Yakult Earnings: Growth Driven by 1000 Series Boom Loses Steam While Asia Weakness Persists

Narrow-moat Yakult’s 2267 first-quarter results point to decelerating domestic volume growth and further weakness of China, two negatives sending the shares down nearly 10% after earnings were released. While the first-quarter growth remains solid, with sales up 13% year on year (+8.3% currency neutral) and operating profits up 15% (+7.7%), the domestic growth momentum, boosted by Yakult 1000/ Y1000 (1000 series) and New Yakult, has slowed substantially from June. Despite the fact that our earnings are on the lower end of the consensus as we have factored in the slowdown of domestic volume growth, the end of the Yakult 1000/Y1000 boom remains a key downside risk to our projections. We have maintained our forecasts. After a nearly 10% correction, we view shares as undervalued, trading at a 14% discount to our fair value estimate of JPY 9,400. Sizable volume decline triggered by a 20% hike of New Yakult in Japan and yen strength are the potential near-term threats to its earnings.

The preliminary sales report of its overseas business indicates that volume declined 20.6% in China during the second quarter (April-June) compared with a 7.9% decline in the first quarter. All the regions—except Shanghai, which suffered large-scale lockdowns in 2022—saw volume decline widen. Management cited that slow traffic at hypermarkets comprising a high-20% of China volume is attributable to the weakness. We believe the 10% hikes starting from January have also depressed demand. We do not think management’s plan to channel resources to supermarkets from hypermarkets will help lift volume greatly. We remain cautious about China’s volume growth as a sluggish economy and property market might continue to weigh on consumer spending, although management anticipates stimulus plans to lift consumption.