HIDAY HIDAKA Corporation Restaurant chain serving and Chinese dishes to the mass-market: focusing on new business formats despite the impact of COVID-19 TICKER: 7611 | TSE1 | HP: http://hidakaya.hiday.co.jp/english/ | LAST UPDATE: 2021.08.23

Business Strengths and weaknesses

Runs Hidakaya restaurant chain near train stations in Greater Tokyo; particular focus Strengths on opening new branches in Kanagawa Cost advantages from area-dominant Business model: Core business is chain of Hidakaya restaurants (94.2% of strategy and central kitchen: GPM above FY02/21 sales) that serve ramen, gyoza (dumplings), and other popular Chinese 70% for over 20 years through FY02/21, dishes. It also offers side dishes that go with alcohol for customers who want a despite relatively low-price menu. One of only quick drink. Customers range from students to businesspeople, late-shift workers, a handful of leading listed restaurant and seniors, all attracted by affordable prices (JPY390 for ramen and JPY230 for operators with a GPM above 70%. gyoza including tax) and late hours (nearly half of stores are open till 2 a.m.; more Directly operated restaurants maintain than 10% are open 24 hours*). Average customer spend is about JPY750 (before quality, boost brand power, and enable tax; FY02/21). Per the company, no other chain operates the same restaurant flexible operations format (serving both ramen and Chinese dishes). From FY02/10 to FY02/19, Low prices and classic dishes keep HIDAY HIDAKA maintained an OPM of over 10%, but in FY02/21 sales fell and the customers coming back: Maintained company posted an operating loss, due in large part to shortened opening hours comparable store sales of at least 100% YoY amid the COVID-19 outbreak. for eight consecutive years through FY02/19 *In compliance with requests for cooperation from cities and prefectures covered by the state (-30.3% YoY in FY02/21) of emergency declaration and/or priority measures for prevention of the spread of COVID-19, Weaknesses stores in affected areas have been closing at 8 p.m. or 9 p.m. and are not serving alcohol. Limiting restaurant openings to Greater Dominant strategy: The company’s chain restaurants are almost all directly Tokyo squeezes availability of favorable operated. The company opens stores of around 100sqm (30 tsubo) in busy locations: As the company continues to open shopping areas near train stations (usually at multiple exits). As of end-February multiple restaurants in busy locations in 2021, the company had 432 restaurants in Tokyo and the five neighboring Greater Tokyo, only less attractive locations prefectures, and it aims for a net increase of 25 stores annually over the next three are becoming available years, taking the total to 600 in the Greater Tokyo area. In FY02/21, average Difficulty in securing staff: Poor public annual sales per store were JPY68mn. opinion regarding long working hours in the Earnings restaurant industry makes it harder to hire staff Operating loss in FY02/21; no FY02/22 forecast disclosed at the start of fiscal year Formats other than Hidakaya underdeveloped: The company needs Sales down 30% YoY, in the red at operating level: In FY02/21, HIDAY formats other than Hidakaya to grow in HIDAKA posted sales of JPY29.6bn (-30.0% YoY) and an operating loss of JPY2.8bn Greater Tokyo, but successor formats still in (profit of JPY4.1bn in FY02/20). Comparable store sales fell 30.3% YoY due to the development stage shortened opening hours and restraints on alcohol sales, with consumers also refraining from going out under the COVID-19 related state of emergency. Growth drivers Operating cash flow was JPY8.1bn lower YoY, and although interest-bearing debt Historical: Hidakaya format is key was zero as at end-FY02/21, cash and deposits fell JPY5.9bn YoY. Future: Hidakaya to be key format, but raise FY02/22 forecast: HIDAY HIDAKA did not disclose a forecast for FY02/22 at the brand awareness of Yakitori Hidaka start of the fiscal year. When reporting Q1 results the company announced a forecast calling for sales of JPY30.0bn (+1.5% YoY) and an operating loss of JPY2.8bn (loss of JPY2.8bn in FY02/21). It forecasts recurring profit of JPY1.3bn and net income of JPY1.0bn, partly in anticipation of compensation payments for cooperation with reduced opening hours. Plans call for 30 new store openings, mainly in the Hidakaya format, and seven closures. The company will open new stores not just in busy areas near train stations but also in roadside locations and new formats. It will focus also on maintaining and enhancing the brand equity of all formats. Medium-term strategy 600 restaurants. Long-term steady growth with 10%+ ROE and 10%+ RP ratio Adjusted for stock splits; issued shares include treasury stock. Steady sustainable growth: The company has not released detailed medium-term targets, but aims for a net increase of 25 restaurants p.a. over the next three years until the number of restaurants reaches 600 in Greater Tokyo. Assuming annual sales per restaurant remain at about JPY100mn (pre-pandemic level), 600 restaurants implies sales of JPY60bn. The company plans to improve employee satisfaction and quality, service, and cleanliness (QSC). It targets long-term stable RP to sales ratio of 10% and ROE of 10% or higher.

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HIDAY HIDAKA Corporation｜7611｜ Research Espresso by Shared Research

Note: Figures rounded to the nearest million yen (company data rounded down to the nearest million yen); per-share data adjusted for splits

Business Hidakaya restaurants in Greater Tokyo serve noodles as well as stir-fries and side dishes Company overview Hidakaya is key format

Key restaurant format is Hidakaya (94.2% of sales in FY02/21) that serves ramen, gyoza ▶ Serves ramen, sometimes called the (dumplings), and other popular Chinese dishes at low prices. The company has 432 “national dish,” and other popular Chinese dishes at low prices restaurants under this chain in Tokyo and five neighboring prefectures (end-FY02/21).

Share of sales by region in FY02/21 was Tokyo, 49.2%; Saitama, 22.7%; Kanagawa, 16.4%; ▶ Basic concept since 1973 founding: “Food Chiba, 10.9%; Tochigi, 0.3%; and Ibaraki, 0.5%. stands near train stations” (where customers can drop in casually, open until Sales by format and region (FY02/21) late at night)

▶ 432 restaurants in Tokyo and five neighboring prefectures

▶ Growth in sales and operating profit from FY02/04 through FY02/19

Source: Shared Research based on company data

Historical overview The company was founded by Tadashi Kanda (current chairman) in February 1973, who was born in Saitama city, Saitama. Successfully launched first downtown Tokyo outlet (Shinjuku Ramen Kabukicho restaurant, later the Hidakaya Seibu Shinjuku Ekimae restaurant, closed in 2017) in December 1994. Listed on OTC market in September 1999 to improve fundraising and borrowing capacity (note: HIDAY HIDAKA normally leases stores, which are not useful as collateral, so fundraising capacity was a constraint on growth at the time; store leasing requires borrowing ability). The Hidakaya format was launched in June 2002. Gyoda factory was completed in February 2005. The company listed on the TSE Second Section in April 2005, transferring to TSE First Section in August 2006. Expanded Gyoda factory in November 2013.

Continued sales and profit growth Successfully opening restaurants in prime urban Tokyo locations, and improving fundraising and borrowing capacity following a public share offering and listing led to the company accelerating its rollout of restaurants near train stations. These prime locations were highly profitable despite steep rents. The store rollout strategy was the springboard for today’s success. From FY02/99 (before the company’s public share offering in September 1999) through FY02/20, the company posted a string of 21 YoY gains in sales. From FY02/04 through FY02/19, the company posted new record highs in operating profit for 16 consecutive years.

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HIDAY HIDAKA Corporation｜7611｜ Research Espresso by Shared Research

Long-term trends in sales, operating profit, GPM, and OPM

Business model Hidakaya restaurants serve ramen and other popular Chinese dishes to a broad customer base

▶ Directly operated restaurants in Tokyo and five neighboring prefectures under dominant strategy

Source: Shared Research based on company data; figures rounded to the nearest million yen ▶ Opens restaurants in busy areas near train stations Business model ▶ Low prices Key format is Hidakaya restaurants (94.2% of sales in FY02/21) that serve ramen, gyoza, and

other popular Chinese dishes. Using an area-dominant strategy, the company focuses on ▶ Broad demographic including students, opening directly managed chain restaurants. It has a broad customer base due to low businesspeople, and late-shift workers prices and long opening hours. ▶ Owns a food production plant (central kitchen) Restaurant locations The company opens restaurants in busy shopping areas near train stations (at multiple exits of each station) of around 100sqm (30 tsubo). It has 432 restaurants in Tokyo and five neighboring prefectures. (Share of restaurants by region in FY02/21: Tokyo, 49.2%; Saitama, 22.7%; Kanagawa, 16.4%; Chiba, 10.9%; Tochigi, 0.3%; and Ibaraki, 0.5%.) The company aims for a net increase of 25 stores annually over the next three years, taking the total to 600 in the Greater Tokyo area.

Restaurant numbers and sales

Source: Shared Research based on company data

Pricing and customer demographics Customer demographics span a wide range including students, businesspeople, and late-shift workers, as well as seniors, due to affordable prices (JPY390 for ramen and JPY230 for gyoza including tax) and long opening hours (nearly half of stores are open till 2 a.m.; more than 10% are open 24 hours; about 40% close before 12 a.m.*). The restaurants also offer side dishes that go with alcohol for customers who want a quick drink. According to the company, busy periods are lunchtime (30–35% of customer count), evenings from 6 to 10 p.m. (nearly 30%), and late at night from 10 p.m. to 2 a.m. (15–20%). Average customer spend at Hidakaya is about JPY750 (before tax; FY02/21). According to the company, spend per customer is around JPY100 above average at night, and around JPY100 below average during lunchtime. The company said that no other company operates chain restaurants in the same format, serving both ramen and other popular Chinese dishes.

In May 2019, the company reduced opening hours for just over a third of all stores. Further, in compliance with requests for cooperation from cities and prefectures covered by the central government’s COVID-19-related state of emergency declaration and/or priority measures for prevention

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HIDAY HIDAKA Corporation｜7611｜ Research Espresso by Shared Research

of the spread of disease, stores in affected areas have been closing at 8 p.m. or 9 p.m. and are not serving alcohol.

Central kitchen HIDAY HIDAKA has a food production plant (central kitchen) in Gyoda, Saitama, to ensure quality improvement, standardization, and a stable supply of foodstuffs. The plant was completed in February 2005 and is ISO22000 certified. In addition to production of noodles, gyoza, cut vegetables, and sauces, the plant is also responsible for business operations and logistics for foodstuff procurement for each restaurant. The plant makes one daily delivery to each restaurant. It was expanded in November 2013 and has enough production capacity to serve 600 restaurants. The plant’s production mix in FY02/21 was noodles, 21.2%; gyoza and dim sum, 27.8%; seasonings (sauces), 22.4%; and processed goods (cut vegetables etc.), 28.6%. The value of production in FY02/21 was JPY2.8bn, a fall of 21.9% YoY due to decreased sales.

Business flow chart

Source: Shared Research based on company data

Monthly sales trends All-store sales

All-store sales growth, YoY FY02/21: All-store sales fell 31.2% YoY, due to effects from the COVID-19 pandemic

Source: Shared Research based on company data

All-store sales, customer count, and average customer spend, YoY

Source: Shared Research based on company data

◤ FY02/21 YoY results: sales -31.2%, customer count -32.1%, average customer spend +2.9%

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HIDAY HIDAKA Corporation｜7611｜ Research Espresso by Shared Research

Comparable stores

Source: Shared Research based on company data

Comparable store sales, customer count, and average customer spend, YoY

Source: Shared Research based on company data

Comparable store ◤ FY02/21 YoY results: Sales -30.3%, customer count -45.3%, average customer spend Comparable store sales FY02/21 comparable store sales down 30.3% -0.7% YoY: Second straight year of YoY decline after ◤ Comparable store sales decreased 30.3% YoY, for the second straight year of YoY FY02/20 became first in nine years (since decline after FY02/20 became the first in nine years (since FY02/11). This was FY02/11). Attributed mainly to reduction in attributed mainly to a reduction in night-time opening hours and decline in alcohol night-time opening hours and decline in sales owing to effects from the COVID-19 outbreak. alcohol sales owing to effects from COVID-19 outbreak. ◤ Customer count fell 32.1% YoY: The company attributes this to effects from the COVID-19 outbreak including shortened opening hours and restraints on alcohol sales, with consumers also refraining from going out in the first place.

◤ Average customer spend was 2.6% higher YoY: The average customer spend increased YoY, despite the company making no change to tax-inclusive prices for its four best-selling items (ramen, draft beer, gyoza, and tanmen) at the time of the consumption tax increase in October 2019 (effectively lowering the pre-tax price). Shared Research believes that the uptrend in wages on the consumer side (minimum hourly wage in Tokyo was JPY850 in 2012; JPY869 in 2013; JPY888 in 2014; JPY907 in 2015; JPY932 in 2016; JPY958 in 2017; JPY985 in 2018, and JPY1,013 in 2019 and 2020 [MHLW data]) also helped customers accept the small price increase.

Sales by format Formats are Hidakaya, Yakitori Hidaka (chicken skewers), and Other. The mainstay Hidakaya Hidakaya restaurants account for 94.2% of brands include Chukasoba Hidakaya (ramen), Chuka Shokudo Hidakaya (Chinese sales cafeteria), and RaiRaiKen. The Other category includes Chuka Ichiban and sales to franchises.

Main format Hidakaya accounts for 94.2% of sales (FY02/21) and 91.0% of restaurant numbers with 393 restaurants. Yakitori Hidaka makes up 6.7% of restaurant numbers with 29 restaurants and the Other category 2.3% with 10 restaurants. Companywide annual

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HIDAY HIDAKA Corporation｜7611｜ Research Espresso by Shared Research

sales per store were JPY68mn: JPY71mn for Hidakaya and JPY48mn for Yakitori Hidaka.

Sales and store numbers by format

Source: Shared Research based on company data Note: Reporting formats changed in FY02/18 (formerly, Yakitori Hidaka and Chuka Ichiban were included in Other formats). Prior to FY02/16, the category names comprised “Other formats” for the current “Yakitori Hidaka”, and “Others” (sales to franchises) for the current “Other formats.” Annual sales per store is derived by dividing sales by the average of beginning and ending number of stores for the relevant financial year.

Sales by region The share of sales by region in FY02/21: Tokyo, 49.2%; Saitama, 22.7%; Kanagawa, 16.4%; Share of sales by area Chiba, 10.9%; Tochigi, 0.2%; and Ibaraki, 0.5%. Sales fell YoY in every region. Store ▶ Tokyo: 49.2% numbers by region were Tokyo, 46.8%; Saitama, 25.0%; Kanagawa, 16.0%; Chiba, 11.3%; ▶ Saitama: 22.7%

Tochigi, 0.2%; and Ibaraki, 0.7% (FY02/21). Sales per restaurant, in descending order: ▶ Kanagawa: 16.4% Tochigi, JPY73mn; Tokyo, JPY70mn; Kanagawa, JPY70mn; Chiba, JPY68mn; Saitama, ▶ Chiba: 10.9% JPY62mn; and Ibaraki, JPY53mn.

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HIDAY HIDAKA Corporation｜7611｜ Research Espresso by Shared Research

Sales by region

Source: Shared Research based on company data Note: Annual sales per store derived by dividing sales by average of beginning and ending number of stores for relevant financial year. Figures rounded to the nearest million yen.

Restaurant market

According to the Japan Food Service Association, the restaurant market peaked in 1997 Restaurant market had been recovering since with an aggregate value of JPY29.1tn and shrank to JPY22.8tn in 2011 before recovering to 2012, but was substantially affected in 2020 JPY25.8tn in 2018. by the COVID-19 pandemic with average spend on the rise

Restaurant industry sales fell 15.1% YoY in 2020, for the largest decline since the association initiated this survey in 1994. Inbound demand slowed dramatically due in large part to travel restrictions aimed at combatting the COVID-19 pandemic, while on the other hand takeout and delivery spending increased due to altered work practices such as teleworking, and a desire to avoid infection.

According to data from the association, average spend per customer in the restaurant industry has been growing: +2.7% in 2014; +3.3% in 2015; +1.2% in 2016; +0.9% in 2017; +1.5% in 2018; +1.7% in 2019; and 3.3% in 2020. The industry data includes takeout and so forth, and the association says that average spend per customer also increased every quarter in 2020.

Japan’s restaurant market

Source: Shared Research based on Japan Food Service Association materials

Sales, customer count, and average customer spend (prior year = 100%)

Source: Shared Research based on Japan Food Service Association materials

Competitors

◤ According to the Ministry of health, Labour and Welfare’s “Report on Public Health According to the company, none of its Administration and Services,” there were 740,693 restaurant establishments (general competitors operate a similar chain restaurant format ▶ Only a few of the nearly 90 listed restaurant companies have an OPM of around 10%, as HIDAY HIDAKA did prior to the COVID-19 07 /19 outbreak in FY2019 R

HIDAY HIDAKA Corporation｜7611｜ Research Espresso by Shared Research

eating places and restaurants) in Japan in FY2019, down 0.2% YoY. These accounted for 11.6% of the 6,398,912 businesses in Japan (according to the Ministry of Internal Affairs and Communications 2020 “Economic Census—Basic Survey”) ◤ There are roughly 90 listed restaurant companies, but according to the company, none of its competitors operate a similar format (chains serving both ramen and popular Chinese dishes). In the categories of popular Chinese food and ramen shops, competitors include Ohsho Food Service Corporation (TSE1: 9936), Korakuen Holdings (TSE1: 7554), and Ringer Hut (TSE1: 8200) ◤ Price comparison with major chains: The company’s products are relatively low-priced. For example, the average ramen price of the seven major chains is JPY607 (including tax), while HIDAY HIDAKA’s is JPY390 (including tax)

Price comparison: major ramen restaurant chains (tax included)

Source: Shared Research based on company websites

Major listed restaurant companies: sales (X axis, JPYmn) and OPM (Y axis)

Source: Shared Research based on company data Hiramatsu (2764), FY03/21 result; Bronco Billy (3091), FY12/20 result; Arcland Service (3085), FY12/20 result; HIDAY HIDAKA (7611), FY02/21 result; Saint Marc Holdings (3395), FY03/21 result; (7630), FY02/21 result; Amiyaki Tei (2753), FY03/21 result; Ohsho Food Service (9936), FY03/21 result; Ringer Hut (8200), FY02/21 result; Torikizoku (3193), FY07/20 result; (7581), FY08/20 result; Kura Corporation (2695), FY10/20 result; (9887), FY03/21 result; Genki (9828), FY03/21 result; Zensho Holdings (7550), FY03/21 result; Holdings (9861), FY02/21 result; Korakuen Holdings (7554), FY03/21 result

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HIDAY HIDAKA Corporation｜7611｜ Research Espresso by Shared Research

Source: Shared Research based on company data

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HIDAY HIDAKA Corporation｜7611｜ Research Espresso by Shared Research

Cumulative FY02/19 FY02/20 FY02/21 FY02/21 (JPYmn) Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4% of Est. Est. Total sales 10,644 21,106 31,395 41,863 10,690 21,103 31,421 42,210 6,473 14,110 22,748 29,564 95.1% 31,100 YoY 5.0% 4.2% 3.8% 3.0% 0.4% -0.0% 0.1% 0.8% -39.5% -33.1% -27.6% -30.0% -26.3% ＜by format＞ Hidakaya 10,206 20,223 30,059 40,031 10,140 20,011 29,783 39,814 6,122 13,301 21,449 27,857 YoY 5.3% 4.4% 3.8% 2.7% -0.6% -1.0% -0.9% -0.5% -39.6% -33.5% -28.0% -30.0% % of total sales 95.9% 95.8% 95.7% 95.6% 94.9% 94.8% 94.8% 94.3% 94.6% 94.3% 94.3% 94.2% Yakitori Hidaka 417 840 1,264 1,718 511 1,013 1,506 2,194 296 683 1,088 1,381 YoY -0.5% 2.1% 4.5% 9.0% 22.6% 20.5% 19.2% 27.7% -42.1% -32.5% -27.8% -37.0% % of total sales 3.9% 4.0% 4.0% 4.1% 4.8% 4.8% 4.8% 5.2% 4.6% 4.8% 4.8% 4.7% Other formats 21 42 73 114 39 79 133 202 55 125 211 326 YoY -17.4% -14.9% -3.4% 8.4% 83.3% 86.4% 82.0% 77.6% 41.2% 59.4% 59.0% 61.4% % of total sales 0.2% 0.2% 0.2% 0.3% 0.4% 0.4% 0.4% 0.5% 0.9% 0.9% 0.9% 1.1% ＜by region＞ Tokyo 5,518 10,919 16,261 21,615 5,469 10,775 16,037 21,487 3,200 6,938 11,212 14,550 YoY 6.3% 4.8% 4.2% 3.2% -0.9% -1.3% -1.4% -0.6% -41.5% -35.6% -30.1% -32.3% % of total sales 51.8% 51.7% 51.8% 51.6% 51.2% 51.1% 51.0% 50.9% 49.4% 49.2% 49.3% 49.2% Saitama 2,358 4,691 6,986 9,347 2,408 4,765 7,052 9,488 1,468 3,206 5,149 6,706 YoY 3.7% 4.2% 3.7% 3.1% 2.1% 1.6% 0.9% 1.5% -39.1% -32.7% -27.0% -29.3% % of total sales 22.2% 22.2% 22.3% 22.3% 22.5% 22.6% 22.4% 22.5% 22.7% 22.7% 22.6% 22.7% Kanagawa 1,647 3,258 4,802 6,418 1,656 3,303 4,933 6,631 1,034 2,297 3,720 4,851 YoY 2.8% 2.4% 2.1% 1.6% 0.6% 1.4% 2.7% 3.3% -37.6% -30.5% -24.6% -26.8% % of total sales 15.5% 15.4% 15.3% 15.3% 15.5% 15.7% 15.7% 15.7% 16.0% 16.3% 16.4% 16.4% Chiba 1,058 2,110 3,155 4,227 1,090 2,129 3,188 4,310 720 1,557 2,490 3,224 YoY 4.6% 4.1% 4.2% 3.7% 3.1% 0.9% 1.0% 2.0% -34.0% -26.9% -21.9% -25.2% % of total sales 9.9% 10.0% 10.1% 10.1% 10.2% 10.1% 10.1% 10.2% 11.1% 11.0% 10.9% 10.9% Ibaraki 35 70 105 141 37 73 128 184 35 78 123 160 YoY -1.1% -0.3% 1.6% 1.8% 5.1% 3.5% 22.0% 30.8% -4.6% 6.8% -4.4% -13.3% % of total sales 0.3% 0.3% 0.3% 0.3% 0.3% 0.3% 0.4% 0.4% 0.5% 0.5% 0.5% 0.5% Tochigi 29 58 86 114 29 57 82 109 16 34 55 73 YoY 9.7% 9.5% 9.1% 7.8% 1.2% -1.1% -4.5% -4.6% -44.5% -40.3% -33.5% -33.0% % of total sales 0.3% 0.3% 0.3% 0.3% 0.3% 0.3% 0.3% 0.3% 0.2% 0.2% 0.2% 0.2% Cost of goods sold 2,904 5,703 8,480 11,283 2,919 5,748 8,615 11,570 1,905 4,069 6,465 8,363 YoY 5.8% 4.3% 3.5% 1.9% 0.5% 0.8% 1.6% 2.5% -34.7% -29.2% -25.0% -27.7% Cost ratio 27.3% 27.0% 27.0% 27.0% 27.3% 27.2% 27.4% 27.4% 29.4% 28.8% 28.4% 28.3% Gross profit 7,740 15,403 22,915 30,580 7,770 15,355 22,806 30,640 4,567 10,040 16,282 21,201 YoY 4.7% 4.2% 3.9% 3.4% 0.4% -0.3% -0.5% 0.2% -41.2% -34.6% -28.6% -30.8% GPM 72.7% 73.0% 73.0% 73.0% 72.7% 72.8% 72.6% 72.6% 70.6% 71.2% 71.6% 71.7% SG&A expenses 6,383 12,841 19,251 25,850 6,485 13,074 19,740 26,543 6,076 12,110 18,347 24,001 YoY 7.3% 5.9% 5.1% 3.8% 1.6% 1.8% 2.5% 2.7% -6.3% -7.4% -7.1% -9.6% SG&A-to-sales ratio 60.0% 60.8% 61.3% 61.8% 60.7% 62.0% 62.8% 62.9% 93.9% 85.8% 80.7% 81.2% Operating profit 1,357 2,562 3,664 4,729 1,285 2,281 3,065 4,096 -1,509 -2,070 -2,065 -2,800 - -2,100 YoY -6.0% -3.4% -2.1% 1.1% -5.3% -11.0% -16.3% -13.4% ------OPM 12.7% 12.1% 11.7% 11.3% 12.0% 10.8% 9.8% 9.7% ------Recurring profit 1,364 2,560 3,640 4,697 1,287 2,274 3,056 4,112 -1,509 -2,061 -2,068 -2,779 - -2,100 YoY -6.1% -3.2% -1.7% 2.1% -5.7% -11.2% -16.0% -12.4% ------RPM 12.8% 12.1% 11.6% 11.2% 12.0% 10.8% 9.7% 9.7% ------Net Income 917 1,712 2,415 3,082 859 1,488 1,932 2,579 -1,263 -1,714 -1,921 -2,947 - -1,950 YoY -6.6% -1.4% -0.2% 2.0% -6.3% -13.1% -20.0% -16.3% ------Net margin 8.6% 8.1% 7.7% 7.4% 8.0% 7.1% 6.1% 6.1% ------Source: Shared Research based on company data

Earnings FY02/21 earnings Sales down in FY02/21, operating loss reported; no FY02/22 forecast disclosed at start of ▶ Sales: JPY29.6bn (-30.0% YoY) fiscal year given uncertainty over when COVID-19 will be contained ▶ Operating loss: JPY2.8bn (JPY4.1bn profit in FY02/21 earnings (out April 7, 2021): In FY02/21, HIDAY HIDAKA posted sales of FY02/20) JPY29.6bn (-30.0% YoY), an operating loss of JPY2.8bn (operating profit of JPY4.1bn in ▶ Recurring loss: JPY2.8bn (JPY4.1bn profit)

FY02/20), a recurring loss of JPY2.8bn (recurring profit of JPY4.1bn in FY02/20), and a net ▶ Net loss: JPY2.9bn (JPY2.6bn profit) loss of JPY2.9bn (net income of JPY2.6bn in FY02/20). Sales fell after increasing every year for 21 consecutive years through FY02/20, and the company posted an operating loss.

HIDAY HIDAKA did not disclose a forecast for FY02/21 at the start of the fiscal year, given uncertainty over when the COVID-19 pandemic would be contained. When reporting Q3 FY02/21 results the company announced a forecast calling for sales of JPY31.1bn (-26.3% YoY) and an operating loss of JPY2.1bn. Sales fell 4.9% short of plan and the operating loss was JPY700mn larger than projected. Comparable store sales fell 30.3% YoY, while the SG&A expense ratio increased 18.3pp (from 62.9% to 81.2%) owing to higher personnel expenses, increases in rent and repair expenses, and fees for QR code-based payment.

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HIDAY HIDAKA Corporation｜7611｜ Research Espresso by Shared Research

Initial company forecasts versus results

Source: Shared Research based on company data Note: Figures may differ from company materials due to differences in rounding methods.

Comparable store sales fell 30.3% YoY, due to factors linked to the COVID-19-related state of emergency declaration, including shortened evening opening hours and restraints on alcohol sales, with consumers also refraining from going out in the first place. While the company also put effort into takeout sales, these accounted for only around 10% of the total.

The number of new restaurants* (14) undershot the initial target (25), and for the first time there was a net decrease in store numbers, with the number of restaurants closed (24) exceeding the initial plan (five). One store was converted to a franchise format. Comparable store sales were down 30.3% YoY, customer count was down 45.3%, and average customer spend was down 0.7%.

*The company is opening new stores not just in busy areas near train stations but also inside shopping malls and train station commercial complexes, and in roadside locations.

◤ Store rollout: In FY02/21, the company opened 14 restaurants (six in Tokyo, four in Saitama, one in Kanagawa, and three in Chiba) while closing 24 and converting one to a franchise format. This brought the number of restaurants to 432 at end-February 2021, for the first net decrease, of 11. Of these, 393 restaurants were in the Hidakaya chain (including RaiRaiKen), 30 were Yakitori Hidaka (including Taishu Shokudo Hidakaya and Tonkatsu Hidaka), and nine were Chuka Ichiban.

◤ Sales: The company launched time-limited menus: ramen dipped in a separate bowl of dashi and soy broth, and chilled noodles with black vinegar and soy sauce from April 2020; sesame-miso chilled noodles from June 2020; salt prawn broth ramen from September 2020; pig innards and vegetable ramen from October 2020; and spicy miso ramen from December 2020. In January 2021, the company also added basil gyoza to its gyoza lineup, achieving a refreshing and healthy taste through the use of holy basil and domestically produced chicken breast.

◤ Production and costs: The CoGS ratio rose by 0.9pp YoY from 27.4% to 28.3%, with the increase attributed in the main to decreased capacity utilization as a result of lower sales, even though the unit cost of procurement improved as the company reviewed sourcing for no-wash rice.

◤ SG&A expenses: The SG&A to sales ratio rose 18.3pp YoY from 62.9% to 81.2%, which the company attributed to higher personnel expenses, increases in rent and repair expenses, and an increase in fees accompanying growth in QR code-based payment (which apparently now accounts for 12–13% of all sales).

◤ Hiring: As of end-FY02/21 there were 859 employees (+21 YoY), and 2,845 part-time and temporary workers (-835). The number of temporary workers decreased largely because of non-Japanese workers being unable to renew contracts once their visas expired, due to effects from the COVID-19 pandemic.

◤ Solid balance sheet: As of end-FY02/21, the company had zero interest-bearing debt.

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HIDAY HIDAKA Corporation｜7611｜ Research Espresso by Shared Research

It had a current ratio of 373.3%, a quick ratio of 313.4%, a shareholders’ equity ratio of 85.2%, and healthy cash flow. Note: The company posted an extraordinary gain of JPY50mn on compensation income, and also booked as extraordinary losses an impairment loss* of JPY711mn (+JPY486mn YoY).

*The company categorizes individual restaurants as its smallest cashflow-generating unit. It reduces the book values of loss-making restaurants (restaurants projected to continuously post losses from store operation and those slated for closure) to values that are deemed recoverable, and records the reduced amount as an impairment loss. In FY02/21, the company recognized impairment losses on stores that had been closed and those that had seen profitability decline due to effects from the COVID-19 pandemic.

Regular and part-time/temporary employees, share of part-time/temporary employees

Source: Shared Research based on company data Part-time and temporary employees: annual average assuming eight-hour’s work a day

FY02/22 forecast: The company plans to open 30 restaurants, mainly in the Hidakaya FY02/22 forecast format, and close seven. Openings are proceeding apace, as the company already has ▶ Not disclosed at the start of the fiscal year

inked contracts for 17 stores and made an informal decision on three (as of May 28, 2021). ▶ Announced when Q1 results were The company will open new stores not just in busy areas near train stations but also in reported roadside locations and new formats. It aims to maintain and strengthen brand equity for all ▶ Calls for YoY sales growth of 1.5% and a formats. switch to recurring profit

The company did not disclose a forecast for FY02/22 at the start of the fiscal year, citing lack of visibility over an end to ongoing disruption caused by global resurgence of the COVID-19 pandemic and local governments’ stay-at-home and business shutdown requests. When reporting Q1 FY02/22 results it announced a forecast for sales of JPY30.0bn (+1.5% YoY), an operating loss of JPY2.8bn (operating loss of JPY2.8bn in FY02/21), a recurring profit of JPY1.3bn (recurring loss of JPY2.8bn in FY02/21), and a net income of JPY1.0bn (net loss of JPY2.9bn in FY02/21). It forecasts a switch to recurring profit partly in anticipation of compensation payments for cooperation with reduced opening hours.

◤ Store rollout and sales: In addition to opening restaurants in the Hidakaya format, the company plans to open outlets in new formats such as Chuka Shokudo Shinshin and Chuka Soba Shinki. It intends to close seven restaurants, but also will consider closing stores where operational efficiency has fallen. The company will continue with initiatives such as limited-time menus, improvements to existing menus, and initiatives to enhance service.

◤ Takeout and delivery: The company can now offer ramen and other noodle dishes on a takeout basis, having adopted a new two-layered container that keeps the broth and noodles apart. As of end-June 2021, 345 stores were using the E-Park takeout reservation service, while 318 stores were using the Demaekan portal site for food delivery services.

◤ Capex plan: JPY1.9bn (+53.57% YoY). Breakdown: new restaurants, JPY1.3bn (+99.1% YoY); existing restaurants, JPY600mn (+10.4%); other, JPY100mn (+141.1%).

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HIDAY HIDAKA Corporation｜7611｜ Research Espresso by Shared Research

◤ Depreciation expense forecast: JPY1.0bn (-13.3% YoY)

Capex and depreciation expenses

Source: Shared Research based on company data

Medium-term strategy Aim for 600 restaurants. ROE of over 10% and RP to sales ratio of over 10% in long term Steady sustainable growth Medium-term strategy The company has not published detailed medium-term targets. It intends to open at most ▶ 600 stores in Greater Tokyo 30 restaurants per annum to reach 600 in Greater Tokyo. For its restaurants, the company ▶ originally targeted stations with 50,000 commuters passing through, but recently has been Room to roll out stores in central Tokyo and Kanagawa addressing smaller markets with 35,000 commuters. It believes there is still room to grow

in central Tokyo and Kanagawa. Key formats are the main format Hidakaya and Yakitori ▶ ROE of over 10% and stable RP to sales Hidaka*. ratio of 10% in long term

*For prime properties in busy areas near train stations, if the site is too small for Hidakaya, or if there is a Hidakaya located nearby, the company considers opening Yakitori Hidaka.

◤ Restaurant opening strategy: Aim for 600 restaurants through steady rollout in Greater Tokyo and three neighboring prefectures (Kanagawa, Saitama, and Chiba)  Restaurant numbers: Aims for a net increase of 25 restaurants annually for the next three years (the company targets 457 in FY02/22, 480 in FY02/23, and 505 in FY02/24)  Format: In addition to Hidakaya and Yakitori Hidaka, the company launched new formats, opening a restaurant specializing in retro ramen flavors evoking the Showa era and a Chinese restaurant located in a redeveloped building.

◤ QSC* enhancement: Strengthen personnel training, improve work environment, and continue recruitment. To eliminate quality inconsistencies, the company urges not only full-time employees, but also part-time and temporary workers, to acquire internal qualifications (regular, senior, and master ranks in food preparation and customer service). It aims to get full-time employees to take holidays and reduce working hours, and will implement a trainer system in which capable part-time and temporary workers train others. The company also seeks to add value to existing products, also offering seasonal items answering the needs of the time.

*Q (taste) S (service) and C (cleanliness, safety)

◤ Improvement in employee satisfaction: The company aims to enhance its restaurant assistance system and adjust business hours by promoting restaurant management in which restaurant managers use their own initiative (measure started in September 2010). It aims to improve employee satisfaction by shifting from a top down style of management to a bottom up style. Assuming annual sales per restaurant of JPY100mn (the level seen before the COVID-19 outbreak), 600 restaurants implies sales of JPY60bn. The company targets are long-term stable indicators, with recurring profit to sales ratio of over 10% and ROE of 10% or higher.

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HIDAY HIDAKA Corporation｜7611｜ Research Espresso by Shared Research

Strengths and weaknesses

Strengths Strengths ◤ Cost advantages on dominant strategy and central kitchen: The company has ▶ Cost advantages on dominant strategy and low-cost operations stemming from effective brand penetration within regions via its central kitchen

dominant strategy, and its in-house central kitchen and outsourced logistics. As a ▶ Directly operated restaurants maintain result, the company was able to maintain a GPM above 70% for over 20 years from quality, boost brand power, and enable FY02/99 through FY02/21, despite a relatively low-price menu. It is one of only a flexible operations

handful of leading listed restaurant operators with a GPM above 70%. ▶ Popular, low-priced standards that ◤ Directly operated restaurant chains maintain quality, boost brand power, customers never tire of ensure repeat and enable flexible operations: It mainly operates directly operated restaurants. As customers of end-February 2021, five restaurants were franchises operated by former employees Weaknesses (internal franchises) and the remaining 432 were all directly managed. Direct ▶ Constraints of dominant strategy

management standardizes and maintains quality and enables a flexible, integrated ▶ Difficulty recruiting staff operating strategy encompassing enhanced brand power, employee training, and ▶ Immaturity of formats other than Hidakaya restaurant management.

◤ Low prices and standard dishes ensure repeat customers: The company has many repeat customers at its restaurants because it offers low prices (ramen, JPY390; gyoza, JPY230; and draft beer, JPY290) and standard dishes that even if eaten daily customers do not tire of (such as ramen). In fact, the company says that the best-selling items on its menu by volume are ramen and tanmen noodles (excludes draft beer). The average spend per customer has been rising since October 2013, due to seasonal menus and alcoholic beverages. Comparable store sales maintained 100% or more of previous year sales over the eight-year period from FY02/12 through FY02/19 (falling 30.3% YoY in FY02/21 due to effects from the COVID-19 pandemic). Weaknesses ◤ Area-dominant strategy that limits restaurant openings to Greater Tokyo: Under its area-dominant strategy, HIDAY HIDAKA opens multiple restaurants near train stations in Greater Tokyo. It thinks there is still room to grow in central Tokyo and Kanagawa. Yet since the company limits its restaurants to Greater Tokyo and has continued to open multiple restaurants in busy areas, only less attractive locations remain for new restaurant openings. While the company plans to step up openings of roadside restaurants, locations conceivably could be limited by difficulty in deliveries from the central kitchen.

◤ Difficulty in securing staff: Personnel are a key ingredient in the company’s growth. It is difficult for outsiders to emulate the company’s expertise in effective staff utilization including employee training and motivation. However, the public sees the demanding work and long hours generally required in the restaurant industry, and although HIDAY HIDAKA is an exception, poor public opinion regarding tough working conditions has hurt the company’s hiring activities.

◤ Formats other than Hidakaya underdeveloped: The company is not looking to expand outside of Greater Tokyo. Yet to overcome the constraints of the area-dominant strategy (i.e., limited favorable locations for new Hidakaya restaurants), it needs to develop successor formats to Hidakaya, such as Yakitori Hidaka. However, formats other than Hidakaya still account for less than 10% of sales (Hidakaya generated 94.2% of FY02/21 sales).

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HIDAY HIDAKA Corporation｜7611｜ Research Espresso by Shared Research

Income statement

Source: Shared Research based on company data Note: Figures rounded to the nearest million yen

GPM remains above 70%. The cost of manufacturing foodstuffs at the plant is roughly one Income statement third of CoGS, and foodstuff procurement costs comprise the remaining two thirds. Over ▶ GPM remains above 70%. Increase in rate the past 10 years, the share of foodstuff procurement costs to total CoGS has climbed. of restaurant ingredient procurement offset Following the expansion of the Gyoda factory in November 2013, growth in depreciation by the peaking of depreciation expenses expenses (calculated using the declining balance method) peaked in FY02/15. The for expanded facilities

depreciation and amortization to sales ratio (related to CoGS) was on a declining trajectory ▶ Personnel expenses kept in check through at 0.7% in FY02/14, 0.8% in FY02/15, 0.6% in FY02/16, 0.5% in FY02/17, 0.4% in FY02/18, adroit labor management, even though 0.3% in FY02/19, and 0.3% in FY02/20 (see following table). In FY02/21, though, the ratio hiring continued increased to 0.5% owing to lower sales.

SG&A expenses: Although the company is skillfully managing major cost items such as rent expenses, personnel expenses rose noticeably on hiring new graduates and due to raising average hourly wages for part-time and temporary employees and expanding performance-linked bonuses (SG&A expense ratio: 60.6% in FY02/14, 60.9% in FY02/15, 60.9% in FY02/16, 60.8% in FY02/17, 61.3% in FY02/18, 61.8% in FY02/19, and 62.9% in FY02/20). In FY02/21, the company kept personnel expenses in check through adroit labor management, even though it continued with hiring. Although SG&A expenses fell 9.6% YoY, the SG&A expense ratio rose to 81.2% due to lower sales.

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HIDAY HIDAKA Corporation｜7611｜ Research Espresso by Shared Research

Breakdown of restaurant foodstuff manufacturing costs

Source: Shared Research based on company data Note: Figures rounded to the nearest million yen

Breakdown of SG&A expenses

Source: Shared Research based on company data Note: Figures rounded to the nearest million yen

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HIDAY HIDAKA Corporation｜7611｜ Research Espresso by Shared Research

Balance sheet

Source: Shared Research based on company data Note: Figures rounded to the nearest million yen Balance sheet ◤ Roughly 61.3% of assets are fixed assets. This is because the company operates ▶ High proportion of fixed assets (company operates directly managed restaurants)

▶ Net asset ratio remains at 80% or higher

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HIDAY HIDAKA Corporation｜7611｜ Research Espresso by Shared Research

directly managed restaurants.

◤ Net cash was JPY7.8bn, down 42.9% YoY from JPY13.8bn as of end-FY02/20. However, roughly JPY5.7bn remains after deducting accounts payable (end of month deadline, payable on the 20th of following month), unpaid restaurant construction expenses, and unpaid personnel expenses, which total roughly JPY2.2bn. According to the company, it requires cash on hand equivalent to around two months of sales in case of unforeseen circumstances, and based on the FY02/22 company forecast, the cash after deduction is equivalent to 2.3 months of sales.

◤ The net asset ratio has remained at 80% or higher since FY02/19, and was 85.2% in FY02/21.

Per-share data (JPY, after adjusting for stock splits)

Source: Shared Research based on company data

Cash flow statement

Cash flow: solid

Source: Shared Research based on company data

Finances remain sound as operating cash inflows cover investment and financing cash outflows.

Financial ratios

Source: Shared Research based on company data

◤ Margins and efficiency are high. Aside from in FY02/21, when the company was hard hit by the COVID-19 pandemic, OPM has been over 10%; ROA and ROE in the High profitability and efficiency (OPM, ROA, double digits. and ROE are all double-digit) and robust balance sheet ◤ Solid balance sheet. The current ratio and net assets ratio are both adequate. Net cash fell 42.9% YoY in FY02/21, but the company has zero borrowings. The quick ratio is 313.4% and the shareholders’ equity ratio is 85.2%.

Policy on shareholder returns The company’s policy is to pay out a stable dividend over the long term, while retaining some funds to support new store rollout and unforeseen business risks. Based on this, the company has a stance of proactive returns to shareholders through dividend increases

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HIDAY HIDAKA Corporation｜7611｜ Research Espresso by Shared Research

accompanying profit growth, stock splits, etc. On six occasions since March 1, 2012, HIDAY HIDAKA conducted 1.2-for-one stock splits of common shares, and in FY02/19, it conducted a 1.1-for-one stock split of common shares. In FY02/21 the company paid a total dividend of JPY36.0, comprising an interim dividend of JPY18.0 and a year-end dividend of JPY18.0. A dividend for FY02/22 had not been decided as of the Q1 results announcement.

Shareholders

Source: Shared Research based on company data

Corporate governance

Organization form and capital structure Cont rolling shareholder - Parent company ticker - Directors Number of directors under Articles of Incorporation 10 Directors' terms under Articles of Incorporation 1 year Number of independent outside directors 2 Audit & Supervisory Board Number of members of Audit & Supervisory Board under Articles of Incorporation 4 Number of independent outside members of Audit & Supervisory Board 2 Other No. of independent outside officers (directors and members of Audit & Supervisory Board) 4 Part icipat ion in elect ronic vot ing plat form None Ot her init iat ives t o enhance vot ing right s of invest ors None Providing convocat ion not ice in English None Disclosure of directors' compensation None Disclosure of executive officers' compensation - Policy on determining amount of compensation and calculation methodology In place Takeover defenses None Source: Shared Research based on company data

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