Note 1: This premium potato chip producer is highly illiquid. However, their impressive product strategy and resulting OP margin growth prompted me to prepare a brief memo. Their defensive nature has attracted few foreign buyers (2.3% of total holdings). Nissin Group (2897), a cup noodle giant, owns 45% of the company, contributing to the low liquidity. Owning Nissin shares can be a way to benefit from Koike-ya’s recent strength, although the correlation between the share performance of these two companies is low:
Three-year stork price-performance:
Koikeya: 104%,
Nissin: 29%,
Topix: 23%.
Nissin’s market cap: ¥1,221 Bn, PE: 21.8x, PB: 2.42x, YTD: -20%.
Koike-ya’s low liquidity likely makes it difficult for you to invest in the company. However, I wanted to highlight their impressive product strategy, which they have developed to compete against the larger Calbee. Their success can be seen in the steady improvement of their operating margin.
| JPY MM | FY6/18 | FY6/19 | FY6/20 | FY6/21 | CAGR | FY3/22 (9 mos) | FY3/23 | FY3/24 | Y/Y | 1Q FY3/24 | 1Q FY3/25 | Q/Q growth | FY3/25 guid | FY3/24 vs. FY3/25 G |
| Sales | 32,232 | 33,965 | 37,739 | 40,205 | 7.6% | 30,395 | 44,574 | 54,829 | 23.0% | 12,899 | 14,764 | 14.5% | 59,000 | 7.6% |
| Gr Profits | 12,271 | 12,785 | 14,242 | 15,756 | 8.7% | 9,112 | 13,138 | 18,165 | 38.3% | 3,980 | 4,807 | 20.8% | ||
| Gross Margin | 38.1% | 37.6% | 37.7% | 39.2% | 30.0% | 29.5% | 33.1% | 30.9% | 32.6% | 0.0% | ||||
| Op Profits | 276 | 677 | 1012 | 1665 | 82.0% | 1,089 | 1,774 | 3,598 | 102.8% | 847 | 1,175 | 38.7% | 4,000 | 11.2% |
| Op Margin | 0.9% | 2.0% | 2.7% | 4.1% | 3.6% | 4.0% | 6.6% | 6.6% | 8.0% | 6.8% | ||||
| Ord. Profits | 364 | 724 | 1,125 | 1,687 | 66.7% | 1,142 | 1,807 | 3,490 | 93.1% | 884 | 1,213 | 37.2% | 3,950 | 13.2% |
| Ord Prt Margin | 1.1% | 2.1% | 3.0% | 4.2% | 3.8% | 4.1% | 6.4% | 6.9% | 8.2% | 6.7% | ||||
| Int expenses | 4 | 3 | 4 | 7 | 7 | 7 | 6 | 1 | 1 | |||||
| Net profits | 177 | 404 | 643 | 1,161 | 87.2% | 835 | 1,164 | 2,208 | 89.7% | 601 | 701 | 16.6% | 2,500 | 13.2% |
| Depreciation | 879 | 857 | 966 | 874 | 921 | 1,232 | 1,303 | |||||||
| EBITDA | 1,155 | 1,581 | 2,091 | 2,561 | 30.4% | 2,010 | 3,006 | 4,901 | 847 | 1,175 | NA | |||
| Div Pmnts | 253 | 253 | 213 | 240 | 320 | 240 | 346 | 64 | ||||||
| Capital ratio | 52.3 | 54.1 | 54.9 | 50.4 | 51.8 | 50.9 | 47.0 |
Note 2: I am planning to send you a note on a more liquid stock in a week.
1. The company background
Koike-ya (Koikeya, or the company) pioneered the industry by successfully mass-producing potato chips in Japan for the first time in 1962. They faced net losses in 2012 and 2013 due to competitive pressures from Calbee. In 2011, before these losses, they formed a capital and business alliance with Nissin Foods Holdings.
The current CEO Mr. Sato (since 2016) is a marketing heavyweight who once made ‘Namacha’ a hit at Kirin Beverage and also served as its president. He has chosen not to compete with Calbee for a market share but with quality and unique products. The first product under him was “Pride Potato” which is a premium line of potato chips introduced by Koikeya in February 2017.
2. Unique branding
Pride Potato
Pride Potato exemplified Koikeya’s desire to create a high-quality product that harkens back to the origins of Koikeya, where the chips are made from carefully selected domestic potatoes, thickly sliced, and fried to preserve their natural flavor and texture.
Pride Potato has met the growing consumer demand for high-quality snacks, with a premium feel, making it suitable as a casual gift or a special treat. The chips are seasoned with umami-rich flavors and do not contain any flavor enhancers or artificial ingredients, catering to health-conscious consumers. Pride Potato quickly became a hit, earning ¥4 billion in sales in its first year, which was double the initial target.
Karamucho
Karamucho is another example of the company’s ability to create high-quality, yet unique products.
In 1984, Koikeya launched Karamucho, which became one of their most iconic products. Karamucho is known for its unique combination of spiciness and umami, achieved by blending chili with meat and vegetable flavors. This innovative flavor profile quickly gained popularity.
Lunch Pie
Most recently, in 3/24, the company released the ‘Lunch Pie’ as a ‘new food option’ that can be easily eaten as a convenient in-between meal.
It offers two flavors: “Clam chowder” and “Delicious pizza”. The dough is slightly sweet and has a flaky light texture. But the inside fillings are salty.
The company is aiming to expand brand awareness among a wider audience who may not eat snacks regularly. For its retailer partners, it is proposing ideas for creating sales spaces and expanding to multiple locations to establish “Lunch Pie” in the market.
3. Growing industry
The below data sources forecast a steady 2-3% growth for the Japanese potato chip market.
1) The Potato Chips market in Japan registered a positive CAGR of 2.36% during the period 2016 to 2021 with a sales value of JPY 244,693.24 Million ($1.7Bn) in 2021, an increase of 4.07% over 2020. The market achieved its strongest performance in 2021 when it grew by 4.07% over its previous year, and its weakest performance in 2020, when it fell by -1.04% over 2019 (source: Japan potato chips market assessment and forecast to2026 by global data, published: March 08, 2023.
2) Revenue in the Potato Chips market amounts to US$1.17bn in 2024. The market is expected to grow annually by 2.44% (CAGR 2024-2029). By Statista
The reasons cited for a steady growth are:
- Busy consumers need ready-to-eat snacks.
- The industry is striving to offer a variety of flavors.
- Consumers’ preference for higher quality/premium products is met by some manufacturers, such as Koike-ya.
- An increasing number of retailers are carrying potato chips.
4. The strong earnings momentum for FY3/24
The company changed its fiscal year end from 6/30 to 3/31 starting FY3/22. Thus, CAGR is calculated for the period of FY6/18 to FY6/21 and the y/y rate is listed in the above table.
CAGR FY6/18-FY6/21:
Sales: 7.6%
Gross profits: 8.7%, thanks to solid sales of premium (high margin) products
Operating profits: 82%
Year on Year growth FY3/23 – FY3/24
Sales: +23%
Gross profits: +38.3%
Operating profits: +102.8%
Particularly notable is the stable improvement in the operating margin from 0.9% in FY6/18 to 6.6% in FY3/24. The company increased its operating margin from 4.4% in FY3/23 to 6.6% in FY3/24, thanks to 1) production streamlining and 2) maintaining sales volume despite price hikes due to cost increases.
FY3/24 sales: Japan (90% of total sales)
The sales of the following products were strong, contributing to the total sales increase:
- “Koikeya Potato Chips,” which underwent a full renewal a year ago
- Non-potato products such as corn brands (“Scone,” and “Donsales)
- The various size variations, such as large bags, small bags, slim bag series, and hanging multi-pack products, which responded to the diverse changes in eating styles,
- High-value-added products such as the “PURE POTATO” brand, and the newly launched “Koikeya Pride Potato GOLD STYLE No Salt,” “Complete Meal Karamucho Hot Chili Flavor,” which pursue a perfect balance of nutrition and taste.
Cost reduction measures such as improving production and logistics efficiency and reviewing product design were able to offset rising raw material prices and utility costs. Also, sales volume did not decrease even after the price hikes.
As a result, domestic sales were ¥49,244 million (a 24.2% increase y/y) with a segment profit of ¥3,292 million (a 68.7% y/y)
Overseas (10%)
In Taiwan, Vietnam, and Thailand, partnerships/cooperation with local retailers have been successful, leading to smooth product distribution and increased sales. Efforts to improve profits have also been made, including changes in product specifications and reductions in logistics costs.
As a result, overseas sales reached ¥5,585 million (an increase of 13.4% y/y) with a segment profit of ¥350 million.
5. Valuations: peer comparison
The snack sector attracts certain investor attention, as the above-average PE indicates.
| FY23 OP | FY24 OP | Y/Y % | Next FY Guid/ Analyst OP | Next FY Y/Y | Market Cap(Y Bn) | Price YTD 9/19/24 (%) | FY2023OP% | E PE | 2.16 | E ROE | Capital Ratio | Div Yield (%) | ||
| 2229 | Calbee | 22,233 | 27,304 | 22.8% | 29,500 | 8.0% | 451.6 | 20.9 | 9.01 | 24.54 | 2.16 | 9.5 | 65.6 | 1.7 |
| 2220 | Kameda | 3,564 | 4,467 | 25.3% | 5,000 | 11.9% | 100.5 | 7.6 | 4.67 | 26.45 | 1.32 | 5.4 | 58 | 1.27 |
| 2226 | Koikeya | 1,774 | 3,598 | 102.8% | 4,300 | 19.5% | 55.0 | 40.4 | 6.56 | 20.66 | 3.22 | 15.7 | 46.9 | 1.04 |
| 221 | Iwatsuka | (213) | 603 | 183.1% | 650 | 7.8% | 31.4 | 3.6 | 2.74 | 13.09 | 0.4 | 3.7 | 74.4 | 0.95 |
(source: shikiho)
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