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

Meiji Holdings (2269 / 2269 JP) Rating OUTPERFORM* Price (29 Aug 16, ¥) 9,400 INITIATION

Target price (¥) 10,500¹ Chg to TP (%) 11.7 Market cap. (¥ bn) 1,384.00 (US$ 13.52) Probiotics leader poised for stable long-term growth Enterprise value (¥ bn) 1,458.57 Number of shares (mn) 147.23 ■ Initiating coverage: We initiate coverage of Meiji Holdings with an Free float (%) 70.0 OUTPERFORM rating and a ¥10,500 target price (potential return 11.7%). 52-week price range 10,880 - 8,250 Meiji has been the main driver of growth in Japan’s probiotics market over *Stock ratings are relative to the coverage universe in each analyst's or each team's respective sector. the past several years. The company’s functional yogurt remains popular, ¹Target price is for 12 months. and the fresh and fermented dairy segment generates half of the company’s

Research Analysts profits. Greater selection and focus in the brand portfolio has boosted margins, resulting in higher profitability and capital efficiency for the Masashi Mori 81 3 4550 9695 company as a whole. [email protected] ■ Investment theme: The Japanese yogurt and chocolate markets are expanding amid increasing health consciousness. Meiji Holdings is the largest player in both categories. We expect skillful brand marketing to help Meiji achieve growth in excess of the market. The yogurt market is at risk of escalating competition, but we expect the market to continue growing steadily at around 3% due to: (1) consumer health consciousness, (2) an aging population, and (3) increasing demand for simple breakfast foods. The global yogurt market has grown at an annual rate of around 7% over the past five years. We expect Meiji’s OP to post CAGR of 11% over the next three years. ■ Valuation/risks: Our target price is derived by applying a P/E of roughly 25x to our FY3/17 EPS estimate. While we believe that earnings momentum and the upbeat market environment justify a premium to the sector, the high current valuation means such a premium is unlikely to be attached for now. We therefore use the Japanese food sector average to set our target price. Downside risks: (1) sharp slowing of growth in probiotics yogurt, (2) escalating competition in the yogurt market, and (3) lower demand in the baby formula and sports nutrition businesses.

Share price performance Financial and valuation metrics

Year 3/16A 3/17E 3/18E 3/19E Price (LHS) Rebased Rel (RHS) Sales (¥ bn) 1,223.7 1,263.0 1,283.0 1,305.0 12000 400 10000 300 Operating profit (¥ bn) 77.8 89.0 100.0 107.0 8000 200 Recurring profit (¥ bn) 81.8 92.5 103.5 110.5 6000 100 4000 0 Net income (¥ bn) 62.6 61.0 65.0 69.4 EPS (¥) 425.1 414.3 441.5 471.4 Change from previous EPS (%) n.a. IBES Consensus EPS (¥) n.a. 401.2 451.4 500.3 The price relative chart measures performance against the EPS growth (%) 102.6 -2.5 6.6 6.8 TOPIX which closed at 1313.24 on 29/08/16 P/E (x) 21.3 22.7 21.3 19.9 On 29/08/16 the spot exchange rate was ¥102.35/US$1 Dividend yield (%) 1.0 1.0 1.1 1.1 EV/EBITDA(x) 12.1 11.0 9.8 9.0 Performance over 1M 3M 12M P/B (x) 3.3 3.0 2.7 2.5 Absolute (%) -12.6 -6.1 -4.4 ROE(%) 16.1 14.1 13.5 13.0 Relative (%) -11.9 -1.3 10.8 Net debt/equity (%) 28.4 16.3 5.7 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. CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS BEYOND INFORMATION® Client-Driven Solutions, Insights, and Access

30 August 2016

Valuation and risks Share price valuation Our target price is derived by applying a P/E of roughly 25x to our FY3/17 EPS estimate. While we believe that earnings momentum and the upbeat market environment justify a premium to the sector average, the high current valuation makes this unlikely for now. We therefore use the market cap weighted average FY1E P/E (based on median values of Bloomberg consensus estimates) for the Japanese food sector average (Meiji Holdings, Ajinomoto (2802), Yakult (2267), Kikkoman (2801), Nissin Food Holdings (2897), Toyo Suisan (2876), NH Foods (2282), Yamazaki Baking (2212), Calbee (2229), Nissin Seifun (2002)) to set our target price.

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

(x) (x) 40 12 35 +2σ 34.6 +2σ 11.4 30 +1σ 27.7 10 +1σ 9.5 25 Ave. 20.8 8 20 Ave. 7.6

15 -1σ 13.9 6 -1σ 5.7 10 -2σ 7.0 4 5 -2σ 3.8

0 2 09/4 10/4 11/4 12/4 13/4 14/4 15/4 16/4 09/4 10/4 11/4 12/4 13/4 14/4 15/4 16/4 Source: Bloomberg, Credit Suisse estimates Source: Bloomberg, Credit Suisse estimates Risks Downside risks: (1) sharp slowing of growth in probiotics yogurt, (2) escalating competition in the yogurt market, and (3) lower demand in the baby formula and sports nutrition businesses. In some strong product categories, growth has been slowing recently in the wake of recent sharp growth. Products with high penetration rates are at risk of faster growth deceleration. In the stable-growth yogurt and chocolate markets, competitors are developing products and stepping up marketing, so we assume that margins are at risk of deterioration due to increased competition.

Meiji Holdings (2269 / 2269 JP) 2 30 August 2016

Company profile Probiotics firm drawing the greatest market attention Meiji Holdings was established in April 2009 as a joint holding company for Meiji Seika Kaisha, Ltd., and Meiji Dairies Corporation, Japan’s largest companies in the confectionery and dairy products fields. In April 2011, realignment of the businesses within the Meiji group created the food business (Meiji Co., Ltd.) and the pharmaceuticals business (Meiji Seika Pharma, Co., Ltd.), and this remains the structure now. The core business domains are dairy products, confectionery, nutritionals and functional foods, and pharmaceuticals. Meiji Holdings has been the undisputed driver of growth in Japan’s probiotics market over the past several years. The company’s functional yogurts have been popular for many years, so that the fermented dairy business generates half of its profits. Margins in other food businesses are increasing as well, reflecting success in focusing on sales of products with strong brands. The pharmaceuticals business currently accounts for only around 10% of company-wide profits. The basic strategy is to achieve differentiation in three key areas: anti-infective drugs, drugs for central nervous system (CNS) disorders, and generic drugs.

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

Pharmaceuticals Pharmaceuticals 11% 12% Fresh and Other Fermented 4% Dairy 35% Other Nutritionals 24% 12% Fresh and Fermented Dairy 50%

Confectionery Nutritionals 15% 6% Processed Food Confectionery 13% Processed Food 11% 7% Source: Company data (FY3/16A), Credit Suisse Source: Company data (FY3/16A), Credit Suisse Longer term strategy and shareholder returns Meiji Group 2020 Vision, the long-term business strategy, calls for OP of ¥75bn and ROE of 10% in FY3/21. However, these targets were already met in FY3/16, rendering the plan’s targets effectively meaningless. Consequently, we forego discussion of the plan’s details. We do note that the target dividend payout ratio for shareholder returns is 30%.

Figure 5: Dividend, buyback and dividend payout ratio Figure 6: Net debt, D/E ratios (JPY bn) (%) (JPY bn) Dividend (LHS) Net debt D/E ratio (RHS) (%) 250 80 16.0 Buyback (LHS) 100 90 70 14.0 Dividend payout ratio (RHS) 200 80 12.0 60 70 150 50 10.0 60 8.0 50 100 40 40 30 6.0 50 30 4.0 20 20 0 10 2.0 10 -50 0 0.0 0

Source: Company data, Credit Suisse estimates Note: Positive indicates net debt Source: Company data, Credit Suisse estimates

Meiji Holdings (2269 / 2269 JP) 3 30 August 2016

Yogurt and chocolate sales growing due to health appeal Japan’s yogurt market: 6% CAGR over the past five years One point of differentiation for Meiji’s yogurt (or fermented dairy) business is its huge library of bacterial strains. Meiji has approximately 5,621 strains of lactobacilli and bifidobacterium (combined total as of March 2016). Although quantitative comparison with competitors is not possible, we believe that Meiji has the highest number of strains in the world. Probiotics, which are used to improve the gut environment and promote general health, have a relatively short history, so there is still little compelling evidence of benefits or efficacy. Probiotics naturally have low recognition in emerging nations, and recognition in industrialized nations is not that high either, but attention is growing. Probiotics are also said to have esthetic effects in addition to health benefits, leading us to still see significant room for growth. According to a survey by Nikkan Keizai Tsushin, Japan’s yogurt market first exceeded ¥300bn in 2002, spurred by media reports on the health benefits of fermented dairy products. Growth subsequently weakened, but the yogurt market resumed growth in 2009 due to the launch of several yogurt drinks. Around 2012, Meiji’s R-1 probiotic yogurt attracted media attention, boosting the growth rate for the overall yogurt market. The market has grown at an annual rate of 6% over the past five years compared with 3% annual growth over 10 years. The yogurt market was worth just under ¥400bn in 2015.

Figure 7: Domestic yogurt market size (sales basis) Figure 8: Company shares in domestic yogurt market (sales basis) (Ybn) (%) 450 100 Others 400 90 Ohayo-milk 350 80 70 Ezaki Glico 300 60 250 Danone 50 200 Yakult 40 150 30 Megmilk 100 20 Snow Brand Morinaga 50 10 Milk 0 0 Meiji HD 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16E 17E 01 02 03 04 05 06 07 08 09 10 11 12 13 14

Source: Nikkan Keizai Tsushin, Credit Suisse estimates Source: Nikkan Keizai Tsushin, Credit Suisse The largest driver of market growth is yogurt drinks. The main products in this category are Meiji’s R-1, LG21, and PA-3 drinks; Megmilk Snow Brand’s (2270) Megumi series; and Morinaga’s (2264) lactoferrin and Aloe Bene products, which share a beauty theme. More non-dairy companies have entered the market in recent years, creating the risk of greater competition in the future. Meanwhile, products high in calcium and protein, such as Greek yogurt and strained yogurt, are seeing growing sales to older consumers and athletes, so we believe there is considerable room for penetration in the high-price range. Demand for these products is also expanding along with growth in the market for cereal, including granola. Theoretically, this could broaden to the product and consumption scenes, and we believe there is little reason for concern at this point. Japan’s per-capita yogurt consumption volume is higher than in the US and UK, but still lower than yogurt consumption volume in France and Bulgaria. We therefore believe there is still room for growth in consumption volume in Japan. We expect the yogurt market to continue growing at a stable rate of around 3%, underpinned by growing health

Meiji Holdings (2269 / 2269 JP) 4 30 August 2016 consciousness on the part of consumers, the aging of Japan’s population, and growing demand for simple breakfast foods. The global yogurt market has grown in value at an average annual rate of about 7% over the past five years.

Figure 9: Annual per-household consumption expenditure Figure 10: Global annual per-capita yogurt consumption on yogurt in Japan (k JPY/yr) (kg Per Capita) Plain Yoghurt 12 4.0 Fruited Yoghurt Flavoured Yoghurt 3.5 Drinking Yoghurt 10

3.0 Thousands 8 2.5

6 2.0

1.5 4 1.0 2 0.5

0 0.0 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15

Source: MIC, Credit Suisse Source: Euromonitor, Credit Suisse

Figure 11: Annual per-capita yogurt consumption by country (2015) (kg Per Capita) 25

20

15

10

5

0

Source: Euromonitor, Credit Suisse Chocolate market: 4% CAGR over the past five years Growth in Japan’s chocolate market is coming mainly from health-promoting chocolates. The health and beauty benefits provided by the antioxidant properties of cacao polyphenols, which are contained in chocolate and cocoa, has been gaining broader recognition in recent years. This has put the spotlight on chocolate with a higher percentage of cacao. Some visitors to Japan are even purchasing cacao products as souvenirs or gifts for friends, relatives, and co-workers in their home countries. As the largest participant in the domestic chocolate market, Meiji Holdings is positioned to benefit from such upturns in the external environment. Because Japanese food culture differs from Western Europe's, simple comparison is not possible. However, Japan actually has the lowest per-capital chocolate consumption in monetary value among the industrialized nations. Assuming more products with strong health appeal come onto the market and consumer awareness of this segment continues to increase, we see significant room for market expansion.

Meiji Holdings (2269 / 2269 JP) 5 30 August 2016

Figure 12: Domestic confectionery market size Figure 13: Domestic chocolate market share (based on 2014 sales)

(JPY bn) Chocolate Rice snacks (JPY bn) 550 Snacks Candy 3,350 Other Meiji HD 500 Biscuit Confectionery total (RHS) 3,300 31% 28%

450 3,250

400 3,200

350 3,150

300 3,100

250 3,050 Morinaga 200 3,000 & Co. Lotte 18% 7% Nestle Ezaki 8% Glico 8% Source: All Nippon Kashi Association, Credit Suisse Source: Nikkan Keizai Tsushin, Credit Suisse

Figure 14: Annual per-capita chocolate consumption volume by country (2015) (kg Per Capita) 10 9 8 7 6 5 4 3 2 1 0

Source: Euromonitor, Credit Suisse

Meiji Holdings (2269 / 2269 JP) 6 30 August 2016

Earnings forecasts

Figure 15: Earnings forecast summary Sales Operating profit Recurring profit Net profit EPS ¥mn YoY (%) ¥mn YoY (%) ¥mn YoY (%) ¥mn YoY (%) ¥ YoY (%) Consolidated 16/3 Actual 1,223,746 5.4 77,781 50.9 81,826 52.7 62,580 102.6 425.1 1.3 17/3 CS E 1,263,000 3.2 89,000 14.4 92,500 13.0 61,000 -2.5 414.3 -2.5 CoE 1,251,000 2.2 74,500 -4.2 74,200 -9.3 50,000 -20.1 339.6 -20.1 IBES E 1,258,917 2.9 86,971 11.8 88,739 8.4 58,977 -5.8 399.6 -6.0 18/3 CS E 1,283,000 1.6 100,000 12.4 103,500 11.9 65,000 6.6 441.5 6.6 IBES E 1,291,987 2.6 96,807 11.3 98,632 11.1 66,338 12.5 449.3 12.4 19/3 CS E 1,305,000 1.7 107,000 7.0 110,500 6.8 69,400 6.8 471.4 6.8 IBES E 1,323,313 2.4 106,722 10.2 109,150 10.7 73,146 10.3 497.0 10.6 Source: Company data, I/B/E/S, Credit Suisse estimates We look for FY3/17 OP of ¥89.0bn, above company guidance for ¥74.5bn. We believe the fermented dairy business (mainly probiotic yogurt) will be the largest contributor to sales growth. We look for probiotic yogurt sales to rise 15% YoY and yogurt sales to increase 6%. Also, with the overall market for commercially available cheese growing due to shifting consumer preferences, we expect the company’s sales in this business to rise 6%. We look for upbeat growth in the confectionery business, supported by higher sales of cocoa polyphenol-rich chocolate (up 7%), which has market gained traction amid growing health consciousness. In addition to benefits from higher food business sales, we expect positive contributions form efficiency gains and lower raw materials prices. Over the medium term, we expect three-year OP CAGR of 11%. We look for stable profit growth from FY3/18 onward, with continued growth in the consumption of health-oriented products (e.g., yogurt and chocolate) offsetting negative growth of inbound tourist demand for baby formula.

Figure 16: OP and OP margin Figure 17: ROE, ROIC and OPM (JPY b) (%) Operating profits OP margin (RHS) (%) (%) 120 9 18 ROE 12 8 16 ROIC (rhs) 100 10 7 14 OPM (rhs) 80 6 12 8 5 10 60 6 4 8 40 3 6 4 2 20 4 1 2 2 0 0

0 0

FY3/10 FY3/11 FY3/12 FY3/13 FY3/14 FY3/15 FY3/16

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

FY3/15 FY3/11 FY3/12 FY3/13 FY3/14 FY3/16

FY3/10

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

Meiji Holdings (2269 / 2269 JP) 7 30 August 2016

Figure 18: Sales and OP forecasts by segment (¥mn) FY3/14 FY3/15 FY3/16 FY3/17E FY3/18E FY3/19E Sales by segment (JPYm) Food 1,015,265 1,021,806 1,061,398 1,092,000 1,106,000 1,122,000 Fresh and Fermented Dairy 481,400 479,400 511,700 532,000 543,000 557,000 Processed Food 195,200 194,500 191,600 181,000 181,000 180,000 Confectionery 156,500 158,900 160,400 165,000 170,000 173,000 Nutritionals 86,500 85,300 95,700 94,000 92,000 92,000 Other 328,400 340,300 349,300 360,000 360,000 360,000 Elimination -232,900 -236,900 -247,600 -240,000 -240,000 -240,000 Pharmaceuticals 135,105 141,338 164,542 173,000 179,000 185,000 Elimination (intra-company transactions) -2,294 -1,992 -2,194 -2,000 -2,000 -2,000 Total 1,148,076 1,161,152 1,223,746 1,263,000 1,283,000 1,305,000 Sales (y-y,%) Food - 0.6 3.9 2.9 1.3 1.4 Fresh and Fermented Dairy - -0.4 6.7 4.0 2.1 2.6 Processed Food - -0.4 -1.5 -5.5 0.0 -0.6 Confectionery - 1.5 0.9 2.9 3.0 1.8 Nutritionals - -1.4 12.2 -1.8 -2.1 0.0 Other - 3.6 2.6 3.1 0.0 0.0 Elimination - 1.7 4.5 -3.1 0.0 0.0 Pharmaceuticals - 4.6 16.4 5.1 3.5 3.4 Total - 1.1 5.4 3.2 1.6 1.7 OP (JPY m) Food 28,190 41,664 68,289 81,600 89,200 96,700 Fresh and Fermented Dairy 22,600 28,300 41,900 55,400 61,200 67,300 Processed Food 2,200 3,500 6,000 6,500 6,700 7,000 Confectionery 5,600 9,500 12,700 13,000 13,800 14,200 Nutritionals 2,700 4,600 9,700 11,000 11,800 12,500 Other -2,000 400 3,200 3,200 3,400 3,700 Elimination -3,000 -4,700 -5,300 -7,500 -7,700 -8,000 Pharmaceuticals 8,356 10,076 10,118 7,900 11,300 10,800 Elimination (intra-company transactions) -50 -198 -626 -500 -500 -500 Total 36,496 51,543 77,781 89,000 100,000 107,000 OP (y-y,%) Food - 47.8 63.9 19.5 9.3 8.4 Fresh and Fermented Dairy - 25.2 48.1 32.2 10.5 10.0 Processed Food - 59.1 71.4 8.3 3.1 4.5 Confectionery - 69.6 33.7 2.4 6.2 2.9 Nutritionals - 70.4 110.9 13.4 7.3 5.9 Other - -120.0 700.0 0.0 6.3 8.8 Elimination - 56.7 12.8 41.5 2.7 3.9 Pharmaceuticals - 20.6 0.4 -21.9 43.0 -4.4 Total - 41.2 50.9 14.4 12.4 7.0 OPM (%) Food 2.8 4.1 6.4 7.5 8.1 8.6 Fresh and Fermented Dairy 4.7 5.9 8.2 10.4 11.3 12.1 Processed Food 1.1 1.8 3.1 3.6 3.7 3.9 Confectionery 3.6 6.0 7.9 7.9 8.1 8.2 Nutritionals 3.1 5.4 10.1 11.7 12.8 13.6 Other -0.6 0.1 0.9 0.9 0.9 1.0 Pharmaceuticals 6.2 7.1 6.1 4.6 6.3 5.8 Total 3.2 4.4 6.4 7.0 7.8 8.2 Sales breakdown (%) Fresh and Fermented Dairy 34.8 34.2 34.7 35.3 35.6 36.0 Processed Food 14.1 13.9 13.0 12.0 11.9 11.6 Confectionery 11.3 11.3 10.9 11.0 11.1 11.2 Nutritionals 6.3 6.1 6.5 6.2 6.0 5.9 Other 23.7 24.3 23.7 23.9 23.6 23.3 Pharmaceuticals 9.8 10.1 11.2 11.5 11.7 12.0 OP breakdown (%) Fresh and Fermented Dairy 57.1 50.1 50.1 57.1 56.6 58.3 Processed Food 5.6 6.2 7.2 6.7 6.2 6.1 Confectionery 14.2 16.8 15.2 13.4 12.8 12.3 Nutritionals 6.8 8.2 11.6 11.3 10.9 10.8 Other -5.1 0.7 3.8 3.3 3.1 3.2 Pharmaceuticals 21.1 17.9 12.1 8.1 10.4 9.4 Source: Company data, Credit Suisse estimates

Meiji Holdings (2269 / 2269 JP) 8 30 August 2016

Figure 19: Consolidated balance sheet and change in net assets (¥mn) FY3/11 FY3/12 FY3/13 FY3/14 FY3/15 FY3/16 FY3/17E FY3/18E FY3/19E (Assets) Cash,cash equivalents & securities 21,759 14,662 16,902 19,577 22,489 31,883 34,292 44,022 55,273 Account receivable 146,377 168,699 175,803 163,135 172,762 181,493 182,809 185,036 187,076 Inventories 105,150 112,012 121,192 121,661 130,049 123,603 130,894 129,264 132,309 Other 28,390 27,158 27,314 24,698 26,718 25,940 25,940 25,940 25,940 Total current assets 301,676 322,531 341,211 329,071 352,018 362,919 373,935 384,261 400,599 Tangible fixed assets 334,869 311,184 312,124 325,644 353,044 349,314 352,314 353,314 354,314 Depreciable PP&E 249,468 236,963 237,970 240,636 269,760 264,955 - - - Land 66,451 65,255 68,655 68,247 71,036 72,837 - - - Construction in progress 18,950 8,966 5,499 16,761 12,248 11,522 - - - Intangible fixed assets 9,726 8,040 7,746 8,167 31,711 29,100 26,489 23,878 21,267 Investments & other assets 70,096 108,228 124,431 116,578 140,593 114,781 114,781 114,781 114,781 Investment securities 34,926 42,212 53,931 60,333 79,171 80,234 80,234 80,234 80,234 Other 35,170 66,016 70,500 56,245 61,422 34,547 34,547 34,547 34,547 Total fixed assets 414,692 427,453 444,302 450,390 525,349 493,196 493,584 491,973 490,362 Total assets 716,368 749,985 785,514 779,461 877,367 856,115 867,519 876,234 890,961 (Liabilities) Account payable 92,157 109,136 109,460 94,327 104,279 104,006 107,483 107,419 109,294 Short-term debt 110,232 150,179 98,523 64,959 88,584 49,831 30,461 26,052 13,013 Other 98,944 93,185 101,781 102,180 105,712 122,859 121,630 117,981 114,442 Total current liabilities 301,333 352,500 309,764 261,466 298,575 276,696 259,574 251,453 236,749 Long-term debt 86,895 59,418 110,773 136,680 135,487 97,997 78,398 47,039 23,519 Other 34,609 39,576 44,366 53,192 63,002 62,269 61,646 58,564 55,636 Total fixed liabilities 121,504 98,994 155,139 189,872 198,489 160,266 140,044 105,603 79,155 Total liabilities 422,838 451,494 464,904 451,339 497,065 436,963 399,618 357,055 315,904 (Net assets) Capital stock 30,000 30,000 30,000 30,000 30,000 30,000 30,000 30,000 30,000 Capital surplus 98,852 98,852 98,851 98,852 98,853 98,502 98,502 98,502 98,502 Retained earnings 172,128 174,494 185,436 198,957 223,166 277,869 325,619 375,897 430,575 Treasury stock -9,255 -9,268 -9,299 -9,451 -9,577 -9,727 -9,727 -9,727 -9,727 Total shareholders' equity 291,725 294,078 304,988 318,358 342,442 396,645 444,394 494,672 549,350 Valuation and translation adjustments -3,942 -2,488 8,394 2,089 27,898 12,229 12,229 12,229 12,229 Total equity capital 287,782 291,590 313,383 320,447 370,340 408,874 456,623 506,901 561,579 Minority interests 5,748 6,901 7,226 7,674 9,961 10,278 11,278 12,278 13,478 Total net assets 293,530 298,491 320,609 328,121 380,302 419,152 467,901 519,179 575,057 Total liabilities & net assets 716,368 749,985 785,514 779,461 877,367 856,115 867,519 876,234 890,961

FY3/11 FY3/12 FY3/13 FY3/14 FY3/15 FY3/16 FY3/17E FY3/18E FY3/19E (Changes in net assets) Beginning balance 297,771 293,530 298,491 320,609 328,121 380,302 419,152 467,901 519,179 Capital stock 0 0 0 0 0 0 0 0 0 Capital surplus 0 0 -1 1 1 -351 0 0 0 Net profits 9,552 6,805 16,646 19,060 30,891 62,580 61,000 65,000 69,400 Dividends from surplus -8,910 -5,982 -5,949 -5,979 -5,971 -8,554 -13,250 -14,722 -14,722 Treasury stock -130 -13 -31 -152 -126 -150 0 0 0 Valuation and translation adjustments -4,482 1,454 10,882 -6,305 25,809 -15,669 0 0 0 Minority interests -2,137 1,153 325 448 2,287 317 1,000 1,000 1,200 Other 1,866 1,544 246 439 -710 677 -1 0 0 Final balance 293,530 298,491 320,609 328,121 380,302 419,152 467,901 519,179 575,057 Source: Company data, Credit Suisse estimates

Meiji Holdings (2269 / 2269 JP) 9 30 August 2016

Figure 20: Consolidated profit and loss and cash flow statements (¥mn) FY3/11 FY3/12 FY3/13 FY3/14 FY3/15 FY3/16 FY3/17E FY3/18E FY3/19E Sales revenue 1,111,000 1,109,275 1,126,520 1,148,076 1,161,152 1,223,746 1,263,000 1,283,000 1,305,000 COGS 732,931 738,500 743,835 754,013 757,766 778,184 794,000 802,000 810,000 Gross profit 378,068 370,774 382,684 394,062 403,386 445,562 469,000 481,000 495,000 SG&A 348,109 350,585 356,825 357,566 351,842 367,780 380,000 381,000 388,000 OP 29,959 20,189 25,859 36,496 51,543 77,781 89,000 100,000 107,000 Interest income and dividend 894 957 918 987 1,106 2,427 2,500 2,500 2,500 Interest expense 2,209 1,979 1,549 1,288 1,116 983 1,000 1,000 1,000 Other 1,807 2,715 3,903 2,894 2,049 2,601 2,000 2,000 2,000 RP 30,451 21,882 29,131 39,089 53,582 81,826 92,500 103,500 110,500 Extraordinary gains 1,799 685 2,540 1,589 2,821 20,454 5,000 0 0 Etrtraordinary losses 14,325 7,978 6,457 6,991 7,747 7,069 5,000 5,000 5,000 Pretax profit 17,925 14,588 25,214 33,687 48,657 95,210 92,500 98,500 105,500 Income taxes 8,339 7,537 8,367 14,694 17,184 31,606 30,500 32,500 34,900 Minority interests 34 245 200 -67 582 1,023 1,000 1,000 1,200 NP 9,552 6,805 16,646 19,060 30,891 62,580 61,000 65,000 69,400 Tax rate 46.5% 51.7% 33.2% 43.6% 35.3% 33.2% 33.0% 33.0% 33.1% Depreciation expense 41,337 40,871 40,821 40,972 41,885 42,077 43,000 44,000 44,000 Capital expenditure 44,897 39,948 42,063 52,589 98,351 45,513 46,000 45,000 45,000 R&D expense 23,418 23,823 26,199 26,067 26,100 27,300 27,000 27,000 27,000 To sales ratio (%) CGS 66.0 66.6 66.0 65.7 65.3 63.6 62.9 62.5 62.1 Gross profit 34.0 33.4 34.0 34.3 34.7 36.4 37.1 37.5 37.9 OP 2.7 1.8 2.3 3.2 4.4 6.4 7.0 7.8 8.2 Pretax profit 1.6 1.3 2.2 2.9 4.2 7.8 7.3 7.7 8.1 NP 0.9 0.6 1.5 1.7 2.7 5.1 4.8 5.1 5.3 YoY (%) Sales revenue 0.4 -0.2 1.6 1.9 1.1 5.4 3.2 1.6 1.7 Gross profit 1.6 -1.9 3.2 3.0 2.4 10.5 5.3 2.6 2.9 OP 4.1 -32.6 28.1 41.1 41.2 50.9 14.4 12.4 7.0 Pretax profit -25.6 -18.6 72.8 33.6 44.4 95.7 -2.8 6.5 7.1 NP -27.0 -28.8 144.6 14.5 62.1 102.6 -2.5 6.6 6.8 FY3/11 FY3/12 FY3/13 FY3/14 FY3/15 FY3/16 FY3/17E FY3/18E FY3/19E (Operating activities) NP 9,552 6,805 16,646 19,060 30,891 62,580 61,000 65,000 69,400 Depreciation(+) 41,337 40,871 40,821 40,972 41,885 42,077 43,000 44,000 44,000 Account receivable(-) 8,212 -22,322 -7,104 12,668 -9,627 -8,731 -1,316 -2,226 -2,041 Inventories(-) 6,148 -6,862 -9,180 -469 -8,388 6,446 -7,291 1,631 -3,046 Account payable(+) -3,007 16,979 324 -15,133 9,952 -273 3,477 -64 1,875 Minority interests(+) 34 245 200 -67 582 1,023 1,000 1,000 1,200 Other -4,532 -5,472 8,605 6,529 21,192 2,033 0 0 0 Operating cashflow 57,995 30,597 50,622 63,847 86,487 105,155 99,870 109,340 111,388 (Investing activities) Capital expenditures(-) -36,717 -35,669 -31,011 -42,111 -57,822 -37,726 -46,000 -45,000 -45,000 Other 4,277 -8,645 -8,493 -5,182 -35,000 27,917 0 0 0 Investing cashflow -32,440 -44,314 -39,504 -47,293 -92,822 -9,809 -46,000 -45,000 -45,000 (Financing activities) Debt (+) 58,741 12,470 -301 -7,657 22,432 -76,243 -38,970 -35,767 -36,558 Dividends (-) -8,910 -5,982 -5,949 -5,979 -5,971 -8,554 -13,250 -14,722 -14,722 Other -69,401 -1,627 -3,161 -4,558 -9,615 -274 0 0 0 Financing cashflow -19,570 4,861 -9,411 -18,194 6,846 -85,071 -52,220 -50,490 -51,280 (Cash & cash equivalents) Increases 5,985 -8,856 1,707 -1,640 511 10,275 1,650 13,851 15,108 Beginning balance 16,682 21,759 14,662 16,902 19,577 22,489 31,883 34,292 44,022 Final balance 22,667 12,903 16,369 15,262 20,088 32,764 33,533 48,142 59,130 Adjustments -908 1,759 533 4,315 2,401 -881 759 -4,120 -3,857 Source: Company data, Credit Suisse estimates

Meiji Holdings (2269 / 2269 JP) 10 30 August 2016

Figure 21: Financial indicators FY3/11 FY3/12 FY3/13 FY3/14 FY3/15 FY3/16 FY3/17E FY3/18E FY3/19E (Safety) Current ratio (%) 100.1 91.5 110.2 125.9 117.9 131.2 144.1 152.8 169.2 Quick ratio (%) 55.8 52.0 62.2 69.9 65.4 77.1 83.6 91.1 102.4 Adjusted quick ratio (%) 19.7 9.8 17.2 30.1 25.4 64.0 112.6 169.0 424.8 Fixed ratio (%) 144.1 146.6 141.8 140.6 141.9 120.6 108.1 97.1 87.3 Interest-bearing debt (¥mn) 197,127 209,597 209,296 201,639 224,071 147,828 108,858 73,091 36,532 Average debt interest rate (%) 1.3 1.0 0.7 0.6 0.5 0.5 0.8 1.1 1.8 Dependence on debt (%) 27.5 27.9 26.6 25.9 25.5 17.3 12.5 8.3 4.1 Net debt (¥mn) 175,368 194,935 192,394 182,062 201,582 115,945 74,567 29,069 -18,741 Equity capital ratio (%) 40.2 38.9 39.9 41.1 42.2 47.8 52.6 57.8 63.0 D/E ratio (%) 68.5 71.9 66.8 62.9 60.5 36.2 23.8 14.4 6.5 Long-term debt ratio (%) 44.1 28.3 52.9 67.8 60.5 66.3 72.0 64.4 64.4 Working capital (¥mn) 343 -29,969 31,447 67,605 53,443 86,223 114,361 132,809 163,850 Net interest expense (¥mn) -1,315 -1,022 -631 -301 -10 1,444 1,500 1,500 1,500 Cash plus marketable securities (¥mn) 21,759 14,662 16,902 19,577 22,489 31,883 34,292 44,022 55,273 Interest coverage ratio (x) 13.97 10.69 17.29 29.10 47.18 81.60 91.50 102.50 109.50 Financial leverage (x) 2.49 2.57 2.51 2.43 2.37 2.09 1.90 1.73 1.59 A/R to A/P ratio (%) 158.8 154.6 160.6 172.9 165.7 174.5 170.1 172.3 171.2 Dividend on equity (%) 3.1 2.1 2.0 1.9 1.7 2.2 3.1 3.1 2.8 (Profitability) ROE (%) 3.3 2.3 5.5 6.0 8.9 16.1 14.1 13.5 13.0 ROA (%) 4.1 2.8 3.4 4.7 6.2 9.0 10.3 11.5 12.1 Inventory turnover ratio (x) 10.3 10.2 9.7 9.5 9.2 9.6 9.9 9.9 10.0 A/R turnover ratio (x) 7.4 7.0 6.5 6.8 6.9 6.9 6.9 7.0 7.0 A/P turnover ratio (x) 11.9 11.0 10.3 11.3 11.7 11.8 11.9 11.9 12.0 Inventory turnover days (days) 35.6 35.7 37.8 38.6 39.6 37.8 36.8 37.0 36.6 A/R turnover days (days) 49.4 51.8 55.8 53.9 52.8 52.8 52.6 52.3 52.0 A/P turnover days (days) 30.8 33.1 35.4 32.4 31.2 31.1 30.6 30.6 30.3 Sales per employee (¥mn) 76.5 73.5 74.7 76.9 73.5 74.1 76.8 78.0 79.3 OP per employee (¥mn) 2.1 1.3 1.7 2.4 3.3 4.7 5.4 6.1 6.5 (Per share data) EPS (¥) 64.8 46.2 113.0 129.4 209.8 425.1 414.3 441.5 471.4 BPS (¥) 1,885 1,910 2,053 2,176 2,515 2,777 3,102 3,443 3,815 Sales per share (¥) 7,538 7,529 7,646 7,794 7,886 8,312 8,579 8,715 8,864 Operating cashflow per share (¥) 393.5 207.7 343.6 433.4 587.3 714.2 678.4 742.7 756.6 DPS (¥) 40.0 40.0 40.0 40.0 50.0 90.0 90.0 100.0 100.0 Dividend ratio (%) 61.7 86.6 35.4 30.9 23.8 21.2 21.7 22.6 21.2 (Growth) EPS growth (%) -27.1 -28.7 144.6 14.5 62.1 102.6 -2.5 6.6 6.8 BPS growth (%) -0.7 1.3 7.5 6.0 15.6 10.4 11.7 11.0 10.8 Total assets growth (%) -1.9 4.7 4.7 -0.8 12.6 -2.4 1.3 1.0 1.7 Sustainable growth rate (%) 1.3 0.3 3.6 4.2 6.8 12.7 11.0 10.4 10.2 (Investment profitability) Capital invested (¥ mn) 409,286 390,584 468,522 510,319 568,829 569,140 596,667 612,504 640,734 NOPAT (¥ mn) 16,988 11,070 19,886 22,208 34,665 53,698 60,995 68,345 72,942 ROIC (%) 4.2 2.8 4.2 4.4 6.1 9.4 10.2 11.2 11.4 WACC (%) 2.9 2.7 2.7 2.7 2.7 3.2 3.5 3.8 4.1 EVA (¥ mn) 5,272 409 7,217 8,177 19,338 35,591 40,083 45,154 46,987 EVA spread (%) 1.3 0.1 1.5 1.6 3.4 6.3 6.7 7.4 7.3 (Cashflow) EBITDA (¥mn) 71,296 61,060 66,680 77,468 93,428 119,858 132,000 144,000 151,000 EBITDA margin (%) 6.4 5.5 5.9 6.7 8.0 9.8 10.5 11.2 11.6 FCF (¥mn) 25,555 -13,717 11,118 16,554 -6,335 95,346 53,870 64,340 66,388 Operating C/F to Investment C/F rate (%) 178.8 69.0 128.1 135.0 93.2 1072.0 217.1 243.0 247.5 (Other) Employees numbers 14,861 15,338 14,819 15,033 16,559 16,456 16,456 16,456 16,456 Consolidated subsidiaries numbers 52 53 54 48 59 59 59 59 59 Average shares outstanding (mn) 147.4 147.3 147.3 147.3 147.2 147.2 147.2 147.2 147.2 End-of-period shares outstanding (mn) 152.7 152.7 152.7 147.3 147.2 147.2 147.2 147.2 147.2 Source: Company data, Credit Suisse estimates

Meiji Holdings (2269 / 2269 JP) 11 30 August 2016

Companies Mentioned (Price as of 29-Aug-2016) Ajinomoto (2802.T, ¥2,265) Calbee (2229.T, ¥4,020) China Steel (2002.TW, NT$22.25) Kikkoman (2801.T, ¥3,350) MEGMILK SNOW BRD (2270.T, ¥3,320) Meiji Holdings (2269.T, ¥9,400, OUTPERFORM, TP ¥10,500) Morinaga Milk (2264.T, ¥677) Nippon Meat Packers (2282.T, ¥2,271) Nisshin Seifun Group (2002.T, ¥1,493) Nissin Foods Holdings (2897.T, ¥5,830) Toyo Suisan (2875.T, ¥4,240) Yakult Honsha (2267.T, ¥4,740) Yamazaki Baking (2212.T, ¥2,361) Refer to Figures 8 and 13 for other companies mentioned

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. 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: 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.

Meiji Holdings (2269 / 2269 JP) 12 30 August 2016

Credit Suisse's distribution of stock ratings (and banking clients) is:

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.

Credit Suisse’s policy is to update research reports as it deems appropriate, based on developments with the subject company, the sector or the market that may have a material impact on the research views or opinions stated herein. Credit Suisse's policy is only to publish investment research that is impartial, independent, clear, fair and not misleading. For more detail please refer to Credit Suisse's Policies for Managing Conflicts of Interest in connection with Investment Research: http://www.csfb.com/research-and- analytics/disclaimer/managing_conflicts_disclaimer.html Credit Suisse does not provide any tax advice. Any statement herein regarding any US federal tax is not intended or written to be used, and cannot be used, by any taxpayer for the purposes of avoiding any penalties.

Target Price and Rating Valuation Methodology and Risks: (12 months) for Meiji Holdings (2269.T) Method: Our ¥10,500 target price for Meiji Holdings is based on a fair P/E of roughly 25x applied to our FY3/17 EPS estimate. While we believe that earnings momentum and the upbeat market environment justify a premium to the sector average, the high current valuation makes this unlikely for now. We therefore use the market cap weighted average FY1E P/E (based on median values of Bloomberg consensus estimates) for the Japanese food sector average (Meiji Holdings, Ajinomoto (2802), Yakult (2267), Kikkoman (2801), Nissin Food Holdings (2897), Toyo Suisan (2876), NH Foods (2282), Yamazaki Baking (2212), Calbee (2229), Nissin Seifun (2002)) to set our target price. We base our OUTPERFORM rating on our expectations for total returns and comparisons with our coverage universe over the next 12 months.

Risk: Downside risks to our ¥10,500 target price and OUTPERFORM rating for Meiji Holdings include: (1) rapidly slowing growth for probiotic yoghurt, (2) intensifying competition in the yoghurt market, and (3) a contraction in demand for powdered milk and sports nutrition supplements.

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 The subject company (2897.T, 2002.TW) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of Credit Suisse. Credit Suisse provided investment banking services to the subject company (2897.T) within the past 12 months. Credit Suisse has received investment banking related compensation from the subject company (2897.T) within the past 12 months Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (2269.T, 2802.T, 2801.T, 2897.T, 2229.T, 2002.TW) within the next 3 months. As of the end of the preceding month, Credit Suisse beneficially own 1% or more of a class of common equity securities of (2002.TW).

For other important disclosures concerning companies featured in this report, including price charts, please visit the website at https://rave.credit- suisse.com/disclosures or call +1 (877) 291-2683. 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=245224&v=-aiiv2aykg6kltnup4b2wny1n . 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.

Meiji Holdings (2269 / 2269 JP) 13 30 August 2016

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Meiji Holdings (2269 / 2269 JP) 14 30 August 2016

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2269_083016_Meiji HD_E.doc Meiji Holdings (2269 / 2269 JP) 15