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Appetite grows for Japan Foods' brand despite concerns about its joint ventures

Samantha Chiew
Samantha Chiew • 7 min read
Appetite grows for Japan Foods' brand despite concerns about its joint ventures
SINGAPORE (Jan 31): For the past 23 years, Japan Foods Holding has been bringing flavours of Japan to Singapore. It all started when founder, executive chairman and chief operating officer Takahashi Kenichi was posted here as an engineer for Pioneer Asia
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SINGAPORE (Jan 31): For the past 23 years, Japan Foods Holding has been bringing flavours of Japan to Singapore. It all started when founder, executive chairman and chief operating officer Takahashi Kenichi was posted here as an engineer for Pioneer Asia Group in 1994 but realised he could not find a decent bowl of ramen anywhere in the city.

Determined to bring a taste of home to Singapore, the Kanagawa prefecture native left his job and started Japan Foods. The company’s first food and beverage brand, via a franchising arrangement, Ajisen Ramen, was born in 1997. It was also the first ramen chain to open here.

Fast forward to 2020 and the company shows no sign of slowing down. The group currently operates 59 restaurants around the island under various self-developed and franchised brands. Apart from Ajisen Ramen (founded in Kumamoto, Japan in 1968), Japan Foods currently manages a host of franchises like noodle and dumpling restaurant Afuri (located at the newly revamped Funan Mall), udon restaurant Kazokutei at Bugis Junction and gyoza specialty joint Osaka Ohsho, which is located at various malls around the island.

Meanwhile, Japan Foods’ newest brand Men House Yamamoto – another ramen concept which opened at Raffles City last October – is also finding favour with Japanese food aficionados raving about the shop’s exclusive items like the Truffle Shio Ramen, Porcini Shoyu Ramen and the vegetarian-friendly Avocado Ramen. This restaurant is the sister brand of Tokyo ramen chain Konjiki Hototogisu, famous for its pork and clam infused broth and a recipient of Tokyo’s Michelin Bib Gourmand award since 2015. Japan Foods owns the franchise to operate Konjiki Hototogisu both here and in Hong Kong. In Singapore, the chain has outlets at Chjimes, Great World City, Paragon, Jewel Changi Airport and 100AM.

Part of maintaining a successful business is being aware of market trends. Kenichi knows this. While Japanese food remains popular here, he has noticed a shift among consumers: Fickle younger patrons prefer specialised restaurants. Therefore, Japan Foods’ range of proprietary and franchise brands shows that the group is also evolving with customers’ tastes.

For example, its various ramen restaurants focus on different regional styles. The Konjiki Hototogisu brand is no different, finding favour with customers not just in Singapore but in Hong Kong. It is the third ramen restaurant ever to ever obtain a Michelin Star and that buzz drew Hong Kong residents to the brand’s first outlet at the International Finance Centre (IFC) Mall, located in the city’s Central district.

Seven months of unrest may have taken a heavy toll on many businesses there but Japan Foods’ chief financial officer Kenneth Liew says Hong Kong’s Konjiki Hototogisu – which opened on Dec 3 – is experiencing brisk sales and there are also there are plans for another outlet there sometime this year.

As Japan Foods runs multiple brands across multiple locations, it is able to adopt a “restaurant portfolio” management strategy: When a certain outlet under a certain brand underperforms, for example, the company will try and swap it with another brand that works.

Sometimes, the group might even swap the restaurant not because it is underperforming but with another brand that might do better in that area.

For example, the group switched out a Menya Musashi outlet – a popular Tokyo ramen brand also operated by Japan Foods – in Raffles City and opened up Men House Yamamoto in its place. This switch – which happened in October 2019 – saw sales grow by some 30%.

The group also operates a dessert shop Fruit Paradise – located in 111 Somerset and VivoCity – and Curry Is Drink (so named because you can actually slurp the curry down as a soup). Fruit Paradise has been successful since opening in 2008 while the latter – located at Changi City Point – opened three years ago. The two brands are self-developed Japan Foods concepts. Another one is expected to debut later this year.

Simmering stock

Japan Foods Holding listed on SGX in February 2009. Its IPO was then priced at 20 cents per share, which when adjusted for two subsequent bonus issues, is equivalent to 11 cents per share. 11 years later, the stock has quadrupled to close at 42.5 cents on Jan 20. At this level the stock is trading at a forward price-to-earnings ratio of 22.5 times.

In its latest 2QFY2020 ended September 2019, Japan Foods saw earnings increase by 7.4% y-o-y to $810,000 from $754,000. This came on the back of an 8.3% increase in revenue to $18.0 million, which was mainly due to contribution by new restaurants Fruit Paradise, Afuri Ramen and Konjiki Hototogisu.

“With its net cash balance accounting for about 30% of its market cap, Japan Foods’ excash price-to-earnings ratio is at a discount to listed restaurant peers in Singapore,” says RHB analyst Shekhar Jaiswal in a Nov 8 2019 report.

The analyst has a “neutral” call on the stock with a target price of 40 cents.

Jaiswal is remaining positive on the group’s new brands, as he believes that while subdued consumer discretionary spending could post some near-term challenges, the contribution from new brands and the group’s growing regional presence should help it deliver a strong FY2021 and FY2022 profit.

However, the analyst is concerned about the group’s associated companies in Hong Kong and Singapore. The one in Hong Kong, for example, is still in the red because of stiff competition and the prolonged protests last year. Its joint venture (JV) company with Minor Singapore, which has yet to commence operations, also reported losses due to the incurring of general overheads and administrative costs. The group reported 1HFY2020 loss of $34,000 from associates and JVs as against RHB’s estimate of profits, adds Jaiswal.

The company entered into a 50-50 JV with Minor Singapore in December 2018 to franchise and operate each other’s existing brands in Japan, Thailand and China. Minor Singapore is a subsidiary of Minor International, a leading Thailand-based F&B company that runs a broad portfolio of F&B brands across Asia such as Thai Express, Xin Wang Hong Kong Café, Poulet, Buffet Town and Kiseki Japanese Buffet Restaurant.

Similarly, KGI Securities continues to rate Japan Foods “neutral” with a target price of 46 cents in a Nov 11 2019 report. Its analyst Joel Ng says that the unchanged rating on the stock is due to an expected challenging FY2020 outlook for the group on the back of heightened competition and underperformance of its overseas associates. But despite the challenging short-term outlook, Ng believes that the group’s business model remains resilient and adaptable in the face of higher costs.

“Given a longer investment horizon, Japan Foods remains an attractive investment for its approximately 5% dividend yield and resilient business model,” he says.

Bringing it back home

After more than two decades, Japan Foods has reached a certain scale in Singapore. Kenichi’s next step is further expansion – this time, bringing its brands back to Japan.

The company, in its JV with Minor Singapore, is bringing the Thai Express brand to Japan. As of Jan 13, the group has identified two potential locations in Tokyo and hopes to open it ahead of the Tokyo Olympics this year.

“This is a big breakthrough for Japan Foods because it is the fulfilment of a long-time vision of the group to have a presence in the Japanese market. We have been bringing Japanese cuisine brands to Singapore for more than two decades and we have waited a long time to introduce some regional flavours to Japan,” says Kenichi.

Could this work in Japan’s already crowded culinary climate?

Both Kenichi and Liew remain hopeful and positive. “I think Thai and Vietnamese food has grown in Japan and many housewives in Japan are open to trying out new food,” says Kenichi.

“We will be opening the Thai Express outlet in a big city area, where there are a lot of office people who are quite well-travelled. Many of them would have also previously worked in Thailand, since it is a big Japanese car manufacturing facility,” says Liew.

But to cater to locals, some tweaks will be made to make the food less spicy thus more suitable to the Japanese palette he adds.

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