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CALBEE CORPORATION

【Hirota Seminar】

Yuhei Uemura

Shuhei Kusano

Megumi Shimada

Sae Shimizu

Sho Yamakawa

Stock code 2229

Stock price (08/31: closing price) ¥3595

Stock Rating: SELL

Target Price: ¥3435

Agenda

1. Investment Summary

2. Company Overview

3. Management

4. Business Overview

5. Characteristics of the Business of CALBEE

6. Future net sales

7. Valuation: DCF (Discounted Cash Flow) Model

8. Summary

9. Risk

1. Investment Summary

The target stock price of CALBEE CORPORATION (hereafter, CALBEE) was estimated at ¥3435 by

using the Discounted Cash Flow method (hereafter, DCF method). And present stock price is ¥3595(8/31).

Thus the investment recommendation of CALBEE is "SELL"(overvalued by 4%).

There are some reasons for this gap. But the main reason is the difference of anticipation about future

sales amount of foreign country. Investors think positive, but we think negative. This is because we think

that CALBEE could not make use of strength of CALBEE in foreign countries.

2. Company Overview

<History of CALBEE>

CALBEE was established in 1949, by Matsuo Takashi.

It`s philosophy is “We make delicious and amusing product with the blessings of nature. And we will

contribute to the healthy livings of people.”, and since establishment, philosophy of CALBEE has never

changed.

Until today, CALBEE produced many hit snacks. For example “KAPPAEBISEN”, ”PIZZA POTATO”

and “JYAGARIKO”. Hit snacks were produced in every ten years, and those have attracted Japanese

people for a long time.

In recent years, CALBEE`s product entered overseas market, and it begins to attract foreign people too.

Especially “SAYAENDO” increases its share in North America, and JYAGARIKO has gained popularity

in Taiwan.

Until 2008, CALBEE was a kind of family firm. Matsuo family always assumed the presidency. However,

On 2008 Akira Matsumoto became a chairperson-cum-CEO. The first “not family man” to be a

Chairman-cum-CEO of CALBEE was him. Since Matsumoto became a chairperson, he worked out his

various strategies, for example Cost reduction. His strategy had changed Calbee dramatically in a good

way. For example, CALBEE was listed on the stock exchange in 2011.

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Calbee has been enjoying NO.1 sales in Japanese market and it has been increased smoothly. Nowadays,

CALBEE accounts for more than 50% of share in the Japanese snack food market in 2013 (figure1). The

second largest company in snack food market is KOIKEYA, but Calbee takes a huge lead with Koikeya

(figure2).

<Domestic Market>

(figure1)

(figure2)

(million of yen)

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<Overseas Business>

With the maturation of the Japanese market, overseas business is now very important for CALBEE. The

overseas sales ratio in 2014 is only 8%, and CALBEE aims at 30% of overseas sales ratio in the future

(figure3).

In this report, we focus on North America and China. That is because CALBEE regards these two

markets as a most important market. North America snack food market is the biggest market over the

world, and Chinese snack food market has a possibility to grow as large as North America snack food

market.

CALBEE.co overseas sales amount・sales amount ratio growth

(figure3)

North America

North America is the biggest snack market in the world, and over the past 10 years its CAGR has been

3.8%. CALBEE has contracted a business alliance with Pepsico, the biggest company in North America.

So then, CALBEE can sell their products under the brand of PepsiCo which is approachable for American

people. The main product of CALBEE in North America is “ SNAPEA CRISPS” made by snow peas.

Sales amount in the North America is about 5 billion yen, and CALBEE aims to achieve 50 billion yen in

the next 5 years.

China

The Chinese snack food market is growing by amazing speed, with the economic growth of China. In

terms of market share, Want Holdings is the leader. Also, foreign firms such like the PepsiCo group also

holds strong positions. CALBEE started with “JAGABEE” and two flour based products “Prawn Cracker”

and “Potato Snack”, but sales lagged and the company posted a loss in its initial year. The sales amount

of CALBEE in China is about 2.5 billion yen, and CALBEE aims to expand their market share (figure4).

(million of yen) (%)

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(figure4)

3．Management CALBEE felt a limitation of conventional family-owned management to adjust themselves to

globalization. So then, CALBEE decided to end up its family owning. CALBEE selected Akira

Matsumoto for its next chairperson, who has an experience of operating Johnson & Johnson`s Japanese

branch.

At first, Mr. Matsumoto focused on the manufacturing cost rate of CALBEE. At that time,

manufacturing cost rate of CALBEE was about 1%.This rate was too much lower against other snack

food supplier. To raise its manufacturing cost rate, Mr. Matsumoto had realized that CALBEE must

improve these following problems.

1. Quality of products

2. Low cost

3. Supply system

CALBEE was not equipped with a cost. Therefore, Mr. Matsumoto was challenged to cut its’ costs.

CALBEE`s problem was its underutilized plant. Therefore, Mr. Matsumoto has reduced the variable costs.

As a result, CALBEE`s underutilized plant had gained its efficiency, and CALBEE succeed to raise its

manufacturing cost rate. Furthermore, Mr. Matsumoto decided to use the money saved by this act to

discount it‘s product.

Mr. Matsumoto is a manager who returns it`s profit to their supplier.

4. Business Overview

The main product of CALBEE is snack, and accounts for 87% of CALBEE business.

Furthermore, snack product of CALBEE can be divided into four (figure5).

Potato snack: This business accounts for about 56% of snack sales.

CALBEE use the potatoes that made the breed development and quality management with contract

farmers. Its main products are potato chips and JAGARIKO and so on. Potato snack is the

company's leading product.

Wheat snack: This business accounts for about 11% of snack sales.

"Kappa EBISEN", which is the first snack product of this firm have continued to be popular for

the 50 years, as taste of home.

Corn snack: This business accounts for about 7% of snack sales.

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CALBEE has acquired the Japan Frito-Lay, and it has contributed to improving brand power of the

company.

As you can see, Potato snack is occupied for the most part in CALBEE business.

CALBEE.co sales amount break down (Product)

(figure5)

5. Characteristics of the Business of CALBEE

CALBEE has two characteristics of the business.

Strong preference for quality: CALBEE carry on production control of potato for 35 years, and use

natural shrimp selected carefully. CALBEEs policy like this results from its philosophy, and other

company can’t imitate this easily. Can`t act stoic like this for quality. The reason is “because the

Unification of awareness like this takes long time.”

However, high quality products doesn`t always mean hit product loved by many consumers. CALBEE

develops their product in each area of Japan, and that is another secret of CALBEE`s “Loved” product.

Product according to the area: CALBEE classifies whole country in 7 groups, and make each

group to develop new product and compete. For example ”JYAGAPOKKLE”、”OSATSU HOKKORI”

were produced in this way. CALBEE developed many hit products, but there was also one big problem.

This method costs largely. Cost occurs in each group, so amount of cost gets very big and production cost

price rate gets very high. This way is a very good way to make a hit product but on the other hand, it cost

too much.

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Since Akira Matsumoto became a chairperson, CALBEE started cost reduction. Matsumoto realized the

collective purchasing in the head office. By this policy, CALBEE could reduce its cost.

After its success of cost reduction, Akira Matsumoto decided to make the price of production cheaper by

the money remained by cost reduction. That is how CALBEE adopted for Price competition.

6. Future net sales

-Sales-

CALBEE operates its business in Japan, North America, China and other areas. The sales ratio of whole

CALBEE is Japan 92%, North America 3%, China 2%, and the others 3% (figure6).

So we calculated sales amount by the calculation below.

Sales amount = sales amount of Japan*92%

+sales amount of The North America*3%

+sales amount of China*2%

+sales amount of others

Then we explain each sales amount.

CALBEE.co sales amount break down Product

(figure6)

【Japan】

Change of the sale amount in domestic market can be calculated by this formula “change of scale of

market time change of market share.” “Change of scale of snack market” means “change of population

time change of sale of snack per people”.

So then, we will explain each change in detail. First, we explain change of population in Japan, low birth rate and aging is getting serious problem. Recently, population decreased to be 99.8% per year for these 3 years. So then, we assumed that

population will decrease at the 99.8% ratio per year continuously after 2014 (figure7).

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Population change expectation

(figuer7)

Next, we explain change of sales of snack per people.

In 1970, price of potatoes were 100 yen per 90g, however 2014 price of potatoes were 90 yen per 60g. Price soared in 2009. The reason why the price of potatoes has soared in 2009 is because its poor harvest

of potatoes in this year. CALBEE also were hit by this problem. However, CALBEE is working with

contract farmers, and have improved the next year.

We assume that rises in the future 101.2%. This is a growth rate of CALBEE (figure8).

Expected future price of CALBEE’s snack

(figure8)

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Finally, we explain change of market share. Market share of CALBEE is 54%, and it is No.1 in the

domestic Market (figure9). Rivals of CALBEE are KOIKEYA and private brand(PB).

Market share

(figure9)

Private brand is a brand which is made by supplier itself, and its feature is Cheap Price and

“Not delicious but all right taste”. In this market, since PB entered and reduced an average price, and

then price competition happened. CALBEE carried out cost reduction to adapt for it, and success to

confront private brand. On the other hand KOIKEYA couldn’t adapt for it. By this, only share of

KOIKEYA is going down these days, and we expect that CALBEE will take KOIKEYA`s consumers.

We think CALBEE`s share would rise 1.6% continuously like over the last 12 months.

【North America】

The North America is the biggest market in the world. PepsiCo, cooperating with CALBEE is strongest

company in U.S. The Market size has been growing up 4% for 10 years. We suppose that the market size

grows up 4% per year after 2014 (figure10).

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CAGR transition (North America)

(figure10)

Although we think CALBEE`s sales would increase, CALBEE’s share is only 0.1% and we think it is too

small. To do something for this, CALBEE cooperate with PepsiCo, and CALBEE begun to sells its

product as it is PepsiCo`s product. They borrow the name of PepsiCo. However, we think this strategy is

not the best one. In this strategy, we think CALBEE can‘t keep their strong point “high quality” alive. If

consumers can`t recognize the name “CALBEE” they also can`t notice their strong preference. High

quality, tasty, and healthy snack is required in the market. So, we suppose that CALBEE no longer

increase their market share if they could not inform their preferences to consumer.

The other reason we think CALBEE can`t increase their market share even if CALBEE ties up with

PepsiCo is this. CALBEE sales its product with PepsiCo`s name but now, CALBEE can`t use its strong

point “Strong feelings for its materials” (ex; Hokkaido`s potato farm) full. Furthermore, CALBEE and

PepsiCo`s management philosophy differs, so CALBEE can`t do their business like they want to do.

These two reason is why we think CALBEE can`t increase its market share.

【China】

Chinese market grows up extremely. The market size grows up in the same way as a past change. So, we

suppose that the market size grows up 14% per year after 2014(figure11).

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CAGR transition (China)

(figure11)

Like North America, CALBEE increases sales, but CALBEE’s share is only 0.7%. The competition is

intense in China.

Because Calbee has gone to Chinese market quite recent years, CALBEE has many problems to solve in

Chinese market, and for this, CALBEE does not adjust to Chinese snack market yet in many reasons

(taste, price, target and so on…)

Furthermore China is a growing market, and Chinese consumer doesn`t have great importance to qualities

yet, so we think it doesn`t match well with CALBEE.

Even if CALBEE continues its challenge, we think it will take a long time to adjust. This is the reason

why we think CALBEE can’t get Chinese share, and also share no longer increases.

-Cost of Sales- The cost to sales ratio has been decreased until 2013 by reduction of cost. In 2013, the cost to sales ratio

of CALBEE reached to the average of the cost to sales ratio in the market.

Furthermore CALBEE declared that it will decrease the cost to sales ratio by 50%. In the future,

CALBEE will reduce its cost of sales in other countries. And also since there are factories which works

too much, CALBEE makes it possible to reduce the cost of manufacture by reduce those factories.

Therefore it is predicted that the cost to manufacture ratio reaches to 50%. However the cost to

manufacture ratio would not go down under 50%.

-Selling and general administrative expenses-

According to CALBEE’s settlement of accounts, CALBEE will strongly invest on selling expenses in

order to expand the share of market in other countries. Therefore we assume that the ratio of sales is

stable.

7. Valuation: DCF (Discounted Cash Flow) Model

The target stock price was estimated by discounting the future operating free cash flow of ten years and

continuation value with WACC (Weighted Average Cost of Capital:0.45). As a result, the target stock

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price is estimated to be ¥3435. The target stock price is lower than the current stock price ¥3595.

Therefore, our investment recommendation is “SELL”.

8. Summary

Overseas sales ratio over 30% is what CALBEE is now aiming at and investors believe that CALBEE

can attain that ratio. They acquire information through a financial statement. However, in the present

condition snack food market share in U.S and China is still very low and we expect that CALBEE can`t

achieve their goal in this situation.

Source of competitiveness of CALBEE is located in the quality of production, such as potato fields that

were built up over the years. It’s important 'history' is a source of this competitiveness. In Japan,

CALBEE has created a source of competitiveness over 35 years. However, current overseas sales ratio is

8%. To achieve a 30% overseas sales ratio until 2020, there is not enough time. We think CALBEE is not

possible to make its source of competitiveness in overseas business.

Furthermore, we think CALBEE can`t use their goodness “High quality product” in this present strategy.

They use local companies name when they sell their products (like PepsiCo), so consumers can`t

recognize CALBEE`s strong preference against their product.

About the domestic market, we expect that sales will fall by a decrease of population and sales of snack

per people.

Based on the reasons above, we think present stock price is expensive, and assumed the target price

￥3435.

Furthermore, for the following risks, we made our recommendation “SELL”、not “HOLD” even price

differs only 160yen. Downward adjustment can be expected from these risks.

・An end of partnership with its partner company.(U.S, China, etc.)

・Continuous high yen rate.

・KOIKEYA restores it`s share.

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Based on the risks above CALBEE`s stock price may decrease more and that is the reason we made our

recommendation “SELL”.

9. Risk

【the relationship between CALBEE and PepsiCo】 PepsiCo is the second largest snack food company and CALBEE makes use of PepisiCo’s brand power

to grow up in area of North America. Thanks to the partnership with CALBEE, PepsiCo can sell its

snack products in Japan now. This means that PepsiCo is not a competitor of CALBEE right now.

However in case of dissolution of the contract with PepsiCo since PepsiCo changes its management

policy and business strategy, Pepsi Co could be a large competitor of CALBEE.

【The Antitrust Law】 It is expected that CALBEE would expand its share in the market of potato’s snack. As long as

KOIKEYA exists in the market, there is no risk that CALBEE violates the Antitrust Law. However while

CALBEE grows up, if CALBEE forces KOIKEYA to retreat from the market, there would be a risk that

CALBEE violates the Antitrust Law.

【The Yen depreciation】 CALBEE obtains almost all of ingredient only in domestic. Therefore in case the Yen goes down against

dollar, it would enable CALBEE to make cost of its product which is made in other countries cheap. If

the Yen goes down, the sales of CALBEE would be higher than our prediction.

〔Further partnership〕 While the CALBEE expand overseas, if it can conclude a business partnership like an example of

PepciCo in each area, these relationships will lead to more success. This can be possibility of upward

revision.

[Procurement of raw material] Ingredient of potato’s snack which is main production of CALBEE was officially restricted to import.

That’s why CALBEE makes a contract with farmer in domestic country for a long time. This contract

enables purvey of ingredient to be stable. Since CALBEE obtains all of ingredient only in domestic,, there

is a risk that cost of purvey goes up and CALBEE can’t get any raw ingredient.