Yakult Earnings: Price Hikes and Cost Control Curb Profit Decline; China Sees Volume Silver Lining

Narrow-moat Yakult’s first-quarter sales volume significantly fell short of its annual target. Yet, price hikes, coupled with rigorous cost control and favorable currency movement, capped the profit decline at 5.2% year on year. Strength in Americas offset the persistent weakness in Asia. The preliminary second-quarter volume data indicate that volume contraction started narrowing in China thanks to the successful new product launch. We expect volume decline will continue to lessen given the easier comparison base, but the pace of recovery will largely hinge on the real wage growth in the core markets. We maintained our projections. Given the recent correction, we view shares, trading at a 30% discount to our fair value estimate of JPY 3,800, as undervalued. Whether the volume decline will cease in China and Japan in coming quarters is critical to restoring the market’s confidence, in our view.