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T. Hasegawa (4958 JP) is one of the world leaders in the global flavours and fragrances market. It’s currently the second-largest flavours & fragrances company in Japan and has decent exposure to the fast-growing Chinese and Southeast Asian markets.
Roughly 85% of T. Hasegawa’s revenues come from ingredients used to improve the flavour or enhance the texture of food or beverages. The remaining 15% of revenues come from fragrances that create specific scents in household products or perfumes. A little over half of the revenues come from Japan and the rest from other Asian countries and the United States.
The flavours & fragrances industry is characterised by high switching costs and pricing power. The cost of a flavour is typically a tiny fraction of the total production cost yet contributes significantly to the success of a product. Customers are therefore willing to pay up for industry-leading R&D.
The companies in the sector tend to dominate specific local markets. To succeed, you need R&D personnel on the ground who understand what scents and flavours people enjoy. In Japan, the market is dominated by industry-leader Takasago, followed by T. Hasegawa. Globally, the major companies in the industry are Givaudan, IFF and Symrise.
For many years, T. Hasegawa has been a sleepy company, growing EPS in the mid-to-high single digits. The Japanese flavours & fragrances market is mature and slow-growing because of stagnant income growth and weak demographics. But the Chinese and Southeast Asian markets are significantly more attractive, with industry growth of around 7-8% per year.
What brought my attention to T. Hasegawa is UK shareholder activist AVI Japan Opportunities Trust's new campaign to reform the company. AVI sent a 13-page letter to Hasegawa last year, asking them to revamp the top leadership so that the company becomes more aggressive, more entrepreneurial.
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