R Yoshinoya HD / 9861 COVERAGE INITIATED ON: 2018.11.14 LAST UPDATE: 2019.07.05 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. Yoshinoya HD / 9861 R LAST UPDATE: 2019.07.05 Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp Coverage 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 ---------------------------------------------------------------------------------------------------------------------------------------- 7 Highlights ------------------------------------------------------------------------------------------------------------------------------------------------------------7 Trends and outlook ----------------------------------------------------------------------------------------------------------------------------------- 8 Quarterly trends and results -----------------------------------------------------------------------------------------------------------------------------------8 Past initial forecasts versus results -------------------------------------------------------------------------------------------------------------------------- 17 Business ------------------------------------------------------------------------------------------------------------------------------------------------ 21 Business description -------------------------------------------------------------------------------------------------------------------------------------------- 21 Group strategy --------------------------------------------------------------------------------------------------------------------------------------------------- 36 Group structure -------------------------------------------------------------------------------------------------------------------------------------------------- 37 Profitability snapshot ------------------------------------------------------------------------------------------------------------------------------------------- 38 Strengths and weaknesses ------------------------------------------------------------------------------------------------------------------------------------ 42 Market and value chain ---------------------------------------------------------------------------------------------------------------------------- 44 Restaurant market trends ------------------------------------------------------------------------------------------------------------------------------------- 44 Competition ------------------------------------------------------------------------------------------------------------------------------------------------------ 45 Historical performance and financial statements ------------------------------------------------------------------------------------------ 48 Income statement ----------------------------------------------------------------------------------------------------------------------------------------------- 48 Balance sheet ----------------------------------------------------------------------------------------------------------------------------------------------------- 49 Cash flow statement -------------------------------------------------------------------------------------------------------------------------------------------- 51 Historical performance ---------------------------------------------------------------------------------------------------------------------------------------- 52 Other information ---------------------------------------------------------------------------------------------------------------------------------- 60 History -------------------------------------------------------------------------------------------------------------------------------------------------------------- 60 News and topics ------------------------------------------------------------------------------------------------------------------------------------------------- 61 Corporate governance and top management --------------------------------------------------------------------------------------------------------- 64 Dividend policy -------------------------------------------------------------------------------------------------------------------------------------------------- 65 Major shareholders --------------------------------------------------------------------------------------------------------------------------------------------- 65 Employees --------------------------------------------------------------------------------------------------------------------------------------------------------- 66 By the way --------------------------------------------------------------------------------------------------------------------------------------------------------- 66 Profile ---------------------------------------------------------------------------------------------------------------------------------------------------------------- 67 02/68 Yoshinoya HD / 9861 R LAST UPDATE: 2019.07.05 Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp Coverage Executive summary Business overview Yoshinoya HD operates major restaurant chains in Japan and overseas. Its core business is Yoshinoya, which invented gyudon ◤ (beef bowl) and boasts a 120-year history since opening its first restaurant. The company began actively acquiring businesses from around 1995, and has grown to operate a diverse portfolio of restaurants. Main brands include Yoshinoya (gyudon), Hanamaru Udon (udon noodles), Volks (steak), Steak-no-Don (steaks), Kyotaru (take-out sushi), and Kaisen Misakiko (conveyor belt sushi). As of end February 2019, it had a total of 3,403 restaurants, 2,480 in Japan and 923 overseas. The majority of its restaurants in Japan are directly managed, whereas overseas (mainly Yoshinoya and Hanamaru restaurants) most are operated as franchises. The company has five business segments: Yoshinoya, Hanamaru, Arcmeal, Kyotaru, and Overseas. In the Yoshinoya segment, which accounts for 50% of total sales and 60% of operating profit, the company operated 1,211 ◤ restaurants in Japan (as of end February 2019), ranking the chain second among the three companies that dominate the domestic beef bowl market. Annual sales per restaurant were JPY85mn. Over the past five years, Yoshinoya restaurants in Japan have increased by 21 outlets (net) as the company continued to scrap and build its domestic suburban stores. While Yoshinoya is a strong brand, the overall earnings environment for the company is challenging, because gyudon has a large sales weighting and beef prices remain high. Yoshinoya’s segment profit margin (before adjustments) driven by beef prices is generally low (3.4% in FY02/19). Consequently, companywide OPM over the past five years only averaged 1.2%, placing Yoshinoya HD near the bottom of the food-service sector, although profit levels have recovered somewhat from the post-BSE slump. Growth drivers are the Hanamaru segment (14.3% of total sales in FY02/19) and the Overseas segment (10.5%). The ◤ Hanamaru business comprised 512 restaurants around the country (mostly directly operated), making it the second-largest udon chain in Japan. Annual sales per restaurant were JPY57mn. The company targets a total of 1,000 locations. The Overseas segment mostly involves Yoshinoya (923 locations) and Hanamaru (44) restaurants in the US, China, and the ASEAN region (as of end FY02/19). The company is also focusing on opening directly operated restaurants abroad and expects the number of overseas restaurants to exceed that of Yoshinoya restaurants in Japan by 2025. In addition, although details have not been disclosed, it also considers Kaisen Misakiko (Kyotaru segment) to be a growth business that is highly profitable. The strategy for Kaisen Misakiko is to continue opening restaurants in urban commercial buildings. Trends and outlook For FY02/19, the company reported consolidated sales of JPY202.4bn (+2.0% YoY), an operating profit of JPY104mn (-97.4% ◤ YoY), recurring profit of JPY349mn (-92.4% YoY), and net loss of JPY6.0bn (versus profit of JPY1.5bn in FY 02/18). Although operating hours and days in operation at some restaurants were shortened as a result of severe weather conditions and natural disasters such as torrential rains, typhoons, and earthquake, sales at existing Yoshinoya restaurants logged solid gains and top-line growth was further aided by new restaurant openings by the company's Hanamaru chain and overseas. On the earnings front, operating profit fell due to the rising cost of beef, rice, and other ingredients; personnel-related