30 August 2016 Pacific/Japan Equity Research Packaged Foods (Food (Japan)) / MARKET WEIGHT

Yakult Honsha (2267 / 2267 JP) Rating UNDERPERFORM* Price (29 Aug 16, ¥) 4,740 INITIATION

Target price (¥) 4,200¹ Chg to TP (%) -11.4 Market cap. (¥ bn) 783.69 (US$ 7.66) Forecast sluggish profit growth near term Enterprise value (¥ bn) 755.78 Number of shares (mn) 165.33 ■ Initiate coverage: We initiate coverage of Yakult Honsha with a ¥4,200 target Free float (%) 55.0 price (potential return −11.4%) and an UNDERPERFORM rating. The company 52-week price range 6,780 - 4,655 generates nearly half of its overall profits in Asian markets, centered on *Stock ratings are relative to the coverage universe in each analyst's or each team's respective sector. and . Growth in China has slowed in recent years due to stiffer ¹Target price is for 12 months. competition, so a rebound in this market will probably take time. Yakult generates more than 20% of its OP in the Americas including Mexico and Brazil, Research Analysts but growth in the region has stalled due to higher penetration rates and slower Masashi Mori macroeconomic growth. Pharmaceuticals too, have been hit by weak profits. A 81 3 4550 9695 muted share price suggests equity markets have already priced in sluggish [email protected] earnings. We take a bearish stance on Yakult relative to the sector, as the stock’s valuations continue to appear somewhat demanding. ■ Investment theme: Asian markets are the main focus for investors. In Indonesia, where door-to-door delivery accounts for around 50% of sales, Yakult’s business base remains stable (impervious to consumer sentiment and weather factors). In the effective absence of rivals, we expect Yakult to maintain double-digit volume growth for now. China, however, poses issues. Sales growth slowed to high single-digits for the first time in 2015. We expect heated competition with comparable products in the general retail channel to continue. ■ Valuation and risks: We derive our target price by applying a P/E of roughly 28x to our FY3/17 EPS estimate. We see little prospect for Yakult to regain its share price premium in the near term due to sluggish earnings, and regard the company’s historical 10-year average valuations minus one standard deviation, a level close to the domestic food sector average, as reasonable. Upside risks: (1) substantial improvement in China market growth, (2) greater-than-expected expansion in Brazil, Mexico and other Latin American markets; (3) margin improvement in Japan; (4) sharply higher sales of generics at the pharmaceutical business; and (5) further softening in input costs.

Share price performance Financial and valuation metrics

Year 3/16A 3/17E 3/18E 3/19E Price (LHS) Rebased Rel (RHS) Sales (¥ bn) 390.4 377.0 381.0 390.0 10000 140 Operating profit (¥ bn) 40.1 34.5 35.0 37.0 8000 120 Recurring profit (¥ bn) 50.6 43.9 44.5 46.7 6000 100 4000 80 Net income (¥ bn) 28.8 25.4 25.7 27.2 EPS (¥) 174.5 153.7 155.5 164.6 Change from previous EPS (%) n.a. IBES Consensus EPS (¥) n.a. 163.8 178.4 191.5 The price relative chart measures performance against the EPS growth (%) 15.2 -11.9 1.2 5.8 TOPIX which closed at 1313.24 on 29/08/16 P/E (x) 28.6 30.8 30.5 28.8 On 29/08/16 the spot exchange rate was ¥102.35/US$1 Dividend yield (%) 1.0 0.7 0.7 0.7 EV/EBITDA(x) 12.7 12.9 12.4 11.6 Performance over 1M 3M 12M P/B (x) 2.5 2.2 2.1 2.0 Absolute (%) -4.0 -12.9 -30.9 ROE(%) 8.8 7.4 7.1 7.1 Relative (%) -3.3 -8.0 -15.6 Net debt/equity (%) net cash net cash net cash net cash

Source: Company data, Thomson Reuters, IFIS, Credit Suisse estimates.

DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, LEGAL ENTITY DISCLOSURE AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

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30 August 2016

Valuation and risks Share price valuation We derive our target price by applying a P/E of roughly 28x to our FY3/17 EPS estimate. For now we see little sign of the previous share price premium being restored, in view of lackluster growth at the overseas beverages business, and the outlook for more tough times at the pharmaceutical business. We base our multiple on Yakult’s historical 10-year average valuations minus one standard deviation. We regard the level as reasonable, as it is close to the average domestic food sector forward multiple of roughly 25x.

Figure 1: P/E (12-month forward CS forecasts base) Figure 2: EV/EBITDA (12-month forward CS forecasts base)

(x) (x) 50 21

19 45 +2σ 44.4 +2σ 18.5 17 40 +1σ 15.5 +1σ 38.8 15

35 13 Ave. 12.5 Ave. 33.2 11 30 -1σ 9.5 -1σ 27.6 9 25 7 -2σ 6.6 -2σ 22.0 20 5 06/5 07/5 08/5 09/5 10/5 11/5 12/5 13/5 14/5 15/5 16/5 06/5 07/5 08/5 09/5 10/5 11/5 12/5 13/5 14/5 15/5 16/5 Source: Bloomberg, Credit Suisse estimates Source: Bloomberg, Credit Suisse estimates Risks Upside risks include: (1) substantial improvement in China market growth, (2) greater- than-expected expansion in Brazil, Mexico and other Latin American markets; (3) margin improvement in Japan; (4) sharply higher sales of generics at the pharmaceutical business; and (5) further softening in input costs. Awareness of probiotics is on the rise in Japan as consumers increasingly focus on the value of lactic acid bacterium. Yakult had placed a greater priority on developing overseas markets so far in terms of managerial resources, but it is now stepping up moves to prop up the Japanese market. The company aims to beef up its sales channels centered on the door-to-door delivery model, product portfolio, and marketing strategy. Yakult’s Japan business could re-enter a phase of profit growth if its renewed investment in the above proves successful. We take a neutral stance on Yakult’s strategy in this regard, so success here would imply an upside earnings risk versus our outlook.

Yakult Honsha (2267 / 2267 JP) 2 30 August 2016

Corporate profile Yakult represents Japan in probiotics Yakult traces its origins back to Minoru Shirota, a medical doctor and the company’s founder, who successfully created/cultured a special strain of the bacterium Lactobacillus casei Shirota during research at the Kyoto Imperial University’s School of Medicine in 1930. He began selling beverages in Fukuoka City under the trademark of Yakult in 1935. After the war, Shirota expanded Yakult’s beverage sales agency network all over Japan. Yakult Honsha was established in 1955 to oversee the network of agencies nationwide. Yakult later diversified into other beverages and food products and also entered the market for cosmetics and pharmaceuticals. As a result of the company’s proactive involvement in overseas business development, it now sells its products in over 30 countries (daily global fermented milk beverage sales volume of 30mn units). The company also boasts a broad sales network consisting of a unique door-to-door sales force of “Yakult Ladies” and general retail stores. Yakult currently generates nearly half of its profits in Asian markets, particularly China and Indonesia. Yakult generates more than 20% of its profits in the Americas including Mexico and Brazil, but growth in the region has stalled in recent years. Sluggish profits in pharmaceuticals mean that Asian markets will remain Yakult’s largest profit driver over the foreseeable future.

Figure 3: Sales by business segment Figure 4: OP by business segment

Others Pharma 5% Others 8% Pharma 2% 9% Japan (Bev) Europe (Bev) 17% 2% Europe (Bev) Japan (Bev) 1% 48%

Asia/Oceania (Bev) 24% Americas (Bev) 23%

Americas Asia/Oceania (Bev) (Bev) 48% 13%

Source: Company data (FY3/16A), Credit Suisse Source: Company data (FY3/16A), Credit Suisse Longer-term strategy and shareholder returns The FY3/21 OP target outlined in the long-term vision “Yakult Vision 2020” is ¥50.0bn (OPM 10%; FY3/17 OP target reduced from ¥43.0bn to ¥36.5bn). The company’s vision statement calls for (1) global value promotion activities for probiotics, Yakult’s mainstay product, (2) R&D capability bolstering for scientifically proven new products, and (3) contribution to people’s health globally through innovation focused on oncology. Yakult’s dividend policy places the utmost priority on maintaining stable dividends. Based on the company’s 1) solid financial base, 2) stable cash flow, and 3) a business model requiring little or no large M&A deals or capital investment, we note significant room for improving shareholder returns. However, given the company’s conservative outlook on financial strategy, we think there is little likelihood of the company stepping up shareholder returns. At present, we anticipate Yakult to merely raise dividends gradually.

Yakult Honsha (2267 / 2267 JP) 3 30 August 2016

Figure 5: Dividend, buyback and dividend payout ratio Figure 6: Net debt, D/E ratios (JPY bn) (%) (JPY bn) Net debt D/E ratio (RHS) (%) 45.0 Dividend (LHS) 100 10 45 0 40.0 90 40 Buyback (LHS) -10 35.0 80 35 70 -20 30.0 Dividend payout ratio 30 (RHS) 60 -30 25.0 25 50 -40 20.0 20 40 -50 15.0 15 30 -60 10 10.0 20 -70 -80 5 5.0 10 -90 0 0.0 0

Source: Company data, Credit Suisse estimates Note: Positive indicates net debt Source: Company data, Credit Suisse estimates Trends in the overseas beverage business We believe beverage business in emerging markets is the largest profit driver for Yakult. Growth in sales volume is still strong across the Americas region. However, room for growth is gradually narrowing due to a steady rise in penetration rates in Mexico. Also, sales in Brazil swung to negative growth in 2015 in tandem with the ongoing macroeconomic deterioration. We believe it will take time for Yakult to revert to a growth trajectory in the region. Under these conditions, investors are likely to look for growth in Asian markets, particularly in China and Indonesia. Both and Vietnam represent substantial long-term growth prospects, but these markets are still not sufficiently mature.

Figure 7: Sales breakdown at the overseas beverage Figure 8: Sales breakdown of China business by region business by country/region Other Europe Americas 6% 3% Brazil 11% China Guangzhou 38% 38% Other regions 45%

Mexico 19%

Indonesia Shanghai Other Asia Beijing 11% 12% 11% 6%

Source: Credit Suisse assumptions (based on FY3/16 results) Source: Credit Suisse assumptions (based on FY3/16 results)

Yakult Honsha (2267 / 2267 JP) 4 30 August 2016

Figure 9: Penetration rate for Yakult products in key markets versus targeted population (2015 population ratio) 9% 7.7% 8% 7% 6.5% 6% 5% 4.1% 4% 2.7% 3% 2.5% 2.3% 2.0% 2% 1.5% 1.1% 0.9% 1.2% 1% 0.3% 0.2% 0.5% 0%

Source: Company data, Credit Suisse Indonesia is probably the most promising market for Yakult, considering (1) its door-to- door delivery model (using “Yakult Ladies”) accounts for around half of total sales and sales trends remain firm (impervious to consumer sentiment or weather factors), (2) a bolstered production structure following the startup of Plant 2 in 2014, and (3) a strong OTC sales capability stemming from successful employee training. The company, which has no effective rivals in the market, is highly likely to maintain double-digit volume growth in Indonesia in the near term, as long as there is no significant macroeconomic deterioration. As of end-2015, average daily sales volume in Indonesia was 4.34mn bottles, a penetration rate of 2.7% measured against target population. Yakult has set itself a long- term target of 8mn bottles per day and a penetration rate of 5%. Of the 42 urban markets in Indonesia where Yakult’s products are sold, the company has achieved a penetration rate of over 5% in 14 of these markets (as of October 2015) with Jakarta at the top. There are still regions in Indonesia not covered by Yakult. The only action it needs to take going forward is to steadily expand its sales area in line with its local slogan of equating perseverance with strength. We forecast Indonesia to outstrip China in terms of sales volume and emerge as the largest overseas market for Yakult in 2018.

Figure 10: Trends in daily sales volume and the number of Yakult Ladies in Indonesia (mn units/day) (ppl) 7 7,000 Average daily sales volume 6 6,000 Number of Yakult Lady (RHS) 5 5,000 4 4,000 3 3,000 2 2,000 1 1,000 0 0 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16E 17E 18E

Source: Company data, Credit Suisse assumptions and estimates

Yakult Honsha (2267 / 2267 JP) 5 30 August 2016

China, however, poses issues. After its full-fledged entry into the market around 2005, Yakult registered double-digit growth in sales volume for a while, but growth slowed to the high single-digits for the first time in 2015. We forecast an annual volume growth rate of 8% over the next three years and believe Yakult is unlikely to return to a period of double- digit growth. The five main reasons for our slightly pessimistic outlook compared with guidance are: (1) difficulty in bolstering Yakult’s door-to-door delivery model due to Chinese regulations and wage inflation, (2) stiffer competition in retail store sales (with many comparable products hitting store shelves), (3) expectations for stepped up expansion into the hinterland, as penetration rates are already high in Shanghai and Guangzhou, but for strong momentum to offset slower growth in coastal cities appearing unlikely in the near term, (4) a sustained shift to e-commerce in the food category weighing down offline growth (Yakult is considering entry into e-commerce), and (5) risk of stiffer competition with other health-oriented products amid an overall rise in health awareness. For reference, the combined sales and OP of China Mengniu Dairy (2319 HK), Bright Dairy & Food (600597 CH), and Inner Mongolia Yili Industrial Group (600887 CH) are projected to grow 7.4% and 11.5%, respectively, over the next three years (median Bloomberg estimates). Also, OPM is expected to rise from 6.5% in 2015 to 7.3% in 2018. Taking this into account, we think it may be difficult for Yakult to sustain double-digit topline growth. However, the above may not serve as valid reference for earnings, as that probably hinges on competitive conditions in the future.

Figure 11: Average daily sales volume and ratio of door-to-door delivery in China (mn units/day) (%) Average daily sales volume 7 18% % of door-to-door delivery (RHS) 6 16% 14% 5 12% 4 10% 3 8% 6% 2 4% 1 2% 0 0% 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16E 17E 18E

Source: Company data, Credit Suisse assumptions and estimates

Figure 12: OPM trends at major Chinese dairy product Figure 13: Sales and OP growth rates at major Chinese companies dairy product companies (bn CNY) (%) (%) (%) Sales YoY growth rate 12 EBIT EBIT margin (RHS) 8% 45 70 EBIT YoY growth rate (RHS) 60 10 6% 40 35 50 8 4% 40 30 6 2% 30 25 4 0% 20 20 10 2 -2% 15 0 0 -4% 10 -10 -2 -6% 5 -20 0 -30 -4 -8% 04 05 06 07 08 09 10 11 12 13 14 15 16E 17E 18E 03 04 05 06 07 08 09 10 11 12 13 14 15 16E 17E 18E

Note 1: Combined sales and OP of the three leading Chinese milk Note 1: Combined sales and OP of the three leading Chinese milk beverage makers beverage makers Note 2: Median Bloomberg estimates Note 2: Median Bloomberg estimates Source: Credit Suisse Source: Credit Suisse

Yakult Honsha (2267 / 2267 JP) 6 30 August 2016

Earnings forecasts

Figure 14: Earnings forecast summary Sales Operating profit Recurring profit Net profit EPS ¥mn YoY (%) ¥mn YoY (%) ¥mn YoY (%) ¥mn YoY (%) ¥ YoY (%) Consolidated 16/3 Actual 390,412 6.1 40,057 14.8 50,629 11.0 28,843 15.1 174.5 15.2 17/3 CS E 377,000 -3.4 34,500 -13.9 43,900 -13.3 25,400 -11.9 153.7 -11.9 CoE 389,000 -0.4 36,500 -8.9 46,000 -9.1 28,000 -2.9 169.4 -2.9 IBES E 380,573 -2.5 36,286 -9.4 45,559 -10.0 27,204 -5.7 163.8 -6.1 18/3 CS E 381,000 1.1 35,000 1.4 44,500 1.4 25,700 1.2 155.5 1.2 IBES E 388,747 2.1 39,819 9.7 49,133 7.8 29,624 8.9 178.4 8.9 19/3 CS E 390,000 2.4 37,000 5.7 46,700 4.9 27,200 5.8 164.6 5.8 IBES E 399,505 2.8 42,718 7.3 52,233 6.3 31,782 7.3 191.5 7.4 Source: Company data, I/B/E/S, Credit Suisse estimates We forecast FY3/17 OP of ¥34.5bn (−14% YoY) to fall short of guidance. We forecast 3% YoY growth in domestic beverages due to (1) a boost from price revisions (price of Yakult 400 raised in May), (2) sales growth driven by stepped up marketing outlay for existing products, and (3) weather factors. We also forecast 31% YoY growth in OP due in part to a rebound in one-off cost increases a year earlier. In the overseas beverage business, we anticipate strong growth in sales volume centered on Asia, but look for a double-digit profit decline due a stronger yen. We forecast a 44% YoY profit decline at the pharmaceutical business. The drop is mainly attributable to our outlook for a 25% sales drop for Yakult’s mainstay anticancer agent “Elplat” driven by the impact of drug price revisions (we anticipate a 16% price cut) and volume decline due to generic alternatives (9% decline). Yakult is working to widen the application of Elplat to pancreatic and gastric cancer treatment, but ongoing competition with generics in Elplat’s main application (colorectal cancer) signals a sustained downtrend in Elplat sales in the medium term. Yakult, which has a diverse generics portfolio, has initiated moves to counter the Elplat sales decline by ramping up sales of generic drugs. We expect this to stem the sales downtrend at the pharmaceutical business in FY3/18 and subsequent years. However, we note that sales decline for the lucrative Elplat is likely to make this task a lot harder.

Figure 15: OP and OPM Figure 16: ROE, ROIC and OPM (JPY b) (%) Operating profits OP margin (RHS) (%) ROE (%) 45 12 10 ROIC (rhs) 12 40 OPM (rhs) 10 10 35 8 30 8 8 25 6 6 20 6 15 4 4 4 10 2 5 2 2 0 0

0 0

FY3/3

FY3/11 FY3/12 FY3/02 FY3/04 FY3/05 FY3/06 FY3/07 FY3/08 FY3/09 FY3/10 FY3/13 FY3/14 FY3/15 FY3/16

FY3/3

FY3/17E FY3/18E FY3/19E

FY3/10 FY3/04 FY3/05 FY3/06 FY3/07 FY3/08 FY3/09 FY3/11 FY3/12 FY3/13 FY3/14 FY3/15 FY3/16

FY3/02

FY3/18E FY3/19E FY3/17E Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

Yakult Honsha (2267 / 2267 JP) 7 30 August 2016

Figure 17: Sales and OP forecasts by segment (¥mn) FY3/10 FY3/11 FY3/12 FY3/13 FY3/14 FY3/15 FY3/16 FY3/17E FY3/18E FY3/19E Sales by segment (JPYm) Japan (Bev) 180,469 189,778 188,040 191,849 200,471 197,250 198,959 204,900 206,000 206,700 Americas (Bev) 34,595 37,585 39,039 38,822 49,247 54,643 52,736 43,600 43,100 43,700 Asia/Oceania (Bev) 22,475 25,477 31,953 41,250 60,986 79,176 97,121 90,300 94,100 102,200 Europe (Bev) 9,671 8,608 8,002 7,472 8,632 8,891 8,621 7,700 7,200 7,200 Pharmaceuticals 35,079 38,878 39,373 37,072 35,324 32,560 34,813 30,000 30,300 30,700 Others 14,246 17,197 18,581 17,436 18,042 17,789 20,315 20,000 20,000 20,000 Eliminations -5,857 -11,579 -12,437 -14,711 -22,380 -22,332 -22,156 -19,500 -19,700 -20,500 Total 290,678 305,944 312,552 319,193 350,322 367,980 390,412 377,000 381,000 390,000 OP (JPYm) Japan (Bev) 8,581 11,009 9,863 9,547 9,783 11,622 9,534 12,500 12,500 13,000 Americas (Bev) 7,662 8,298 8,797 8,667 11,454 12,798 12,778 11,300 11,200 11,400 Asia/Oceania (Bev) 4,284 4,101 5,526 9,595 16,753 20,396 26,980 23,000 24,000 26,100 Europe (Bev) 584 570 150 281 -336 -182 618 0 0 0 Pharmaceuticals 10,625 10,243 10,145 8,982 8,550 5,842 5,361 3,000 2,900 2,700 Others 3 -668 627 706 1,326 669 1,406 500 500 500 Eliminations -12,749 -13,154 -14,293 -14,712 -15,504 -16,249 -16,623 -15,800 -16,100 -16,700 Total 18,990 20,401 20,817 23,068 32,026 34,898 40,057 34,500 35,000 37,000 Sales y-y (%) Japan (Bev) 7.0% 5.2% -0.9% 2.0% 4.5% -1.6% 0.9% 3.0% 0.5% 0.3% Americas (Bev) -18.4% 8.6% 3.9% -0.6% 26.9% 11.0% -3.5% -17.3% -1.1% 1.4% Asia/Oceania (Bev) 11.1% 13.4% 25.4% 29.1% 47.8% 29.8% 22.7% -7.0% 4.2% 8.6% Europe (Bev) -25.2% -11.0% -7.0% -6.6% 15.5% 3.0% -3.0% -10.7% -6.5% 0.0% Pharmaceuticals -0.4% 10.8% 1.3% -5.8% -4.7% -7.8% 6.9% -13.8% 1.0% 1.3% Total -1.0% 5.3% 2.2% 2.1% 9.8% 5.0% 6.1% -3.4% 1.1% 2.4% OP y-y (%) Japan (Bev) 110.5% 28.3% -10.4% -3.2% 2.5% 18.8% -18.0% 31.1% 0.0% 4.0% Americas (Bev) -28.6% 8.3% 6.0% -1.5% 32.2% 11.7% -0.2% -11.6% -0.9% 1.8% Asia/Oceania (Bev) 71.1% -4.3% 34.7% 73.6% 74.6% 21.7% 32.3% -14.8% 4.3% 8.7% Europe (Bev) -422.7% -2.4% -73.7% 87.3% -219.6% -45.8% -439.6% - - - Pharmaceuticals -12.3% -3.6% -1.0% -11.5% -4.8% -31.7% -8.2% -44.0% -3.3% -6.9% Total 13.4% 7.4% 2.0% 10.8% 38.8% 9.0% 14.8% -13.9% 1.4% 5.7% OPM (%) Japan (Bev) 4.8% 5.8% 5.2% 5.0% 4.9% 5.9% 4.8% 6.1% 6.1% 6.3% Americas (Bev) 22.1% 22.1% 22.5% 22.3% 23.3% 23.4% 24.2% 25.9% 26.0% 26.1% Asia/Oceania (Bev) 19.1% 16.1% 17.3% 23.3% 27.5% 25.8% 27.8% 25.5% 25.5% 25.5% Europe (Bev) 6.0% 6.6% 1.9% 3.8% -3.9% -2.0% 7.2% 0.0% 0.0% 0.0% Pharmaceuticals 30.3% 26.3% 25.8% 24.2% 24.2% 17.9% 15.4% 10.0% 9.6% 8.8% Total 6.5% 6.7% 6.7% 7.2% 9.1% 9.5% 10.3% 9.2% 9.2% 9.5% Sales breakdown (%) Japan (Bev) 60.9% 59.8% 57.9% 57.5% 53.8% 50.5% 48.2% 51.7% 51.4% 50.4% Americas (Bev) 11.7% 11.8% 12.0% 11.6% 13.2% 14.0% 12.8% 11.0% 10.8% 10.6% Asia/Oceania (Bev) 7.6% 8.0% 9.8% 12.4% 16.4% 20.3% 23.5% 22.8% 23.5% 24.9% Europe (Bev) 3.3% 2.7% 2.5% 2.2% 2.3% 2.3% 2.1% 1.9% 1.8% 1.8% Pharmaceuticals 11.8% 12.2% 12.1% 11.1% 9.5% 8.3% 8.4% 7.6% 7.6% 7.5% Others 4.8% 5.4% 5.7% 5.2% 4.8% 4.6% 4.9% 5.0% 5.0% 4.9% OP breakdown (%) Japan (Bev) 27.0% 32.8% 28.1% 25.3% 20.6% 22.7% 16.8% 24.9% 24.5% 24.2% Americas (Bev) 24.1% 24.7% 25.1% 22.9% 24.1% 25.0% 22.5% 22.5% 21.9% 21.2% Asia/Oceania (Bev) 13.5% 12.2% 15.7% 25.4% 35.2% 39.9% 47.6% 45.7% 47.0% 48.6% Europe (Bev) 1.8% 1.7% 0.4% 0.7% -0.7% -0.4% 1.1% 0.0% 0.0% 0.0% Pharmaceuticals 33.5% 30.5% 28.9% 23.8% 18.0% 11.4% 9.5% 6.0% 5.7% 5.0% Others 0.0% -2.0% 1.8% 1.9% 2.8% 1.3% 2.5% 1.0% 1.0% 0.9% Source: Company data, Credit Suisse estimates

Yakult Honsha (2267 / 2267 JP) 8 30 August 2016

Figure 18: Consolidated balance sheet and change in net assets (¥mn) FY3/10 FY3/11 FY3/12 FY3/13 FY3/14 FY3/15 FY3/16 FY3/17E FY3/18E FY3/19E (Assets) Cash,cash equivalents & securities 85,903 88,837 79,119 90,576 110,081 120,349 121,846 117,705 121,211 122,644 Account receivable 49,280 49,073 52,531 53,169 57,002 55,853 56,285 54,143 55,800 56,270 Inventories 31,102 27,739 31,203 27,434 29,383 31,630 28,055 28,817 28,738 29,457 Other 16,046 17,634 15,042 14,277 15,137 18,380 15,645 15,645 15,645 15,645 Allowance for doubtful accounts -615 -453 -301 -323 -327 -254 -204 -204 -204 -204 Total current assets 181,716 182,830 177,594 185,133 211,276 225,959 221,629 216,106 221,190 223,813 Tangible fixed assets 130,391 133,717 136,962 150,612 184,207 205,595 201,798 203,798 204,798 205,798 Depreciable PP&E 91,894 90,168 88,647 100,510 122,713 154,693 160,032 - - - Land 33,929 34,629 34,002 38,148 37,832 37,670 37,233 - - - Construction in progress 4,568 8,920 14,313 11,954 23,662 13,232 4,533 - - - Intangible fixed assets 4,941 5,911 5,903 6,302 6,089 6,482 5,381 5,381 5,381 5,381 Investments & other assets 72,841 70,369 76,753 96,127 117,997 141,307 148,724 148,724 148,724 148,724 Investment securities 60,739 57,288 65,279 87,512 108,704 131,558 139,992 139,992 139,992 139,992 Other 12,102 13,081 11,474 8,615 9,293 9,749 8,732 8,732 8,732 8,732 Total fixed assets 208,175 209,998 219,619 253,042 308,294 353,384 355,904 357,903 358,903 359,903 Total assets 389,891 392,828 397,213 438,175 519,570 579,344 577,534 574,009 580,093 583,716 (Liabilities) Account payable 21,452 22,167 24,638 24,371 24,991 23,718 24,652 23,354 24,258 24,368 Short-term debt 9,962 7,653 8,629 59,441 35,961 44,856 46,645 23,532 15,190 6,322 Other 31,499 33,355 38,714 37,406 47,970 47,147 40,316 40,316 40,316 40,316 Total current liabilities 62,913 63,175 71,981 121,218 108,922 115,721 111,613 87,202 79,763 71,007 Long-term debt 51,916 49,946 47,796 6,173 74,278 74,834 69,757 66,269 55,003 41,253 Other 26,139 28,735 25,193 23,685 28,337 26,576 30,699 29,164 27,706 26,321 Total fixed liabilities 78,055 78,681 72,989 29,858 102,615 101,410 100,456 95,433 82,709 67,573 Total liabilities 140,969 141,856 144,970 151,077 211,537 217,131 212,069 182,635 162,473 138,580 (Net assets) Capital stock 31,117 31,117 31,117 31,117 31,117 31,117 31,117 31,117 31,117 31,117 Capital surplus 41,229 41,192 41,290 41,507 41,584 41,536 41,534 41,534 41,534 41,534 Retained earnings 187,991 200,996 210,536 223,040 241,617 268,076 290,723 310,835 331,081 352,497 Treasury stock -8,431 -9,050 -8,697 -7,658 -40,549 -40,731 -41,213 -41,213 -41,213 -41,213 Total shareholders' equity 251,907 264,256 274,247 288,006 273,769 299,999 322,162 342,273 362,519 383,935 Valuation and translation adjustments -28,040 -38,369 -45,621 -26,163 1,060 25,014 9,634 9,634 9,634 9,634 Total equity capital 223,867 225,886 228,626 261,843 274,830 325,013 331,796 351,907 372,153 393,569 Minority interests 25,055 25,085 23,616 25,255 33,203 37,199 33,667 39,467 45,467 51,567 Total net assets 248,922 250,971 252,242 287,098 308,033 362,212 365,464 391,374 417,620 445,136 Total liabilities & net assets 389,891 392,828 397,213 438,175 519,570 579,344 577,534 574,009 580,093 583,716

FY3/10 FY3/11 FY3/12 FY3/13 FY3/14 FY3/15 FY3/16 FY3/17E FY3/18E FY3/19E (Changes in net assets) Beginning balance 226,965 248,922 250,971 252,242 287,098 308,033 362,212 365,464 391,374 417,620 Capital stock 0 0 0 0 0 0 0 0 0 0 Capital surplus 94 -37 98 217 77 -48 -2 0 0 0 Net profits 13,248 13,168 13,291 16,379 22,543 25,056 28,843 25,400 25,700 27,200 Dividends from surplus -4,754 -4,026 -6,501 -8,102 -6,029 -6,284 -8,710 -5,288 -5,454 -5,784 Treasury stock 522 -619 353 1,039 -32,891 -182 -482 0 0 0 Valuation and translation adjustments 7,826 -10,329 -7,252 19,458 27,223 23,954 -15,380 0 0 0 Minority interests 3,738 30 -1,469 1,639 7,948 3,996 -3,532 5,800 6,000 6,100 Other 1,283 3,862 2,751 4,226 2,064 7,687 2,515 -2 0 0 Final balance 248,922 250,971 252,242 287,098 308,033 362,212 365,464 391,374 417,620 445,136 Source: Company data, Credit Suisse estimates

Yakult Honsha (2267 / 2267 JP) 9 30 August 2016

Figure 19: Consolidated profit and loss and cash flow statements (¥mn) FY3/10 FY3/11 FY3/12 FY3/13 FY3/14 FY3/15 FY3/16 FY3/17E FY3/18E FY3/19E Sales revenue 290,678 305,944 312,552 319,193 350,322 367,980 390,412 377,000 381,000 390,000 COGS 133,103 138,404 142,521 147,545 156,332 164,990 171,611 167,800 168,800 172,400 Gross profit 157,575 167,540 170,031 171,648 193,990 202,990 218,801 209,200 212,200 217,600 SG&A 138,585 147,139 149,214 148,580 161,964 168,092 178,744 174,700 177,200 180,600 OP 18,990 20,401 20,817 23,068 32,026 34,898 40,057 34,500 35,000 37,000 Interest income and dividend 2,357 2,552 3,091 3,106 3,444 4,003 4,442 4,000 4,000 4,000 Interest expense 807 811 695 720 756 808 914 1,000 1,000 1,000 Equity in net income of affiliates 2,275 2,130 2,529 2,129 2,839 3,305 3,314 3,400 3,500 3,700 Other 1,909 1,516 2,242 1,841 1,982 4,209 3,730 3,000 3,000 3,000 RP 24,724 25,788 27,984 29,424 39,535 45,608 50,629 43,900 44,500 46,700 Extraordinary gains 606 503 2,348 1,420 1,346 600 509 500 500 500 Etrtraordinary losses 3,712 4,888 4,384 2,907 1,424 1,091 1,397 1,000 1,000 1,000 Pretax profit 21,619 21,402 25,948 27,937 39,458 45,117 49,741 43,400 44,000 46,200 Income taxes 5,686 5,267 8,568 8,508 12,387 14,591 15,095 12,200 12,300 12,900 Minority interests 2,684 2,966 4,087 3,048 4,526 5,470 5,803 5,800 6,000 6,100 NP 13,248 13,168 13,291 16,379 22,543 25,056 28,843 25,400 25,700 27,200 Tax rate 26.3% 24.6% 33.0% 30.5% 31.4% 32.3% 30.3% 28.1% 28.0% 27.9% Depreciation expense 18,912 19,628 18,337 19,434 20,077 22,793 24,364 24,000 24,000 24,000 Capital expenditure 19,979 23,969 25,007 33,587 50,163 40,370 27,402 26,000 25,000 25,000 R&D expense 9,621 11,480 12,414 10,760 11,165 12,134 12,677 12,000 12,000 12,000 To sales ratio (%) CGS 45.8 45.2 45.6 46.2 44.6 44.8 44.0 44.5 44.3 44.2 Gross profit 54.2 54.8 54.4 53.8 55.4 55.2 56.0 55.5 55.7 55.8 OP 6.5 6.7 6.7 7.2 9.1 9.5 10.3 9.2 9.2 9.5 RP 8.5 8.4 9.0 9.2 11.3 12.4 13.0 11.6 11.7 12.0 Pretax profit 7.4 7.0 8.3 8.8 11.3 12.3 12.7 11.5 11.5 11.8 NP 4.6 4.3 4.3 5.1 6.4 6.8 7.4 6.7 6.7 7.0 YoY (%) Sales revenue -1.0 5.3 2.2 2.1 9.8 5.0 6.1 -3.4 1.1 2.4 Gross profit 1.8 6.3 1.5 1.0 13.0 4.6 7.8 -4.4 1.4 2.5 OP 13.4 7.4 2.0 10.8 38.8 9.0 14.8 -13.9 1.4 5.7 RP -2.5 4.3 8.5 5.1 34.4 15.4 11.0 -13.3 1.4 4.9 Pretax profit 64.5 -1.0 21.2 7.7 41.2 14.3 10.2 -12.7 1.4 5.0 NP 17.0 -0.6 0.9 23.2 37.6 11.1 15.1 -11.9 1.2 5.8 FY3/10 FY3/11 FY3/12 FY3/13 FY3/14 FY3/15 FY3/16 FY3/17E FY3/18E FY3/19E (Operating activities) NP 13,248 13,168 13,291 16,379 22,543 25,056 28,843 25,400 25,700 27,200 Depreciation(+) 18,912 19,628 18,337 19,434 20,077 22,793 24,364 24,000 24,000 24,000 Account receivable(-) -690 207 -3,458 -638 -3,833 1,149 -432 2,142 -1,657 -470 Inventories(-) 111 3,363 -3,464 3,769 -1,949 -2,247 3,575 -762 79 -720 Account payable(+) -1,393 715 2,471 -267 620 -1,273 934 -1,298 904 111 Equity in earnings of affiliates(-) -2,275 -2,130 -2,529 -2,129 -2,839 -3,305 -3,314 -3,400 -3,500 -3,700 Minority interests(+) 2,684 2,966 4,087 3,048 4,526 5,470 5,803 5,800 6,000 6,100 Other 8,938 3,070 4,709 3,291 9,434 7,764 2,376 0 0 0 Operating cashflow 39,535 40,987 33,444 42,887 48,579 55,407 62,149 51,882 51,526 52,521 (Investing activities) Capital expenditures(-) -15,275 -32,328 -19,187 -21,078 -21,068 -44,181 -20,567 -26,000 -25,000 -25,000 Other -4,695 10,703 -9,108 -22,472 -28,877 -5,885 -16,871 0 0 0 Investing cashflow -19,970 -21,625 -28,295 -43,550 -49,945 -50,066 -37,438 -26,000 -25,000 -25,000 (Financing activities) Debt (+) 5,083 -4,279 -1,174 9,189 44,625 9,451 -3,288 -26,601 -19,608 -22,618 Dividends (-) -4,754 -4,026 -6,501 -8,102 -6,029 -6,284 -8,710 -5,288 -5,454 -5,784 Other -3,072 -4,108 -1,606 -703 -35,091 -4,801 -3,026 0 0 0 Financing cashflow -2,743 -12,413 -9,281 384 3,505 -1,634 -15,024 -31,889 -25,062 -28,402 (Cash & cash equivalents) Increases 16,822 6,949 -4,132 -279 2,139 3,707 9,687 -6,007 1,464 -881 Beginning balance 66,352 85,903 88,837 79,119 90,576 110,081 120,349 121,846 117,705 121,211 Final balance 83,174 92,852 84,705 78,840 92,715 113,788 130,036 115,839 119,169 120,330 Adjustments 2,729 -4,015 -5,586 11,736 17,366 6,561 -8,190 1,866 2,042 2,315 Source: Company data, Credit Suisse estimates

Yakult Honsha (2267 / 2267 JP) 10 30 August 2016

Figure 20: Financial indicators FY3/10 FY3/11 FY3/12 FY3/13 FY3/14 FY3/15 FY3/16 FY3/17E FY3/18E FY3/19E (Safety) Current ratio (%) 288.8 289.4 246.7 152.7 194.0 195.3 198.6 247.8 277.3 315.2 Quick ratio (%) 214.9 218.3 182.9 118.6 153.4 152.3 159.6 197.1 221.9 252.0 Adjusted quick ratio (%) 862.3 1,160.8 916.9 152.4 306.1 268.3 261.2 500.2 798.0 1,939.9 Fixed ratio (%) 93.0 93.0 96.1 96.6 112.2 108.7 107.3 101.7 96.4 91.4 Interest-bearing debt (¥mn) 61,878 57,599 56,425 65,614 110,239 119,690 116,402 89,801 70,193 47,575 Average debt interest rate (%) 1.4 1.4 1.2 1.2 0.9 0.7 0.8 1.0 1.3 1.7 Dependence on debt (%) 15.9 14.7 14.2 15.0 21.2 20.7 20.2 15.6 12.1 8.2 Net debt (¥mn) -24,025 -31,238 -22,694 -24,962 158 -659 -5,444 -27,904 -51,018 -75,070 Equity capital ratio (%) 57.4 57.5 57.6 59.8 52.9 56.1 57.5 61.3 64.2 67.4 D/E ratio (%) 27.6 25.5 24.7 25.1 40.1 36.8 35.1 25.5 18.9 12.1 Long-term debt ratio (%) 83.9 86.7 84.7 9.4 67.4 62.5 59.9 73.8 78.4 86.7 Working capital (¥mn) 118,803 119,655 105,613 63,915 102,354 110,238 110,016 128,904 141,426 152,806 Net interest expense (¥mn) 1,550 1,741 2,396 2,386 2,688 3,195 3,528 3,000 3,000 3,000 Cash plus marketable securities (¥mn) 85,903 88,837 79,119 90,576 110,081 120,349 121,846 117,705 121,211 122,644 Interest coverage ratio (x) 26.45 28.30 34.40 36.35 46.92 48.14 48.69 38.50 39.00 41.00 Financial leverage (x) 1.74 1.74 1.74 1.67 1.89 1.78 1.74 1.63 1.56 1.48 A/R to A/P ratio (%) 229.7 221.4 213.2 218.2 228.1 235.5 228.3 231.8 230.0 230.9 Dividend on equity (%) 2.2 1.8 2.9 3.3 2.2 2.1 2.7 1.5 1.5 1.5 (Profitability) ROE (%) 6.2 5.9 5.8 6.7 8.4 8.4 8.8 7.4 7.1 7.1 ROA (%) 5.1 5.2 5.3 5.5 6.7 6.4 6.9 6.0 6.1 6.4 Inventory turnover ratio (x) 9.3 10.4 10.6 10.9 12.3 12.1 13.1 13.3 13.2 13.4 A/R turnover ratio (x) 5.9 6.2 6.2 6.0 6.4 6.5 7.0 6.8 6.9 7.0 A/P turnover ratio (x) 13.1 14.0 13.4 13.0 14.2 15.1 16.1 15.7 16.0 16.0 Inventory turnover ratio (x) 2.2 2.3 2.3 2.2 2.1 1.9 1.9 1.9 1.9 1.9 Inventory turnover days (days) 39.1 35.1 34.4 33.5 29.6 30.3 27.9 27.5 27.6 27.2 A/R turnover days (days) 61.4 58.7 59.3 60.4 57.4 56.0 52.4 53.5 52.7 52.4 A/P turnover days (days) 27.8 26.0 27.3 28.0 25.7 24.2 22.6 23.2 22.8 22.8 Sales per employee (¥mn) 17.0 17.6 17.2 16.8 17.5 17.3 17.3 16.3 16.4 16.8 OP per employee (¥mn) 1.1 1.2 1.1 1.2 1.6 1.6 1.8 1.5 1.5 1.6 (Per share data) EPS (¥) 77.1 76.6 77.3 95.0 134.4 151.6 174.5 153.7 155.5 164.6 BPS (¥) 1,300 1,313 1,329 1,518 1,662 1,966 2,008 2,129 2,252 2,382 Sales per share (¥) 1,692 1,779 1,818 1,852 2,089 2,226 2,363 2,281 2,305 2,360 Operating cashflow per share (¥) 230.1 238.3 194.6 248.8 289.7 335.2 376.1 313.9 311.8 317.8 DPS (¥) 20.0 22.0 22.0 23.0 24.0 25.0 50.0 32.0 33.0 35.0 Dividend ratio (%) 25.9 28.7 28.5 24.2 17.9 16.5 28.6 20.8 21.2 21.3 (Growth) EPS growth (%) 17.3 -0.7 1.0 22.9 41.5 12.8 15.2 -11.9 1.2 5.8 BPS growth (%) 8.7 1.0 1.2 14.2 9.5 18.3 2.1 6.1 5.8 5.8 Total assets growth (%) 7.7 0.8 1.1 10.3 18.6 11.5 -0.3 -0.6 1.1 0.6 Sustainable growth rate (%) 4.6 4.2 4.2 5.1 6.9 7.0 6.3 5.9 5.6 5.6 (Investment profitability) Capital invested (¥ mn) 301,922 304,567 301,615 291,701 377,445 426,423 432,252 447,340 454,862 461,142 NOPAT (¥ mn) 17,079 18,129 17,139 18,804 25,280 28,696 32,807 29,403 29,899 31,498 ROIC (%) 5.7 6.0 5.7 6.4 6.7 6.7 7.6 6.6 6.6 6.8 WACC (%) 3.7 3.8 3.8 3.8 3.3 3.3 3.4 3.6 3.9 4.1 EVA (¥ mn) 5,775 6,536 5,624 7,837 12,706 14,600 18,124 13,081 12,382 12,732 EVA spread (%) 1.9 2.1 1.9 2.7 3.4 3.4 4.2 2.9 2.7 2.8 (Cashflow) EBITDA (¥mn) 37,902 40,029 39,154 42,502 52,103 58,591 65,321 59,400 59,900 61,900 EBITDA margin (%) 13.0 13.1 12.5 13.3 14.9 15.9 16.7 15.8 15.7 15.9 FCF (¥mn) 19,565 19,362 5,149 -663 -1,366 5,341 24,711 25,882 26,526 27,521 Operating C/F to Investment C/F rate (%) 198.0 189.5 118.2 98.5 97.3 110.7 166.0 199.5 206.1 210.1 (Other) Employees numbers 16,876 17,859 18,563 19,435 20,492 22,036 23,192 23,192 23,192 23,192 Consolidated subsidiaries numbers 68 81 79 79 78 74 74 74 74 74 Equity method affiliates numbers 4 4 4 4 4 4 4 4 4 4 Average shares outstanding (mn) 171.8 172.0 171.9 172.4 167.7 165.3 165.3 165.3 165.3 165.3 End-of-period shares outstanding (mn) 172.2 172.0 172.1 172.5 165.3 165.3 165.3 165.3 165.3 165.3 Source: Company data, Credit Suisse estimates

Yakult Honsha (2267 / 2267 JP) 11 30 August 2016

Companies Mentioned (Price as of 29-Aug-2016) Bright Dairy & Food Co., Ltd (600597.SS, Rmb14.27) China Mengniu Dairy (2319.HK, HK$14.98) Inner Mongolia Yili Industrial Group (600887.SS, Rmb16.83) Yakult Honsha (2267.T, ¥4,740, UNDERPERFORM, TP ¥4,200)

Disclosure Appendix

Important Global Disclosures I, Masashi Mori, certify that (1) the views expressed in this report accurately reflect my personal views about all of the subject companies and securities and (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.

3-Year Price and Rating History for Yakult Honsha (2267.T)

2267.T Closing Price Target Price Date (¥) (¥) Rating 25-Sep-13 4,870 5,000 N 18-Apr-14 5,250 NR * Asterisk signifies initiation or assumption of coverage.

NEUTRAL N O T RAT ED

The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities As of December 10, 2012 Analysts’ stock rating are defined as follows: Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark* over the next 12 months. Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months. Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months. *Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin Ame rican and non-Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiveness of a stock’s total return potential within an analyst’s coverage universe. For Australian and New Zealand stocks, the expected total return (ETR) calculation includes 12-month rolling dividend yield. An Outperform rating is assigned where an ETR is greater than or equal to 7.5%; Underperform where an ETR less than or equal to 5%. A Neutral may be assigned where the ETR is between -5% and 15%. The overlapping rating range allows analysts to assign a rating that puts ETR in the context of associated risks. Prior to 18 May 2015, ETR ranges for Outperform and Underperform ratings did not overlap with Neutral thresholds between 15% and 7.5%, which was in operation from 7 July 2011. Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances. Not Rated : Credit Suisse Equity Research does not have an investment rating or view on the stock or any other securities related to the company at this time. Not Covered (NC) : Credit Suisse Equity Research does not provide ongoing coverage of the company or offer an investment rating or investment view on the equity security of the company or related products.

Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward.

Analysts’ sector weightings are distinct from analysts’ stock ratings and are based on the analyst’s expectations for the fundamentals and/or valuation of the sector* relative to the group’s historic fundamentals and/or valuation:

Yakult Honsha (2267 / 2267 JP) 12 30 August 2016

Overweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is favorable over the next 12 months. Market Weight : The analyst’s expectation for the sector’s fundamentals and/or valuation is neutral over the next 12 months. Underweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is cautious over the next 12 months. *An analyst’s coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cover multiple sectors.

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Global Ratings Distribution Rating Versus universe (%) Of which banking clients (%) Outperform/Buy* 54% (50% banking clients) Neutral/Hold* 30% (23% banking clients) Underperform/Sell* 16% (44% banking clients) Restricted 0% *For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, and Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdings, and other individual factors.

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Target Price and Rating Valuation Methodology and Risks: (12 months) for Yakult Honsha (2267.T)

Method: We derive our ¥4,200 target price for Yakult Honsha by applying a P/E of roughly 28x to our FY3/17 EPS estimate. For now we see little sign of the previous share price premium being restored, in view of lackluster growth at the overseas beverages business, and the outlook for more tough times at the pharmaceutical business. Our fair-value P/E is one standard-deviation below Yakult Honsha's average for the past ten years, and close to the Japan food sector average. We base our UNDERPERFORM rating on our expectations for total returns and comparisons with our coverage universe over the next 12 months.

Risk: Upside risks to our ¥4,200 target price and our UNDERPERFORM rating for Yakult Honsha include: (1) renewed growth in the China business; (2) greater-than-expected expansion in Brazil, Mexico and other Latin American markets; (3) margin improvement in Japan; (4) sharply higher sales of generics at the pharmaceutical business; and (5) further softening in input costs.

Please refer to the firm's disclosure website at https://rave.credit-suisse.com/disclosures for the definitions of abbreviations typically used in the target price method and risk sections.

See the Companies Mentioned section for full company names

For a history of recommendations for the subject company(ies) featured in this report, disseminated within the past 12 months, please refer to https://rave.credit-suisse.com/disclosures/view/report?i=245252&v=3n5xfxlbfku7c0tn23skivs88 . Important Regional Disclosures Singapore recipients should contact Credit Suisse AG, Singapore Branch for any matters arising from this research report. The analyst(s) involved in the preparation of this report may participate in events hosted by the subject company, including site visits. Credit Suisse does not accept or permit analysts to accept payment or reimbursement for travel expenses associated with these events. Restrictions on certain Canadian securities are indicated by the following abbreviations: NVS--Non-Voting shares; RVS--Restricted Voting Shares; SVS--Subordinate Voting Shares. Individuals receiving this report from a Canadian investment dealer that is not affiliated with Credit Suisse should be advised that this report may not contain regulatory disclosures the non-affiliated Canadian investment dealer would be required to make if this were its own report. For Credit Suisse Securities (Canada), Inc.'s policies and procedures regarding the dissemination of equity research, please visit https://www.credit- suisse.com/sites/disclaimers-ib/en/canada-research-policy.html. Principal is not guaranteed in the case of equities because equity prices are variable. Commission is the commission rate or the amount agreed with a customer when setting up an account or at any time after that.

Yakult Honsha (2267 / 2267 JP) 13 30 August 2016

This research report is authored by: Credit Suisse Securities (Japan) Limited ...... Masashi Mori To the extent this is a report authored in whole or in part by a non-U.S. analyst and is made available in the U.S., the following are important disclosures regarding any non-U.S. analyst contributors: The non-U.S. research analysts listed below (if any) are not registered/qualified as research analysts with FINRA. The non-U.S. research analysts listed below may not be associated persons of CSSU and therefore may not be subject to the NASD Rule 2711 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account. Credit Suisse Securities (Japan) Limited ...... Masashi Mori

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Yakult Honsha (2267 / 2267 JP) 14 30 August 2016

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