KFC Holdings Japan / 9873 COVERAGE INITIATED ON: 2016.10.31 LAST UPDATE: 2020.11.11 Shared Research Inc. has produced this report by request from the company discussed in the report. The aim is to provide an “owner’s manual” to investors. We at Shared Research Inc. make every effort to provide an accurate, objective, and neutral analysis. In order to highlight any biases, we clearly attribute our data and findings. We will always present opinions from company management as such. Our views are ours where stated. We do not try to convince or influence, only inform. We appreciate your suggestions and feedback. Write to us at [email protected] or find us on Bloomberg. Research Coverage Report by Shared Research Inc. KFC Holdings Japan / 9873 RCoverage LAST UPDATE: 2020.11.11 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp INDEX How to read a Shared Research report: This report begins with the trends and outlook section, which discusses the company’s most recent earnings. First-time readers should start at the business section later in the report. Executive summary ----------------------------------------------------------------------------------------------------------------------------------- 3 Key financial data ------------------------------------------------------------------------------------------------------------------------------------- 5 Recent updates ---------------------------------------------------------------------------------------------------------------------------------------- 6 Highlights ------------------------------------------------------------------------------------------------------------------------------------------------------------ 6 Trends and outlook ----------------------------------------------------------------------------------------------------------------------------------- 7 Monthly trends ----------------------------------------------------------------------------------------------------------------------------------------------------- 7 Quarterly trends and results ----------------------------------------------------------------------------------------------------------------------------------- 8 Medium-term management plan --------------------------------------------------------------------------------------------------------------- 13 Business ------------------------------------------------------------------------------------------------------------------------------------------------ 15 Overview ----------------------------------------------------------------------------------------------------------------------------------------------------------- 15 KFC business ------------------------------------------------------------------------------------------------------------------------------------------------------ 17 Earnings structure ----------------------------------------------------------------------------------------------------------------------------------------------- 24 Market and value chain ---------------------------------------------------------------------------------------------------------------------------------------- 26 Strengths and weaknesses ------------------------------------------------------------------------------------------------------------------------------------ 30 Financial statements ------------------------------------------------------------------------------------------------------------------------------- 31 Income statement ----------------------------------------------------------------------------------------------------------------------------------------------- 31 Balance sheet ----------------------------------------------------------------------------------------------------------------------------------------------------- 32 Cash flow statement -------------------------------------------------------------------------------------------------------------------------------------------- 33 ROE, ROA, ROIC ------------------------------------------------------------------------------------------------------------------------------------------------- 34 Historical performance ---------------------------------------------------------------------------------------------------------------------------- 35 News and topics ------------------------------------------------------------------------------------------------------------------------------------------------- 42 Other information ---------------------------------------------------------------------------------------------------------------------------------- 43 History -------------------------------------------------------------------------------------------------------------------------------------------------------------- 43 Corporate governance and top management --------------------------------------------------------------------------------------------------------- 44 Major shareholders (as of end-March 2020) ----------------------------------------------------------------------------------------------------------- 45 Principal group companies (as of March 2020) ------------------------------------------------------------------------------------------------------- 45 Dividend policy -------------------------------------------------------------------------------------------------------------------------------------------------- 45 Employees --------------------------------------------------------------------------------------------------------------------------------------------------------- 46 By the way --------------------------------------------------------------------------------------------------------------------------------------------------------- 46 Profile ---------------------------------------------------------------------------------------------------------------------------------------------------------------- 47 02/48 KFC Holdings Japan / 9873 RCoverage LAST UPDATE: 2020.11.11 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp Executive summary Core businesses Under a master franchise agreement with Yum! Brands, Inc., KFC Holdings Japan operates KFC brand restaurants in Japan. The company also acts as a franchisor in Japan for the KFC brand, earning royalties and other revenues. As of end-March 2020, the company had 306 directly operated restaurants primarily in Greater Tokyo, and 827 restaurants run by franchisees, mainly in regional areas. It boasts the leading domestic market share in fried chicken fast food restaurants, and it is one of the most well-known fast food restaurant brands, alongside such names as McDonald’s and Mos Burger. Japan’s fried chicken market has been relatively flat since 2000, and in 2003 major convenience stores began entering the fried chicken market. KFC is distinctive due to the brand power of its “original-recipe chicken,” which it has cultivated since its launch in Japan in 1970, and procurement arrangements with major trading company Mitsubishi Corporation (TSE1: 8058) for high-quality chicken. Convenience stores primarily use imported frozen chicken 50 days old or older, while KFC uses only Japan-raised chickens (about 38 days old), which are more tender but make stable procurement difficult. Trends and outlook In FY03/20, revenues were JPY79.6bn (+7.1% YoY), operating profit was JPY4.8bn (2.2x the FY03/19 figure), and net income attributable to owners of the parent was JPY1.5bn (-25.4% YoY). In the mainstay KFC business, system sales at existing stores were up 10.1% YoY and strong throughout the year as the company stepped up measures to promote daily use. The combination of value measures to promote daily use (in the form of reasonably-priced set menus) and product measures to deliver pleasant surprise and enjoyment proved successful. While revenues grew, the cost of revenues ratio improved due to a reduction in losses from food disposal among other factors. SG&A expenses rose only 1.1% YoY as a result of cost optimization efforts. On the other hand, the spread of COVID-19 led to a decline in business results of equity-method affiliates, and the company recorded an equity-method investment loss of JPY1.9bn as a non-operating expense, resulting in lower net income. The company will pay an annual dividend of JPY50 per share (dividend payout ratio of 72.9%) for FY03/20. The company forecasts FY03/21 revenues of JPY86.5bn (+8.6% YoY) and operating profit of JPY6.0bn (+25.4% YoY), but has not disclosed forecasts for recurring profit and net income. It expects promotion of daily patronage; developing new products; and strengthening takeout, drive-through, and delivery services to drive earnings growth. On the other hand, equity-method affiliates continue to face tough conditions, including temporary restaurant closures and reduced hours of operation due to the COVID-19 outbreak. Recurring profit and net income forecasts remain undetermined as it is unclear when the COVID-19 pandemic will end. A dividend of JPY50 per share is planned for FY03/21, on par with the dividend paid in FY03/20. By end-FY03/21, the company expects to have 1,135 stores (net increase of two; +0.2% YoY), including 22 newly opened ones, 197 that are renovated, and 340 that provide delivery services (+120 YoY). On September 12, 2018, the company unveiled its medium-term management plan “Toward Our 50th Anniversary.” Under the brand slogan, Why not make it KFC today? introduced in FY03/19, the company is positioning FY03/19–FY03/21 as a period to rebuild the foundations of the KFC business to support sustainable