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OOTOYA Holdings Co., LTD.

Hirota seminar 10th(Ando・Sakurayama・Takahashi・Chiba)

The stock code 2705（Tokyo stock JQS /Retail）

Rating Buy

Stock price 1400 yen（8/9/2014）

Target price 1547 yen

Index

１． Investment Summary

２． What is Ootoya and Teishoku?

３． Company’s overview

４． Description of business

＜Domestic company and franchise stores business＞

＜International company and franchise stores business＞

５． Market Overview and Future trends

＜Domestic meal chain business＞

＜Overseas meal Chain Business＞

６． Source of Competitiveness

７． Earnings forecast

８． Risk factor

＜Specific risk＞

＜Food service industry’s risk＞

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1. Investment Summary

We calculated the target stock price of this company by discounted cash flow method.

As a result, the target stock price is 1547yen. This price is relatively more expensive

than the present stock price, 1400yen, so our investment recommendation is ‘BUY’.

We think the difference of these two prices is made because the market judges that

high growth of Ootoya will slowdown in the future.

Exactly, it’s hard to think the sale will grow at the same level considering reduction

of the whole food service industry. But, Ootoya achieved success in targeting on women

by unique branding strategy. Due to this strategy, Ootoya can attract women workers

predicted that will increase from now on. Thus, we judged that the slowdown of Ootoya

sale would be moderated compared with the growth of other competing companies.

Including this point, we consider that Ootoya can keep this high growth and the

difference between the present stock price and the target stock price also can happen.

2. What is Ootoya and Teishoku?

Ootoya is a chain restaurant that provides a “Teishoku”. Teishoku is the style of the

traditional meals of Japan. In general, teishoku is a set of the main, white rice, miso

soup, pickles, salad etc. It will be provided in the form, such as the photos below. It has

been familiar to many Japanese because it is relatively inexpensive and well

nutritional balanced.

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3. Company’s overview

＜History＞

In 1983, OOTOYA Co, Ltd was established that is predecessor of OOTOYA Holdings

Co, Ltd because the first store at the east exit of Ikebukuro station was great success.

The second store was open at Takadanobaba in 1983, and the third one at Kichijo-ji in

1985.

In 1992, the store in Kichijo-ji was on fire. Because of that accident, they renovated

the store aiming that it’s easy for women to enter and regarded it as a model. It hit the

mark, from then on, Ootoya has grown up rapidly.

In 2001, they listed their stocks on JASDAQ. And, in 2002, the first international

store in Thai land was open. After that, they opened any stores in Taiwan, Hong Kong,

Indonesia and Singapore. They mainly focused on Asia region. In domestic and

international project, they increased the number of stores that are company managed

and franchise.

In 2011, they became a holding company. Corporation on the domestic project is the

same as usual, OOTOYA Co, Ltd. On the other hand, they changed the company’s

name to OOTOYA Holdings Co, Ltd.

At the same time, they started up the store in the U.S. This store was the first

international one except for Asia region.

On June 2014, they have 277 stores in Japan (142 company stores, 135 franchise

stores) and 70 stores in foreign countries (10 company stores, 60 franchise stores).

＜Manager＞

The present managers are Hisami Mitsumori, a chairman of board of directors, and

Kenichi Kubota, CEO. Mr. Mitsumori is 56-year-old, and Mr. Kubota is 43-year-old. Mr.

Mitsumori succeeded ‘Ootoya Shokudou’in Ikebukuro Tokyo in 1979, because his foster

father died. In 1983, He established OOTOTA Co,. Ltd and assumed CEO, after that

became a chairman of board of director. On the other hand, Mr. Kubota entered this

company in 1996. He mainly have been in charge of franchise project, assumed a chief

of domestic project in 2011. The next year 2012, He was also appointed as CEO as well.

So, now he holds two posts.

These two persons are very influential in this company.

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4. Description of business

Their management philosophy is “We try to promote mental and physical health,

contribute to formation and development of human through a food service industry.”

Then, food service industry is only business Ootoya do. They basically run their

restaurants “Ootoya gohan-dokoro” in Japan and overseas and manage chain stores

development.

Food service can be divided into 5 categories. Those are domestic company store

business, domestic franchise stores business, international company stores business,

international franchise stores business and the other businesses (maintenance

business, nutrition education business and quality control business). Then we will

complement those.

＜Domestic company stores business＞

On June, 2014 there are 151 stores that are 148 “Ootoya gohan-dokoro” and 3 other

stores.

Expansion business is their target but they have policy not adopting central-kitchen

system (It is a system that previously preparing food ingredients in a factory. Usually

chain restaurants adopt this system.)

The stores are developed in front of a station in a shopping center, a business district,

etc. There are mainly on metropolitan area. These days they expand stores on suburbs.

＜Domestic franchise stores business＞

On June, 2014 there are 157 “Ootoya gohan-dokoro”.

They started franchise business on 2003 and favorably expanded.

＜International company stores business＞

On June, 2014 there are 12 stores overseas that are in Taiwan, Shanghai, Hong

Kong, Thailand, Singapore, Indonesia, and USA. They care about relationship between

China and Japan, so they mainly opens stores in foreign countries that are pro-

Japanese like Thailand, Singapore and so on.

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They started international business on 2005 opening Thailand and mainly expanded

in Asia. On 2012, first store that was not opened in Asia was opened in Chelsea, New

York. They aimed to expand international business also in a new country.

On international business, a policy that not localizing and not adopting central-kitchen

system was strictly kept. Then why do they not localize the meals? There are two

reasons. First, their policy is ‘offering the real Japanese food to foreign countries’, not

‘getting profit in foreign countries’. Second, not localizing can make new position ‘a

company that offer higher-grade Japanese food’. These efforts made it possible that

they gained both customers local people and Japanese who lived there.

＜International franchise stores business＞

On June 2014, they have 63 stores overseas (40 stores in Thailand, 17 stores in

Taiwan, 6 stores in Indonesia).

There are some steps in the overseas business. First of all, they open company stores

aiming at penetrating on the spot. Second, they give these company stores to the local

companies which consent to an idea or a policy of Ootoya. Finally, they change

company stores to franchise stores. They pursue the economy of scale, changing

company stores to franchise stores. Actually company stores in Thailand transferred to

the Central Restaurant Group of the major circulation company of a spot in Thailand

in 2011 which reached a 30-shop scale.

＜The other businesses＞

This included maintenance business, nutrition education business and quality

control business. But profit is comparatively low.

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＜Figure:1 Sales ratio of each business to total sales＞

(Created based on the 2013 Annual Report)

5. Market Overview and Future trends

＜Domestic teishoku chain business＞

In the domestic teishoku chain industry, three major companies exist. However, it is

considered not to contend for market share. I’d like to show the reason in the following.

Three major companies are Ootoya, Yayoi-Ken, and Maido-ookini-shokudou. There are

differences in profit rate and sales. However, the number of stores is mostly the same.

(Referring to Figure 2). Each feature is as follows.

Ootoya: The menu is well balanced and healthy, so they can attract a lot of women.

They have many commercial premises in stores and urban stores. That the meaning of

urban stores, they opened the building of urban areas, to target the salary men and OL.

Yayoi-Ken: The meal is very filling, and free for extra bowl of rice. They target on

men mainly. They have a lot of stores in urban.

Maido-ookini-shokudou: It is possible to select meals one by one, so they don’t intend

to narrow the target. They have a lot of suburban stores. Almost all of the stores have a

big parking lot, targeting on family.

66%

25%

8%

1% 0%

Domestic company stores

Domestic franchise stores

International company stores

International franchise stores

The other

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These are competing companies, but they are differentiated. In addition, the number

of stores is small, the locations to open do not suffer nearly. Therefore, it is considered

not to contend for market share.

Based on them, and think about the market trends that may affect the performance

of Ootoya. Scale of the food service industry has been reduced to a peak in 1997 (Figure

3). In recent years, it has continued to stagnate while repeating the increase or

decrease of some. It is expected that scale will continue to shrink in the long term.

There are two reasons. First, Population began to decline after peaking in 2008. Second,

the development of “ready-made meal" is expected. Meaning of "home-meal

replacement" is an eating habit that you eat at work or home to buy outside.

＜Figure:2 The number of stores and sales of each companies＞

200

250

300

350

400

450

500

0

5000000

10000000

15000000

20000000

25000000

30000000

大戸屋 やよい軒 まいどおおきに Ootoya Yayoi Maidookinishokudou

The number of sales The number of stores

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＜Figure:3 Growth trends in home-meal replacement and food

service industry＞

(Data: Safety and security of the Foundation Foundation diet (2014))

<Overseas meal Chain Business>

Three major take the overseas expansion strategy similar. It's increasing the number

of stores in Southeast Asia. Therefore, I take a look around Southeast Asia.

According to the "(March 2013) Southeast Asia Japanese food situation report ①" of

JETRO, income earners has increased in Southeast Asia, spending on eating out has

also increased. A genuine intention for food, health consciousness is also increasing. In

this situation, Japanese food has been accepted in the image of "peace of mind, safety

and healthy." By the coincidence of needs, Japanese food has maintained a high

popularity still. I considered income earners will increase in Southeast Asia in the

future. Thus, it is expected that the consumption of Japanese food is also increased, the

market will expand.

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50,000

100,000

150,000

200,000

250,000

300,000

350,000

Cafeteria/Restaurant Home-meal replacement Restaurant industry

Southeast

Asia

East

Asia

Others

Total

Ootoya 50 23 2 75

Yayoi 119 0 0 119

Maidookinishokudou 0 3 1 4

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6. Source of Competitiveness

We introduce about two sources of competitiveness of Ootoya, “targeting on women”

and “keeping Ootoya policy”.

First, we explain the former. Ootoya serve “Teishoku” which is Japanese traditional

style of meal. A restaurant which serve Teishoku is called “Teishoku-yak”. It is called

that Teishoku-yak serve cheap meal and quantity is for males, and the interior has

gloomy image. But Ootoya aims at not only men but also women. Ootoya are using a

vegetable additive-free, and provide products that nutritional balance was considered

enough. An extensive menu of fish and meat, and a seasonal thing are uniform,

‘Choosing’ a meal from lots of menus also can be fun for female customers. In addition,

they came up with various idea like ingenious visual, beautiful interior etc., aiming

that it’s easy for women to enter. In terms of service, it is a full-service, not the food

ticket type and you can be substituted for staple grains rice and white rice. They

overturned the image of Teishoku-yak until now by taking such a strategy, it is allowed

to fix the image of Ootoya, and has been successfully branding.

It is believed that this strategy, it is possible to target men and women of all ages

except for the kid’s layer, and contributing to increased sales potentially.

Next we explain the latter. Ootoya that has the basic "Providing home cooking

delicious and healthy safe and secure" is showing a commitment to the quality of the

ingredients and products. In particular, cooking in a store in order to provide a set

meal of fresh is difficult to imitate for other companies because of high cost for

education to employees and equipment. These efforts made Ootoya’s good image and it

can be "Providing home cooking delicious and healthy safe and secure".

It is important that these two points have been kept in mind from the beginning of

chain expansion. Because it is not a fake strategy to tailor to the needs of the modern,

its DNA is ingrained in Ootoya own. It can be said that not something that can be in a

day and this branding can’t be imitated by any other chain restaurants.

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7. Earnings forecast

From the above, we try to forecast the performance. About sale forecast, we don’t

separate sales of the projects that are directly managed and franchise in domestic and

international because these are affected similarly by outsiders.

＜Domestic sales forecast＞

We forecast the domestic sales based on this formula.

Sales = Sales in the preceding year

× The annual average growth rate past 5 years

× The average growth rate of the market scale

×The average rate of shrinkage of population since 2014

In this calculation, we use the average growth rate of the market scale in the last

decade and also the average rate of shrinkage of population in decade. Because the

population haven’t changed so much past decade and the market is stagnant , so we

think that we can’t show the shrinkage of the market using only the average growth of

the market scale.(referring to figure 3 and 4 ) Thus, we reflected the rate of shrinkage

of population based on future prediction.

It is said that the shrinkage on the market scale is affected by depopulation and

increasing the demand of ready-made meal. So we judged the scale would continue to

grow negatively by these effect factors and calculated the forecast in view of this trend.

In addition to it, we used numerical value that is categorized ‘shokudou ・restaurant’,

not the whole food service industry.

Then, I would like to explain about the effect to numerical value brought by the

branding strategy targeting on customers including women.

From figure 5, we can understand that the number of women workers increases year

by year. Nevertheless, we didn’t add a variable independently. Because they executed

this branding strategy from the beginning of chain development. In other words,

enlargement of the ability to attract customers by climbing the population of women

workers is already reflected on sales so far. So, we think that the enlargement of

women workers’ population is already included in the annual average growth rate past 5

years.

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Shown the concrete numerical value below.

・the annual average growth rate past 5 years=6.5%

・the growth rate of the market scale

(the average growth rate past 10 years) =-0.5％

・the rate of shrinkage of population (the average rate of shrinkage of population in

decade based on future prediction)=-0.44％

＜Figure:4 transition of population so far and future population prediction

(thousand)＞

（Source: National Institute of Population and Social Security Research in 2012）

50,000

60,000

70,000

80,000

90,000

100,000

110,000

120,000

130,000

140,000

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＜Figure:5 Transition of the number of workers segregated by gender

(ten thousand)＞

（Data in 2013 from the Ministry of Internal Affairs and Communications）

＜Sales prediction in international project＞

We forecast the international sales based on this formula.

Sales= sales in the preceding year × the annual average growth rate past 5 years

The area to open in foreign countries is mainly in Asia that there is big space to grow.

We predict that they will keep the policy in the future. Thus, the international

prediction is not the same as domestic one and doesn’t include the decline of the

market. So, we judged international sales will grow by 6.0 %.

＜Prediction of capital increase＞

The profit rate of Ootoya is lower than other companies, they pay costs of expanding

number of stores and maintenance relying on debt. So, the Capital-to-asset ratio of

Ootoya is lower than other companies. In addition, there is a possibility for them to

increase capital in decade from the past trend. They increased capital 2 times so far.

The first time in 2010, they raised funds for 513 million yen. And the second time in

2013 for 1482 million yen.

Each chance of increasing capital were used for expanding number of stores in

domestic and international area, maintenance for existing stores. So, in decade, they

2500

2700

2900

3100

3300

3500

3700

3900

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

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will continue to do the same activity. That is why we think that they are ready to

increase capital.

When they increased capital in 2013, the Capital-to-asset ratio of Ootoya was under

30 %. So, according to this, we assumed that they would do increasing capital a

following year after the ratio is under 30%. As a result, we predict that they will do

increasing capital for 1233 million yen both in 2017 and 2022.

＜ Figure 6 The Capital-to-asset ratio and ROE＞

8. Risk factor

So far, we thought the story of the success of Ootoya, but the surrounding of a

company does not always change as we expect. Then we refer to risk factors that may

affect the management of Ootoya.

＜Specific risk＞

・Resignation of Mr. Mitsumori

It is Mr. Mitsumori that made Ootoya succeeded from his uncle a big teishoku chain

restaurant in one generation. It is possible to say that there is Ootoya now, just

because there was a strong commitment to "food" and skills of management of him.

0.0%

5.0%

10.0%

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30.0%

35.0%

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45.0%

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Equity ratio（

Perfomance）

Equity ratio （Prediction

）

Return on Equity（

Perfomance）

Return on Equity（

Prediction）

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Mr. Mitsumori himself aware of it probably, and he said he is focusing on the

development of Kubota who is the current CEO. It is also declared in an interview to

continue to reduce the part he involve, and create a condition which there is no

problem when he will retire.

But it can be considered as immeasurable magnitude of the presence of Mitsumori,

We determined that his resignation is a risk factor.

・Consignment of purchase to the "Nippon Access, INC."

Ootoya are entrusted to "Nippon Access, INC." all of the purchase of each store. It can

be said that they had been entrusted with the purchase of all the "Mitsui Foods Co.,

Ltd." If they are forced to trade goods too unfavorably, it is possible to change the

business partner. However, taken into account that point, it is determined that the

situation relies on all purchases to a single company is fraught with significant risk.

・Distrust of governance

It was often that IR information was not performed on time or was eventually

destroyed. Specifically, it might be mentioned that the own factory for making

chemical-free vegetables which is the reason for the capital increasing has not been

built eventually and cases that opening new store were not in time to the scheduled

date. The failures would lead to distrust of management, so that there is a possibility

that the shareholders would away or dismissal request occurs.

＜Food service industry’s risk＞

・Lack of employee

In Japan, news of the beef bowl chain stores in the "Sukiya", a large number of part-

time employees couldn’t withstand the harsh labor, was still fresh in our minds. It can

say this is a risk inherent in the food service industry that rely on part-time employees

most of the store operations.

Ootoya’s policy is cooking in a store so that resignation of employees with high skill

would make much more trouble than any other chain restaurants. If the resignation of

a large amount came out as at the time of the Sukiya, compared to other restaurant

chains, it will take more time to resume store operations.

Because there is possibility to repeat the tragedy of Sukiya, we cited as one of the risk.

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・Fluctuations in the economy

The past few years, the transition of the food service industry is showing the same

moving as the price level (GDP deflator). In the future, it is expected that

fluctuations in the economy affect labor costs, the sales and so on. Therefore, it was

thought to be one of the risk either upward revision or downward revision.