial series was broadcast from June 2018, and monthly revenues at the company began to increase from July.

Successful two-layered campaign: combination of value meals and new menu items

Source: Company website

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Digital marketing also contributed The company stated that contribution of digital marketing has also become significant. It is strengthening its approach to consumers who cannot be reached using television ads alone, via Twitter, Line, YouTube, and other digital marketing platforms. Further, as of the end of FY03/19, the KFC smartphone app had surpassed 12mn downloads, and the company is trying to lock in customers through its KFC mileage program. Television advertising comprises a large proportion of advertising expenses at approximately 50%, but digital advertising (including web advertising and SNS advertising) also comprises approximately 50%. During the Christmas sales season of winter 2018 (December 21–25), system sales reached a new record-high at JPY6.9bn (+2.3% YoY), with approximately 30% of which coming from online orders.

Despite introduction of value meals, GPM improved GPM widened by 0.1pp YoY, from 43.0% to 43.1% in FY03/19. This shows that although the company actively implemented value campaigns, this did not cause profitability to deteriorate. SG&A expenses were reduced by 4.2% YoY, and the SG&A expense ratio narrowed from 42.4% in FY03/18 to 40.1% FY03/19. It seems that there was a large reduction in expenses due to a net decrease in store numbers.

Equity-method affiliates also contributed to performance It is notable that non-operating income included equity in earnings of affiliates of JPY565mn. In FY03/18, the company booked investment losses of JPY51mn. The company has two equity-method affiliates: BYO Co., Ltd. (operates Obon de Gohan and other restaurants in Japan; invested in March 2018), and Bamboo Holding Pte. Ltd. The performance of the equity-method affiliate in Thailand, in particular, grew, and its fair value increased. It is possible that the menu development and operational know-how KFC has cultivated in Japan is proving useful in Thailand as well. The company booked extraordinary income of JPY527mn, including gains on store transfers of JPY273mn and gains on sale of non-current assets of JPY240mn. The company recorded extraordinary losses of JPY354mn, including impairment losses of JPY335mn.

Q3 FY03/19 results (out on February 13, 2019)

▷ Cumulative Q3 (April–December 2019): Revenues at existing stores were JPY56.7bn (down 1.8% YoY), operating profit was JPY2.2bn (up 2.14x YoY), and net income attributable to parent company shareholders was JPY1.5bn (+2.8%).  Despite revenues taking a hit from the impact of the Pizza Hut sale, operating profit rebounded strongly due in part to lower SG&A expenses. Cumulative Q3 FY03/18 saw the booking of extraordinary gains on the sale of subsidiaries, leading to a modest recovery in net income. ▷ No change to full-year forecasts: The company made no changes to full-year forecasts, which are: revenue of JPY73.0bn (-0.6% YoY), operating profit of JPY1.0bn (+2.1x), and net income of JPY700mn (+21.1%). Against full-year forecasts, cumulative Q3

sales reached 77.7%, operating profit reached 215.1%, and net income reached 210.0%. ▷ Monthly improvements: During the April–December period, KFC system sales rose 3.1% YoY, while comparable store sales were up 2.1%. Results were especially strong during the December peak season, with system sales and comparable store sales up 6.1% and 4.7%, respectively.  KFC ran a Christmas promotion during the five-day period spanning December 21–25, while promotional items were available for pre-order in-store and online from November 1st onward. The success of the Christmas period boosted revenues by 2.3%.

Results overview In cumulative Q3 (April–December 2018), revenues were JPY56.7bn (-1.8% YoY), operating profit was JPY2.2bn (2.14x YoY), and net income attributable to parent company shareholders was JPY1.5bn (+2.8% YoY). Despite revenues taking a hit from the June 2017 Pizza Hut sale, operating profit rebounded sharply. Marketing to encourage everyday patronage and online ordering drove order growth around Christmas (+2.3% YoY between December 21 and 25 to a record JPY6.9bn). In addition to sales growth at

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the mainstay Kentucky Fried Chicken stores, lower SG&A expenses underpinned profit growth. Net income was up just modestly because in cumulative Q3 FY03/18 the company booked extraordinary gains on the sale of subsidiaries, which was absent in Q3 FY03/19. Results overall were solid.

The company maintained full-year forecasts: Revenues of JPY73.0bn (-0.6% YoY), operating profit of JPY1.0bn (2.10x YoY), and net income of JPY700mn (+21.1% YoY). Against full-year forecasts, cumulative Q3 revenues reached 77.7%, operating profit 215.1%, and net income 210.0%. This suggests that in the absence of significant one-time costs (such as unexpected asset write-downs) in Q4, FY03/19 results are likely to come in above forecasts.

KFC system sales were generally strong. During the April‒December period, KFC system sales rose 3.1% YoY and comparable store sales were up 2.1% YoY. In January system sales were up 5.9% YoY and comparable store sales were up 4.2% YoY. The company has changed its marketing focus since 2018. Previously much of the advertising emphasized newness such as informing customers about new products, but recently advertising has focused on daily patronage. Advertising campaigns have featured JPY500 lunches and JPY1,000 packs to encourage customers to come in at lunchtime by offering value. These are flowing through to results.

Q3 standalone revenues were JPY21.7bn (+3.7% YoY), operating profit JPY1.7bn (+90.2% YoY), and net income JPY1.1bn (+88.2% YoY). The GPM was 43.1% versus 42.3% in Q3 FY03/18. There appears to have been a major benefit from sales growth, and lower chicken prices were also a likely factor in higher margins. In cumulative Q3, the GPM was 42.8%, tracking above the company’s full-year FY03/19 forecast of 42.2%.

Q3 standalone SG&A expenses were JPY7.7bn (-3.6% YoY), and the SG&A expense ratio fell to 35.4% from 38.1% in Q3 FY03/18. It appears that the efficient use of part-time workers continued to bear fruit. In cumulative Q3, SG&A expenses declined by 7.0% YoY versus the company’s full-year forecast of a 4.3% decline. In the absence of temporary factors such as large impairment losses in Q4, SG&A expenses are likely to be lower than initial forecasts.

In October–December, the company opened four stores (three franchises and one directly operated), closed nine, and renovated 30. In cumulative Q3, there were 19 store openings, 31 closures, and 64 renovations. Initial company forecasts were for 31 openings, 25 closures, and 119 renovations, so openings and renovations are lagging but the company is making solid progress in closures.

Shared Research thinks that the company will aim to further expand its customer base in FY03/20 with campaigns to appeal to value and attract lunchtime customers. Under “Toward Our 50th Anniversary,” the company's three-year medium term management plan beginning in FY03/19, the company shifted its business model to increase the value of its customer experience. It broadened its approach from the tagline “Nothing like KFC for a special day” to “Let’s have KFC today” to promote consumption on an everyday basis instead of only on special occasions. Monthly revenues have started improving since July 2018, raising the performance hurdle, but the company is unlikely to change its strategy dramatically.

1H FY03/19 results (out on November 7, 2018)

▷ 1H: Revenues at existing stores up 1.9%, and operating profit was JPY500mn. Sales promotions and marketing initiatives were successful in Q2, leading to increased customer count and revenues in the quarter  Quarterly results: Significant improvement in Q2 (revenues up 10%, operating profit of JPY1.0bn) compared to Q1 (revenues down 19%, operating loss of JPY500mn)  KFC business: Excluding impact from the sale of the Pizza Hut business, revenue increased by JPY934mn and operating profit increased by JPY357mn  Existing stores: On the whole, sales rose by 1.9% in 1H, after a 4.9% decline in Q1. The customer count and average customer spending for each month were both higher in Q2 FY03/19 than in Q2 FY03/18

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▷ Initiatives: The JPY500 lunch menu captured demand for weekday lunch and contributed to increases in the frequency of store visits and customer count.  Marketing: Shift to marketing that promotes everyday consumption, effective two-layer structure that interlocked product campaigns with value promotions  Success of the associated JPY500 lunch promotion (from July 23 to September 5), produced recovery in revenue at existing locations by raising the standard number of customers during lunchtime hours  Product offerings: Third variety of chicken, “hot and spicy chicken,” debuted in April; seasonal menu item “red hot chicken” launched in July  Interlocked the Wednesdays-only JPY1,500 nine-piece bucket campaign with the JPY500 lunch value promotion. The company also plans to commit to the same strategy of interlocking campaigns during 2H ▷ Single KFC segment as of Q1 FY03/19; segment information disclosures omitted accordingly ▷ Medium-term plan: KFC Holdings Japan announced its medium-term management plan in September 2018. Through this plan, the company is aiming for revenues of JPY75.0bn, operating profit of JPY2.4bn, and net income attributable to parent company shareholders of JPY1.6bn in FY03/21

Results overview In 1H FY03/19, revenues were JPY35.1bn (down JPY1.8bn, -4.8% YoY), and operating profit was JPY485mn (+JPY358mn YoY), with revenues falling and profits rising for the half, cumulatively. However, excluding impact from the sale of the Pizza Hut business, revenues increased by JPY934mn (+2.7% YoY), GPM rose by 3.6pp, and operating profit climbed by JPY357mn (2.8 times higher YoY), which are all results worthy of noting. The company revised its promotional campaign calendar at the beginning of FY03/19 and found success with a two-layer structure that interlocked product campaigns with value promotions. In particular, the JPY500 lunch promotion greatly increased standard customer numbers and sales during lunch hours, which led to a recovery in revenue at existing locations.

Net income attributable to parent company shareholders was JPY367mn (JPY477mn decline YoY), as the company recorded JPY1.4bn in gains from the sale of subsidiaries in FY03/18. However, excluding impact from the sale of the Pizza Hut business, profit increased by JPY258mn.

In Q1, comparable store sales at directly operated locations and average sales per store at all stores declined YoY every month, but Q2 saw a major turnaround, with increases of both figures recovering each month; comparable store sales at directly operated locations increased 1.9% in 1H (customer count declined by 1.1%, and average customer spending rose by 3.0%), and average system sales increased by 2.8%, showing recovery from the Q1 slump. Thanks to promotions such as the JPY500 lunch menu (from July 23 to September 5) and marketing focusing on everyday consumption, it seems that the decline in customer count has been put to a halt (4.8% increase for July, 9.0% increase for August, 1.0% increase for September), which is a point worthy of attention. The company appears to have secured new clientele in addition to bringing back members of their core customer base. These core base members make highly frequent purchases, and the company noted a recovery in their numbers during October. In addition to promotional campaigns, the company also benefitted from contributions from its KFC mileage program, which began in March 2018 (the related app was downloaded more than 10mn times as of end-August 2018).

GPM also rose YoY, when excluding impact from the sale of the Pizza Hut business, and improved slightly in Q2 compared to Q1. The company is enhancing its management of SG&A expenses, and labor costs, which had been an unresolved issue, fell YoY. Employee numbers increased overall but the company was apparently able to curtail labor costs primarily through more efficient use of its part-time staff. Shared Research will follow this trend to see if it continues in Q3. Expenses related to renovations also abated due to renovation numbers that were below forecasts and lower than they were in FY03/18.

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Progress with initiatives launched in FY03/19 In FY03/19, the company is proceeding with companywide efforts to secure new customers. Specifically, with the aim of promoting everyday consumption under its communication and brand strengthening measures, the company is working on overhauling its marketing strategy, strengthening delivery services, and promoting product development. The company restructured the department in charge of marketing in April 2018. Further, it completely revised the content and timing of promotions, and plans to launch highly effective promotions extensively upon carefully choosing the timing of launch. As mentioned previously, these measures were particularly effective in Q2. Progress with each initiative is outlined below.

Marketing KFC Holdings Japan revised its FY03/19 promotional campaign calendar and rolled out value promotions that interlocked with product campaigns (two-layer structure). The company is also strengthening its delivery service. As promotional campaigns began to have a positive effect in Q2, the company expanded its delivery service to include 159 out of 1,146 locations (14%) by end-Q2.

The company implemented the following initiatives in Q1:

▷ Product campaign: Hot and spicy chicken (on sale April 19) ▷ Value promotions: The Wednesdays-only “9-piece bucket for JPY1,500,” which ran from May 9 through June 27, proved popular ▷ Delivery: Offered at 138 locations (43 of which participate in UberEats)

The Wednesdays-only promotion was popular and brought in strong results on targeted Wednesdays, but it had limited effect on other days. Further, the share of stores offering delivery services gradually increased to make up about 12% of 1,147 total stores, contributing to growth in comparable store sales. From Q2 onward, the company had been proceeding with initiatives aimed at expanding delivery services centered on high-demand areas, such as the Greater Tokyo and Kansai regions. Further, it had been gradually expanding the service to regional cities.

The company implemented the following initiatives in Q2:

▷ Product campaign: Red hot chicken, a signature seasonal product, sold from July 5 to August 15

▷ Value promotions: The JPY500 lunch menu from July 23 to September 5; 30%-off bucket from September 6 to September 26 (simultaneously introduced two types of Tsukimi Sandwich) ▷ Promoting everyday consumption: from the beginning of FY03/19, the company changed its slogan from “Nothing like KFC for a special day” to “Why not make it KFC today?” with an aim of promoting everyday consumption rather than occasional consumption on special occasions. In conjunction with this shift, the company implemented a JPY500 lunch promotion. The JPY500 lunch appears to have enabled the company to capture demand for weekday lunches, leading to acquisition of new customers and increased usage frequency, as shown in the Q2 customer count increase. Average customer spending increased YoY (as it did in Q1 FY03/19), and increased revenues compensated for the decline in GPM, which had been a point of concern (GPM for the KFC business rose YoY in 1H). As of end-Q2, 159 locations (69 of which participate in UberEats) offered delivery services and the company forecasts further expansion in 2H.

Q3 is an important quarter that includes December, the month that attracts the highest levels of demand. As previously announced, KFC Holdings Japan began its pre-Christmas sales strategy on November 22 by selling small premium bowls, which are decorated with 2018 limited-edition designs featuring Moomin characters, along with its red hot chicken and chicken cream pot pie, both signature seasonal products. The company began taking reservations for its Christmas campaign on November 1 and will offer a limited-time Christmas menu, which includes the company’s signature Christmas party barrel, for five days (December 21–25). The

39/47 KFC Holdings Japan / 9873 RCoverage LAST UPDATE: 2019.10.07 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp

weekend closest to Christmas Day 2018 will be a three-day holiday spanning from Saturday, December 22 to Monday, December 24. This stands in contrast to the typical two-day weekend of 2017 (Saturday, December 23 and Sunday, December 24). As in 2017, Christmas Day 2018 will be a weekday, but the long weekend is noteworthy.

Regarding the number of locations, there were 15 new store openings (five directly operated restaurants, ten franchises) and 34 renovations (seven directly operated, 27 franchises). The company is still targeting 31 store openings in FY03/19, as well as 119 store renovations. The company apparently intends to promote store renovations as it continues to consider store locations and customer base. Despite these goals, the company faces a high possibility of not meeting these targets when considering 1H results. KFC Holdings Japan appears to be making steady progress in converting directly operated restaurants to franchise stores (booked extraordinary gains on store transfers of JPY57mn in Q1 and JPY113mn in Q2).

Q1 FY03/19 results (out on August 8, 2018)

▷ Q1: Revenues at existing stores down 4.9%, operating loss JPY500mn. Operating loss widened despite rebound in sales on overhaul of marketing initiatives and efforts to curb overhead ▷ Bolstered delivery efforts (direct delivery and through delivery agents): Delivery service offered at 138 locations (of which 43 participate in UberEats, primarily in Greater Tokyo and the Kansai regions) ▷ Product offerings: Third variety of chicken “hot and spicy chicken” debuted in April; seasonal menu item “red hot chicken” launched in July ▷ Single KFC segment as of Q1 FY03/19; segment information disclosures omitted accordingly ▷ Q2: Captured demand for weekday lunch with JPY500 lunch menu, which contributed to increases in the frequency of store visits and customer count. Strong performance continued in July and the first half of August

Results overview In Q1 FY03/19, revenues were JPY15.4bn (down JPY3.5bn, -18.7% YoY) and operating loss was JPY515mn (JPY109mn operating loss in Q1 FY03/18), a decline in both revenues and profits. Net loss attributable to parent company shareholders was JPY324mn (JPY963mn decline YoY), as gains from the sale of stores (registered a year earlier) dropped off. Even after excluding the impact of the sale of the Pizza Hut business, revenues fell manly due to a large decline in customer counts at existing stores. The company was able to reduce expenses by a greater extent than initially planned thanks to thorough cost management, but operating loss widened as the decline in expenses could not offset the drop in revenues. While it appears as though results are falling behind the initial full-year forecasts of JPY73.0bn in revenues and JPY1.0bn in operating profit, the company has retained its full-year targets.

It has revised its segments, paring down the original KFC, Pizza Hut, and Other segments to a single KFC segment as of Q1 FY03/19. Accordingly, segment information disclosures have been omitted.

Progress with initiatives launched in FY03/19 In FY03/19, with the aim of promoting everyday consumption under its Weekly Value measure, the company is working on overhauling its marketing strategy, strengthening delivery services, and promoting product development. The company restructured the department in charge of marketing in April 2018. Further, it completely revised the content and timing of promotions, and plans to launch highly effective promotions extensively upon carefully choosing the timing of launch. Progress with each initiative is outlined below.

Marketing The company implemented the following initiatives in Q1:

▷ Promotions: the Wednesdays-only “9-piece bucket for JPY1,500,” which ran from May 9 through June 27, proved popular ▷ Delivery: offered at 138 locations (43 of which participate in UberEats)

40/47 KFC Holdings Japan / 9873 RCoverage LAST UPDATE: 2019.10.07 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp

The Wednesdays-only promotion was popular and brought in strong results on targeted Wednesdays, but it had limited effect on other days. Further, the share of stores offering delivery services gradually increased to make up about 10% of the total stores, contributing to growth in comparable store sales. The company is working on expanding delivery services centered on high-demand areas such as Greater Tokyo and the Kansai regions from Q2 onward. Further, it is gradually expanding the service to regional cities.

Product strategy Looking at product offerings, sales of “hot and spicy chicken,” a third variety of chicken and number one seller in the Asia region, began on April 19. Comparable store sales at directly operated locations fell YoY (April -5.5%, May -4.2%, June -2.7%, cumulative Q1 -4.9%; foot traffic -8.3%; average customer spending +3.8%). It seems that even the company found it difficult to deem the strategy successful.

Regarding the number of locations, there were five new store openings (two directly operated restaurants, three franchises), and 18 renovations (five directly operated, 13 franchises). The number of stores undergoing a renovation was in line with the full-year target of 119. The number of store openings and closures was also in line with plan, with more store openings and closures typically taking place in Q2 and Q3. The company intends to promote store renovations as it continues to consider store locations and customer base. The company is making steady progress with shifting directly operated restaurants to franchise stores (booked an extraordinary gain of JPY57mn on store transfers in Q1).

Outlook for Q2 FY03/19 and beyond and full-year FY03/19 Red hot chicken contributes to revenue growth As conditions in Q2 differed from those in Q1, the company posted strong performance for the first half of Q2 (July to the first half of August). In addition to the effects of marketing strategy overhaul, initiatives geared toward improving product offerings seemed to be making steady progress. In specific, the company began sales of its signature seasonal product red hot chicken from July 5 through August 15 and JPY500 lunch menu from July 23 through September 5; both have been well-received. In July, revenue increased 7.6% (customer count, +4.8%; spending per customer, +2.7%), an increase for the first time in ten months since September 2017, with customer counts reaching high level in the last five years. The positive momentum of July continued through the first half of August. The company began selling red hot chicken from June 22 in 2017, and the difference in launch timing seemed to have affected YoY performance in Q1.

JPY500 lunch menu succeeded in promoting everyday consumption From FY03/19, the company changed its slogan from “Nothing like KFC for a special day” to “Why not make it KFC today?” with an aim of promoting everyday consumption instead of for special occasions only. With the new slogan, JPY500 lunch menu were launched to encourage customers to have KFC on regular days. The launch of JPY500 lunch menu enabled the company to capture demand for weekday lunches that it had overlooked, leading to acquisition of new customers and increased usage frequency, which in turn contributed to an increase in customer count. The growth in customer count compensated for declines in spending per customer and GPM. The momentum seen in July continued in early August, but the company does not plan on extending the JPY500 lunch menu promotion. From September onward, upon carefully choosing the timing of promotions, the company plans to extensively introduce highly effective promotions centered on those well-received in the past.

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News and topics September 2018 On September 12, 2018, KFC Holdings Japan, Ltd. unveiled its “Toward Our 50th Anniversary” medium-term management plan, which calls for FY03/21 revenues of JPY75.0bn, operating profit of JPY2.4bn, OPM of 3.2%, and net income of JPY1.6bn. The plan factors in new M&A activity in Japan and overseas, and targets 2,000 restaurants across the group over the medium to long term.

Other information

History

Date Event

Mar 1970 KFC International opens test restaurant at Japan Expo, with daily sales of up to JPY2.8mn

Jul 1970 KFC Japan established in Shibuya, Tokyo with equal investments from Kentucky Fried Chicken Corporation and Mitsubishi Corporation and capital of JPY72mn

Nov 1970 First Kentucky Fried Chicken (KFC) restaurant in Japan opens in Nishi, Nagoya

Sep 1971 First KFC franchise opens in Enoshima

Jul 1972 Heublein Inc. buys Kentucky Fried Chicken Corporation

Oct 1982 R.J. Reynolds Industries Inc. buys Heublein Inc.

Oct 1986 PepsiCo Inc. buys Kentucky Fried Chicken Corporation from RJR Nabisco Inc.

Aug 1990 Lists on Tokyo Stock Exchange Second Section and increases capital to JPY7.3bn

Mar 1991 Establishes consolidated subsidiary K Ad

May 1991 Launches Pizza Hut business

Oct 1997 Food services business spun out from PepsiCo to establish Tricon Global Restaurants Inc. (currently Yum! Brands Inc.)

Dec 2007 Mitsubishi becomes parent company after Yum! Brands Inc. sells shares indirectly held in KFC Japan to Mitsubishi via public tender offer

Sep 2008 Consolidated subsidiary K Foods established

Apr 2013 Consolidated subsidiary Phoenix Foods established

May 2013 Consolidated subsidiaries K Dining Ltd. (new company name: Kentucky Fried Chicken Japan Ltd.), Phoenix Ltd. and Natural Dining Ltd. established

Apr 2014 Name changed to KFC Holdings Japan Ltd. Restaurant operating company spun off and takes over 100% subsidiaries Kentucky Fried Chicken Japan Ltd., Phoenix Ltd. and Natural Dining Ltd.

Nov 2015 Mitsubishi sells ordinary shares in the company and changes from parent company to other affiliated company

Aug 2016 Establishes investment holding company Fast Restaurant International Pte. Ltd. (FRI) as a consolidated subsidiary in Singapore. Invests in Bamboo (Thailand) Holding Pte. Ltd., which operates KFC restaurants in Thailand, through FRI.

June 2017 Sells and transfers all share of consolidated subsidiaries, Pizza Hut Japan Ltd. and Phoenix Foods Inc., to Endeavor United Partners Six, Co., Ltd.

Feb 2018 Entered capital and business alliance with BYO Co., Ltd. Source: Shared Research based on company data

Relationship with Mitsubishi Corporation In the 1960s, a manager in Mitsubishi Corporation’s food business noticed that Kentucky Fried Chicken Corporation had a successful franchise business in the US and visited Colonel Harland Sanders on multiple occasions. Following four years of

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negotiations, he won the approval of Colonel Sanders in 1969 and a test restaurant was opened at the Osaka Expo in March 1970.

Following the success at the Osaka Expo, in July 1970 KFC Japan was established with equal investments from Mitsubishi and Kentucky Fried Chicken. Mitsubishi built a value chain from chicken feed through animal breeding and restaurant operations. Upstream is Mitsubishi’s US subsidiary Agrex Inc., a wholesaler of grains used in chicken feed, and on the downstream end is KFC Japan, which is responsible for restaurant operations.

In November 2015, Mitsubishi sold 627,000 of KFC Japan’s ordinary shares. The aim was to improve the company’s corporate value as increased liquidity of the shares led to an expanded investor base. Mitsubishi held a 65.86% stake of KFC Holdings Japan before the sale, and changed from being the parent company to a major shareholder (stake: 35.12% as of March 31, 2018). However, Mitsubishi said it would continue to use its network of grain, chicken feed, and made-in-Japan chicken raised at designated KFC-accredited farms to support KFC Japan.

Corporate governance and top management

Corporate governance system (as of June 2019)

Capital structure

Controlling shareholders None

Foreign investor shareholding Under 10%

Organization and directors

Organizational type Company with audit and supervisory committee

Number of directors under Articles of Association Upper limit on number of directors not specified

Number of directors 8

Directors' terms under Articles of Association 1 year

Chair of the Board of Directors President

Number of external directors 4

Number of external directors designated as independent directors 3

Voluntary committee equivalent to Nomination Committee or Compensation In place Committee

Number of members on Audit Committee 3

Number of external members on Audit Committee 3

Number of external Audit Committee members designated as independent 3 Audit Committee members

Other

Measures to provide incentives to directors Performance linked compensation system in place

Stock-option grantees None

Disclosure of directors’ compensation No individual compensation disclosure

Policy on determining amount of compensation and calculation methodology In place

Corporate takeover defenses None Source: Shared Research based on company data

CEO Masaki Kondo (born in 1955) joined the food business of Mitsubishi Corporation in April 1978 after graduating with a degree in economics from Waseda University in March that year. He was assigned to Mitsubishi Colombia in May 1985 and in April 2001 became Coffee Unit Manager in the Food Division. He was appointed President of Mitsubishi Brazil in April 2008 and in April 2013 became Assistant to the Group CEO (GM, Human Resources) in Mitsubishi’s Living Essentials Group. In April 2014 he was appointed executive officer and president of KFC Holdings Japan, and in June 2014 was appointed to his current position of representative director and executive president.

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Major shareholders (As of March 31, 2019)

Shareholding Top shareholders Shares held ('000) ratio Mitsubishi Corporation 7,875 35.12% Japan KFC Holdings Franchise Owners Stockholding Association 225 1.00% JP MORGAN CHASE BANK 385151 (Standing proxy: Mizuho Bank, Ltd.) 184 0.82% Meiji Yasuda Life Insurance Company (Standing proxy: Trust & Custody Services Bank, Ltd.) 110 0.49% SSBTC CLIENT OMNIBUS ACCOUNT (Standing proxy: The Hongkong and Shanghai 107 0.48% Banking Corporation Limited Tokyo Branch) The Master Trust Bank of Japan, Ltd. 73 0.32% Tanabe Corporation 72 0.32% Morgan Stanley MUFG Securities Co., Ltd. 70 0.31% JPMorgan Securities Japan Co., Ltd. 70 0.31% Kewpie Corporation 67 0.29% SUM 8,855 39.49% Source: Shared Research based on company data

Principal group companies (as of March 2019)

Company Location Stake Business description

Kentucky Fried Chicken Japan, Ltd. Yokohama, 100% Operation of Kentucky Fried Chicken restaurants Kanagawa Prefecture

K Ad, Ltd. Yokohama, 100% Chicken advertising Kanagawa Prefecture

K Foods, Ltd. Osaka , Osaka 100% Operation of Kentucky Fried Chicken restaurants Prefecture

Fast Restaurant International Pte. Ltd. Republic of 100% Investment holding company Singapore Source: Shared Research based on company data

Dividend policy

The company has a policy of paying out excess funds as dividends twice a year, as interim and year-end dividends. Since FY03/12, it has maintained a stable annual dividend of JPY50 per share.

Source: Shared Research based on company data

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Employees

No. of employees (consolidated) FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 FY03/19 KFC 686 663 661 633 674 666 708 723 813 Pizza Hut 307 270 268 247 266 248 244 - Other 2217171714134111104 Company-wide (common) 112 136 137 148 117 - - - 70 Total 1,127 1,086 1,083 1,045 1,071 1,048 1,063 827 883 No. of temporary workers (consolidated) FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 FY03/19 KFC 2,281 2,501 2,325 2,394 2,371 2,349 2,435 2,369 2,234 Pizza Hut 1,190 1,187 1,228 1,218 1,325 1,071 922 - - Other 4551575997241612- Company-wide (common) 119568- - -12 Total 3,527 3,748 3,615 3,677 3,801 3,444 3,373 2,381 2,246 Source: Shared Research based on company data

By the way The story of Colonel Sanders In 1930, Harland Sanders (Sanders was commissioned with the honorary title of Kentucky Colonel in 1935 by the state governor, and was henceforth known as Colonel Harland Sanders) opened a gas station in Corbin, Kentucky. At one side of the station, he started a restaurant with one table and six chairs. In 1939 Sanders perfected his “original chicken” recipe using 11 secret herbs and spices for fried chicken cooked with pure vegetable oil in a pressure cooker.

In 1952, he launched the franchise system that became the basis for the current KFC chain. He granted permission to use the Kentucky Fried Chicken brand to restaurant owners and in return received five cents in royalty for every chicken sold.

In 1964, he sold the franchise rights, which were bringing in USD300,000 annually, to future governor of Kentucky John Y. Brown, Jr. and Jack C. Massey. In his subsequent worldwide travels, he visited Japan three times and apparently confided to Roy Weston, then the chairman of KFC Japan that “Japanese fried chicken is my favorite.”

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Profile

Company Head office

Yokohama i-MARK PLACE, KFC Holdings Japan, Ltd. 4-4-5 Minatomirai, Nishi-ku, Yokohama-shi, Kanagawa

Phone Listed on

+81-45-307-0700 Tokyo Stock Exchange 2nd section Established Exchange listing July 4, 1970 August 21, 1990 Website Fiscal year-end - March

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