Summary:
Yamami Co., founded in 1975 and headquartered in Hiroshima, Japan specializes in the manufacture and sale of tofu and related products, with a recent focus on automation to modernize the ancient craft.
Yamami’s two-decade-long commitment to automation has indeed carved out a significant cost advantage for the company. This strategic move has positioned them favorably in terms of production efficiency. However, the reliance on cost leadership through automation has its limits in terms of scaling the business. Growth through increased sales is the next logical step for Yamami.
The domestic tofu market’s sales are expected to remain relatively stable. This is despite declining population, offset by the stable consumer interest in quality tofu brands and an uptick in per capita volume consumption. In this static industry, Yamami’s growth strategy is twofold: geographical expansion into the densely populated and economically vibrant Greater Tokyo area, and capturing market share from less competitive firms by enhancing offerings in premium products at lower prices.
What is Tofu?
Tofu is soy-based and is one of the staple food items for the Japanese, thus, there is a constant demand for it. Especially during the winter, Tofu keeps irreplaceable spot in Nabe* and Oden* dishes.
*Nabe, meaning “pot” in Japanese, is a hot pot dish where various ingredients like meat, fish, and vegetables are stewed together in a pot. It’s a communal winter food given its physical warmth and ability to provide “togetherness”.
**Oden: Like its cousin nabe, Oden is a type of simmered dish featuring an assortment of fish cakes.
Yamami manufactures all kinds of tofu, including deep-fried, baked, silk, and okara (a bean curd).
I. Investment thesis
1) Forward-thinking management
If you understand Japanese, I highly recommend a presentation by Mr. Kiyoshi Yamana (Chairman) available on YouTube. He openly shared with the audience the journey of expanding his tofu operations since 1978 when he purchased a tofu business.
I couldn’t help but laugh during his recount of launching an automated tofu factory in 2000. His bankers nearly rejected his idea, labeling it reckless, as no one had ever constructed a large-scale automation facility in the traditional tofu sector. They questioned him, “Do you have the sales and profits to justify such significant capital expenditure?” Despite their skepticism, he pursued his ambitious vision, and two decades later, he has proven his foresight.
The incident has offered valuable insights into the business acumen of Mr. Yámana, who now stepping down as a chairman. But his son, as president, has continued to implement the strategies required to propel the company into its next phase of growth, maintaining the legacy of prudent and forward-thinking leadership.
2) Share price reactions
Yamami’s shares soared following the release of their robust FY6/23 results on 8/9/23. Net sales climbed by 17.1% year-over-year, while operating profit saw a 15.2% uptick. The FY6/24 outlook was promising, projecting a 10% increase in sales to ¥17,800 MM and a 15.5% rise in operating profits to ¥1,200 MM. These forecasts were subsequently revised upwards on February 14, 2024, with operating profits expected to rise from the previously forecast ¥1,200 MM to ¥2,000 MM, buoyed by a surge in sales despite a price hike. The company also announced a dividend payout policy of over 30%.
The stock reached an all-time high of ¥4,170 on 2/14/24, up from approximately ¥1,444 in early August 2023. However, the shares have since retracted to ¥3,000, a 28% decrease, likely due to profit-taking and the absence of fresh catalysts.
With the recent dip in share price, the stock is now trading at an attractive 14 times 6/25E, compared to the historical operating profit CAGR of 16% over the past four years, with another 15.5% increase anticipated for FY6/25.
Yamami is currently listed at TSE Standard market. The family’s recent reduction in their stake from approximately 60% to 48% was a strategic move to meet the liquidity criteria for transitioning to the Tokyo Prime market. This action reflects the management’s commitment to enhancing shareholder value, a motive that may not be universally prioritized among Japanese companies.
Yamami’s move to TSE Prime will likely be one of stock upside catalysts.
3) Profitable growth in no-growth Japanese tofu industry
Tofu, an everyday food staple in Japanese diet, is appreciated for its accessible prices. It is so popular that it frequently is on promotional sales at grocery stores. This trend makes it challenging for manufacturers to increase prices, even as there’s a general trend of rising costs in the food sector.
Government data indicates that Japanese households are spending almost 30% less on tofu now than in 2000, even as the volume consumed rose by 9% during the same period, as they buy cheaper products. (Source: Bloomberg 12/17/23).
Import prices for soybeans used to make tofu doubled in the five years to March 2022, resulting in about 40% of mom-and-pop shops suffering losses due to higher expenses, according to Teikoku DataBank (credit information research firm) data.
The number of tofu-makers in Japan has more than halved over the past 20 years, while bankruptcies in the sector were estimated to have hit a record high in 2023.
Before 2000, there were approximately 16,000 tofu producers in total, and about 3,000 of those businesses had more than four employees. As of 2022, there are about 3,000 business establishments overall, a decrease of more than 1,000 per year. There were only 700 establishments with four or more employees.
Market size
Despite the above challenges, market size have remained at around ¥600 Bn (both BtC and BtB):
In the past, the industry was estimated to be about ¥600 Bn with high unit prices and low consumption.
Current market size is also at around ¥600 Bn, with a trend of increasing consumption despite a decline in unit price, resulting in a steady market.
Going forward, because it is a traditional food ingredient and also considered a health food, a rapid increase or decrease in the market is unlikely, maintaining market size of ¥600 Bn.
Who will thrive in this flat-growth market?
The retailors who are the tofu manufacturers’ customers, have grown larger through consolidations and have become stringent negotiators on prices and quality. As a result, fewer tofu producers have been cable of meeting negotiations and three types of Tofu producers have emerged.
1) Large producers: has the sufficient scale to serve nationwide-customer retail chains
2) Regional giant: Yamami now belong to this group.
3) Niche player with loyal customer base.
4) Growth strategy in this stable industry
Yamami’s long term market share goal is a 10% with sale of JPY 60 bn vs. JPY 19 bn guided for FY6/24. Yamami’s strategy to reach the goals are:
4-1) Regional expansion – Greater Tokyo
The Greater Tokyo Area holds the title of the world’s most densely populated metropolitan zone, boasting an estimated population of 40.8 MM as of 2022. This region exhibits a population density of 3,000 individuals per km² (7,900 per sq mi), reflecting a significant concentration of human resources. Moreover, it contributes a staggering 40% to Japan’s GDP, underscoring its substantial consumer market potential.
Yamami has opened Mt. Fuji Foothill plant, much closer to Tokyo than two other factories in western Japan, to compete in by far the biggest market in the country. Distance is very important because tofu goes bad quickly. This factory, which has a larger site area than the Tokyo Dome (the baseball field), is the company’s largest facility and produces 15,000 units per hour.
The Kanto region’s introduction of Yamami tofu initially experienced a sluggish uptake. However, the perception of its high quality and competitive pricing has been slowly gaining traction. Initially available only in grocery stores, the products have now found their way into drugstores and convenience stores, signaling a broader acceptance. Despite a 5% price hike in FY6/23, due to escalating raw material costs, the company witnessed no downturn in sales. On the contrary, sales figures have shown an upward trend.
Yamami’s Fuji plant, operational since September 2019, celebrated its first month of profit in 9/23. The plant’s sales revenue for the Q3 for FY6/24 reached ¥2,169 MM, marking an increase of ¥642 MM compared to the previous year’s performance of ¥1,527 MM.
Currently operating at half its capacity, the plant holds the potential to bolster production volumes significantly. Management is optimistic about the underutilized capacity at the other two facilities, anticipating that optimizing their use will contribute to improved operating margins. This reflects a strategic opportunity for the company to enhance profitability while meeting the growing demand for its products.
The company strategically constructed three plants within a 300 km radius of each other to ensure uninterrupted production, even in the event of a single facility’s downtime.
4-2) Global expansion
The global tofu market has grown at an 8.3% CAGR from 2017 to 2023 and is estimated at $1.66 Bn in 2024. It is expected to reach $2.95 Bn by 2029, growing at a CAGR of 12.16% during 2024-2029. The growth is fueled by renewed interests in Tofu as healthy plant-based cheaper meat alternative. The sign-ups for the Veganuary campaign in 2022, where people eat vegan for the month of January, were over 629,000. People signed up from 228 countries and territories, and in 2021, there were 582,000 participants. This rise in the vegan trend had implications for food service operators to provide vegan dishes based on tofu. Moreover, vegan restaurants have also emerged across all regions.
According to Mordor Intelligence, the largest player in global tofu industry is Japan’s House Foods. However, House is struggling with thin overseas margin under the weight of intense competition. Yamami President, Tohru Yamana, commented that the company is keeping an eye on potential overseas expansion, but no immediate plan is in the works. He was cited by Bloomberg, commenting “If we are to expand, we want to make people eat tofu not because it is healthy but because it is tasty.”
4-3) Value-added Tofu
Tofu is an incredibly versatile ingredient. It can be enjoyed raw, simply accompanied by soy sauce. It’s also a staple in dishes like miso soup or nabe. Firm tofu, often referred to as momen or cotton tofu, can be barbecued, making it an excellent salad topping. Jyouchin (filling) tofu is made from soymilk and packed without water and can last up to 10 months in a fridge. There are also various value-added tofu options such as baked, fried, and thick-fried tofu, all of which can be grilled and served on their own or incorporated into sandwiches, soups and pasta.
In addition to its mainstay product, the “Mocchri (thick and soft) silky fried tofu” Yamami is also expanding its business by developing products such as ‘cut tofu’ and ‘chopped fried tofu’ that reduce the time and effort required for cooking. Additionally, they have started selling commercial tofu for the food processing industry and the restaurant industry, further expanding customer base.
Furthermore, Yamami offers a unique variety known as “Silken tofu,” which has the advantage of being storable at room temperature for an extended period.
Yamami’s Technical advantages
The production of these value-added tofu varieties involves additional processing steps. Yamami has consistently invested in capital improvements and updated its facilities at a pace unmatched by competitors. This strategy of rapid investment allows Yamami to master the art of mass-producing items that typically defy such scale. As a result, Yamami can reduce processing costs and offer its products to customers at competitive prices, thereby taking market shares.
5) Competitive advantage
The company boasts high operating margin in tofu industry with OP margin of 6.42% for FY6/23, but still lags behind the other larger food production players. For example, Yakult which specializes in probiotic drinks have operating margin of 11.3% and Kikkoman (soy source giant) at 9.5%.
The company recorded 12.3% operating margin for the first 9 months of FY6/24 which encompass winter months, “Nabe” season. It believes it can reach 10.5% of OP margin in full year FY 6/24, 11% in FY 6/25 and 12% in FY6/26. While it is much smaller than the food giants such as Kikkoman and Morinaga, an impressive 92.5% jump in operating profits from FY6/24 to FY6/25 is expected by Toyo Keisai. The forces which pushes up the operating margin are:
a) Yamami is the first recipient of FSSC22000 in tofu industry which is a comprehensive certification scheme for food safety management systems. This vindicates that the company has built not only a fast but safety-focused production system.
b) Yamami’s fast speed automated production line has enabled the industry leading productivity. The company’s production costs are 15% lower than peers’ which leads to its cost per tofu at ¥5 vs. peers at ¥20.
c) The company is currently developing new products targeting easy-to-open and prepared tofu, looking to appeal to time-starved customers. Furthermore, it is strengthening ties with commercial customers such as food preparing companies and restaurants.
d) President Touru Yamana has a goal of improving utilization rate of each factories and frequently visits Robotics related convention.
6) Steady financial growth expected – Historical high sales and profits reached in FY6/23
Profits and losses FY6/19 through FY6/23
For the above period, the company operated against many headwinds: 1) lower sales to restaurants during Covid shutdown, 2) continuous price pressure from price conscious consumers and 3) large scale retailers demanding volume shipment and price concessions. However, it has managed to generate sales CAGR of 11.8% and operating profits CAGR of 16.3%.
Since its IPO in FY 6/16, the company has consistently seen sales growth each year. However, operating profits have been less stable, with notable fluctuations. The decline in operating profits in FY6/20 can be attributed to significant investments made to ramp up the Fuji foothill factory.
A substantial decrease in FY6/2013 was due to the failed introduction of “Soy Milk”, with a capital expenditure of ¥1.5 Bn. This product failed to profitably compete against established brands like Kibun and Marusan. Reflecting the volatility in operating profits, operating margins also varied, reaching a low of 2.9% in FY6/20 and peaking at 8.6% in FY6/19.
It’s noteworthy that the company is projecting an operating margin of 10.5% for FY 6/24, which would place it at the upper echelon of the Japanese food sector. This optimistic forecast is supported by the improved utilization rate of the Fuji factory and the market’s acceptance of a 5% price increase.
Solid balance sheet to fuel the further growth:
The net proceeds of ¥1,359 MM from 6/2016 IPO was used to develop lines for new products in both Hiroshima and Himeji plants.
The company’s major capital expenditure has been done for now with the completion of the Fuji Foothill factory. It has started its operations in FY6/19 and generated first monthly profits in 9/23. Yamami funded this factory construction and the necessary equipment with debts and capital leases which pushed Net debts + leases ratio to 11.14x in FY 6/20. However, with strong operating cash flow generating ability (op cash generated was ¥2.6 Bn in FY6/21), the same ratio decreased to 2x in FY 6/21. The factories and equipment need continuous repair and improvement, thus, D+L/net cash ratio went up again to 3.72x in FY 6/22 but decreased to 2.26x in FY6/23. These trend speaks well to the Yamami’s ability to support the future growth initiatives. Free cash flow for FY6/20-FY6/23 (after the completion of Fuji foothill plant) has been positive ranging ¥1-2 Bn/year.
Guidance for FY6/24 and goal for FY6/25
On 2/14/24, the company’s FY 6/24 Guidance was upped: Sales increase of 17% to ¥19 Bn and 92.5% y/y rise of Operating profits to ¥2 Bn. The rationale:
During FY6/24, material costs had continue to soar (US soybeans and transportation costs doubled over the last couple years) and utility costs remained high. However,
1) Sales continued to increase after price hike to reflect the cost increase,
2) Sales of products made with domestic soybeans rose. These tofus carry higher price tags and margins
3) These sales volume increase has led to the Fujiyama foothills factory turning a profit, significantly improving profitability.
Dividends
Higher than expected FY6/24 profits outlook prompted management to raise dividend/share to ¥19/share from the FY6/23’s ¥14/share.
For the next two fiscal years, the company plans to generate around 10% sales increase y/y to reach ¥23 Bn in FY6/26 and operating profit growth of around 15-16% to reach ¥2.76 Bn yen. Operating margin goal is 11% in F6/25 and 12% in FY6/26.
Mr. Yamana, the chairman, has expressed confidence in the company’s conservative guidance, which has been cautiously formulated in light of previous experience in missing guidance. He is optimistic that the projected figures are attainable, attributing this to the steady progress of the company’s expansion in Tokyo and the introduction of several new products.
II. Weaknesses/Risks
1. One trick pony
Yamami concentrates its efforts solely on the tofu segment, allowing them to specialize their management and staff expertise. This focus, however, exposes them to the vulnerability of a major tofu demand decline. To mitigate this risk, the company is broadening its domestic service area and diversifying its product portfolio.
2。Continuing increase of soy beans and transportation costs.
Tofu’s weight and need for chilled transport drive up transportation costs per unit. To offset potential future increases, Yamami is implementing cost-cutting measures like bulk shipping and streamlined routes. Despite their belief that imported soybean prices may have peaked, Yamami has shifted its sourcing from overseas to domestic soybeans. This switch, though potentially more expensive, aligns with consumer preference for what’s perceived as higher quality domestically grown beans.
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