1、ab18 July 2025Global ResearchJapan Food SectorDuPont analysis shows conditions for sector re-evaluationFood stocks are ultimately not being valued because ROE is not improvingLooking back over the past ten years,the TOPIX Foods index has only outperformed TOPIX by more than 5%in one year.The market

2、appears to have a vague sense of stagnation for the food sector,and we believe this is fundamentally due to stagnant ROE.Taking the simple average ROE for the 23 food stocks in our coverage,from 2014 to 2016,when profitability improved significantly due to restructuring,average ROE improved from 6.4

3、%to 9.4%,and although it reached 10.5%in 2017,when large-scale M&A using leverage(e.g.Asahis acquisitions)and asset sales(e.g.Kirins portfolio restructuring)accelerated,it has declined since then to around the 8%range recently(Figure 1).We have conducted DuPont analysis to determine what is needed f

4、or ROE to improve hereafter.Profitability improvement stagnant,asset turnover also deterioratingThe simple average net profit margin for the 23 food stocks we cover closely resembles the ROE trend.Although it improved from 2014 to 2017,it was range-bound from 2018 to 2024(Figure 2).We believe one re

5、ason for this is that,at least over the past five years,the food sector has faced an ongoing conflict between cost push and price increases,and has been unable to achieve fundamental profit improvement.Furthermore,the simple average asset turnover ratio shows that while it deteriorated from 2016 to

6、2021,it has bottomed and improved since 2021.This is mainly because sales have expanded due to price hikes and likely does not necessarily mean that asset turnover has improved fundamentally.In fact,most of the companies that announced medium-term plans at the end of FY24 have assumed that capex wil