Yakult Honsha (2267 JP)

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Our friends at recently wrote about Japanese yogurt giant Yakult Honsha (2267 JP － US$6.1 billion). Their write-up was brilliant, so I wanted to dig into Yakult myself. And hopefully, add something to the discussion.

Yakult Honsha is a Japanese producer of probiotic yogurt drinks, which have become so iconic that the brand name has become synonymous with the product itself.

The drinks are typically sold in 65 milliliter bottles costing about US$0.3 each. Since Yakult drinks contain over 10 billion live bacteria of the proprietary lactobacillus casei “Shirota” strain, they’re marketed as health products that can help improve your gut.

I think the health benefits of Yakult drinks might be overstated. But then again, studies show that they can help alleviate constipation and improve stool consistency. So, if you’re experiencing gut issues or taking antibiotics, drinking Yakult will probably help.

The tiny bottles have become a major business for the company. They now sell over 40 million bottles per day across 38 countries. Yakult is especially popular among children who like the sweet taste of the product. It helps that Yakult doesn’t contain much lactose, so even lactose-intolerant individuals can consume it.

Other than its strong brand, Yakult also owns intellectual property. From my understanding, other companies are unable to use the same lactobacillus casei Shirota strain in their products. That’s helpful because this particular strain of bacteria can survive in the acidic environment of the stomach and reach the intestines, where it can help restore balance in the gut microbiome.

The company is also special in that it uses a group of contractors called “Yakult Ladies,” who sell the product home-to-home in return for a 25% commission. These ladies are typically housewives who want extra work during idle hours. Visiting customers is also a social activity, helping customers and the ladies alike. Since the Yakult Ladies are not company employees, Yakult can benefit from their hard work without taking much risk.

I think Yakult's long-term outlook is excellent. The use of antibiotics continues to rise, especially in emerging markets. This trend is likely to lead to more gut problems, and probiotic drinks will help alleviate such issues.

The stock price has underperformed, however, and I think that’s partly related to their shrinking business in China. Yakult used to sell 8 bottles in China per day and now they’re down to just 5.

It’s unclear why Yakult is losing its position in the Chinese market when it’s doing so well elsewhere. Chinese consumers seem to be choosing local alternatives from Yili, Mengniu and others over Yakult, perhaps due to their lower prices.

In Japan, Yakult is firing on all cylinders. In 2019, it introduced a new product called “Yakult 1000” through its Yakult Ladies network with much higher bacterial count. Two years later, a similar product called “Y1000” was released to supermarkets and convenience stores across Japan. The product was so popular that it sold out practically everywhere.

As East Asia Stock Insights pointed out, these new products are a game changer for Yakult’s Japan segment margins. Since Yakult 1000 and Y1000 average selling prices are over twice as high, the blended average selling price for Yakult’s Japan business has risen by 50%, causing margins to rise from 8% in 2019 to almost 21% today.

I think there’s a case to be made that the shortages should be easing now that Yakult has just completed a new factory in Fuji Oyama that will bring up the daily production of Yakult 1000 and Y1000 to 4.3 million bottles per day, over 10% of Yakult’s total capacity.

Yakult is also doing well in the United States, where average selling prices are much higher. A new factory in Georgia slated for 2026 will enable Yakult to launch nationwide, likely pushing sales higher.

The stock isn’t exactly “cheap” at 17x P/E. But historically, Yakult has traded closer to 32x, as Japanese investors have always considered the company to enjoy a strong economic moat.

You might also argue that Yakult’s capital allocation is about to improve. Since the new CEO Hiroshi Narita joined in 2016, Yakult’s share count has declined by a whopping 16%. The dividend payout ratio has also increased from 21% to 34%. That’s still a low payout ratio, but it's certainly a step in the right direction.

So, if you consider the improved capital allocation, perhaps there’s also value in the US$1.2 billion net cash position on top of the 8.8% of shares outstanding held as Treasury shares. The net cash could be put to good use, perhaps through share buybacks. And the Treasury shares might one day be cancelled. For reference, Yakult’s EV/EBIT is only 11x.

I don’t see many risks on the horizon. Yakult has indeed faced difficult competition in China from Yili and others. But Yakult is hardly the only foreign company that has suffered from increased nationalism in China since 2019. In my view, Yakult’s China segment is almost a write-off at this point and doesn’t contribute much to earnings anyway.

The heavy competition that Yakult has faced in China is unlikely to be an issue in other markets. For example, in Singapore, Yakult has been competing against Vitagen for many years, yet parents like myself know the difference between the real deal and its slightly cheaper copycat.

Most likely, Yakult will continue to see margin expansion from higher average selling prices in Japan while continuing to grow steadily across Indonesia, Vietnam and the United States. It’s a steady grower, with volumes likely to increase as Yakult’s new factories gradually come online.

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