Yakult Earnings: Volume Contraction in China Triggers Downward Revision; Yakult 1000 Loses Steam

Narrow-moat Yakult’s downward revision, induced by the more than 30% decline in sales volume in China, was a surprise. We have slashed our profit estimates by 15%-20% through our 5-year explicit forecast period as its renewed product and channel strategies look unlikely to boost the sales volume in China significantly unless consumer sentiment improves. The third-quarter preliminary overseas sales volume also points to a deteriorating volume trend in Indonesia. We believe management misread the markets and price hikes have compounded the volume contraction in its two largest overseas markets. Meanwhile, growth of Yakult 1000 has decelerated substantially from August to low-single digits, a risk we have flagged previously. Accordingly, we have reduced our fair value estimate to JPY 3,800 from JPY 4,700. After a 25% correction over the past 4 months, we view shares as modestly undervalued. Our operating profit forecast is 4% below 2023 guidance.